Why Do Sales Taxes Exist?
By Bryan Caplan
Mankiw’s post on AMT reform reminds me of yet another simple challenge to the rational, selfish voter model: Since we can deduct state & local income and property taxes on our federal income tax, but not state & local sales taxes, why do sales taxes still exist?
After all, a state could abolish its sales tax, increase the income tax enough to equal the lost revenue, keep spending levels the same, and let the federal government write refund checks equal to roughly 1/3 of the tax increase.
You could say this is too simple, because sales taxes weigh more heavily on the poor. But (a) this is exaggerated, because a lot of states exempt necessities from the sales tax, and (b) you could compensate for the problem by cutting income taxes in a progressive way.
Anyone care to meet my challenge? Why would rational, selfish voters keep sales taxes at the state & local level, when the feds only allow deduction of income and property taxes?