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Thursday, June 06, 2002

REPRINT: Taxation Equals Disincentive

The state of Tennessee, from which I am originally, faces a budgetary crisis. Political groupspeak maintains that we need more "revenues" (READ: taxes) to sustain our "livelihood" (READ: unwieldy budget). The flip side of the coin prefers a laissez-faire approach on taxation. Indeed, it seems to me there are too many stakeholders, with too many viewpoints. Such a dilution of proposals has led to the oncoming maelstrom we see today.

It would benefit us all to look not to other states' tax models, but simple supply-side economics to understand the benefits and detriments of these taxation proposals. I have read the maze of graphics in the Sentinel, and they seem to misrepresent the situation.

To wit, let's assume that the state enacts an increase in the franchise tax. This is reported to yield $88.4 million in additional revenue. A sales tax increase? Sure, that supposedly raises another $175 million with a mere quarter percent increase. There are myriad examples of tax increases that SHOULD pay big dividends to the state finances. Right? Wrong.

The pertinent factor that is not being considered is simple: taxation is a "disincentive" for economic growth and consumption. This is fundamental, indisputable theory from Economics 101. Simply put, if you raise your sales tax, people will buy less in their local stores, and more from Georgia, Kentucky, et.al., or the Internet vis a vis e-portals and web warehouses. If we burden the businesses of the state, mark my words: they will exit stage right, leaving many Tennesseeans unemployed. Unemployment leads to financial indigence, and removes a taxpayer from the state coffers.

Tax policy is not an exact science, because such factors are too often ignored. However, the basic tenet remains intact. Raise a tax, decrease the taxed activity.

Consider the analogy: if my checking account only contains $2000, and I cannot finance the debt, I cannot pay $20,000 for a new car. It's not a mathematical feasibility. The only amenable solution to Tennessee's taxation dilemma is to trim government services, seek privatization for all services that can be sustained, and stop promising spending increases to lobby groups, and voter blocs as a "purchase" of a vote. The founders of our nation never intended for legislators to have carte blanche for seeking revenue. Legislators: act now. Cut the spending. Live within your means. Deal with the political flack, and more importantly, do what is not only right, but economically fundamental.


.: posted by Dave 1:00 PM

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