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.