What Makes a Good Tax Structure
Have you ever looked at Chapter 143 of Title X of the Missouri Revised Statutes? This chapter applies to individual and corporate income taxes. Rather than go through a list of each subsection, we collected data on the number of subsections in Chapter 143 from 1973 through 2012. We plotted the number of effective subsections for each year in Figure 1. Clearly, things have changed over time, with the number of subsections increasing from 54 in 1973 to 154 in 2012.
The next question is, why have the number of subsections in Chapter 143 of Title X increased? Several possible answers apply. For one thing, no law is ever written perfectly the first time. So, new subsections refine things, such as loopholes that were not evident when the law was initially written and to redefine what income is subject to taxation. Additionally, the state assembly sees opportunities to use tax laws that seek to stimulate economic development by changing the amount of income subject to the state income tax. By implementing such changes, the carrot-and-stick approach aims to modify people’s behavior so that the Missouri economy will grow faster.
Third, if we started from scratch, would we implement the same set of subsections? The calls for tax reform are based on the notion that tax code becomes unnecessarily complicated over time. The view is that the number of laws that adjust taxable income changes over time complicate things by altering the set of deductions, exclusions, and credits that apply to taxpayers.4 Each filer must keep up in order to comply. Each new subsection adds a layer of new questions that taxpayers confront when filing their taxes. Do I qualify for the new tax credit? Does the new deduction apply to me? On the other hand, the filer risks either not complying or paying too much in taxes if he ignores new tax laws.
We have moved systematically through three questions. At the end, there is a case to be made for tax reform, if nothing else, to reduce the complexity and save people time. Tax reform, however, is not limited to dealing with the complexity issue. Indeed, it is also a good time to ask, what kind of taxes do the least harm to Missourians?
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