I suggested in this post that, as part of Governor Patrick’s plan to promote fiscal responsibility while finding ways to generate needed revenues, he begin the process of amending the state Constitution to allow for a progressive income tax. That suggestion has generated the predictable heated discussion in the comments. I thought a few more data points might be useful.
- The federal government, and the vast majority of states — 34 — already have a progressive income tax. Nine more states do not tax earned income. Only seven states (including MA) have a flat rate that applies to all income levels. If anyone has evidence that “class warfare” (one of the usual argument against a progressive income tax) has taken hold in the 34 states with a progressive income tax to a greater extent than in the no-tax or flat-tax states, I’d love to see it.
- There is a lovely table of the tax rates in every state at this link.
- There are some very interesting suggestions on how to structure a progressive income tax in the comments to my previous post, courtesy of dweir and RealityBased. Excellent jumping-off points. How would you do it? What are the safeguards that would need to be built in to ensure both fairness and political feasibility?
Please share widely!
is that, yes, MA does purport to a “flat tax”; however, as anyone who does their own taxes can attest, many of the deductions (property taxes, mortgage interest, now 401k deferrals for the self-employed) aren’t there in the MA tax code. In fact you get a deduction as a renter but not as a homeowner.
<
p>Many of the states that do have a progressive tax also mirror federal deductions. Advocating a progressive tax without at least giving people the corresponding federal deductions is a nonstarter, especially if the economic world is ending as advocated on other posts. Don’t ever recall proposing to increase taxes at the same time an economy is entering a recession as a politically sound strategy.
base the MA tax on federal AGI? That way you automatically take account of all federal deductions. Then add in a couple more state-specific ones (e.g. renter’s deduction), and go from there.
The problem with tying the Massachusetts tax to definitions in the IRC is that when federal law changes, Massachsuetts law changes automatically. The estate tax provides a good example. When the estate tax was cut, states like Massachusetts that did not want to go along had to “decouple” their law, which had previously incorporated federal law, such that now one has to refer back to federal law as of such-and-so a date to know what Massachusetts law is today.
<
p>That’s not to say that David’s idea is wrong, but it’s just one factor that suggests adopting federal law may not necessarily be the way to go.
<
p>TedF
Mass inheritance tax was tied to Federal for decades. Fed indicated a phase out of the Federal tax and Mass decoupled. That was easy.
<
p>AGI has been a stable calculation since the 50s, probably little changed since the 30s.
<
p>As is, the Mass tax base is very similar to AGI. To adopt the Federal as a base could significant cut DOR budget.
<
p>Job cuts would be unpopular; politicians believe that fiscal changes to their little 5% rate is actually meaningful; Yankees hate change. Add the three together and the State won’t adopt Federal as the base. It’s true in most states for the same reasons.
When I lived in Rhode Island, they did it this way. Your state tax was defined as being 27.5% of the federal amount, plus or minus a few rare adjustments. Made taxes very easy, automatically progressive, with all the same deductions and credits as the federal.
Isn’t David’s major point that this would be a tax break for many, tax neutral for the vast majority of people… and only a tax hike for the most well off? The top 1-2%?
<
p>No one’s calling for a tax hike on the vast majority of people, bad economic times or not. We’re talking about a system that’s fairer and better.
… the stimulus effect of putting money into the pockets of lower wage earners who are more likely to spend right back into the economy. It’s trickle up, not trickle down.
so there are 16 states with flat rates. And take another look at that chart. If I’m reading it correctly, the top rate in many states with “progressive” rates kicks in at very low levels of income. $10,000 or less in AL, CT, GA, MS, MO, OK, and OR. $25,000 or less in ID, LA, ME, MT, NM, NY, SC, and VA. As long as I’m reading the chart correctly, a close examination of the facts indicates that the majority of states in the US have a flat rate or a very minimal level of progressivity in their personal income tax systems.
Firstly, a tax rate of 0 is a flat tax.
<
p>Secondly, many states do have absurdly low values for their highest income bracket, making them dang close to flat tax. That problem, though, may very well be with those state legislatures not updating their code to reflect inflation — but the reality is that, indeed, few states have effectively progressive income tax rates (13 states have a highest bracket in excess of $50,000 income).
A zero percent tax rate is neither flat, progressive, regressive, or quadratic… it’s nothing!
<
p>The mean number of tax brackets for non-flat or zero income tax states is over 5- which in itself implies progressivity.
…”the trivial solution” in mathematics.
and state that 0/0 = 1 (only way to make pension calculations work – had us actuaries in a dither).
more precisely, the zero tax rate is:
<
p>f(x) = 0.
<
p>Whatever your income $x, your tax rate is zero. The derivative of the function is denoted f'(x), and the derivative of any constant is also zero. In other words,
<
p>f'(x) = 0.
<
p>Therefore, since “flat” means having a slope of zero, a zero percent tax rate is, in fact, “flat”.
Institute a truly flat tax in MA in November. vote yes on question 1!
…either where you plan to make up the lost revenue or what you plan to cut from the budget. Please use specific numbers and show how you justify any cuts.
… how one could be serious about such a thing unless the goal was to manufacture a crisis in order to “starve the beast”.
is quite trivial . It is not levied, therefore it does not exist.
is just to line our tax rate up, proportionally, with the federal income tax. Of course, that’s less than ideal in terms of progressive taxation… since the people at the top in our federal system have a true gift in their rates… but it would be better than what we have right now, and extremely easy for people to file.
but when you do align, have to recognize that changes in the Federal deductions, credits, etc. will impact your revenue. Nothing is ever simple.
but you could base the tax on federal taxable income after deductions but before credits, then apply state credits for state purposes.
<
p>So you’d have a unified definition of “taxable income,” but a state rate and system of credits.
Tax policy wonks have been calling for the States to adopt Federal AGI, or Federal taxable income as the State taxable base for decades: it’s simple; would minimize audit staffs and DORs because the fed would do the audit, and the state would simply reapply the State rate to the audit changes the fed made.
<
p>But, for the majority, States refuse, because the politicians prefer total control over their Departments of Revenue and fiscal tax policy.
After all, sometimes state public policy goals differ from national goals, and therefore rewarding/penalizing differently is used to accomplish different sets of goals.
<
p>It’s the tradeoff between detailed fine tuning and simple broad strokes.
Right. See my comment on the estate tax here.
<
p>TedF
By comparison, the Federal government might seem very generous to a lot of lower-middle class and middle-class people at tax time. Granted, there’s a lot of smoke and mirrors (Federal payroll deductions are greater, so the rebate is greater if you are entitled to one, etc.), and everyone’s situation is different.
<
p>I chose California, NY and New Jersey, as each has the more progressive tax system and each possessed of numbinly complicated tax codes.
<
p>Interestingly, each now face the greatest budget deficits of the states:
<
p>California, rich people versus kids, clinics and transit riders. The tax increase proposed is on the rich and corporations:
<
p>
<
p>New York. Note the second paragraph where sentiment is: don’t raise taxes generally, but raise taxes on them (them being the rich).
<
p>
<
p>Each, classic divide and conquer: WE-have-a-problem-but-YOU-must-pay, and since we outnumber you, we win.
<
p>
New Yorkers say raise the sales tax, which affects everyone. How is that evidence of “class warfare”?
It’s tough bein’ rich these days (violin playing, etc.).
I take it that you would deem a poll showing that people favored raising the tax rate on the highest income bracket, but keeping it steady on those with lower incomes, as “class warfare.” You can call it whatever you want, but that doesn’t make it so.
<
p>”Class warfare” is really something quite different from what you’re talking about — like, say, your posited oppressed class (the rich) rioting in the streets, or something. But the reality is that much of the support for a progressive income tax structure comes from those who would most likely see their tax rates go up. You know, Howie Carr’s trust-fund-having brie-munching Volvo-driving latte-and-chardonnay-sipping moonbats. How do you explain that?
Define your terms as you please, as will I, but a devisive question that pits one income class’s interest against another is by my terms class warfare. YMMV.
<
p>And as far as concluding that ‘much of the support…comes from those who would most likely see their tax rates go up’ is just weasel words.
<
p>’Much of the support’?! Let’s just call ’em limosine liberals.
<
p>Regardless, I can’t get too stirred up about a progressive tax movement on the horizon:
<
p>First, it’s been defeated twice. The trend is your friend.
<
p>Second, can you point to a single legislator who has publicly embraced the concept. Just one.
<
p>Third, the system is already progressive, with the higher rate on dividends and capital gains.
<
p>Forth, it’s small by comparison to the Federal rate.
<
p>Fifth, the wealthy are mobile and New Hampshire is close.
<
p>Sixth, it often backfires. Recall Gray Davis (they did) or NJ’s Gov Florio.
<
p>Wake me up when someone elected begins to ruminate about taxing the rich.
Greenwich, CT is now the hedge fund capital of the world, and that ain’t a coincidence given its proximity to NYC and differing taxes (who wants to pay both state and city taxes).
<
p>We’re not talking widget factories here folks. Tax the financial sector and they’ll scramble at the drop of a hat. Not like you have to pack up a ton of physical plant to shift locations.
First off, I’m ambivalent on this issue. I can see the concerns you raise, but at the same time, a flat tax system just strikes me as fundamentally unfair.
<
p>But the states that have progressive systems are nonetheless pretty darn flat, which suggests to me that the concern you raise might be overstated somewhat.
Some ambivalence here also.
<
p>As I think about it, it’s just too small to be concerned with. A revenue neutral tax simply won’t pass; there’s no loot in it for the
piratesgovernment.<
p>And to generate meaningful revenue means dipping too far down into the tax brackets to justify the Political risk.
<
p>Add to that the progressive tax’s defeat in referendum, and this issue adds up to a snorer.
<
p>Yeah sure, go progressive tax. I’m all on board.
To get a constitutional amendment if it’s just to create a minimally progressive system that’s still pretty darn flat? It doesn’t seem worth it. On the other hand, if the goal is a highly progressive system then those concerns that gary pointed out and that you can see are heightened.
Gee, I wonder why?
tax policy.
Why is it that the states with the most progressive tax systems, also are experiencing the greatest deficits: NY, NJ, CA?
The skewed wealth distribution that has leaned ever more to the high-side under the current administration is a threat to the economy.
<
p>http://www.geocities.com/Capit…
<
p>The current US tax code, although progressive on the surface (consider the Capital Gains rate and who makes most use of that, and the expiration of payroll taxes above $100K), is a contributing factor. If MA is to create a progressive tax system, it would probably not be wise to have it be a percentage of the federal tax (or even AGI).
<
p>But the wealth disparity goes well beyond the individual income tax code. What we really need is turn the wealth generation policy upside down, so that pre-tax income is not so discrepant. Does the CEO have the right to a salary 400 times the average worker in his company, the worker upon whose efforts his worth is created? Should the corporate tax code be so kind to those who increase their profits via the race to the worker bottom? Should income be so highly rewarded to those who make the rules?
<
p>I would suggest that the entire tax code be changed, but changed in ways that aren’t so rewarding to increasing the disparity of earnings. No special break to high earners on Capital Gains, maybe a 10% reduction incentive to all tax brackets. No funding mansions through the home interest tax deduction, but rather a fixed percentage of interest paid, capped at an amount that precludes taxpayer-funded mansions. No loophole to allow index fund managers to convert ordinary income into a Capital gain. No tax breaks for moving jobs offshore, and no special breaks for shadow corporations “located” in the Cayman Islands (those same islands that are now third on the list to whom the US is a debtor nation!) With that, a flat tax would be much more palatable.
Fifty percent or less of the taxpayers in this country pay more than ninety percent of the taxes. Time for USA to do what most of Europe does: VAT/Sales taxes—-state and federal. The free ride is over—everyone pays.
We all pay sales tax. We all pay gas tax. We all pay for our goods and services including built in taxes for the profits of the business. We all pay real estate taxes, either directly or through our landlord.
<
p>To top it off, we love to set up situations where the poor pay a little extra. We market the hell out of the lottery, but certainly not in Wellesley. We tax cigaretts, knowing full well that poor people are more likely to be addicted. Sure poor city people can take the bus, but lots of poor suburban and rural dwellers have to drive their old beaters, and they’re paying an unavoidable gas tax — all at a much higher percentage of their income than their high earning fellow Americans.
<
p>VAT/Sales tax is incredibly regressive, since people with low incomes have to spend nearly all of it to survive, whereas people with high incomes don’t, and therefore pay a lower percentage of their income in taxes. Even if you give those with the lowest incomes a pass, you still end up taxing the middle class at the highest rates.
but there are opinions to the contrary that we should consider:
<
p>http://www.boston.com/bostongl…
<
p>But that’s silly. Wealth is the opposite of buying goods and services. If you buy goods and services, you end up with a bunch of stuff, [nearly] all worth far less than you paid for it*. The wealthy aren’t wealthy because they’ve bought lots of stuff — they’re wealthy because they’ve still got plenty more [yet untaxed under this plan] money under the mattress.
<
p>As for saving and spending later, the article ignores the reality that the more money you’ve got, the more of a return you’ll tend to get. This isn’t a guarantee of course, but lucrative business opportunities and early investments aren’t open to we BMGers; we lack the necessary capital.
<
p>
<
p>There are two interesting transition points though, and the author gets to one of them. The first transition point is the immediate one. Consider Amy, Beth, and Cathleen. Amy has a negative net worth [credit card debt] and a regular job. Beth has a small nest egg and a good job. Cathleen is filthy rich, and generates substantial income through employment and investments.
<
p>What happens strictly in the first transition:
A: She comes out ahead if we believe she’ll cover her debts one day. After all, she consumed items on her credit card without paying the income tax to cover the purchases; now she’ll get untaxed income and will use it to pay for purchases earlier.
B: She comes out slightly behind if you believe that her nest egg exists for her own retirement. After all, she’ll pay taxes on that nest egg money twice — once in income tax that she’s already paid, and again in 30 years when she spends it during her retirement.
C: She may come out way ahead. After all, while much of her wealth was taxed as income, any unrealized gains have yet to be taxed. Now, there are two scenarios: i. real estate isn’t taxed at 30%, since it’s not really consumed, or ii. real estate is taxed at 30%. If the former, all Cathleen has to do to avoid paying the tax is to buy her children’s homes, etc, since home buying doesn’t count as consumption. If (ii), Beth is particularly screwed, since her home just dropped in value roughly 30 [technically 1/.3*100%].
<
p>So, in the first transition, those with consumption debt come out ahead, those with a nest egg come out behind, and the very wealthy — it’s not clear.
<
p>
<
p>But what about the second transition? Which one is that? That’s when, after some number of years, we switch back to an income tax. Consider Amy Jr, Beth Jr, and Cathleen Jr — in equivalent financial situations a generation later, during the switch back
<
p>A: She’s hurt, because the converse of mom hits her — she payed the consumption tax when she purchased her debt on credit card, and now she’ll pay income taxes on her earnings needed to pay back the debt.
B: She comes out ahead if she’s close to retiring, because her income will drop and her consumption will remain roughly level upon retirement, and she’ll have dodged both taxes quite well. The younger Beth is, the less her advantage.
C: Cathleen Jr hits a home run. Since her income had been exceeding her consumption, she was gaining wealth untaxed. Now that it’s switched back, she’s sitting on a pot of gold that avoided paying taxes twice, since it wasn’t consumed during the consumption tax and wasn’t earned during the income tax.
<
p>
<
p>All of this makes me realize — the folks who benefit least from a consumption tax? So-called regular Americans close to retirement. The AARP crowd. After all, pre-pension they will have paid taxes on income, which exceeded their consumption. Post-pension they’ll pay taxes on consumption, which exceeds their income. They’ll pay “more than their share” for both parts of their life, instead of just one or the other.
<
p>The caveat to all of this: any “rebate” where every person gets an automatic check from the government for $xyz dollars as an automatic exemption throws the stories off, depending on the value of $xyz. For example, a check for $2300 would be the same thing as not taxing the first $10,000 of consumption per year for each person.
<
p> * Exceptions include real property and the occasional antique or piece of art.
is that the voters rejected an amendment to permit a graduated income tax back in the 80s.
<
p>Frankly, it is a matter of trust. Every legislator cum lucrative lobbyist, every sweetheart pension deal, every goldbricking disability scam, is not just a drain of the public purse but also poison to the wellsprings of civic life.
<
p>Don’t get me wrong, government is very much part of the solution if your problem is public goods like safety, education, or infrastructure (to name a few categories). The sleaze and grease that we often accept as the price of doing business eats like acid at our collective capacity to do good.
<
p>A constitutional amendment to allow a graduated income tax is a good idea. It is also a proposal to give the legislature more power to tax.
<
p>Good luck with that until the day there is a profound cultural change on Beacon Hill.
I imagine that most voters would have seen a reduction in their income tax as long as the change was “revenue neutral”, yet they voted against it and thus chose to forgo a tax rebate. If the proposal was marketed to the working, lower-middle, and middle classes as essentially a tax cut , I wonder if it would have an easier time passing.
In fact a graduate tax was rejected twice in the last 35 years. Both times there was a strong effort to let people know that it would result in a tax cut to many. But the “marketing budget” for those opposing the graduated tax was much greater and it appeared that most people came away believing that their taxes would rise even when for many is was indisputable they would decrease.
<
p>Not sure I could go through this amendment fight again – sigh.
at the same time the explanation that we just got outspent is insufficient. We also have to labor against the burden of public cynicism that is not entirely unjustified.
<
p>Alas.
was part of the voting population the last time the graduated income tax came up? My guess is about 50%, thanks to death, retirement, and population flux, student and otherwise.
<
p>I don’t see how the fact that it failed 20-odd years ago during a popular Reagan administration gives much predictive power over another vote by a substantially different population during/just after an incredibly unpopular Bush administration which has seen the highest 1% of incomes shoot upward while the lower 50% has stagnated is relevant.
the initiatives hit the ballot in 76 and 94, not in the 80s as I thought. Revise comment appropriately.
A flat rate tax hike coupled with an increase in the personal deductions and other credits like the EITC can essentially do the same thing as a progressive income tax can – raising taxes on higher-income folks and lowering the tax burden for middle and lower-income people – all this within current constitutional strictures I believe.
<
p>All that said – I don’t imagine this will feature as part of the Governor’s agenda for the year ahead. The tax issue he is most on the hook for is providing property tax relief and gaining some traction (and hopefully tweaking) the measures he proposed on that in the last session.
<
p>In fact, if any progress was to be made on a progressive income tax amendment in the neat-term, I would think it would have to be sold as ppart of a broader tax reform to relieve property tax burdens and provide more State assistance to local government. The public won’t go for this unless the upside is clearly better and hatred of property taxes runs deep so that should be the target.
<
p>
several years back, and was rejected by the SJC as an unconstitutional end-run around the flat tax requirement. So there really isn’t a good alternative, AFAIK.
for the SJC decision you are talking about here?
398 Mass. 40 (1986).
I had never read that case before, thank you. I’m surprised the MA Constitution was able to survive such an affront by that brigand Gov. Dukakis.
<
p>I find this to be particularly interesting:
And here is the response from the dissenters.
So it seems that the reason that the tax scheme violated Art. 44 was because of the intent of the legislature creating it rather than the actual substance of the scheme. The majority found that the legislature was not really intending to create reasonable exemptions and was instead trying to end run Art. 44. And the dissent ignored the legislative history and evaluated the law on its merits, and found that the Court should defer to the legislature’s determination of what is a reasonable exemption. If only we had Justice Scalia on the MA SJC, he would ignore the intent of the legislature and evaluate the law strictly on its merits.
<
p>And I wonder, if the legislature did create a new tax system of credits and increased exemptions to end run Art. 44, then would these comments be admissible to discern the legislature’s true intent, given the number of legislators who read this blog?
For the record – the two times a graduated income tax appeared on the ballot were 1972 (a legislative constitutional amendment) and 1994 (an initiative constitutional amendment). I would be interested in finding out the vote percentages but am not sure I have the time to do this now — does anyone else know?
I have seen both 1972 and 1976 listed as the dates for the first constitutional ballot question – more checking is need.
According to sec of state
<
p>No voting tallies though.
Hey, tell you what: we’ll take slightly less of your money if you allow us to take ALOT more of someone else’s money. Fair?
<
p>Interestingly enough, if #1 flies and we chuck the income tax entirely, that might ultimately set the stage best for the left to come back around and institute a “brand new” income tax scheme, maybe with progressive rates.
<
p>I’m still supporting Question 1 though.
It is absolutely fair that disposable income get taxed at a higher rate than non-disposable income. I find this to be utterly non-controversial.
<
p>With respect to gary’s concern about divisiveness, perhaps a fixed ratio can be built into the enabling amendment, so that tax hikes or cuts have to be made in lockstep.
How does one define what disposable income is? If I make $30K a year and I buy a TV was that purchase any less discretionary than if I made a $100K and purchased it?
<
p>Maybe you live in a rural area where housing costs and wages are low. Whereas someone else lives in a high wage area where costs of living are also higher. Who has more disposable income?
<
p>Maybe you are helping out friends or family who have hit hard times, or have other “non-disposable” expenses that are not deductible. How do factor in that?
<
p>Heck — we could have a Chapter 70 of tax formulas:
<
p>- divide the state into labor market areas
– determine what a fair and appropriate housing allowance should be
– determine how much should be allowed for spending on food, heat, electricity, medicine
<
p>Take this data and formulate the foundational non-disposable income limit.
<
p>This whole notion that it’s “fair” to take someone else’s money simply because they have more of it is really twisted.
<
p>How about eliminate the income tax and instead implement a sales tax on only non-essential items?
<
p>
Why should the rich pay more?
<
p>Sutton’s law, aka:
<
p>Q: why did you rob banks?
A: Because that’s where the money is.
How does one define what nonessential is? If I make $30K a year and I buy a pair of jeans was that purchase any less discretionary than if I made a $100K and purchased a pair of jeans?
I have no idea of the origin and therefore the thinking behind the current sales tax exemptions. But, MA law already covers the example you provide. The former would be tax exempt; the latter would not.
<
p>The notion that a person needs a certain amount of money for the essentials of life is not novel in tax law. It is already codified in various exemptions.
<
p>
… one would wish that it was codified well. You certainly can’t depend on the federal definition of poverty for just about anything given it’s poor model.
It kills me how the left presumes themselves the judge of how much money people “need”. Anyone who has more than you can reasonably spend yourself has too much, so its fair to take it.
<
p>I’d love to see some bricklayers from Bangladesh lay into your wealth.
<
p>
Because laying off thousands of teachers will be just one result unless towns across the state hike property taxes by very large amounts.
My last comment did not refer to the previous comment, but to some of the earlier comments offering support for proposition one–my apologies for hitting send too soon.
<
p>You can’t eliminate 12 billion dollars without laying off tens of thousands of teachers and taking hundreds of thousands of residents off of MassHealth. If that’s what some of you want to do please be honest enough to say so and spare us the rhetoric about starving the beast or sending a message.
Many factors could change between now and November, but some changes may have an impact on how people vote. Oil prices going/staying very high may cause people to vore for the elimination of income taxes. I don’t think the notion of this vote passing should be dismissed so quickly.
<
p>A VAT would be superb IMO.
about #1. Sure that the vote would be 99% against if polling was taken on this site, but think the numbers out in the real world will probably skew a little differently…