With all of the scrambling at the Capitol to finalize a budget before the clock ran out on the fiscal year last night, one particularly good idea bubbled up out of the morass--converting Arizona's income tax from a graduated system to a 2.8 percent flat tax by 2012.
With a flat tax system, everyone pays the same tax rate on every dollar of income earned. The beauty of a flat tax is that it does not penalize people for working harder and earning more, like a graduated tax does. And, under this proposal, no one's tax rate would go up, since those currently paying less than 2.8 percent would be exempt. This system has worked well in other states like Pennsylvania. Utah has also recently adopted a flat-tax system.
Some object to low-income people with less discretionary income paying the same tax rate as higher income people. However, a recent Goldwater Institute report by Dr. Art Laffer and other economists predicted that a flat-tax would change incentives so dramatically that 112,000 jobs would be created in Arizona as a result. These are jobs that would go to many people with modest incomes. Besides, the current proposal would exempt anyone earning less than $10,000 from the income tax altogether.
In 1986 the federal income tax was flattened somewhat when the top marginal rate fell from 50 percent to 28 percent and many deductions were eliminated. Tax revenues from higher income brackets increased and the 1986 reform is widely credited with helping to create the long net economic expansion we enjoyed until recently.
If an income tax, which is a direct tax on work, effort, and innovation, has to be part of Arizona's tax mix, a flat tax is the best way to do it.
Byron Schlomach, Ph.D, is director of economic policy at the Goldwater Institute.