BHI
Policy Study Executive Summary
The
Graduated Income Tax: Winners and Losers
Executive
Summary
July 1994
The
graduated income tax (GIT), slated for voter approval this November
[1994], promises tax relief for all but the richest 8 percent of Massachusetts
taxpayers. What it would do, instead, is cause thousands of middle-income
taxpayers to pay more in taxes over the course of their working lives.
By offering a quick fix in the form of tax relief for 1995, the GIT
saddles the middle class with the prospect of paying higher rates
in the future when they enter their prime earning years and when they
are likely to be faced with their most pressing family needs.
Discussion
of the GIT so far has ignored the future, focusing, instead, on 1995
alone. Even the Massachusetts Department of Revenue reported on the
economic effects of the GIT after assuming away almost all the adverse
economic effects that the GIT might be expected to impose.
GIT
proponents try to distract voter attention from the future by emphasizing
1995, by dismissing middle-class aspirations toward a higher standard
of living, and by promising that the GIT will be indexed against inflation.
But indexing protects wage earners from higher tax rates only if they
are limited to cost-of-living raises or worse. It does not protect
them from higher tax rates if they get merit raises; if, through education
or hard work, they earn their way to higher levels of responsibility
and commensurate levels of pay; if they save and invest; if they make
two incomes; if they start a business or if they do any of the numerous
things they might do in pursuit of a higher standard of living.
For
every Massachusetts taxpayer who does aspire toward a higher standard
of living, the GIT offers no guarantee of tax relief. Indeed, for
many such taxpayers it guarantees a tax hike. Until now, it was difficult
to determine how much that tax hike would be. This is because a statute
that would implement the GIT contains a number of sweeteners, like
an increase in the dependent deduction and a child-care credit, that
complicate the problem of analyzing its tax effect on the individual
taxpayer.
To fill
this void, the Beacon Hill Institute created a tax simulation model
for the express purpose of showing how the GIT would affect the combined
state and federal tax liabilities of Massachusetts taxpayers over
the rest of their working lives. This report contains our findings,
based on the application of that model to taxpayers filling selected
Boston-area occupations and based on our assessment of the outlook
for those occupations. The following table summarizes those findings
(positive amounts indicate that the taxpayer pays more under the GIT;
negative amounts that he pays less).
Changes
in Tax Liability for Selected Boston-Area Taxpayers Under the GIT
| Occupation |
Age
in 1995 |
Age
at Retirement |
Filing
Status |
Current
Income |
Total
Change in Tax Liability |
| Accountant |
25 |
65 |
Single |
$27,094 |
$8,121 |
| Teacher |
22 |
65 |
Single |
28,750 |
-3,717 |
| Teacher |
22 |
65 |
Head/House |
28,750 |
-10,260 |
| Teacher
& Teacher |
22 |
65 |
Married |
57,227 |
2,553 |
| Accountant
& Secretary |
25 |
65 |
Married |
51,160 |
7,163 |
| Buyer
& Engineer |
25 |
65 |
Married |
58,250 |
46,758 |
| Technical
Engineer & Computer Programmer |
25 |
65 |
Married |
53,146 |
-2,244 |
| Technical
Engineer & Computer Programmer |
25 |
70 |
Married |
53,146 |
2,580 |
| Systems
Analyst |
25 |
65 |
Single |
42,164 |
26,368 |
| Personnel
Manager |
35 |
65 |
Head/House |
56,204 |
10,561 |
| Personnel
Manager & Secretary |
35 |
65 |
Married |
85,027 |
18,942 |
| Accountant |
45 |
65 |
Single |
50,975 |
3,300 |
| Accountant |
45 |
65 |
Head/House |
50,975 |
-933 |
| Secretary |
45 |
65 |
Single |
34,374
|
-3,590 |
| Accountant
& Secretary |
45 |
65 |
Married |
85,001 |
3,663 |
| Accountant
& Accountant |
45 |
65 |
Married |
101,653 |
16,886 |
Future
Shock
What we find squares with common sense: Under the GIT, some middle-income
taxpayers would pay less over their working lives, but others would
pay more. A school teacher, age 22 and filing single, would pay $3,717
less, while an accountant, age 25 and filing single, would pay $8,121
more. A technical engineer and a computer programmer, age 25, married
and planning retirement at age 65, would pay $2,244 less, while a
personnel manager and a secretary, age 35 and married, would pay $18,942
more.
As it
happens, how much more or less you would pay may have less to do with
what you make now than with what you are likely to make in the future.
Two accountants, age 45 and "rich" by GIT standards, would
pay $16,886 more, while a buyer and an engineer, age 35 and currently
only about half as rich, would pay $46,758 more. How much more you
pay also depends on how hard and long you work. The above-noted technical
engineer and computer programmer would end up paying $2,580 more if
they postponed retirement to age 70.
You
often pay more if you get married. A 45-year-old accountant and a
45-year-old secretary who marry would increase their combined working-life
taxes by $3,953. Two Boston school teachers, both 22, one filing single,
the other head-of-household, would increase their working-life taxes
by $16,530 by getting married.
Why
Many Will Pay More
One reason the GIT harms certain middle-income taxpayers is that,
besides replacing the existing flat tax with a graduated rate structure,
it phases out the personal exemption for taxpayers whose income exceeds
a certain threshold. Another is that it raises dramatically the tax
rate on most capital gains. A third is that it creates a new head-of-household
filing status that generously rewards single-parenthood while imposing
a significant marriage penalty.
The
GIT is being promoted as "guaranteeing" tax relief to all
but the very rich and as offering a host of family-friendly benefits.
What it guarantees, in fact, is tax increases for many middle-income
taxpayers, particularly young, professional, double-income families.
The principal winners, under the GIT, are single parents who can look
forward to only cost-of-living raises or worse. GIT proponents would
make these taxpayers "winners" by having Massachusetts voters
adopt a tax law that punishes marriage and occupational success.
A copy
of this study can be purchased by e-mailing the institute at bhi@beaconhill.org
or by calling (617)573-8750.
Format
updated on
19-Apr-2005 1:53 PM