Getting rid of an unbalanced reliance on the income tax and moving to an approach that taxes consumption instead would brand Kentucky a state of producers rather than a commonwealth of punishers.
After all, what do personal and corporate income taxes accomplish other than funding government services and programs by punishing – and thus discouraging – individuals from producing and businesses from growing?
A proven free-market principle is: policies get more of what they encourage and less of what is discouraged.
States moving away from income-tax policies to approaches capturing revenue from purchases of products and services have more vibrant economies than their counterparts, most of which demonstrate only economic mediocrity.
Kentucky currently fits into the latter category, according to the Tax Foundation, which claims that 32 other states have a better business tax climate.
A common attribute among states ranking near the top of the foundation’s 2017 Business Tax Climate Index is that they don’t levy one or more of the major taxes: the corporate or individual income tax or the sales tax.
However, even some states holding onto all major taxes – like Indiana and Utah – rank in the index’s top 10 because they have greatly lowered their rates, albeit with broader bases.
North Carolina, meanwhile, moved from No. 41 on the foundation’s 2013 index to No. 11 in the latest ranking by enacting a flat tax with a relatively low 5.5 percent rate.
Any of these approaches is better than the current policy in Kentucky, which could follow these states’ lead or leap even higher by getting rid of income taxes altogether and raising the greatest portion of its revenue via consumers.
To opponents, however, such an approach would be too fair.
Their narrative is that consumer levies, like sales or flat taxes, treat everyone the same: the more you buy, the more tax you pay; the less you purchase, the lower your tax bill.
How, exactly, is that a problem?
Remember: fairness is not the ultimate goal of these defenders of the status quo. In fact, they don’t care for the fairness of a consumption-based tax at all.
Instead, they favor the Robin-Hood approach (apologies to Russell Crowe).
Implementing a policy whereby the commonwealth raises a significant amount of its revenue by taxing spending rather than producing removes the ability of these modern-day Robin Hoods to ambush producers in the rich forests of the Bluegrass State and redistribute their wealth to others.
However, citizens likely will ultimately resist their Bernie-Sanders-Elizabeth-Warren-Hugo-Chavez approach to tax policy when they understand the real benefits to them personally of a consumption-based tax policy:
- Bigger paychecks.
Abolishing Kentucky’s state income tax would amount to an immediate increase in the size of many paychecks.
- No more April 15 surprises.
Since all taxes owed would be paid during purchases in this pay-as-you-go system, there would be no complicated forms to file, unexpected bills or audits.
- A built-in incentive for Kentuckians to save.
An income-tax policy means entire paychecks are taxed, regardless of how much is saved or spent.
Where’s the incentive to save in that approach?
A consumption-based levy taxes only what is actually spent and likely will result in less impulsive and more productive purchases.
Plus, lawmakers could lighten the burden on lower-income residents by opting not to tax food or medicine, which would give frugal shoppers who purchase only the basics the added advantage of paying even less in taxes.
What better ideas do opponents of a consumption-based tax offer for building healthier savings accounts and, with them, a stronger state economy and more independent and prosperous citizenry?
Jim Waters is president of the Bluegrass Institute for Public Policy Solutions, Kentucky’s free-market think tank. Read previous columns at www.bipps.org. He can be reached at firstname.lastname@example.org and @bipps on Twitter.