People don’t like paying taxes. A new study is out (with an easier discussion of the paper here) showing that high-income people left California and/or took actions that reduced their income after increases to state tax rates in 2012. If tax rates are too high, you can move to a different state, reduce the amount you work, defer income to other time periods, use more tax loopholes, … It’s surprisingly easy to do if you’re not living paycheck to paycheck. This highlights the importance of the Laffer Curve. Higher tax rates don’t necessarily reduce tax revenue (we are not on the downward side of the curve), but the paper does find that the increase in the additional taxes was reduced by 55.6%.
Even though state tax revenues didn’t fall, the reduction in output could have resulted in lower federal tax revenues due to the increase in state tax rates. States and the federal government try not to interfere with each other. That is why the federal government does not tax municipal bond income and state governments don’t tax treasury bond income. The same idea applies here. There should only be one* entity imposing taxes on the individual and that includes taxes on both income and consumption (sales taxes).
Federal Income taxes should be eliminated.
Ideally, taxes should be imposed at the most local level, but for now I’m willing to accept the elimination of income taxes at the federal level and increasing them at the state level. Not only should taxation decisions be made at the local level, so should spending decisions. Healthcare, education, welfare, social security, law enforcement, … can all be done at the state level just as, if not more, effectively than at the federal level.
California by itself might be the world’s 4th largest economy. Texas, New York, Florida, … could all establish their own systems and compete for citizens. Smaller states could coordinate between themselves if they chose to do so. California and Texas might have completely different systems, and that’s OK. There is no reason to believe that there would be a race to the bottom. Government spending is investment that stimulates and expands the economy, and progressives are richer, smarter, and all around better people. Just ask them.
There are very few services that require federal control. National defense is clearly one of them and I would put the environment there too. There would still be a role for Congress. They could raise money from the states. Instead of collecting money from citizens and sending it back to states in the form of block grants, the money flow would be reversed.
They would also be able to collect tax revenue from other sources. Corporate tax revenues and tariffs could still be collected by the federal government. That amounts to over $500 billion per year. That is less than what we spend on national defense, but more than we should spend.
Democracy works best when individuals have greater control over their own lives and that is when decisions are made at the local level. Eliminate federal income taxes.