The Tax Foundation completed an interesting study on which tax revenue options were the best to gain revenue while not completely decimating the economy in the process.
They found that mobility is a major factor:
Capital is the most mobile factor in the economy and therefore most sensitive to a hike in tax rates. Naturally, land is the least mobile and less sensitive to high tax rates.
This is not to say that high taxes won’t affect consumption and property patterns but their impact will simply be less than the impact of taxes on capital and income.
To put these in order (from best to worst options) according to their study:
- Economic Growth
- Asset Sales
- Require Government Sponsored Enterprises (GSEs) and federally-owned businesses to pay federal income taxes
- User fees/leases
- Fix loopholes and remove non-taxed entities exemptions
- Premium/Co-pay increases
- Federal employee contributions
- Sales/Excise tax
- Base broadening (such as taxing employer-provided health care benefits and eliminating industry subsidies/targeted tax preferences
- Payroll tax
- The Alternative Minimum Tax
- Allowing “temporary” expensing to expire
- Raising top individual income tax rates
- Estate tax
- Raising tax rates on capital gains and dividends
- Corporate income tax
I imagine if property tax were included it would be at least before sales/excise tax. Likely very high up on the “good” side of the list. I would also be interested where tariffs fall on this list.
Tax Revenue Options
In short, we should be focusing on tax revenue options that provide the most revenue with the least economic impact.
Naturally, high income taxes disincentive people to earn high incomes. High corporate tax stifles business expansion. High payroll taxes impact wages but are less impactful than something like estate or income taxes.
Likewise, sales tax discourages consumption. However, the impact of the lessened consumption is less harmful than if the same amount of revenue was gained directly through income. Property tax, since land is the least mobile, is arguably one of the most efficient taxes for revenue vs. economic cost.
Removing tax exemption for certain things (like credit unions) is obvious enough as well. One thing I found thought-provoking was user-lease fees. The government owns a tremendous amount of items/land/capital. Leasing or requiring use-fees on much of this could be a massive revenue generator while also provoking economic activity instead of restricting it.
Our current tax structure is nearly the opposite of this. We have the highest corporate tax rate in the world along with an oddly shaped progressive income tax curve.
Switching to focus more on these better forms of taxation would suit us much better for economic growth and activity. Keeping the different taxes is fine. But switching around our portfolio of major revenue earners would help make us much more of an economic powerhouse.
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