Several states (Florida, Nevada, South Dakota, Texas, Washington, and Wyoming) h

Question

Several states (Florida, Nevada, South Dakota, Texas, Washington, and Wyoming) have no state income taxes. (Surprisingly, two of them have sales tax rates of 4% and the others are between 6-7%, right around the average for all states.) Explain the labor market benefit of having no income taxes. From an employer’s perspective, would you expect the wage paid to employees to be higher or lower in these states? From an employee’s perspective, would you expect the wage received (after taxes are deducted) to be higher or lower in these states? If you operated a state and were considering eliminating all income taxes, what are a few of the related issues you would have to address?

Explanation / Answer

The labor market will flourish with no income taxes. Repprts have suggested that such provision helps in creating jobs and keeping a core of young and educated workers from moving other states. The labor supply tends to be good not only in number but also in quality such as in terms of skills. With such properties the growth prospects of businesses also increases in such area creating greater employment generation.

From employer's perspective the wages tend to be less than wage sin other states because of high supply of labors and that too very competitive. As written above such provision attract workers of all nature, skills from other states hence increasing the supply in the no tax state. This tend to create much supply than demand of labor which decreases the wages.

From employee's perspective if the area becomes too competitive that supply exceeds much than demand then it becomes unfruitful to work in such area. As the increased suply would reduce the wages to great pitches that would be far less than net wage that could have been recived in other states after paying taxes.

Immigration would be one of the biggest issue. Managing increasing workforce coming to the state, providing for their provisions with limited resources would be a big issue. Beside to accomodate increased supply the businesses will also try to expand in such areas for which infrastructure should be developed to support and strengthen the frowing businesses as well in order to acheive growth.

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