How to Replace the Earnings Tax in Kansas City

In an earlier report, I demonstrated that earnings taxes are negatively correlated with the size of a city’s economy relative to its suburbs. After developing a simple economic model to explain this relationship, I concluded that the earnings tax creates an economic distortion by encouraging residents and businesses to relocate outside of the city limits in order to avoid the tax. In this study, I argue that a land-value tax is more efficient because it is non-distortionary. Individuals cannot alter their behavior to avoid taxes on land. I use an economic model to demonstrate that it’s possible to eliminate the Kansas City earnings tax in a revenue-neutral fashion by replacing it with a two-tier property tax. If we can eliminate the distortions created by the earnings tax, jobs will be created and residents will flow into the city. My model takes into account the dynamic effects that the elimination of the earnings tax would have on migration and job creation. I find that at the end of the phase-out period, the revenue-neutral land-value tax rate would be 6.7 percent. The model predicts that Kansas City could eliminate the earnings tax in a revenue-neutral fashion over 10 years, replacing it with a 6.7 percent tax on the assessed value of land. The number of people working in Kansas City would increase by 50 percent in the long run. Replacing the earnings tax with higher sales taxes is not a viable option. Like the earnings tax, the sales tax is distortionary. Higher sales taxes will simply cause consumers to shop outside of the city. Although a land-value tax would be more costly to administer than the earnings tax, the economic gains of eliminating the earnings tax would be substantial. Therefore, a two-tier property tax deserves serious consideration as an alternative to the earnings tax.

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