The
Grad Tax Debate:
Down the Slippery Road to Serfdom
April
1994
Executive
Summary
A proposal
to adopt a graduated income tax in Massachusetts threatens to worsen
the state's reputation for being hostile to business. The arguments
made for the grad tax by its proponents are "sophistic" -
based on conjecture, not facts.
Proponents
insist that the grad tax would promote "fairness." But fairness
is a relative term, and efforts to increase "fairness" by
taxing the rich can end up actually hurting the poor. One study offered
by proponents shows that, for Massachusetts, total state and local taxes
represent a smaller fraction of income for the "rich" than
for the "poor." But studies of this kind are meaningless because
they compare tax burdens at a moment in time rather than over taxpayers'
working lives, which is a more accurate measure.
If the
current tax system is unfair, it is because it discriminates against
savers in favor of spenders. The grad tax would worsen this discrimination.
It may actually be unfair also to the "rich" and the "middle
class," considering the way most spending programs disproportionally
benefit the "poor."
Probably
the worst deception lies in the claim that the grad tax would benefit
the middle class. In fact, without any increase in future tax rates,
many middle-income taxpayers could expect to pay more in state income
taxes over their working lives under the grad tax than under the present
law. Moreover, the grad tax would worsen an existing inequity in the
tax-treatment of the self-employed.
Another
deception is the claim that the grad tax would be revenue neutral. It
appears that, if anything, the grad tax would be revenue negative --
that it would cost the state revenue. If so, its imposition would necessitate
future tax-rate increases. By endorsing the principle whereby it is
all right for the majority of taxpayers to reduce their taxes by making
a minority pay more, the grad tax would also make it easier to raise
future tax rates.
Finally,
the grad tax would penalize investment, particularly investment by small
business. It would reduce the after-tax profits of many proprietorships
and S corporations and the after-tax dividends of many investors. By
raising the capital gains tax for most investors, the grad tax would
drive capital and jobs from Massachusetts. A planned capital gains tax
exclusion can be expected to have little effect, except for encouraging
Massachusetts investors to substitute low for high-wage jobs.
The grad
tax is, in short, bad for the middle class and bad for business. Eventually,
by necessitating as well as facilitating future tax-rate increases,
it will be bad for almost all Massachusetts taxpayers.
Questions,
comments or requests for this study can be made by contacting BHI at
bhi@beaconhill.org, or by calling
(617) 573-8750.
Format
revised on
25-Jan-2007 3:29 PM