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Goal of Kansas tax reform is economic growth

Dr. Art Hall, who is Director of the Center for Applied Economics at the University of Kansas has proposed a radical change and simplification to the Kansas tax system. Besides simplification of the way the state collects taxes, the major goal of the proposal is to encourage economic growth in Kansas.

The goal of tax policy should be to raise the funds necessary to run government, and to do so in a way that provides the most incentive for economic growth. The accumulation of capital, which comes from savings, is the best way to promote future economic growth. Capital allows companies to expand productive capacity through making investments in machinery and technology. This leads to more jobs and higher-paying jobs. As the economist Walter E. Williams has discussed: “Ask yourself this question: who earns the higher wage: a man digging a ditch with a shovel, or a man digging a ditch using a power backhoe? The difference between the two is that the man with the backhoe is more productive. That productivity is provided by capital — the savings that someone accumulated (instead of spending on immediate consumption) and invested in a piece of equipment that helped workers to increase their output.”

It’s important, then, that tax policy in Kansas generates revenue for the state in a way that doesn’t harm the accumulation of capital. As Hall writes: “Taxation of the resources used for future production may well lead to less future production.”

The solution Hall proposes is a consumption tax — a comprehensive statewide sales tax — that would replace all state-level taxes in Kansas, including the personal and corporate income tax: “Because saving and investment are key elements of the growth process, consumption taxes can better promote economic growth, all else equal.”

He explains in more depth:

A well-crafted retail sales tax has positive attributes from the perspective of economic growth. It represents one form of a consumption tax, a form familiar to most people. Generally, consumption taxes represent a class of taxes that do not tax money used for saving and investment, regardless of the source of that money. This feature of consumption taxation differs from traditional types of income taxation. Income taxes effectively double tax the money used for saving and investment (but tax only once the money used for consumption), thereby producing a tax bias against saving and investment, which generates a disincentive to dedicate money toward future production.

Hall writes that “A well-crafted retail sales tax would also tax all goods and services uniformly.” His proposal even includes taxing the consumption of rented and owner-occupied housing. While true to the goal of uniformity, Hall recognizes the “novelty (and probable unpopularity) of applying the retails sales tax to rented and owner-occupied housing.”

Hall’s paper is comprehensive and includes discussion of technical issues such as “tax cascading,” where taxes on the inputs used by businesses are taxed again as intermediate goods and services make their way through production processes. There is also discussion of what Kansas could do to make the consumption tax progressive, if that is desired. Border considerations are discussed, too.

Currently the statewide sales tax in Kansas is 5.3%. (Counties and cities may impose additional sales tax on top of that. In Wichita the combined rate is 6.3%, for example.) Depending on the details of the consumption tax that Kansas might implement, the rate could range from 6.77% to 9.99% (those figures calibrated to produce the same revenue that the state collected in 2008).

What would be the impact on economic growth in Kansas? Simulations conducted by Hall indicate that growth in private-sector employment could be in the neighborhood of seven to eight percent per year, depending on the type of plan and phase-in period. This is tremendous growth, especially in light of the fact that private-sector job growth in Kansas has been stagnant or declining for many years. Private-sector investment and take-home pay would rise less rapidly, but at a strong rate.

Currently there is no bill in the Kansas Legislature that would implement a plan like this. It’s thought that an amendment to the Kansas Constitution would be necessary to soundly implement this policy. The amendment, ideally, would prohibit any income tax. Without this constitutional protection, lawmakers could reimpose either personal or corporate income taxes at any time.

Dr. Hall’s paper may be read at A Comprehensive Retail Sales Tax as a Single Tax for the State of Kansas.

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9 Comments

  1. Ty Dillon February 4, 2010

    Thank you for this post. Reading his entire paper now.

    Ty Dillon

  2. Jeffrey Locke February 4, 2010

    Thank you for showing this approach as possible for Kansas. I proposed for passage a Resolution for the January 29th, 2010 State Committee Meeting of the Kansas Republican Party in which Dr.Hall’s idea for a Comprehensive Tax Reform/ Replacement approach was passed with not ONE vote in opposition.
    Earl Long, President of FairtaxKC, sent all four district delegates a copy of Dr. Hall’s proposal and well before the meeting so that all would have time to examine it thoroughly. The Resolutions Committee also recommended passage unanimously and announced that just before the actual vote of the body politic.
    Missouri has already passed their version of the Fairtax model through their House of Representatives last year! We need to get our legislator’s working on their own version of a Kansas Fairtax model or we’ll continue to lose businesses and people to our neighboring state.
    Go to http://www.FairtaxKC.org and get more information and get involved. Of the people, by the people and for the people is the only way to pass this and keep it pure. No state income or corporate income tax as well as no estate, inheritance or capital gains tax. Let’s get it done NOW for Kansas!!!

  3. Craig Gabel February 4, 2010

    Let’s start with Wichita and Sedgwick County. If it works here they can take it state wide. We have a petition that we are going to launch Feb 20th at the Tea party winter rally. It has already been approved by County legal staff.

  4. jerome hughes February 4, 2010

    This is an excellent idea. Growth in the economy(think jobs) would be the natural benefit of this idea. On the national level this is probably the only solution to debt our leaders(followers?) have thrust upon us. On the state level it would give us a competitive edge on other states(not just bordering states) as well as increasing individual responsibility.

  5. scott owens February 7, 2010

    Dr. Halls idea is not a new one. Alan Greenspan proposed a similar concept 15 years ago. Here was a response back then –
    http://mises.org/story/1768 .
    It is equally as valid a critique today.

    But for those of you who can’t read through it here is a notable quote –

    “Hence, the seemingly common-sense view that a retail sales tax will readily be shifted forward to the consumer is totally incorrect. In contrast, the initial impact of the tax will be on the net incomes of retail firms. Their severe losses will lead to a rapid downward shift in demand curves, backward to land and labor, i.e., to wage rates and ground rents. Hence, instead of the retail sales tax being quickly and painlessly shifted forward, it will, in a longer-run, be painfully shifted backward to the incomes of labor and landowners.”

    Everything old is new again … unless you remember the old and why it was a bad idea back then.

    Answer to the question on ditch diggers posed at the start of post: Both will be paid the same amount, it is a silly question.
    If you had to plow a field would you want to do it by hand with 10 men or 1 man with a John Deere ? To the 9 men who are not earning a wage because they don’t own or work for the Deere owner … they would certainly prefer you did it by hand.
    And then what percentage/how much of their wages ( 9 * xx $ ) would flow into the economy instead of just that one man ?

    Would being able to build a house by just pushing a button instead of employing 20 or 30 tradesman for a month be a good thing for those tradesman ? And if so … what would the sales tax on that lumber and copper cost to make up for the loss to a States treasury ? And what did you do with those now idle tradesman who have no jobs – teach them to greet people at a WalMart ?

    Be careful for what you wish for. You might get it.

  6. Anonymous February 7, 2010

    Scott, you confuse people working at jobs with the creation of prosperity and wealth.

    As for Greenspan, at one time he was a believer in economic freedom. But by 15 years ago, he had converted to the corporate welfare / warfare statist view. I’m surprised a tree-hugger like yourself would be interested in what he would say.

  7. Jeffrey Locke February 8, 2010

    Scott you trump out experts whenever your logic fails to impress. But Alan Geenspan does have one quote that means alot to me and why I support the Fairtax model for Kansas. He is quoted as saying “…only people pay taxes”.
    So follow MY logic. All taxes are funded by “new” money and that “new” money comes from the price paid for the product or service rendered to the consumer of that product or service. That reality drives home the reason for a simple, single incidence sales tax with the concurrent removal of all the embedded costs of our current system of confiscation. Scott, here’s your homework. Go to http://www.fairtax.org and access the White Papers section. Read and assimilate what 80 leading economists have said about the necessity of going to the Fairtax model on a National Level. And once you do I believe you’ll come to understand the error of your ways. Over 22 million dollars in research from Harvard, MIT, Stanford and more have proven the efficency and necessity of the Fairtax approach. Of the people, by the people, and for the people. Fairtax NOW!!!!

  8. scott owens February 11, 2010

    Jeff,
    I just repeated what other more wiser folks have said about this topic.
    Today there is a blog thread that uses the very same web site I referenced – https://wichitaliberty.org/economics/hayek-vs-keynes-the-video/ so lets use them again for a review of the fairtax – http://mises.org/story/1814
    ( I’ll give you a hint. The article is titled “The Fair Tax Fraud” ; you can take it from there.
    And I will throw in a quote lifted from Mr. Rothbard – ” The consumption tax does not strike me, in its philosophical implications, as one whit more noble, or less presumptuous, than the income tax.”

    I don’t think a sales tax is fair and my family has a pretty decent income.
    A person who makes 100K and spends none of it pays no tax.
    Yet if I make 100K and buy 50K in groceries – I pay the tax.
    Cheapskates pay no taxes ?

    That just does not seem fair or right. Can you share that MIT research data ?
    I was there last year and would like to see what there writing up.

  9. scott owens February 14, 2010

    Anonymous,

    You wrote ”
    Scott, you confuse people working at jobs with the creation of prosperity and wealth.”

    You think somehow you can have “prosperity and wealth” without people working ?
    Lay off all the workers at Cessna and Boeing. What kind of prosperity and wealth would we have then other than longer lines at the food banks and food stamp lines.
    Now that the welders have no jobs they won’t be hiring anyone to build them new homes and so those carpenters will not buy new trucks and those car sales man will stop sending his daughters to band camp … .and on and on …

    I got Greenspans book a year ago – what a perfect alignment of opportunities in the economic field. Like growing up wanting to play guitar and having Eric Clapton and Eddie Van Halen live on your block … and they both liked your sister.

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