One of the prime differences between liberals and conservatives, I am convinced, is that the former generally see only the initial or first-order effect of a policy, while the latter are able to think it through and see the secondary impact. Nowhere is this clearer than in the case of taxation. Liberals always assume that economic behavior will be unchanged by any adjustment in tax rates. That is why, to them, tax rate cuts are nothing but giveaways, and increases invariably will yield bountiful revenues.
An example of this phenomenon recently took place in Virginia, where I live. Governor Jim Gilmore, recently named chairman of the Republican National Committee by President-elect George W. Bush, was elected in 1997 largely on the strength of his pledge to end the car tax in Virginia. This is an annual tax levied on the assessed value of one's automobiles. It varied from county to county, but, in my case, was 4.5 percent of the assessed value of my car before Gilmore took office. (Needless to say, the assessed value was far, far higher than I could actually sell it for.)
Thus, I write a check for several hundred dollars every year simply for the privilege of owning a rather broken down 1985 Mercedes. Over the years, I have probably paid total personal property taxes close to what I paid for the car, which I bought used in the first place. Needless to say, such a tax system strongly discourages people such as myself from buying new cars.
Most people view the personal property tax as an especially onerous tax. It isn't deducted from one's paycheck like the income tax, you don't pay it a bit at a time like the sales tax, and it isn't paid incrementally through mortgage payments like the property tax. Every year in the fall, you have to write a check for the full amount of the tax. Thus, the personal property tax is far more visible than many other state taxes that may take more out of one's pocket.
Consequently, gubernatorial candidate Gilmore struck a responsive chord when he said he would get rid of Virginia's personal property tax. Initially, his opponent opposed abolition of this tax, then switched and said he would also phase it out. But at this point, he had no credibility, giving Gilmore an easy victory.
Upon taking office, Governor Gilmore immediately put forward a plan to eliminate the car tax. In 1998, tax bills were reduced 12.5 percent. The following year, they fell 27.5 percent. In 2000, the tax was reduced 47.5 percent. This year, the personal property tax will be 70 percent lower, with full elimination next year. In recent days, Governor Gilmore has reiterated his support for phasing-out the personal property tax on the schedule he originally proposed.
Not surprisingly, the reduction and ultimate elimination of the car tax has led to a significant increase in car ownership in Virginia. Between 1997, the last year the full tax was in place, and 1999, the latest year available, Virginia car registrations increased 3.8 percent, while rising just 2 percent for the nation as a whole. Looking at neighboring states, Maryland saw only a 1.4 percent increase in registrations, while North Carolina saw a decline of 1.6 percent. Other states with registration levels roughly equal to Virginia's, such as Indiana and Massachusetts, also saw declines over this period.
Thus it appears that Virginia drivers responded to the cut in the car tax by doing exactly what common sense says they would so: They bought more cars. I know that in the past I have been greatly discouraged from buying a new car by the prospect of paying hundreds or even thousands of dollars of additional taxes each year for the privilege. As the tax has fallen, my interest in buying a new car has risen.
But this is where the limited ability of liberals to think comes into play. They are now complaining that the revenue loss from the car tax phase-out has escalated because Virginians own more cars, according to a Jan. 8 report in the Washington Post. This means, in their minds, that Virginia can no longer afford to abolish the car tax because it would "cost" too much in tax revenue.
Sadly, this is typical of the way all tax bill are analyzed by liberals in Washington. A tax discourages economic activity, such as work or investment. The tax is cut, leading to increased economic activity. Liberals then assume that previous rates of tax would still be collected at the higher rate of activity -- which, of course, only came about because of the lower tax rate -- thus depriving the government of vast revenues it is justly entitled to. It makes no difference to them that economic activity often expands by more than tax rates are cut, thus increasing total revenues. Liberals always still believe that even more would have been collected if only tax rates had not been cut.
In the case of the car tax, liberals assume that additional cars would have been purchased anyway, without any change in the tax. And by multiplying the old car tax rate times the larger number of cars registered, they come up with mythical revenues that could pay for more teachers, police, roads or whatever else the good citizens of Virginia could possibly want.
It is all nonsense. Without a cut in the tax, the cars wouldn't have been bought in the first place. Like me, many Virginians would continue to drive their broken-down clunkers another year rather than write a bigger check to the government. Conservatives understand this, apparently, liberals never will.