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Taxes

 WHY DO HIGH TAXES THREATEN PROSPERITY? 

 Tenth Amendment: The powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states respectively, or to the people.

 The tax structure in the United States has changed significantly over the last two hundred years as the federal government has grown in size and responsibility. As government grows, it must collect more taxes in order to pay for additional government services. In our Foundations paper, we discussed Frederic Bastiat’s concept of “legal plunder,” when the government exceeds it role, taking from some and giving to others as it believes best. However, once it is determined what government needs money for, it is important to collect taxes in ways that are least harmful to the economy. Additionally, there is a different dynamic with federal and state taxes, because states can compete with each other through tax and economic policies and the government is closer to the constituents. It is for that reason the founders wrote the 10^th Amendment, leaving many responsibilities to the states.    

The federal, state, and local tax systems in the United States have changed significantly since colonial times as we have seen all levels of government continue to expand their roles – at the taxpayers’ expense. For much of America’s history, taxpayers had little interaction with the federal government, because much of the federal government’s income used to only come from excise taxes, tariffs, and customs duties, limiting its growth.[1] 

Has the federal income tax always existed? – NO 

The U.S. Supreme Court ruled the first federal income tax as unconstitutional, resulting in the 16^th Amendment in 1913. Before this, the federal government’s income came from tariffs, excise taxes, and customs duties. 

16^th Amendment: The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration. 

All taxes are not created equal. Federal, state, and local governments are now able to tax their residents. However, there are different ways to tax individuals, with some being more economically harmful than others. One of the most harmful is the progressive tax – which essentially applies punishment for earning more income by increasing the percentage of tax they pay based on their salary level. This form of tax is used for both individuals and businesses. It is clear how taxes like this could discourage innovation on the behalf of businesses and entrepreneurs, for fear of getting into a higher tax bracket. Whereas, consumption taxes (or sales taxes) are based on goods or services purchased, rather than the amount of an individual’s income. Other options include taxing everyone at a fixed percentage of their income (flat tax), or taxing only consumption of goods (fair tax) through a federal sales tax, replacing the federal income tax. 

Raising taxes does not always increase tax revenue. Dr. Arthur Laffer, a supply-side economist who served on President Ronald Reagan’s Economic Policy Advisory Board, is best known for the “Laffer Curve,” which illustrates that increased taxes can actually result in decreased government revenue. As taxes increase, consumers spend less, creating less total tax revenue. This is clearly illustrated in an annual publication co-written by Laffer – Rich States, Poor States – which ranks all 50 states on economic competitiveness and performance. States with lower taxes are more economically productive and attract more residents and businesses.Utah ranks 1^st in economic outlook, boasting a 26.3% population growth rate, while New Yorkranks dead last, and has a 3.9% population growth rate. The publication reports, “…states that spend less — especially on income-transfer programs — and states that tax less — particularly on productive activities such as working or investing — experience higher growth rates than states which tax and spend more.”[2]

The role of taxes in America has definitely changed as we’ve shifted from a nation of decentralized local governments to a nation with a more central federal government. However, our economy can continue to grow if we keep many powers at the state level and implement tax policies that are the most fair to the taxpayer.