Taxing income, personal or corporate, is the most economically destructive form of taxation. It suppresses the wealth-creation process that provides the job opportunities and abundance needed to improve the lives of the poorest among us.
Disappointingly, North Carolina still does not have a comprehensive budget bill for the current fiscal year that started way back on July 1, 2025. The biggest sticking point between the House and Senate reportedly is their differing views on personal and corporate income tax cuts that are already scheduled to take place.
The Senate is supportive and even proposed to add further rate cuts to the personal income tax in future years. The House, conversely, desires to make the already scheduled cuts more difficult to implement by raising revenue goals needed to trigger the reductions.
North Carolina has enjoyed economic success over the past dozen years, in no small part due to a steady diet of tax cuts. But we can’t stop now. Halting tax cuts will deny our state the opportunity to reap the benefits of lessening one of the most ruinous policies to economic health.
To understand why the income tax is so harmful to economic progress, one must understand how economic growth happens.
Wealth is expanded via increased productivity. By that we mean an increase in the quantity of products created for a given amount of labor expended. And by expanding wealth, we mean a greater abundance of goods and services that society needs and desires.
As John Chamberlain, the late economic historian, stated, “Poverty in society is overcome by productivity, and in no other way. There is no political alchemy which can transmute diminished production into increased consumption.”
Imagine two different men stranded on islands. One has the use of a fishing net; the other has only his bare hands. Obviously, the one with the fishing net will be far more productive, being able to catch many more fish in a day. As a result, he will be far wealthier.
How is productivity increased? By investing in more fishing nets, resulting in higher productivity.
As the Austrian economist Ludwig von Mises wrote, it is the “accumulation of capital” that increases the productivity of labor, with capital largely referring to productive capital goods like machinery, tools, and other technology. The modern-day farmer is made more productive by his tractor, compared to the farmer of yesteryear who had only a horse and plow, who in turn was more productive than primitive farmers using just their bare hands.
Critical to this process is savings.
Investment in capital goods is made possible only by savings, which we can define as resources not devoted to immediate consumption and thus made available to improve future production.
Businesses devote part of their earnings to expanding operations or investing in more or better capital goods to increase productivity.
Quite often, businesses and new entrepreneurs need to borrow funds to finance their investment in capital goods. These funds come from banks, which use deposits to lend to such business ventures.
When corporations are taxed, that leaves fewer funds for them to invest in productivity. When workers are taxed, that leaves less money for them to put in the bank, where it would have been available to lend to someone to build a factory, expand a plant, buy office space, and hire employees.
As you can readily see, the income tax — be it personal or corporate — depletes the savings available for capital investment. Less capital investment means fewer advancements in productivity or even stagnation. Less investment into productivity translates into fewer job opportunities and lower wages.
Furthermore, when goods are not produced due to a lack of capital, consumers suffer from fewer choices and higher prices relative to what they would have enjoyed under a more productive economy.
A stagnant economy with higher prices disproportionately harms the poor who are often on the margins of employment and who can least afford to pay more for the products they need.
Objections to allowing income taxes to fall further center around fears of a “fiscal cliff.” Gov. Josh Stein warned that rate cuts will cause revenue not to keep up with state spending obligations. Meanwhile, House Speaker Destin Hall said that the currently scheduled rate reductions “no longer make sense” and that cutting taxes too quickly could create “major problems.”
Such warnings, however, are based on very preliminary revenue projections, which historically have been woefully inaccurate and consistently vastly underestimate the amount of revenue generated by lowered tax rates.
Indeed, at a time when critics consistently warned of dangerous budget shortfalls, the state budget experienced a total of $12.6 billion in surplus revenue from 2015 to 2023 (excluding the COVID-shutdown year).
The biggest threat to future revenue is the potential for a national economic slowdown. In such an event, however, North Carolina would be better positioned to recover with lower taxes as higher tax rates would drain the economy of the needed savings and investment needed for a comeback.
If one wanted to halt or otherwise hinder economic progress, it would be difficult to come up with a more effective tool than the income tax. State legislators should be embracing, not shying away from, opportunities to put more money in workers’ paychecks while enabling the process that creates wealth, opportunity, and abundance, especially for low-income workers.