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Everything Tax, Laffer Curves, and Sinquefield

There are many reasons to oppose the Everything Tax being promoted by Sinquefield.   The regressive nature of the tax is primary among the reasons to oppose it.  However, setting “fairness” aside and other considerations, the Everything Tax doesn’t make sense on a statewide level.  Please realize I am limiting the scope of this writing to Sinquefield’s Everything Tax.  I am not arguing against a national sales-tax to replace the income tax nor am I arguing against any of the other ideas to replace the national income tax such as a Value Added Tax or the “Fair Tax”.

When taxes are set at zero percent then the government collects no taxes.  If taxes are set at one-hundred percent then the government collects no taxes because economic activity will cease.  So, as taxes are raised up from zero percent and lowered down from one-hundred percent the government would collect more money in taxes.  This leads to a revenue maximization point where neither raising nor lowering taxes will increase revenue.  I would like to draw attention to four historical examples where movement along the Laffer curve demonstrated how revenues could be raised. 

When Kennedy was president corporate taxes were cut and government revenue from corporate sources increased.  In the 1980s the United States when Reagan was President and the United Kingdom when Thatcher was Prime Minister, both cut top income tax rates and discovered revenue from income taxes increased.

The fourth historical example I would like to draw from is in 1993 when Clinton was President.  Previously, under George H. W. Bush, the luxury tax on yachts had been increased dramatically.  Instead of creating significant government revenue the result was a severe loss of jobs.  The reason being the purchase of yachts is very price elastic.  In other words, small price changes create large changes in the quantity demanded.  When the price of yachts increased as a result of the tax increase then those who would have purchased yachts bought other items, purchased used yachts, or decided to obtain their yachts from foreign sources.  In other words, would-be purchasers of yachts found substitutes.

The Laffer Curve demonstrates how the tax increase on this price elastic product raised taxes above the revenue maximization point and resulted in a net loss of government revenue.  Not to mention the downward impact on the economy as a whole.

The result of the tax increase was terrible for union ship-builders and for the ship construction industry in the United States.  Jobs were lost and communities dependent on the ship building industry were hit hard by the resulting economic slowdown. 

One of the first things the newly elected President Clinton did was to sign legislation to repeal the previous tax increase on yachts in order to bring down the price of yachts and therefore help put the ship building industry back on its feet and union workers back to work.

This fourth illustration of the dynamics of the Laffer Curve are what apply to Sinquefield’s Everything Tax.  As taxes increase, people look for substitute products to purchase.  In the case of a high statewide sales tax consumers would find “substitutes” to purchasing items in Missouri.  For example, higher prices in Branson, Missouri could lead to tourists going to Eureka Springs, Arkansas.  Kansas City, Missouri would see shoppers going to Kansas City, Kansas.  I am sure the people of Olathe, Kansas would appreciate Sinquefield’s Everything Tax as long as it only applied to Missouri.  Hannibal, Missouri would see shoppers driving on Interstate 72 into Illinois.  East Cape Girardeau, Illinois and East St. Louis, Illinois could both see a boom of businesses being set-up to cater to shoppers trying to get away from the Everything Tax in Missouri.

A statewide sales tax to replace the state income tax would be terrible for Missouri’s businesses including tourism, grocery stores, and retail stores.  A large percentage of Missouri citizens live near the border of other states.  St. Louis, Hannibal, St. Joseph, Cape Girardeau, Kansas City, Joplin, Springfield, and Branson just to name a few.

Instead of raising sales tax revenue for Missouri, the Everything Tax would drive shoppers over the border of the state.  Shoppers too far away from the Missouri border would face higher prices, a regressive tax, and smaller disposable income.   Buyers would find “substitutes” just as they did when the tax on yachts was increased.  In this case the substitutes would be stores and tourist areas outside of Missouri.

The Laffer Curve shows us the Everything Tax would put the tax rate at a point above the revenue maximization point.  Additionally, because the “multiplier effect” works both directions, the money spent in other states would have a negative impact on Missouri’s economy in excess of the face value of the money spent.  Instead of a dollar being spent in Missouri being used to pay a Missouri employee who then spends his or her money in Missouri helping to pay another Missouri worker the dollar would not exchange hands multiple times in our own state.  Instead the dollar would leave the state and not change hands in Missouri multiple times.  This would take money out of the pockets of Missourians; it would take money from State revenue coffers and would slow our State’s economy.

A national sales tax to replace the income tax combined with safeguards to keep the tax from being overly regressive may have a place.  However, on a state level, in a state where the largest cities are near the borders of other states, a giant state sales tax is a terrible idea.  The Laffer Curve demonstrates, when substitutes are readily available, a large tax increase results in movement above the revenue maximization point.  The outcome is less tax revenue, less economic activity in the state of Missouri, fewer jobs in Missouri (Eureka Springs, Arkansas would love it), and a shift of the tax burden on lower income working families.

When the Everything Tax fails in Missouri the result will also be less support for a National Sales Tax, “Fair Tax”, or Value Added Tax to replace the national income tax. The supporters of the current national income tax system will only have to point to the Great Missouri Mistake* to scare people away from a national plan.


*Great Missouri Mistake in this particular case refers to a large state sales tax and not the election of Peter Kinder at Lieutenant Governor (also a mistake).



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