In down times, governments are often tempted to increase taxes to mend growing deficits.
But bigger taxes often lead to bigger problems. According to Chris Edwards, author of Downsizing the Federal Government (Cato Institute, 2005), a long series of Depression-era tax increases exacerbated an already-horrendous downturn, and helped to deepen the worst financial crater of modern times.
Now, similar forces are at work. Just recently, New York governor David Patterson proposed a large number of tax increases, traversing movie tickets, alcohol, taxi transportation, cigars, massages, and entertainment-related downloads. The plan would extract pennies from iTunes Store downloads, part of a plan designed to narrow a $15.4 billion budget gap. “We’re going to have to take some extreme measures,” Paterson said, according to the New York Daily News. “Maybe we should have thought about this when we were depending on what we thought were inexhaustible collections of taxes from Wall Street.”
Other states are also pushing similar initiatives into law, though top-line paid downloads appear to be plateauing, at least for music. Ahead, the industry will be closely watching post-Christmas sales of iTunes Store downloads, a critical precursor for sales rates next year.