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Idaho's Weekly Journal of Local & National Commentary Week 2815

 

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by Free Market Duck

Tax Rates Are Not The Same As Tax Burdens

   As ‘The Tax Buster’ who ran for Idaho’s District 18 Senate seat in last May’s Primary, allow me to refute Rep Bunderson’s District 14 editorial:  “Politicians Overstate, Oversimplify Idaho Tax Realities.”

   One of my campaign claims was that Idaho ranked as the 11th highest taxing state in the nation regarding state and local taxes as a percentage of income.  My source was www.taxfoundation.org.

   Rep Bunderson’s analysis relies on tax rates.  But a tax rate is not the same as a tax burden.

   A tax rate is simply a percent at which the government taxes you.  For example, Idaho’s current sales tax rate is 6%.  Mathematically, it means 6/100 times the cost of the taxable item.  6% times $100 equals $6.

   A tax burden is defined as the percentage of the sum of all of your tax dollars divided by your pre-tax income.  If I earn $50,000 as a software consultant in Idaho and my total state and local taxes are $15,000, then my tax burden is 30% ($15,000/$50,000 times 100 = 30%).

   We should be concerned about tax burdens as a percentage of income instead of just individual tax rates.  The following example shows why:

   If I earn $100,000 as a software consultant in California and my total state and local taxes are $20,000, then my tax burden is 20% relative to income.  If I earn $50,000 for the same job in Idaho – not unrealistic, by the way – and my state and local taxes are $15,000, then my tax burden is 30% relative to income.

   In this example, Bunderson’s Idaho tax rates are lower than California, but the Idaho TAX BURDEN is higher because the Idaho income is lower.  Nobody cares about tax rates per se.  Everybody cares about taxes AS A PERCENTAGE OF THEIR INCOME, how much money they have left over after taxes.

   That’s why it’s important for legislators to understand the difference between tax rates and tax burdens.  For example, raising the Idaho sales tax on currently exempt services such as doctor visits, lawyers, landscaping, and haircuts from zero percent to 5% -- even after lowering the sales tax on commodities from 6% to 5% -- may appear to be a reasonable medium sales tax rate for Idaho.  But due to Idaho’s low individual income, it could dramatically raise the average Idahoan’s tax burden.  In fact, it could push Idaho from its current Number 11 position into the nation’s Top Five highest tax burden states.

   Businesses track tax burdens and tax rates.  The Tax Foundation found that the major attraction for businesses is simplicity of state tax codes.  In fact, of the top ten business-friendly states, most have eliminated one of the major three taxes:  income, sales, or corporate taxes.  Colorado, number one, has all three taxes but all three are low.  Colorado’s taxpayer bill of rights – a constitutional amendment – limits tax increases to a two-thirds popular vote.

   Ironically, the very reason Bunderson claims politicians can’t grasp the reality of Idaho’s tax code -- its extreme complexity -- is the main reason why the Tax Foundation claims businesses stay away from Idaho (ranked 33rd as tax-unfriendly to business).

   That’s why our legislators should implement free trade zones.  Low tax rates stimulate production and jobs.  Demand for increased production and jobs stimulate higher individual income.  Higher individual income and low tax rates bring in more tax revenue while retaining low tax burdens because individual income jumps through the roof.

   Welcome to free market capitalism.

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