Who Would a Move to a Flat Tax Benefit? The Best Off

Wednesday, October 31, 2012 at 2:06 PM by

A move to a flatter state income tax, which some legislators have said is a top priority when the state Legislature reconvenes, would benefit the biggest earners and could raise taxes for people in the working class.

Wisconsin, like most states, has a progressive income tax. That means that people who earn less pay a smaller portion of their income in income taxes than people who earn more, a pattern illustrated by the chart below. People who earn very little income can have a negative income tax rate because the state’s Homestead Credit and Earned Income Tax Credit are refundable; if a person’s credit amount is greater than that person’s tax liability, the state writes a check to the person for the difference.

Some Wisconsin legislators are advocating for Wisconsin to switch to a flat income tax system, or to at least flatten the state’s current progressive structure. Depending on how it’s accomplished flattening the income tax wouldn’t necessarily make it any less complicated to fill out tax returns, but it could mean that big earners would pay less in tax and other earners would pay more.

The Legislature hasn’t considered any specific plan to flatten the state’s income tax, so it’s hard to be precise about the effects. But if the Legislature decided to totally flatten the income tax without reducing revenue, roughly the top 30 percent of earners would pay less in taxes and everyone else would pay more. The chart below illustrates this, with the red line representing a potential flat tax rate, and the blue line representing the current progressive structure. (The chart comes from a Department of Revenue presentation, and I added the text showing which people would pay more and which would pay less under a flat tax.)

 

 

Keep in mind that when you look at the bigger picture, lower-income Wisconsinites are already paying a higher portion of their income in total state and local taxes than big earners do. People in the bottom fifth of earners in Wisconsin pay 9.4% of their income in state and local taxes, compared to just 6.7% for the top 1% of earners, according to the Institute on Taxation and Economic Policy. Cutting income tax rates for top earners and raising them on bottom earners would further increase the gap in the share of income that low earners and top earners pay in state and local taxes.

Jack Norman, director of Tax Fairness Wisconsin, sums up the problem with a flat tax by calling it a Trojan Horse: “It appears to offer simplicity and fairness, while in fact it delivers tax breaks for the rich and/or slashes public investments in our future.” The Legislature should focus on other priorities besides cutting income taxes for top earners.

Tamarine Cornelius

Categories: Blog, STATE TAXES, taxes | Comments Off on Who Would a Move to a Flat Tax Benefit? The Best Off

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