Stability

Long term trends and short term fluctuations in the economy both have important impacts on the stability of a tax system. As the economy cycles through growth and recession the government is still required to provide public goods and services. The tax system should be stable enough to provide resources through unstable economic times. For this reason, the tax system needs to include revenue sources that are less subject to economic cycles, and also should be designed in conjunction with other policies, such as mechanisms for accumulating reserves in good times, to provide protection in bad times.

In examining particular taxes, one option to be considered for any tax that meets other criteria but is very unstable is to use the tax to finance one-time expenditures or to build reserves. When a tax is used in this manner its instability is less of a concern, as the money saved in good times can be used when needed and new one-time spending can simply be suspended.

A Note on Measurement. To best compare states and periods in history, this paper generally expresses taxes as a share of personal income. This allows for meaningful comparisons among states with different size economies and between different time periods. In some contexts taxes are presented on a per capita basis, but this paper does not use such a methodology because it does not allow a reader to separate the issue of the level of taxation from the effects of different income levels in different states or time periods. This issue of measurement is best understood by thinking about a specific example and considering just one tax: the income tax. If state A has an income tax rate of five percent and an average income of $100,000 and state B has an income tax rate of eight percent and an average income of $50,000, which state has a higher tax rate? Obviously, the tax rate are higher in state B: for every dollar you earn in state B you pay eight cents in taxes while you pay only five cents in state A. However, under a per-capita measurement, taxes are higher in state A: because per capita tax in state A is $5,000 ($100,000 X .05) and per capita tax in state B is $4,000 ($50,000 X .08). Of course, the per capita tax payments in state A are higher due to their higher income levels, even though the tax rate is lower.