Politicians and researchers in the United States have long been interested in how potential changes to the personal income tax system could affect the nation’s finances. Presidential candidates always talk about lowering income taxes but rarely does it come down by a significant amount. Is it possible to altogether abolish income tax in our country?
If you think it’s a good idea, you first need to know just how big of a revenue source income tax is to state governments. States generate a substantial majority of their tax revenues from three sources: property, general sales, and personal income taxes. These three tax sources make for the largest chunk of total state and local tax revenue. Personal income tax was 17.8% of all general revenue for state government in 2017.
To compensate for any reduction in personal income tax — or done away with entirely — would require alternate sources of revenue generation. Examples of such would be increasing excises on alcohol, beer, tobacco, gasoline, gambling, and business taxes. Some of these alternative tax sources can be touchy subjects— especially raising taxes on gasoline or burdening businesses with higher taxes.
Taxing gambling is also getting tricky as technology makes avenues to gamble online and through mobile apps easier. Increasing sales tax on goods sold is also getting challenging with the advent of online shopping. Raising business or corporate tax rates too much is hard due to competitive pressures between states vying for employment-generating businesses.
Other revenue generation schemes governments would have to consider can be levies on motor vehicle purchases or carbon tax, whereby state governments set a price that businesses must pay for each ton of greenhouse gas emissions they emit. Property taxes are the prime source of revenue for local governments; raising them helps fund county governments and municipalities.
State governments would have to consider levying user fees for public infrastructures such as airports, hospitals, taxing bank transactions or charge more at state universities and utility services. Another proposal would have to be ownership or nationalization of infrastructure such as tolled highways, airports, and ports to secure all the income such ventures generate.
Personal income tax rate cuts or abolishment of the same may encourage individuals to save more, spend more, or invest more. But if the tax cuts are not assisted federally by either revenue sharing or by spending cuts, then it will can result in ballooning federal budget deficit, which in the long-term will reduce national saving and raise interest rates.
Comments