If your tax rate goes up by a lot, will the amount of taxes that you pay go up by a lot as well?
You might think so at first, but as we'll show you in this post, the answer is that your taxes will likely go up, but probably by not anywhere near as much as you might have thought, and certainly not by anywhere near as much as the politicians imposing the tax hike might like.
To understand why, let's use a real world example. Let's say we're talking about property taxes, such as those in Derby, Connecticut, where the mill rate for the town's property taxes has just been jacked up from 27.9 cents to 36.6 cents per $1,000 of its assessed property value.
That increase in tax rate should, if everything else were kept equal, result in your property tax bill going up by over 31%! That result assumes that if you had a property in Derby whose assessed value was $1,000,000 last year, you would have paid $27,900 on it. With that same $1,000,000 valuation this year, with the higher property tax rate, you would pay $36,600, some $8,700 (or just over 31%) more than you paid last year.
[Yes, we know our lone reader in Derby, Connecticut is snickering at the idea that there are any million dollar homes in town, but please bear with us!]
Clearly, that would be bad news for the property owners in the Top 1%, wouldn't it? The town of Derby, New Hampshire could really be sticking it to its landed aristocracy with that kind of massive property tax hike while being able to fully support the full amount of spending its civic leaders want to do, right?
But there's one major problem with achieving that result in reality - the assumption that everything else is being kept equal is false! And what actually happened with Derby, New Hampshire's property taxes helps show why huge increases in tax rates don't necessarily translate into huge increases in the amount of taxes actually collected for the government involved!
Political Calculations is a site that develops, applies and presents both established and cutting edge theory to the topics of investing, business and economics.
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