Tuesday, October 2, 2007

Eliminating The Income Tax

Eliminating The Income Tax

One of the issues I have long advocated is the need for state government to eliminate the progressive state income tax. I think it is bad policy for the government to tax someone for earning money. I believe this takes away incentive for individuals to work hard and be productive, especially when the benefits of relying on welfare are so substantial. I also believe it is difficult for Oklahoma to compete with Texas for economic growth when there is no income tax in Texas.

This year the legislature cut the uppermost income tax percentage to 5.5%. However, this number was far short of the effort launched by the Chairman of the House Revenue and Tax Committee, Representative Randy Terrill of Moore. Terrill, who has been one of the foremost advocates for eliminating the income tax originally sought to lower the top tax rate to 4.65% by 2009. While the Terrill effort was approved by the House Revenue and Tax Committee, it was later sidelined in favor of the 5.5% rate.

Terrill is continuing the effort to reduce the income tax by holding a series of hearings with his committee.

During one of the recent hearings, Phil Kerpen, the national policy director for Americans for Prosperity told the committee that Oklahoma cannot afford to stop the effort to lower the income tax if Oklahoma wants to continue to attract new citizens and businesses. He explained that Oklahoma is not just competing with other states, but is competing in a global economy. There is a 6% corporate tax rate in Oklahoma on top of a 35% federal rate, for a combined 41% corporate tax rate. When the state franchise tax is added in, there is a 43% effective tax rate on companies that do business in Oklahoma - all this before their officers even have to consider paying personal income tax.

Kerpen said that in Europe the average corporate tax is about 25%. In some Asian countries it is even lower. The idea that people can be taxed at whatever rate the government wants and continue to stay and pay high taxes is an antiquated one. People are very mobile and capital is even more mobile. If Oklahoma is going to compete in the global economy and succeed, we need a much lower tax rate.

Between 1980 and 2006, Oklahoma’s real Gross Domestic Product growth lagged behind all neighboring states, according to figures referenced by Kerpen. Oklahoma’s real GDP growth during that period was less than half the rate experienced in New Mexico, Texas and Colorado. Private job growth in Oklahoma lagged far behind Texas, New Mexico and Colorado from 1990 to 2006 as well.

Kerpen also stated that the individual income tax rate is one of the real drivers that determine where people decide to live, how many hours they work and how many businesses they start. It has an incentive effect on all sorts of economic activity. The more you tax people, the less reward they have for working, saving and investing. The result is that they do less in all of those areas. Legislators claim to understand the link between taxes and behavior when it comes to things like cigarette taxes, which are touted as a way to reduce smoking. But for some reason, many lawmakers ignore the fact that taxes on income have the same effect.

The House Revenue and Taxation Subcommittee is expected to conduct several more meetings on the tax issue through November and hear from other national experts. Hopefully, these hearings will continue to bring attention to the need for true state tax reform.

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