5 Principles to Cut Through the Noise on Tax Reform

The need to reform North Carolina’s tax structure is urgent. Our state’s economy continues to struggle, suffering from a 9.7 unemployment rate – fifth highest in the nation. Job and income growth in the private sector have been stagnant this decade, as we fall behind regional and national averages. The Tax Foundation ranks North Carolina as having the 7th worst business tax climate in the country.

Cutting Through the Noise Indeed, tax reform, in some form or fashion, is almost assuredly coming to North Carolina in 2013. Expect the debate to be passionate and fierce. Various interest groups will advocate or criticize any changes to the state’s tax structure, depending on whether they believe they will be helped or harmed. No doubt plenty of terminology like “revenue neutral,” “progressivity” and “tax incidence” will accompany a bevy of numbers and statistical analyses attempting to slice and dice the reform plans. There will be countless voices wishing to weigh in, and the volume of spin will be dizzying.

For lawmakers, it will be critical to cut through the noise and maintain focus on the basic foundation of what sound, pro-growth tax reform should look like. To do that, they should rely on a handful of guiding principles that economists from diverse backgrounds generally agree upon. These guiding principles include:

Guiding Principles for a Sound North Carolina Tax Structure

  1. Growth Enhancing – Tax policy should be one most conducive to economic growth, job creation, opportunity and increased financial prosperity for all North Carolinians. Such a policy would encourage capital investment and make North Carolina more competitive at attracting existing businesses into the state, encouraging more new domestic businesses, and fostering expansion of existing businesses.
  2. Neutrality – Economic decisions should be made for economic reasons, not due to tax considerations. North Carolina’s tax structure should therefore minimize distortions to economic decisions made by households and businesses. The tax system should not favor certain industries, activities or products courtesy of short-sighted political decisions which end up harming businesses not receiving political advantages. As such, North Carolina’s economy will be able to adapt and diversify in concert with an ever-changing, dynamic marketplace rather than being heavily concentrated and tied down to specific industries favored by a biased tax code.
  3. Stable – The tax structure should be designed to limit fluctuations of revenue during economic booms and busts and thus provide a more predictable source of funding for state government. Such stability will help budget writers avoid future tax rate changes and significant changes in state agency appropriations.
  4. Transparency – Tax structures should be clear, consistent and predictable. Taxpayers should be well aware of the tax burden in place and revenue estimates should be fully explained in a public manner.
  5. Simplicity – The state tax code should be easily understood by taxpayers. Compliance costs should be minimized, as should enforcement costs. A simpler tax code increases voluntary compliance and limits the incentives to engage in tax-avoidance activities.
This article was posted in Budget & Taxes by Brian Balfour on October 22, 2012 at 9:00 AM.

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This article can be found at http://www.nccivitas.org/2012/5-principles-to-cut-through-the-noise-on-tax-reform/

Comments on this article

  • 1

    Thom Allen
    Thom Allen Oct 24, 2012 at 12:56

    A poll tax would be the ideal tax. In theory at least, everyone benefits approximately the same from government. Therefore, everyone’s support should be equal. More important from your list of items, it is the ideal tax. No tax is as simple and as easy to understand. No tax is as transparent; it is clear, consistent and predictable. Taxpayers would certainly know how much they are paying. As the population usually does not fluctuate greatly from year to year, it is stable. Population growth rates are much easier to predict than sales, income, and the like. It is neutral as it has no affect on economic decision except perhaps encouraging people to work harder to pay the tax. It is growth enhancing at least after the first year. When people start writing out checks for thousands of dollars, the political leader would quick reduce the tax rate or start decorating trees. A massive reduction in taxes would lead to a massive reduction in the size of government. This would lead to a sustainable economic boom as the chains holding the economy down are removed.

  • 2

    Sonie
    Sonie Oct 25, 2012 at 6:36

    We would love to see the Fair Tax implemented at the state and national level. This would be transparent and keep gov’t in check. If they decide to raise the rate, citizens would scream loudly! A flat tax is also interesting, but the main issue is to stop myriad, complicated laws and loopholes, and treat all straightforward. People who have more will spend more….isn’t this what it should be about?

  • 3

    Tom Sawyer
    Tom Sawyer Oct 30, 2012 at 7:09

    We need the fair tax in North Carolinia as in the rest of the United States. This would ensure that ALL!! of the people living here would pay their part in the support of the U.S. government, instead of living off the 49% of us who actually work our butts of to pay a unfair tax burden to support the people who are too lazy or triffaling to get a job and support theirselves. And gain self respect for theirselves.

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