Tax Reform Season Is Coming

There is no unanimity on how to best fund government budgets using the typical five-source basket of taxes from income, property, unemployment insurance, sales, and usage fees.   When elected officials adopt a tax reform initiative, they structure it as adjustments in rates applying to the five sources or in ways of measuring the five sources, with perhaps a total revenue increase or decrease.

Tax reform results are easier to see at the state level because there are suitable nearby comparisons. In contrast, federal tax reforms lack parallel contemporaneous comparisons.  As a result much federal tax “analysis” is wasted arguing over partisan conceits and counterfactuals.

Tax reform can alter far-reaching economic incentives.  Reductions in state income tax rates for business can attract new employers to enter the state and induce existing employers to make long term investments, thus creating jobs.  Texas is renowned for choosing no business or personal income taxes, and the choice seems associated with robust Texas job creation, while the national economy and high tax states created relatively few jobs.  Officials in Georgia, Kansas, North Carolina, and Ohio have cited the highly productive results of the Texas tax model.

Nationwide, 61% of business income flows through small businesses and that income is taxed by the feds at individual rates as high as 39.6% – a heavy burden to anyone.  Thus, businesses react to changes in both business and individual taxation.  In 2011, six states – Florida, Nevada, Sout Dakota, Texas, Washington State and Wyoming – levied no personal income tax but thirteen states – California, Connecticut, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, North Carolina, Oregon, Virginia and Wisconsin – seized more than $1,000 per capita and Connecticut and New York gorged themselves on more than $1,800 per capita.  High levels of personal income tax can have a chilling effect on business investment.  With that in mind, North Carolina is considering ways to reduce its $1,027 per capita in personal income tax.  North Carolina is planning to cap the mortgage interest and property tax deductions and impose a single lower income tax rate.  As well, North Carolina plans a slightly lower sales tax, but will applying the rates to a broader base, including some services.

We are nearing the season for haggling out the next federal budget, squabbling over government overspending; and striking ostrich poses over the $17 trillion in U.S. debt.  Federal tax reform proposals are inevitable.  A few will be genuine attempts to kick start employment and curb new debt.  Many more will focus on bribing constituencies who demand frequent entitlement upgrades.  Expect proposals from the left that punish high earners and from the right that demand all earners start paying at least some taxes.  Favor tax proposals that incent businesses to invest – because that creates jobs – while leaving us all enough earnings to properly care for our families.

Alan Daley is a retired businessman who lives in Florida and who writes for The American Consumer Institute Center for Citizen Research

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