|GOP Governors’ Alternative to Obama’s Tax Hikes|
By Ashton Ellis
Thursday, January 31 2013
With thirty governorships in Republican hands, some GOP executives are trying to swap their states’ income tax for a broad-based sales tax. Success could set up an alternative to the income-centric debate in Washington, D.C.
Currently, seven states – Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming – have no personal income tax. Two states, Tennessee and New Hampshire, tax only dividend and interest income. More states are looking to join them.
Since January, GOP governors in Virginia, Louisiana, Nebraska and Kansas have all proposed reducing or eliminating their states’ income taxes in favor of raising sales taxes.
The economic benefits are undeniable. A new study by economist Arthur Laffer and the American Legislative Exchange Council reports that over the last decade the nine states without an income tax created 62 percent of the three million net new jobs in America. Even more impressive, those states hold only about 20 percent of the nation’s population, though that number is increasing as citizens relocate to enjoy the more favorable tax and business climate.
The moves are motivated by a straightforward economic philosophy: It’s fairer and more productive to tax consumption rather than savings.
The argument goes like this. Since taxation is inevitable, it falls to tax writers how to collect the money in the fairest, most productive way possible. A tax on income is a tax on work because the money is extracted as a condition of employment. It’s also a tax on savings because it reduces the amount of money a person can hold or invest. This leads workers to demand and get exemptions from the income tax so that they have more money to run a business, buy a home, pay the mortgage and have children. Without the exemptions, workers would have less money to invest in the people and products that increase a nation’s wealth.
The logic extends to corporations as well. Faced with reductions in profits – and thus compensation for workers – from high corporate income taxes, businesses demand and get exemptions for certain activities and investment practices. But like the individual exemptions, these undermine the fairness of the tax system by carving out preferences through political pressure.
Some conservatives believe a sales tax is a fairer, more productive way to raise revenue. (Another tribe prefers a flat tax on income.) By taxing the consumption of goods and services, a sales tax lets workers decide when they will be taxed, and by how much. Moreover, since taxes on sales apply the same percentage to everyone, it is fairer, dollar for dollar, than the current progressive income tax. And it’s more productive because a sales tax reduces the burden on wealth creation, allowing workers to get richer before paying taxes.
Liberals like New York Times columnist Paul Krugman resist swapping income for sales taxes, arguing that doing so impacts a larger percentage of a poor person’s budget. Thus, a sales tax is called regressive because it does the opposite of what a progressive income tax does to the rich. There’s some basis for Krugman’s point, and, to be sure, a sales tax isn’t perfect, but most that exist carve out exceptions for particular items like food, diapers and other necessities.
FairTax.com, an initiative of Americans for Fair Taxation, explains how a sales tax could work at the federal level. But be forewarned: the details include exemptions covered by a “prebate,” and a 23 percent sales tax rate that would be on top of any state rates. The benefits include elimination of other federal taxes on income and payroll, and, of course, abolishing the IRS.
That said the conservative governors pushing for tax reform should be applauded for pursuing an alternative to Washington, D.C.’s income tax wars. If successful in at least some states, the debate about how best to structure the nation’s tax system will be better for it.
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