In the discussion about gradually phasing out Oklahoma's personal income tax, the most common concern I hear is, “How do you eliminate 30 percent of the state's revenues and not cut core services or raise other tax rates?”
In a static world, a reduction in Oklahoma's income tax rate would reduce state revenues. But the world is not static.
Actually, tax cuts have a dynamic effect on the economy. Lower tax rates positively impact work, output and employment — and thereby the tax base — by providing incentives to increase these activities. Raising rates has the opposite effect by penalizing participation in these activities.
Let me change the language from economic-speak into terms those of us from rural Oklahoma can understand. If I have two kernels of corn, and I plant one in the ground, I have one less kernel of corn to eat right now. I have given up 50 percent of my current resources.
However, a few months later I will have a corn stalk with several ears of corn containing numerous kernels of corn. What we know to be true in agriculture has also been proven true numerous times in states and countries throughout history.
This is common sense. Every parent knows you punish behavior you want less of. Progressive income taxes literally punish you more the more productive you are.
Oklahoma has demonstrated the dynamic effects of tax cuts. The 2005 state income tax cuts were projected to cost the state $150 million. In reality, income tax collections grew by $305 million, and sales tax collections grew by $243 million.
Of course, energy revenues figured into that picture. But just as noteworthy was that, prior to the income tax cuts, the annual sales tax growth rate was 2.7 percent the preceding four years. After the tax cuts, sales tax growth was 6.6 percent the next five years.
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