More Evidence that Tax Reform will cost Jobs


As Mainers head to the polls tomorrow to decide on Question 1 pertaining to the repeal of the new tax reform bill–which lowers the income tax rate but broadens the sales tax–should consider the results of a new study in the National Tax Journal (December 2009) which has found severe negative economic consequences of the retail sales tax.  The study is gated at NTJ, but an earlier draft can be found here.

The authors, Michael Smart and Richard M. Bird from the University of Toronto, find that:

“Over a decade ago, several Canadian provinces replaced their retail sales taxes by value-added taxes. This paper estimates the effects of this tax substitution on business investment in the reforming provinces. Consistent with theory, we find that the reform led to significant increases in machinery and equipment investment, in the short run at least. This evidence suggests that a similar reform in a US state with similar retail sales taxes may also be expected to result in increases, possibly substantial, in capital stocks.”

The tax reform bill will cause the reverse to happen in that a broader retail sales taxes will reduce investment in Maine.  In the long run, this means lower productivity, lower wages and fewer jobs.  As I’ve said before, Maine is replacing a bad tax (the income tax) with a worse tax (the sales tax).  That’s not tax reform.

Speaking of value-added taxes as real tax reform, Mainers can look right over the border at New Hampshire’s Business Enterprise Tax.  It is a true flat-rate tax (0.75 percent), can be filled out on a postcard and is an overall better way to tax.  See for yourself here.