Budget & Tax
| November 1, 2008
Thinking Clearly About Taxes
One of the things economics examines is the effect of tax policy upon productivity. Good tax policy does not put a direct tax on production; rather it tends to tax consumption instead. States that directly tax productivity are at a competitive disadvantage to those states that tax consumption.
In an OCPA study of Oklahoma tax and budget issues earlier this year, economists at the firm Arduin, Laffer & Moore Econometrics looked at the various tax categories in Oklahoma and analyzed how our state compares regionally and nationally in each of the selected categories.
As the nearby graph shows, Oklahoma does not have a competitive advantage in capital gains taxes, personal income taxes or corporate income taxes. We look to be on par with other states in our region. Texas has a marked advantage over the other states, and over many decades the Texas economy has grown at a faster rate than its neighbors. Through the years, businesses and industry have gravitated to more favorable tax environments.
Oklahoma does have very low property taxes—lower than most surrounding states. When combined, this makes Oklahoma seem like a low-tax state, ranking us somewhere in the bottom 10 in overall tax burden. But we must remember that Oklahoma is also a low-income state, so even though our overall tax burden seems low, it is high compared to our ability to pay, our ability to bear the tax burden.
These facts merely reinforce our premise: the amount we are taxed is very important, but equally important is how we are taxed.
Taxes range from those on productivity (such as the personal income tax) to those on consumption (such as sales taxes). In a static view of economics, the assumption is that higher taxes will raise more government revenue, but that assumption is not always correct. Economics are dynamic; they affect human behavior and human choices in the economy.
High taxes on production tend to punish productivity. If a state wants to attract greater productivity, it should tax productivity less. It should change to a tax structure that does not directly impact productivity. Rather than higher taxes, we contend that our state should reduce the tax burden on productivity, so the private economy can grow. A steadily growing economy provides more money for all citizens.
Businesses everywhere will respond to economic rewards and punishments. Since 1998, Oklahoma has been reducing its personal income tax. Unsurprisingly, for several years personal income growth in Oklahoma has been exceeding the national average. So has our state revenue from sales taxes and income taxes. The reason for all of this is that a robust economy offsets tax cuts. Policymakers should work to continue this trend.
The late President John F. Kennedy understood that “tax reduction ... sets off a process that can bring gains for everyone, gains won by marshaling resources that would otherwise stand idle—workers without jobs and farm and factory capacity without markets.”
In 2009, Oklahoma tax reforms should seek to continue the momentum of recent years, concentrating on reforms which will increase savings, investment, work effort, and demand for work (which will raise wages). The state should retain its existing low-property-tax advantage over our neighbors, and continue to reduce taxes that punish productivity, such as personal income taxes, corporate income taxes, and capital gains taxes.
This will keep more money in the economy and in the hands of citizens, but also provide ample revenue for government.