2014 could be the year that Georgia's House and Senate vote to either decrease or eliminate the state's income tax. Both have convened study groups to examine specific plans to lower personal income tax rates during the 2013 session. Economics Professor Christine Ries explains why less is more.
Taxation is, or should be, about raising tax revenue for government services. Before 1842, all countries used only consumption or sales taxes to collect tax revenue. By 1939, beginning with the United Kingdom and ending with Switzerland, countries in western Europe, North America, Asia and the Pacific added income taxes to a previously consumption tax regime.
Income taxes were added in order to accomplish new goals of income redistribution, social and economic planning. Social welfare goals could be hidden within the tax system using an income tax. No longer would governments be forced to seek political support for specific and targeted welfare and economic planning schemes. This coincided with extension of the voting franchise to many who were not property owners or income earners and with the rise of left-wing or progressive political parties. It also coincided with a dramatic increase in government budgets and the reach of government power into the private sector.
The recently released Georgia Budget and Policy Institute’s review supports both income versus consumption-based taxes for Georgia and a larger Georgia state government budget. It's directly in line with those 19th and 20th century treatises. The GBPI review creates a number of red herrings, but doesn’t pretend to careful analysis of any specific reform plan. At base, the report just supports the use of Georgia’s tax system for social and economic planning and income redistribution. They just don’t want to lose the use of the tax system for income redistribution.
Using the tax system only to collect revenue with minimal damage to Georgia’s economy, we would tax consumption – not the production, hiring, economic growth and investment. In other words, we would tax so as to release the economy’s growth potential as much as possible.
The historical record in many countries and many U.S. states over a long period of time is clear. Raising tax rates on income suppresses economic growth; lowering tax rates on income releases economic growth. It also makes sense.
Tax consumption if you want to protect the economy and instead provide for welfare with specific, targeted, accountable legislation. Support high income tax rates if you want to use the tax system to meet the community’s needs for welfare and redistribution.
If you want to use the tax system only for the purpose of raising revenue and protect Georgia’s economy, tax Georgians’ consumption at a low rate and over as many individual items as possible. Don’t use our tax system as a back-door scheme for unspecific welfare, redistribution and planning purposes.
THAT is the science and the common sense.
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