Although the prospect for taxation at the federal level is dismal, given the huge annual budget deficits of over $1 trillion as far as we can predict, the story at the state level is much different. Here’s an excerpt from David R. Henderson, “Cuts in Income Tax Rates Continue,” TaxBytes, Institute for Policy Innovation, July 5, 2023.
The progress since I last reported has continued. The state governments of Arkansas, Indiana, Michigan, Mississippi, Nebraska, North Dakota, and West Virginia have cut state income tax rates. Even Connecticut, whose Democratic governor, Ned Lamont, had to deal with a Democrat legislature, succeeded, with Republican support, in cutting all income tax rates except for the top rate paid by the highest-income people.
All of this matters for three reasons. First, as a moral matter, it’s important that people are able to keep more of their income. It’s theirs.
Second, even if cuts in tax rates cause state government revenue to be lower than otherwise, that will somewhat constrain the future growth in government spending. The reason is that, unlike the federal government, state governments can’t print money and almost all have some degree of a balanced-budget requirement.
Third, high income tax rates distort the economy, causing people to engage in tax avoidance (which is legal) and tax evasion (which is illegal.) Tax avoidance means not only aggressively finding legitimate deductions when you do your taxes; it also includes working less and making less money. Cutting tax rates reduces tax avoidance and tax evasion.
Read the whole thing, which is short.
READER COMMENTS
Thomas L Hutcheson
Jul 8 2023 at 10:13pm
Lets hope the reductions are in the lower income brackets and that that they find other ways of raising revenue so as not to create larger deficits.
David Henderson
Jul 8 2023 at 11:34pm
If you read my article, you saw that the reductions were in the lower brackets in Connecticut but that they appeared to be in all brackets in the other states.
Why do you say that we should hope they’re in the lower brackets?
Thomas L Hutcheson
Jul 9 2023 at 12:21pm
Because I think that taxes should generally be more progressive than they are.
Jose Pablo
Jul 9 2023 at 10:18am
Following David’s reasoning, let’s hope the reductions are in the highest income brackets, since:
a) the “moral” argument applies more to higher brackets since much more money is stolen from them and the money stolen is also “theirs”. Close to 70% of the taxes collected came from 20% of the taxpayers.
b) the constraint placed on expenditures will be more effective if the statement: “and we are going to finance this program by taxing the rich” cannot be credibly made any longer. “Somebody else is going to pay for this” should be banned from the political discourse.
c) the distortion that causes people engaging in tax avoidance and tax evasion is wayyy higher in the highest tax brackets.
It seems to me that saying “let’s hope the reductions are in the lower income bracket” is like saying: “I don’t agree with David’s rational for hoping for lower income taxes at the state level”
Thomas L Hutcheson
Jul 12 2023 at 2:39pm
It is indeed likely that Davis and I have different social utility functions. 🙂
David Henderson
Jul 13 2023 at 9:12am
I think you mean “David,” not “Davis.”
BS
Jul 9 2023 at 11:53am
People of means can more readily afford tax avoidance schemes, analogous to how larger corporations can more readily afford the costs of regulatory compliance. There is something to not binding the mouths of the kine that tread the grain.
Jose Pablo
Jul 9 2023 at 10:06am
Although the prospect for taxation at the federal level is dismal, given the huge annual budget deficits of over $1 trillion as far as we can predict, the story at the state level is much different.
This should be expected, since the states “competition” for citizens is much more intense. The barriers to moving between states are lower.
The federal government can “mistreat” their citizens much more because it enjoys a deeper “moat” that taxpayers cannot “jump” that easy.
Corollary: individual mobility encourages lower taxes
Thomas Strenge
Jul 10 2023 at 9:06am
Envy is a sin. Just because you direct towards high income people doesn’t make it more noble. Additionally, high income people are high productivity people. That means their labor is of the greatest benefit to society and any reduction in their efforts hampers society at large. Lastly, high income does not mean wealthy or rich. In most people’s mind, being rich means not having to work. High income people often have to work because their lifestyle cannot be continued once they stop working. Income taxes should be eliminated. In the alternative, low flat rates are preferable.
Herb
Jul 10 2023 at 4:56pm
Unfortunately, California is not on your list.
Comments are closed.