Texas is one of the few states in the country with no state income tax. Instead, the state government gets its money through sales tax. Why is it that most states, as well as the federal government, turn to income tax? Why don't we? Well, actually, our approach seems better to me.
Taxes can serve two purposes: to generate revenue for the government, or to discourage certain types of spending. With income or sales tax, generating revenue is absolutely the focus, and the goal should be to avoid disrupting spending patterns as much as possible. The economy naturally wants to grow, and disruptions will hinder that.
How do the consequences of income and sales taxes differ? The most significant difference, perhaps, is that income taxes apply to investments while sales taxes do not. Income taxes therefore discourage investment, which I believe makes it a detriment to economic growth. Additionally, income taxes will tend to fluctuate more for a given individual; for example, if a wealthy person is temporarily unemployed, they will pay no taxes during that time, whereas that same person would continue to pay sales tax.
Sales tax seems far less disruptive to the economy, and I'm glad we've taken the right approach in Texas. So again, I ask: Why is it that income tax is so widely used in other states?
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It should be noted that Texas is in the lowest fifth of states in terms of overall tax rate, and that most states have both income and sales tax. If Texas wanted to increase its revenue by bumping sales tax, there would be both potential gains and losses to consider. The idea of collecting (significantly) larger sales tax and eliminating income tax was floated on the national level starting with John Linder and his 2005 book The FairTax Book. Proponents of the measure cite as you do the economic benefits of taxing consumption rather than income and outline ways not to increase the effective tax burden on the middle and lower classes using rebates. Opponents have legitimate concerns, however; high taxes on consumption (23% in the FairTax measure) increase the incentive for tax evasion in the form of underground transactions, and rebate systems are open to serious fraud.
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