How often we read of a husband and wife both working, struggling from paycheck to paycheck to raise a family, meet a mortgage, pay their taxes and bills. And yet, some . . . say taxes must be raised. Well, I'm sorry--they're asking the wrong people to tighten their belts. It's time we reduce the [government] budget and left the family budget alone. We do not face large deficits because American families are undertaxed; we face those deficits because the . . . government overspends.

--Ronald Reagan, 1986

Summary--

Taxes are a brake on economic growth. Raising them damages our economic prospects. The more we tax wealth, the less of it we will have. Taxes tend to start as temporary measures. They then become permanent and trend upward. If government officials perceive a new public need, the tendency is not to look for savings in other areas in order to pay for the new service. Instead, they raise taxes. Private businesses that are succeeding in today’s economy do so by cutting expenses. Government should do likewise.

Three types of taxes that should be eliminated when conditions permit are corporate income taxes, capital gains and investment income taxes, and the remaining sales tax on food. Tax deductions for dependents should definitely not be eliminated (see 2010 Legislative Update below). Doing so would be regressive and would put families at risk.
 

2012 Legislative Update—

2011 Legislative Update--

2010 Legislative Update--

The 2010 legislature held the line on all but cigarette taxes. Although I will not have to pay that tax, I will still be affected by it and I wish they had held the line. The tax affects all of us not only because it impacts many lower-income taxpayers disproportionately but also because it will surely reduce retail sales at grocery and convenience stores and cost jobs. I firmly believe that raising taxes hurts our struggling economy, and I wish the legislature and the governor had resisted the urge completely. The point is that every tax, no matter how narrowly focused, ultimately affects everyone in some way.

But there is a larger issue. If we are not concerned when taxes are raised on something that doesn’t seem to affect us personally, what will we do when the majority wants to tax something we do care about? Sometime in the future, the majority may come to the conclusion that citizens with Kentucky Bluegrass lawns should pay an additional tax. That’s not as far fetched as it sounds. Or perhaps voters may one day think that people with more than two children should be taxed extra to pay for the extra services they use—an idea that has arisen repeatedly in recent years. If we tolerate the precedent of raising taxes because it only affects someone else, we may one day find ourselves in the less favored group targeted with extra taxes. At that point, who will stand up for us?

Fortunately, other legislative ideas for tax hikes, including the proposal to raise taxes on higher-income taxpayers—those most responsible for creating and retaining jobs—did not succeed in 2010.

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Yes, Ronald Reagan understood that more taxes are not the answer. He knew that taxes are a brake on our economic growth.

Earlier this year we learned of proposals to increase taxes on the wealthiest Utahns. The flat tax we have so recently implemented here in Utah is suddenly seen as inadequately punitive towards the very wealthy. While I’m pretty sure the Nielson family will never be in a tax bracket where the proposed tax increase would affect our family budget, I still oppose it because I don’t want to discourage attracting and generating the kind of wealth that will create jobs for my children and yours.

Years ago I had the opportunity to have lunch with Walter Williams, the George Mason economics professor and syndicated columnist. Referring to the ability of government to alter the rules of the free market, he put the underlying economic principal about as clearly as possible: "If you want more of something, subsidize it; if you want less of something, tax it." So the more we tax prosperity, the less of it we will have.

While I applaud our governor for starting with a budget that is not balanced on the backs of taxpayers, I wish he had stuck to his guns. There are few actions government could take during these economically challenging times that would do more damage to our community’s financial prospects for prosperity than raising taxes.

President Reagan also reminded us there was nothing so permanent as a temporary tax. Throughout it's history, our country has witnessed the inexorable upward march of taxation as temporary taxes have become permanent and every type of tax has edged upward. For example, when the income tax was introduced to fund the Civil War, that tax was to terminate in 1866. However, it was reintroduced (and increased, of course) not long thereafter.

What began in 1861 as a three percent tax on income over $800 has turned into our current system that:

• Allows myriad deductions, exemptions and credits for things the government wants to encourage,
• Applies marginal tax rates ranging from 10 to 35% depending on how much you make (and can't exclude somehow), and
• Allows states to charge their own income taxes as well, which most do.

Utah's current flat tax takes another 5%, but allows far fewer exclusions that the federal tax.

A few years ago the American Institute of Architects (AIA), my professional organization, decided it wanted to undertake a national TV and radio ad campaign but determined the annual dues it received were not sufficient to fund this new enterprise. Instead of looking for opportunities to cut back or curtail existing operations, to find operational efficiencies, to contract out internal operations, or perhaps to reduce staffing, they assessed a surcharge on members—a surcharge that has continued for years and has essentially become part of the basic cost of AIA membership.

Government is a lot like the AIA. Someone gets a good idea. Executives, administrators, and lawmakers concur that government ought to do it. Do these same officials typically look for savings or cutbacks in other areas in order to fund this new priority? Not nearly often enough. All too often, the tendency is instead to raise taxes.

Would a viable private business take this approach? As one of the owners and Chief Financial Officer of our 50-person business, I know we can't arbitrarily bring in more revenue just because we want to. We can and do increase our marketing efforts, but in today's economy it's challenging to create new markets. We could think about raising prices, but we wouldn't be able to change our current contracts; we'd have even less luck negotiating higher rates on future work because with things so competitive right now, our clients are demanding our fees go down, not up.

How do we succeed in this climate? We do what government should do more of: we cut costs. Businesses like Utah-based Overstock.com, that are weathering this economy, aren't doing it through large increases in revenue. They are succeeding by addressing the expense side of the ledger. For those of us in the private sector, if the economy has taken our sector down 40%, we have to reduce our expenses a similar amount.

Just like businesses, the state governments that are continuing to foster a climate of economic opportunity in these difficult times are those that cut expenses rather than demand more tax revenue from individuals and businesses that are already at the breaking point.

Utah must continue to resist the urge to raise taxes. Let me end with a discussion of three types of taxes that are particularly deserving of elimination when economic conditions allow and one idea for raising taxes that keeps cropping up and must be squelched:

Corporate Income Taxes

This is double taxation! For many companies like mine, our first dollar of corporate income is taxed at 40%. That's 35% to the feds and 5% to Utah. What's left over we can pay as dividends to stockholders or keep in the business as retained earnings, which will also go to stockholders sometime in the future. In either of those events, the stockholder will pay personal income tax on that same corporate income a second time. So every year many businesses make sure expenses match revenue; in good years they pay the extra revenue out as bonuses to avoid having a profit. Either way they start each new year with little or no retained earnings carried forward to fall back on in case of a temporary slowdown.

Corporate income taxes lead to short-term business decisions that cause long-term risk. They place a tax on a legal entity that is really nothing other than the sum of its shareholders, officers, and employees, all of whom will be paying taxes on any profits of the corporation anyway. And they discourage corporations from building profits, retaining earnings, and distributing dividends to shareholders, thus removing some of the incentive for small business owners to build the financial resources necessary to create jobs. Of course we could create even better opportunities for businesses to thrive by eliminating both the corporate income tax and the personal income tax on dividends, but that is covered in the next section.

Taxes on Capital Gains and Investment Income

Economists have argued for generations that capital gains taxes are counterproductive. Taxing capitol gains discourages investors from putting their money at risk in the endeavors most critical to the long-term prosperity of our economy—business enterprises and real estate ventures vital for sustained commerce. In order to encourage capital investment, tax policy should reward investors' willingness to take the risk that their investments might not appreciate (and they would then be worse off due to inflation). Taxes on capital gains should be as low as possible or eliminated entirely.

Looking only at the short-term, some have raised concerns that in the current slowdown, people are saving too much. Hogwash. Long-term, we will experience far greater prosperity and security if we save and invest more and spend less. Government should provide incentives for taxpayers to invest in our future by eliminating taxes on investment earnings (whether income, dividends, or capital gains) altogether.

Sales Tax on Food

In this case, I think former Governor Huntsman had it right. It is wrong to tax what everyone—even the very poor—depend on for survival. Much has been written about how unstable or unpredictable our remaining sales tax base is. If that is the case, when our economy is on a firmer footing, we need to find funding alternatives for small communities and we need to shift some of our sales tax burden to other sources. Surrounding states show models for municipal tax revenue generation that do not rely primarily on point-of-transaction sales tax capture. Idaho and Wyoming are two nearby examples. The funding structure in these states means that communities focus less on competing over large retailers and more on improving statewide economic opportunities and on enhancing property values in the community as a whole.

Tax Deductions for Dependents

This is not something we should eliminate. On the contrary, we must maintain or increase tax exemptions for dependents. The idea of making people with larger families pay higher rather than lower taxes seems to resurface year after year. The argument is that large families use more public resources – particularly public schools – so they should shoulder a greater burden. This demand that those least able to pay have a tax increase tends to come from the same people that otherwise call for more progressive tax rates – like the proposal for extra taxes on the rich mentioned at the beginning of this section.

Tax deductions are based on the notion that we shouldn’t be taxed on money we don’t have because we’ve spent it on bare necessities, like providing for dependent children. Whether we like it or not, taxes are assessed generally based on income, not based on the specific government services we consume. We don’t offer rebates to law-abiding citizens because they never call the police. They pay their share because they and society as a whole benefit from having an effective public safety program.

Finally, charging higher taxes and thus impoverishing people with large families is anti-family. We should never implement public policies that put families at risk. For more discussion of the fundamental reasons we must protect them, take a look at my thoughts on the importance of families.