I recently proposed that Arizona abolish its income taxes and replace them with sales taxes that reach more goods and services. I received many emails from people concerned about how this change would affect families with lower incomes.
As with many things in economics, one must look beyond simple math. The bigger question is how the overall tax structure impacts a person’s ability to pay any kind of tax, regardless of income. During George H.W. Bush’s presidency, a luxury tax aimed at the rich was imposed on items like yachts and private airplanes. This tax so decimated these industries that the unemployment benefits paid to workers who used to build the yachts and planes cost more than the tax generated, according to one federal study. If you put low and middle-income earners out of work with a tax on high-income earners, it hasn’t done much good for anyone, including government coffers.
A study by economists Barry Poulson and Jules Kaplan recently found that states with income taxes grow more slowly than states without income taxes. A recent dissertation by Tae-hwan Rhee at Stanford University also found that states placing the heaviest tax rates on people with higher incomes have the slowest economic growth.
Slow economic growth means there are fewer career advancement opportunities for everyday workers and fewer jobs for those struggling to find employment. Simply put, slow economic growth hurts low and middle-income earners because they can’t find jobs.
So, if we want to design a tax system that helps lower-income families, we must take steps to improve economic growth. The best possible step would be to eliminate income taxes and replace them with a low, broad-based sales tax.
Dr. Byron Schlomach is director of the Goldwater Institute’s Center for Economic Prosperity.
Goldwater Institute: Broad-based sales tax can safely replace income tax that holds back economy
The Cynical Economist: Taxing the “Evil” Rich. Lesson From The Past
Cato Institute: State Income Taxes and Economic Growth
Stanford University: U.S. State Income Tax and Macroeconomics