Many can have several positive effects when enacted correctly.

Many economists have shown that high tax rates hurt economic
growth, particularly when coupled with a slim base – meaning that few items get
taxed at a high rate. Although lowering tax rates is something that people as
individuals support (everyone wants to pay less taxes), it can be a painful
process from a governmental perspective, as it can be expensive and decreases
government revenue.

 

Of course, cutting government spending is one way to
alleviate the deficit, however, we understand the current political climate.

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Although significantly cutting government spending is a wise decision for the
state of Louisiana, the focus of this report is on taxes.

 

The practical way to cut taxes without also increasing the
deficit is to also widen the tax base by eliminating tax preferences. These
include exclusions, deductions, and tax credits that subsidize special
interests. Broadening the tax base also includes taxing all final personal
consumption rather than just some goods. Many states, Louisiana included, levy
sales taxes on a narrow amount of goods due partly to historical accident, but
the entire U.S. economy has become much more service oriented, many of which
are not taxed.

 

Meaningful base broadening can have several positive effects
when enacted correctly. Ending preferential tax treatment for special interests
creates a simpler and unbiased tax code. Expanding the tax base also “allows
for greater tax neutrality and revenue stability, and can be paired with more
targeted relief for low-income households (Kaeding, 2017).” Also important,
broadening the tax base allows state policymakers to cut tax rates without
causing the deficit to increase even more and alleviating the pain of cutting
government spending.

 

State policymakers must first ensure that they are
broadening the correct tax base – the consumption tax. There is much academic literature
that shows that consumption, or sales, taxes are the most economically
efficient tax base (Atkinson and Stiglitz, 1976; Kaplow, 2006; Bankman and
Weisbach, 2006).

 

Second, correctly broadening the tax base should not include
business-to-business transactions, as they hurt investment and economic growth
in the state. Our previous paper, “Addressing
Louisiana’s Budget Shortfall: Strategies for Growth,” discusses this issue in more
detail.

 

Lastly, expanding the base involves eliminating preferential
tax treatment in the form of deductions, exclusions, and credits. Not only do
these create unnecessary complications in the tax code and thus cause high
compliance costs, but they subsidize special interests and show preferential
treatment. 

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