One of the foundational issues in tax policy is the difference between income and consumption taxes. Currently, the US has both as do most of the states. The notion of eliminating one and having the other pick up the lost revenue comes up from time to time. In recent campaigns, the proposal of a “flat tax”, an increased rate of sales tax for everyone, came up on the national level. More recently, the idea has surfaced in a few states.
The key difference ideologically is that income tax taxes the money you take in, while consumption taxes (which include both sales and use taxes) tax the money you spend. Advocates of reduced or eliminated income tax argue that income taxes entail the government deciding where money should be invested, while consumption taxes permit people to decide for themselves where their money will go. Defenders of income tax usually fire back that absent some sort of government control, we would lack investment in roads, bridges and other infrastructure.
In the states where repeal of income tax is proposed, the proposals are drafted to be revenue neutral, that is to end income tax without reducing the income of the state. The proposals accomplish this either by increasing sales tax rates, or by eliminating various deductions or exceptions to the sales taxes. The advocates of these plans say removing personal and corporate income taxes will make their state more appealing to businesses and individuals, encouraging them to move there. That would mean more jobs in the state and also, since more people means a broader tax base, more tax income.
Those opposed to the proposals say sales taxes, as compared to income taxes, unfairly burden lower income individuals.
For more information on this or other tax law matters, contact Horowitz Law Offices.