Although no one likes to pay taxes, they are an inevitable part of funding government. A policymaker’s challenge is to develop an efficient tax system providing necessary revenue while doing the least economic harm. A policymaker should note that not all methods of collecting taxes are created equal.

While each tax affects behavior differently, a personal income tax is among the most pernicious because of the negative effects
it has on earnings, productivity, and wage gains. Because of these adverse effects, people are generally unable to save and consume as much as they would have otherwise.

What’s more, a personal income tax requires a particularly large bureaucratic apparatus for tax collection purposes, much more so than for the collection of a sales tax. With more bureau- cracy comes additional costs for taxpayers, resulting in higher taxes and fees.

The Facts

• Texas is one of nine states without a personal income tax.
• Income taxes substantially damage a state’s economy because they disincentivize savings, investment, productivity, job creation, and economic expansion.
• The nine states without a personal income tax outperformed the nine states with the highest marginal income tax rates and 50-state average in most economic areas from 2004 to 2014.

Recommendations

• Never create a personal income tax in Texas.
• Encourage economic growth by keeping taxes low and adopting pro-growth reforms.