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Serious about Tax Reform? — 3 Reasons You Should Focus on Cutting Income Taxes

By Caleb Taylor

Arkansans would all benefit from shifting the state’s tax burden away from income taxes, ACRE Scholar and UCA Assistant Professor of Economics Dr. Jeremy Horpedahl said in a speech at a “Tax Freedom Day” event at the State Capitol on Friday, April 13th. It’s good for taxpayers, consumers, businesses, and even state government employees and officials!

According to the Tax Foundation, Tax Freedom Day in Arkansas is the date Arkansans have to work until to pay their federal, state and local taxes for the calendar year.

In his speech, Horpedahl discussed his research on Arkansas taxes and options for reform explained in “Arkansas: The Road Map To Tax Reform.”

Arkansas policymakers studying tax reform should eliminate economically harmful exemptions in sales and income taxes and use the increase in revenue to offset income tax reductions, according to Horpedahl.

Horpedahl said such changes  aren’t just “shifting taxes around” but rather are an opportunity to increase individual liberty, improve economic growth, and improve government budgeting.

 

  1. Tax Reform Can Increase Individual Liberty

 

“This increases the choices you have and your individual liberty. If you think about an income tax….that money is taken away from you before you get your paycheck. That money is withheld and you never get to see that money. Whereas with the sales tax, you at least have some choice with how your income is going to be spent. If you lower income tax rates, you have more money going into your bank account and more money going into your pocket. That means you can then choose to spend it and you’d pay the sales tax. Or, you could do other things with it…save it, invest in your business or donate to your church or favorite charity. By lowering income tax rates, we’re going to give you more choices.

 

  1. Tax Reform Can Increase Prosperity

 

“The more you lower those income taxes and shift them to sales taxes…the higher economic growth will be. For example, for every four percentage points of your tax revenue that you shift over to sales or property taxes and away from income taxes, you can increase your economic growth rate by one percent. Some of you may say, ‘One percent? What’s the big deal about that?’ In many years the total economic growth rate is just one percent so you can essentially double the rate of economic growth by shifting say about four percent of your taxes over towards sales and property taxes. Most years we only get two or three percent max so a one percent increase in growth is huge especially if you add it up over decades or generations.”

 

  1. Income Tax Cuts Can Make Government Budgets More Responsible

 

Income taxes are the most volatile. When the economy is doing well, that revenue goes way up for the government. When the economy isn’t doing well, that revenue goes way down. Property taxes are much more stable and sales taxes are still pretty stable compared to income taxes. The more of your total tax revenue you shift away from income taxes, the more stable the government’s budget is overall which makes it easier to plan. It also reduces that temptation when times are good to start new programs. You’ve got new revenue so let’s start something new. When tax revenue goes down you either have to eliminate something or search for new revenue somewhere else. That’s not something we want to encourage. Having that revenue be more stable I think is a good strategy for government budgeting overall.”

 

Upcoming Tax Reform Tour Dates

Horpedahl has two more upcoming “town hall” speaking engagements as part of Americans for Prosperity- Arkansas’s Tax Reform Tour. He’ll be speaking at 6:30 p.m. Thursday, April 19th at the Embassy Suites in Little Rock and 6:30 p.m. Monday, May 17th at a location to be determined in Rogers. A third date in Jonesboro this summer will be announced soon.

More of ACRE’s work on tax policy can be found here. You can read a one-page summary of Horpedahl’s research on income taxes here.