Because the South Carolina economy grows over time, if tax rates remain unchanged, tax revenues will rise. For example, from 1992 to 2003, gross tax revenues increased by 35 percent (an annually compounded rate of 2.78 percent). During the same period, income tax revenues increased by 24 percent (an annually compounded rate of 2 percent). Fiscal liberals generally covet all those additional funds for new and expanded government programs. For the next decade, Gov. Sanford proposes to give part of that money back to the people of South Carolina. Rather than forcing the taxpayers to increase government funds by 35 percent, gradually reducing income tax rates from 7 percent to 4.75 percent will result in government revenue expanding by approximately 25 percent. Rather than compelling government spending cuts, a "static" analysis shows that spending will simply expand less than the amount that fiscal liberals would like.

Gov. Sanford proposes to cut income tax rates in order to improve the South Carolina economy. His "supply-side" reasoning is a sound application of basic economic principles. The income tax is a tax on the provision of labor and other resources to the economy. Lowering the income tax will result in an increase in the supply of such resources, with a matching increase in economic activity in the state.

Gov. Sanford is primarily interested in how the added economic activity will directly improve the well being of the people of South Carolina through additional employment and disposable income. It is worth noting that, given a national personal savings rate in the 4 percent range, roughly 96 percent of the additional disposable income generated by these tax reductions would be plowed back into the economy in the form of consumption of personal goods and services. Also, the 4 percent that is saved would make its way back into the economy as business investment. So, the real question is not that the money will represent a draw on the economy, rather it is who will control the spending. The increase in economic activity will also increase tax revenue. It is possible that tax revenues would expand by even more than the 35 percent that would be expected by leaving income tax rates unchanged. This happy scenario is unlikely. For example, if Sanford's income tax cuts had a similar impact to Reagan's supply-side tax cuts, the result would be an increase in revenue of 30 percent over the decade rather than the 35 percent that would result from keeping income tax rates high. Out-of-state fiscal liberals want that extra 5 percent of additional revenue for new and expanded government programs that they think would be good for the people of South Carolina.

One final note, the article seemed to imply that this tax reduction plan was a benefit to the "rich" at the expense of others. Professor Jones was quoted as saying "the annual tax savings 10 years from now for a family of four earning $40,000 would be about $500, or an extra $9.60 a week. A family of four with annual income of $100,000 would get a bigger break, about $2,000 annually, or $38 a week." While this quote is "technically" correct, it is not reported in the context in which it was offered. To clarify and properly frame the quote, the following points need to be made. First of all, our income tax system is a progressive system, which means that the higher one's taxable income, the higher the tax rate one pays on that income. It should come as no surprise then that a 33 percent reduction in tax rates (which was the assumption under which the quote was given) would yield a greater dollar benefit to a higher taxed individual as compared to a lower taxed individual. Further, the quote is based on current tax code parameters such as personal exemptions and standard deductions that are both indexed to inflation, and will likely not be the same 10 years from now when the tax reductions are fully implemented. However, if we assume that the full force of the tax reduction is realized immediately, the accompanying table more fully illustrates the effect it might have on average taxpayers in the income ranges quoted in the Feb. 18 article.

On balance, while some level of government spending is necessary to provide basic public goods such as quality public education, domestic security, and the protection of individual property rights, we believe that, in general, the one best situated to decide how to spend a taxpayer's money is the taxpayer himself or herself, and we support the governor's tax reduction plan.

Gross Income 				$40,000 	$100,000


Personal Exemptions 			$12,200 	$12,200


Standard Deduction 			$ 7,950 	$7,950


Taxable Income 				$19,850 	$79,850


Tax Before Reductions 			$1,033 	$5,233


Average Tax Rate Before Reductions 		5.20% 	6.55%


Average Tax Rate After Reductions		3.49% 	4.39%


Expected Tax After Reductions		$692 	$3,506


Percent Reduction in Taxes 			-33% 		-33%