Tuesday, September 7th, 2010
April 06, 2009
North Carolina’s system of taxation aggressively interferes with individual liberty and retards economic growth. It does this by using the tax system to reward some activities and penalize others; by placing multiple layers of taxation on saving, investment, and entrepreneurship; and by promoting forms of taxation, the best example being the corporate income tax, that are completely hidden from those who pay. Because taxation inherently interferes with both personal freedom and economic decision-making, policymakers need to be vigilant about not only how much revenue is being generated but also how those revenues are collected. Some types of taxation are more damaging to freedom and prosperity than others. It is quite clear that our current system has been developed without any attention to this fact and without an understanding of how socially damaging a poorly designed tax system can be.
The cornerstones of North Carolina’s tax system are its income tax, which accounts for 54 percent of all taxes going into the state’s general fund, and the sales tax, which contributes 26 percent of the general fund revenues. The largest portion of the remaining 20 percent comes from the corporate income tax, which contributes about 7 percent of the total. Other sources of revenue include taxes on alcohol and tobacco, inheritance and gift taxes, insurance taxes, and non-tax revenues such as user fees. While all of these need overhaul and in some cases should be eliminated, the most damaging to North Carolina’s economy and to the liberty of its citizens are the personal and corporate income tax.
Policymakers should begin to change the tax system with an eye toward the following long-term goals:
• Replace the current progressive income tax with a flat rate “consumed income tax.” This would reduce the tax penalties against economic growth by making all saving and investment tax-deductible and would reduce tax discrimination by abolishing the current “progressive” rate structure.
• Abolish the corporate income tax, which is a hidden tax on workers, consumers, and shareholders.
• Eliminate all special tax breaks for new or existing businesses. The tax code should not subsidize some businesses at the expense of others.
• Eliminate differential sales tax rates and special excise taxes. The state should not be penalizing the choices of some and rewarding the choices of others. Eliminate the sales tax on business purchases.
Download PDF file: Tax Reform in North Carolina (954 k)
