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Letter to the Editor

Flat Tax One Key to Competitiveness

web posted February 20, 2008
We have an opportunity to make our state more competitive by moving to an optional 3.4 percent flat tax; the question is “Will we?” We should in part because the writer Thomas Friedman makes the argument that the most important competition today is between “you and your imagination.”

He argues ideas matter, and about the time you come up with a good one someone else on the other side of the world is sure to do the same - therefore whoever acts first wins.

Are you really free to act, much less imagine ideas on which to act, as you are rooting around shoeboxes of receipts at tax time? I’d say no, and most would admit that keeping up as a clerk for the government during portions of the year does not represent one’s most creative time.

The Atlanta Federal Reserve Board recently said this: “Relative marginal tax rates have a statistically significant negative relationship with relative state growth.” In other words -high income tax rates slow the growth of people’s paychecks and low rates raise them.

In fact, 41 million Americans “voted with their feet” by moving out of high-tax states and into low-tax states over the last 15 years. They wanted more time out of the shoebox filled with receipts and more time in imagining, creating and implementing ideas - all foundational to wealth creation.

For the last four years we have tried to lower the income tax and as a result we were able to get the first cut to the marginal rate in our state’s history as we cut the rate from seven to five percent for small businesses. Unfortunately the head of Senate Finance has been against going further because of hypothetical cuts to government revenue - and so under the category of 1000 ways to skin a cat, we are proposing a different approach.

It harnesses three thoughts – the first of which is the need to expand individual freedom, time and initiative in Friedman’s flat world; second, the simplicity of a flat tax; and third an incredible push by a range of interests groups in our state to raise the cigarette tax. 

Our proposal would simply allow an individual the choice to either pay taxes at the current seven percent, or forgo exemptions and pay 3.4 percent. The choice would be the taxpayers’, and it allows you to avoid the endless debates that stall tax reform. Most people like the idea of moving to a flat tax, but the general public does not drive the inner workings of the tax writing process. Those debates are driven by a long list of constituencies that lose or make money with each exemption in the code, and these voices collectively make changes to our overall code near impossible.

So our reform is premised on what we all seem to want these days – a choice. This is where the cigarette tax comes in, because rather than taking that money to grow government we apply it to lowering the marginal rate. And since all taxes are not created equally, raising our lowest in the nation cigarette tax of 7 cents a pack by a relatively modest 30 cents to us seems good policy. This is particularly true in our instance since anything that does not keep the haul to government the same is dead on arrival with the head of Senate finance – and this proposal simply swaps the money from the cigarette tax for the income tax. This is also true because if the cigarette tax is bound to go up – the only question is what for, more government or a lower tax option? 

A 3.4 percent flat tax would mean that people in the top income bracket – in our case those making more than $12,850 per year  – could see their income tax rate cut by half.

In short, a lowered and flattened tax represents a significant step towards making our economy more attractive, and in this debate it would be hard to improve on the words of Rhode Island House Speaker William Murphy – a Democrat. The goal of the flat tax, he said, “is to put more money directly in people’s pockets both by giving relief to those who need it and by making Rhode Island a more attractive place for business.”

Given the importance of human imagination, and the freedom necessary to see it flourish - not to mention the fact that we’re now competing against economies literally all over the world - the time to re-think our tax structure is now. The flat tax seems a great place to start because I believe systems that maximize human freedom win - and that this would be a win for South Carolina. What you think will drive what comes next on this, and so I’d ask you make your voice heard in the flat tax debate.

S.C. Gov. Mark Sanford
Columbia SC

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