Byron Schlomach

Would a flat tax be good for Arizona? YES

Posted on July 05, 2009 | Type: Op-Ed | Author: Byron Schlomach
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You don't have to spend years poring over economic textbooks to understand that the more you tax something, the less of it is created or consumed. That's one reason tobacco taxes are so high; the government wants to discourage its consumption. And tobacco use is falling partly as a result of this policy.

The same lesson applies to personal income. All income is derived from work, innovation, investment and thrift on someone's part, and income taxes directly tax these activities. But, unlike tobacco, our standard of living and prospects for future economic growth depend on these endeavors, so the negative effects of income taxes should be minimized whenever possible.

A graduated income tax, where tax rates rise with income, discourages those with higher incomes from earning, investing and saving as much as they might otherwise. That's a problem because those are the ways that new businesses, new products and new jobs are created.

Through entrepreneurial and profitable investments, those with higher incomes create economic opportunities not just for themselves but for those with more modest incomes, too.

That's why many people who want to improve economic opportunities for everyone have long argued for a flat income tax, one that taxes every dollar of income at the same rate.

For example, under the simplest flat income tax, someone making $250,000 would pay the same tax rate as someone making $25,000. Not the same dollar amount, mind you.

The higher-income earner in this example would pay 10 times as much in taxes as the lower earner. But because there is no longer a financial disincentive to move into a higher tax bracket, a flat tax would do less to discourage economic opportunity than a graduated tax.

The Goldwater Institute and the Arizona Free Enterprise Club published a study this spring co-authored by Arthur Laffer, former economic adviser to President Ronald Reagan and creator of the famous Laffer Curve. The study concluded that a 3.3 percent flat income tax in Arizona would lead to the creation of 112,000 new jobs. The 2.8 percent flat tax proposed in the Legislature, depending on the details, might perform even better.

Both of these proposals were intended to bring in the same amount of money our current graduated income tax brings in. Some argue a flat tax would actually increase revenue, and with the resulting changes in incentives to work and earn, it very well could. Regardless, the estimate suggesting the Legislature's proposal would cost the state $450 million in revenue is questionable.

In 1986, the federal income tax was flattened somewhat when the top marginal rate fell from 50 percent to 28 percent and many deductions were eliminated. Tax revenue from higher income brackets increased, and the 1986 reform is widely credited with helping to create the decades-long economic expansion we enjoyed until recently.

When Karl Marx introduced "a heavy progressive or graduated income tax" as the second plank in the Communist Manifesto, he was reacting to a world that no longer exists. That was a world with a rigid aristocratic and privileged elite. Today, that world is more likely to be created by a graduated income tax than prevented by it.

A flat income tax could be a boon to Arizona's economy. With the nation's second-largest jump in unemployment, it's time to recognize the role tax policy plays in economic growth and pull out all the stops.

Byron Schlomach is an economist with the Goldwater Institute, a non-profit public-policy research-and-litigation organization in Phoenix (goldwaterinstitute.org).

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