How, then, shall we tax?

I wrote in the Journal last week about a state representative from Lexington putting together a bill to eliminate Kentucky’s state income tax, which would put us with the likes of Texas, Tennessee, Florida and others in that regards. Currently, the state of Kentucky taxes on six different income brackets, ranging from 2 to 6 percent on the dollar depending on how much money you make each year. That’s on top of federal income tax and local income tax. If you work in Nicholasville, like I do, you are taxed both in Nicholasville and Jessamine County, meaning I am sending part of my paycheck to four different governmental bodies.

In his proposal, Rep. Bill Farmer makes up for the lost revenue to the state by extending the sales tax. The overall sales tax goes down from 6 percent to 5 percent, but it is extended to services that were not previously taxed, things like haircuts, plumber bills, cab rides, pedicures, real estate, those types of services. The tax still does not apply to food or most medicines.

So the change goes from taking money directly from our paychecks each week to charging us more on our expenditures. The thought is eliminating the income tax will boost the economy and bring more businesses into the state. There are two fundamental camps on this issue, and I think which one you are in depends on how you view taxes in general. Let’s look at the arguments for both parties. For our purposes, we will use the examples of two different people — Person A, who makes $25,000 a year and Person B, who makes $75,000:

Get rid of the income tax

We made our money, we should not be penalized for earning it. The more you make, the higher the income tax that you pay. Person A makes $25,000 and pays a rate of 5.8 percent and Person B makes $75,000 and pays a rate of 6 percent. Person A pays $1,450 in income tax to the state each year, and Person B pays $4,500. Person B is living in the same state with the same opportunities, but he pays more than three times the income tax that Person B does. Doesn’t seem fair.

Keep the income tax

We don’t accept the “all things equal” argument that the first group does. We look at Person A and says ‘Yes, he will be getting that $1,450 back into his pocket, but he will be charged for more services that he never had to pay taxes on before.’ Eliminating the income tax as a cut for those with higher-paying jobs since now everybody, rich and poor, will be paying the same taxes.

Get rid of the income tax — rebuttal

It’s not a tax break — it’s moving the tax money elsewhere. Person B will naturally spend more than a person making Person A will, therefore it all evens out. It’s a matter of principle — Person B should not have to pay more taxes just because he makes more money. Without an income tax, he is more in control of where his money goes.

Keep the income tax — rebuttal

Surely Person B will not spend three times the money that Person A will. In order for this bill to work, the state can’t lose any revenue money — it’s already in a budget crisis as it is. So the revenue dollars will have to be the same as they are now, and that revenue comes from the citizens. So for this to not affect the poor, Person B will have to continue to spend enough money to pay $4,500 in sales taxes, and Person A will have to limit his spending to where he pays just $1,450 in sales taxes. With the amount of necessary services (car repairs, realtors, etc.) that just won’t happen.

Those are your two fundamental camps. One camp says a person should not have to pay more taxes just because he or she makes more money, and the other camp says taxes should be based on a person’s ability to pay, not on a blanket sales tax that applies to everybody in the same way. It’s an interesting rift, and the differences in those two school of thought are largely the reason that we have a two-party system in our government.

So where do you stand on the state income tax? On the surface, eiminating it sounds great for the average citizen, but are the “hidden fees” too much of a drawback? Is it a break for the rich, or is the system that we have in place now not fair as it is? Do you have a better idea than one of those two? I sure don’t.

Note: You will notice that I did not take a stance in either of the two camps. That’s because I just wrote the story last week, and I’m too close to it right now to make that judgment. Maybe down the road, but I’m ethically bound. I just wanted to get the conversation started. Keep it going. We need a good, strong debate here in the comments section.