PHOTO COURTESY OF RICHARD F. BIEKER
By Dr. Richard F. Bieker
Dr. Richard F. Bieker of Dover is a retired economist. He has taught and/or conducted research at a number of institutions, including Delaware State University, the University of Delaware, Purdue University and Central Michigan University.
In a previous Opinion, I discussed the shortcomings of Gov. Matt Meyer’s plan to raise Delaware’s top marginal income tax rates (“Income tax proposal is against current trends”). I recommended that the legislature consider income tax strategies recently adopted by other states. In this piece, I propose an alternative for the legislature to explore: a combination of a flat income tax and a sales tax. Specifically, I suggest starting with a flat income tax of 2% and a sales tax of 2%. This approach offers several advantages over the current progressive income tax system.
Why shift to a flat income tax?
A flat income tax presents the following benefits:
- Prevention of bracket creep — Unlike a progressive tax system, it avoids the subtle and misleading impact of bracket creep, as explained in my earlier article.
- Incentivizing investment — Higher earnings would not be taxed at progressively higher rates, encouraging greater investment and entrepreneurial activity. This could stimulate economic growth and job creation, a critical need given Delaware’s sluggish economy since 2010.
- Reducing outmigration — It may slow the exodus of high-income earners from Delaware, a concern I have previously addressed.
- Minimizing tax avoidance — Wealthier individuals would have less incentive to engage in tax avoidance or evasion.
- Fairness — Everyone would pay the same rate. For those who do not subscribe to the idea of “soaking the rich,” this approach would seem equitable. Those who are advocates of soaking the rich should recognize that it is easy for affluent residents to relocate, as was discussed in the previous article.
- Administrative simplicity — Flat tax systems are less complex and, therefore, less costly to manage than progressive systems.
Advantages of a modest sales tax
A low sales tax rate of 2% would also provide several benefits:
- Broadened tax base — Both Delaware residents and out-of-state shoppers, including tourists, would contribute. Delaware could still maintain its competitive edge over neighboring states, like Maryland and Pennsylvania, which have much higher sales tax rates. Shouldn’t visitors help pay for their use of Delaware’s public infrastructure?
- Encouragement of saving — Since only consumption is taxed, individuals are incentivized to save and invest more. This could allow households to build retirement wealth and create a pool of capital to support Delaware’s economic growth. Considering the challenges facing the Social Security trust fund and the state’s slow economic growth, these are significant benefits.
- Revenue stability — Sales tax revenues are more stable than income tax revenues, which can fall dramatically during economic downturns. Progressive income tax revenues are particularly volatile, as high-income earners fall into lower brackets during times of reduced earnings.
- Ease of administration — Sales taxes are straightforward to collect at the point of sale.
Moving forward
Given these advantages, I suggest that the legislature seriously consider this alternative approach. Further analysis is needed to estimate more precisely the revenue that this proposal could generate and to determine whether adjustments to the suggested rates are necessary. Ideally, such analysis would indicate that the proposed rates could be reduced, while still meeting or exceeding the revenue generated by Gov. Meyer’s plan. Additionally, if the legislature opts to reduce the expenditures proposed by the governor, the rates could potentially be lowered even further.
Reader reactions, pro or con, are welcomed at civiltalk@iniusa.org.
