Tag: fiscal crisis

Is Greece’s Fiscal Crisis Caused by too Much Spending or too Little Revenue?

It’s been a rough couple of weeks for Greece, which has been battered by rumors of government default. Interest rates have been climbing, as investors are nervous about state finances, and the country’s debt rating has been downgraded.

Not surprisingly, Greek politicians are dealing with the crisis in large part by further increasing the tax burden. One particularly horrible idea is a 90 percent tax on bank bonus payments. I don’t know if lawmakers in Athens have heard of the Laffer Curve, but they’re about to get a real-world lesson that will teach them how punitive tax rates lead to less revenue.

For those who wonder how Greece got into this mess, here’s a quick chart I put together, based on OECD fiscal data. Don’t be  surprised if America has a similar chart in about 10 years.

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Prop 13 and the California Fiscal Crisis

In the Washington Post today, columnist Harold Meyerson blames 1978’s Proposition 13 for today’s budget mess in California. That claim is not supported by the data.

First note that California’s current fiscal crisis is in its state budget. Prop 13 puts restraints on local property taxes.

Second, the most recent Census data show that total state and local general revenues in California were $293 billion in fiscal 2006. Of that, $37 billion was property tax revenue, or  just 13 percent of the total. Meyerson is arguing that that level of property taxes is too low, but it is hard to see how the recent crisis could have been caused by a three-decade old constraint on such a small fraction of overall state and local revenues.

Third, on a per-capita basis, California is in the middle of the pack on property tax collections, thus even though property taxes were cut three decades ago, California governments still get a decent pound of flesh from property owners in the state.

Fourth, Prop 13 placed a supermajority requirement on state tax increases, which Meyerson laments. But that restraint has certainly not led to undertaxation in California. After an initial dip in total state/local tax revenues as a share of income in the late-1970s, California’s tax take has been steady or rising. Estimates for 2008 put the state sixth highest with respect to state and local taxes as a percentage of state incomes.