TAX REFORM FOR GEORGIA:THE GAME

Christine P. Ries
Professor of Economics
Georgia Institute of Technology
Atlanta, GA 30332
Generous Support and Assistance:
Georgia Public Policy Foundation
Center for Data Analysis
The Heritage Foundation
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TAX REFORM: THE GAME

Tax Reform: The Game gives you the opportunity to change the ‘balance of extraction’ of taxes from the private enterprise economy. It demonstrates that tax reductions from one source must be offset with tax increases from another source if the total revenue supplied for state government is to remain unchanged. Of course, if your goal includes an overall tax increase or tax cut that balance doesn’t net to zero. But, if you leave the ‘spending decisions’ to the constitutionally responsible body – the legislature and governor – a tax reformer will concentrate on changing the ‘balance of extraction.’

In this game, constructed from actual Georgia state tax return groups, your choices will be filtered through Georgia’s financial realities. The balance of higher and lower income taxpayers is stored in the engine behind the game so your choice to raise or lower income taxes will reflect those balances in the Georgia taxpayer population. The tool shows the estimates for tax revenue for 2012 if no reform is accomplished. As you choose to tax more or fewer items at higher or lower rates, you change the balance of extraction and the amount of revenue collected.

To practice tax reform analysis, as we did it in the Special Council for Tax Reform and Fairness for Georgians, you must find sources of revenue to offset increasing reduction in income tax rates. In the game, that means your goal is to choose reform modifications so that Summary Total at the top of the right-hand side, yellow section “Revenue Impact of Simulated Tax Reform: $0000000” returns to zero after you have designed your own reform package. You’ll also see the zero balance at the bottom of the right-hand side column “Revenue Impact of Your Tax Reform.”

The game is easy. The political and economic reality is less so……..

CHECK BOXES GENERALLY REFLECT THE SPECIAL COUNCIL’S ACTUAL REPORT

Overall, the Special Council followed advice of all free market economy, supply side experts. The plan we recommended was to change extraction balance so that the free economy remained as efficient as possible with as little distortion or as few perverse incentives as possible created by the way revenues were raised. This requires, in general, broadening the base and lowering the rates. To do this you must lower taxes on income and job creating activities and results and offset with increases on consumption and by reducing exemptions and deductions. Since such exemptions and deductions generally represent social engineering by the government, this approach is consistent with greater freedom and efficiency.

To broaden the base we recommended:

  1. Cancel the exemption of sales tax for food for home consumption.
  2. Extend the sales tax base by taxing not only sales of items, but also sales of service for household and personal use. (Imposing sales taxes on services or items purchased for business production is a jobs and efficiency-killer. This is known as tax pyramiding and is rejected by all tax experts.)
  3. Taxing telecommunication services has the added benefit of correcting a bias toward one kind of technology so that satellite, cable, mobile, etc. are competing solely on economic and technological realities. This generates $166 million..
  4. Excise taxes increase by $222.5 for cigarettes and other tobacco products (OTP) due to increase that brings total tax to $1 per pack.
  5. Eliminate those itemized personal deductions that have been shown NOT to affect underlying behavior, like charitable giving.

To lower rates in a way that stimulated the most economic growth and job creation:

  1. First priority is to lower personal income tax RATES as much as possible. In the best case we could reduce this rate to 0% to match Florida and Tennessee in competitiveness and to bring Georgia into the company of those rapidly growing, job creating states that have no income tax. Personal income tax is the most powerful category because 75% of the new jobs created are created in small or pass-through business that pay taxes as personal income tax returns.
  2. Maintain equality between personal and corporate income tax rates. Without parity, small business taxpayers shift their status between personal and corporate tax and incur substantial and unnecessary switching costs and fees and greater administrative burdens. A waste.