The Tax Contract

When citizens pay taxes to their municipal, state, or federal government, they generally view the payment as upholding their end of a contract with their government. In return, they expect a certain level of services such as infrastructure, public safety, and education.

This model of taxation requires transparency in public spending and taxation, a transparency that can be obscured by fiscal gimmickry that is prevalent at all levels of government. One way that policy makers obfuscate the level of taxation is by creating complicated tax structures that levy high rates on certain goods, such as excise taxes. Constituents may not realize the full burden of these taxes until they reach high enough levels, as may be occurring in Chicago. A recent Chicago Tribune article explains:

Mayor Richard Daley’s budget includes dozens of new or higher taxes and fees to raise an extra $53 million.

[ . . . ]

The taxes and fees were part of what Ald. Robert Fioretti (2nd) calls a “nickel-and-dime” approach to balancing the city budget. Like nearly all his colleagues, Fioretti voted for them in late November, but this week he questioned whether city and county taxes and fees had reached a tipping point.

My constituents are saying they will have to move out of the city, and I’m hearing it also from suburbanites who say they can no longer afford to come into the city,” he said. “I’m concerned. I’m more than concerned at this point.”

When local tax rates reach a level that citizens feel far exceeds the level of services they receive in return, cities and states risk population loss or the type of citizen protest seen in Toms River, New Jersey. In theory, competition between localities should ensure that city and state governments do not allow their tax burdens to get out of line with the public services that they offer. However, if tax policy is difficult to decipher, residents may have a hard time keeping track of what they’re paying for.

This may lead to the conflicting opinions on Toronto’s tax levels.  As reported in the Toronto Sun:

Toronto residents may pay the lowest property taxes in the GTA, but the city’s true property tax rates are being masked by growing user fees, resident groups and council critics told the Sunday Sun.

At 0.85%, Toronto’s combined rate for city and education taxes is the lowest in the GTA. But when you combine other fees, such as garbage, a personal vehicle tax and the land transfer tax, homeowners are also feeling the pressure of being “taxed to death.”

However, a Toronto Star editorial argues that unlike in Chicago, Toronto residents do receive a level of public services that correlates to their tax burden:

You get what you pay for, of course, and despite what the right-wingers would have us believe, Torontonians have it relatively easy when it comes to municipal taxes.

As for the media, their response is as dumb as it is predictable. Mere mention of higher taxes sends the scribblers into paroxysms of outrage.

Get over it.

The Star’s flippant attitude toward the level of municipal taxes may be because the people of Toronto do, in fact, get what they pay for. Or it may perhaps be that the author, the Star‘s Christopher Hume, is a victim of fiscal illusion, unaware of the full amount he pays in taxes and fees.

Regardless, these two conflicting and subjective opinions draw attention to the important concept: all levels of government must honor the contract that they enter into with their citizens when they levy taxes. If this contract is breached, cities and states risk losing population to places that offer a higher value of services for taxes.