Saturday, September 18

The 400 meter hurdle to economic prosperity

From the Kansas Department of Revenue.

The 400 meter hurdle to economic prosperity
By Michael Austin, economist with the Kansas Department of Revenue
Twitter: @KS_TaxEconomist
February 14, 2017

Athletes running hurdles can seem a lot like everyday people navigating costs such as taxes on their way to economic prosperity.

Kansas’ state government is funded primarily from sales and income tax. If these taxes could serve as hurdles on our way to financial gain, then is one better than the other? Using the example of hurdles may shed light on the need to fund state government with consumption taxes and less of a reliance on income taxes.

Imagine you are running a 400 meter hurdle. Every hurdle you approach represents a tax paid, and only after you clear that hurdle by paying that tax, can you consume goods and services. The first hurdle you jump represents the tax paid today, while subsequent hurdles signify future tax payments.

A track consisting of a sales tax on all goods and services closely mirrors what we see when we watch hurdles. The sales tax rate that you pay on items today is the same as the tomorrow, just as hurdles are a consistent height throughout a race. This stability means that Kansans know what to expect, and they are encouraged to save their money and use it (with interest) to consume more in the future. Sales taxes encourage saving and future consumption, and that can grow the economy.

A track with an income tax of the same rate is different. In part, an income tax acts like a tax on goods and services, but over time their burden becomes larger. An income tax goes a step further by raising the price to consume in the future by taking a bite out of your interest gains when you save.

Instead of a track with consistently sized hurdles each hurdle would higher than the one before it, and you must use more energy with every jump. Income taxes make saving your money less attractive, decreasing future consumption far more than a sales tax would. An income tax discourages people to save, and people saving their money to use in the future, our economic growth slows.

This is why income taxes are a more destructive barrier to economic growth than sales tax. The less reliant Kansas’ tax structure is on the income tax, the more opportunities Kansans have to prosper economically.

In 2012, Kansas took more than $1,000 in income tax per person from its taxpayers, a rate higher than its neighboring states. By 2014, after the tax policy, that hurdle has dropped $133 in income tax per person and is now the lowest in the area.

If our state is to become the best place to start and grow a family or business, then we owe it to Kansans to create a predictable tax environment so they can easily see the finish line. Crafting a tax environment that shifts more to sales tax and less on the income tax will allow Kansans to grow their personal wealth.

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