Stephen Slivinski

Consider the long-term economic benefits of flat tax reform

Posted on March 30, 2011 | Author: Stephen Slivinski
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The flat income tax proposal authored by state Representative Steve Court (HB 2636) to replace the current Arizona income tax altogether has started a much needed discussion about tax policy.

The proposal rests on an important insight: the need to have a broad base of taxation with a low, single tax rate that avoids distorting the economy by exempting some activities, but not others from taxation.

What’s been overshadowing the discussion, however, are reports that this specific proposal would increase taxes for the working poor. It is certainly true some people currently pay little or no taxes under the current system and they would pay at least something with a flat tax. It's also true that income isn’t the only form of compensation these sorts of workers receive in a year. They also receive a number of government benefits such as subsidized child care, free health care, and myriad other services. The requirement that all Americans pay at least something in taxes may not seem as onerous when viewed in the broader context of the government services to which they have access.

Another important concern is whether tax policy is geared to increasing economic growth over the long term so those who are currently poor have more and better job opportunities to help them leave poverty. Today's graduated income tax rates targets the very people who can create jobs that lift people out of poverty. Taxpayers in the middle and high income brackets – many of which are investors and small business owners – pay a progressively higher rate for each additional dollar they earn or invest. Economists generally agree that sort of tax system hinders income and job growth for all, and particularly for those at the lower end of the income ladder.

Analysis of tax reform proposals needs to take into account the long term, not just the short term. Seemingly-difficult changes today are worth making if they are part of a reform plan that creates a more robust economy tomorrow.

Steven Slivinski is senior economist with the Goldwater Institute.

Learn More:

Goldwater Institute: "How To Restructure Arizona’s Tax Code: A Smarter, Flatter Tax Plan to Create Jobs."

Goldwater Institute: "Would a flat tax be good for Arizona? Yes"

Hoover Institution: "Questions and Answers about the Flat Tax"

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