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Wednesday, May 25, 2011

Flip It to Fix It: Inverting State Tax Structures to Increase Progressivity

UFE United for a Fair Economy today released Flip It to Fix It: An Immediate, Fair Solution to State Budget Shortfalls. Here is part of the Executive Summary:

At the core of the budget crises facing states are regressive state tax structures (comprised of the major state and local taxes) that are unfair, unsound, and unsustainable by design. Fortunately, there is a sensible solution: inverting the state’s current tax structure.

The inversion exercise takes a state’s current distribution of state and local taxes by income quintile (lowest 20%, second 20%, middle 20%, fourth 20%, top 20%) and flips it at the 50th percentile mark, thereby making a regressive structure progressive. This resulting progressive tax structure has major benefits to states.

  • It raises significant revenue. If every state inverted its tax structure, states would raise a combined $490 billion, wiping out deficits with cash to spare to invest in economy-enhancing activities.
  • It is unmatched in its economic efficiency, which encourages steady and strong economic activity and widespread prosperity over time.
  • It provides commonsense equity, with wealthy families contributing a greater share of their income in taxes than low- and middle-income families.
To achieve the inverted structure, states must establish, or significantly improve upon, the graduated personal income tax—the backbone of any progressive tax structure. Concurrently, states and localities must significantly reduce their reliance on regressive sales, excise, and property taxes, which fall heavily on low- and middle-income families. 

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Comments

These folks are going to be really unhappy when the read the new Michigan tax law passed this week.

And if Governor Snyder does not see a flood of new jobs he is gonna look really silly.

Stay tuned.

Posted by: save_the_rustbelt | May 25, 2011 7:36:59 PM

I bet there's a ton of shady assumptions going on here. What is "a state’s current distribution of state and local taxes"? You can't directly categorize the payor of taxes (other than income taxes) into income quintiles, so its fair to assume that they use statistical models tweaked to their purpose.

We know that (1) more than 50% of California's tax revenue comes from income tax and (2) the top 50% pay almost all of it. That means these authors determined that the smaller source of revenue (sales, use, property tax) is even more overwhelmingly paid by the lower 50%. That's hard to believe.

And everyone of these studies must make assumption about who incurs the tax (e.g., CBO says employer payroll taxes fall on employees, economists say corporate taxes fall on shareholders and employees).

I could be totally wrong but without a less conclusory presentation I doubt it.

Posted by: Guy in the Veal Calf Office | May 25, 2011 8:18:57 PM

These people forget an important fact: when the lower classes pay a tax, it's a lot harder to raise it. That's why flat income taxes are better than progressive ones; the political difficulty of explicitly raising taxes on lower income people makes it harder to raise a flat income tax vs raising just the top bracket of a progressive income tax. That imposes fiscal discipline on legislatures.

Posted by: Bob Smith | May 31, 2011 10:29:06 AM