The Income Tax Debate
By Chris Stiffler
In the continuing saga to adequately fund public education in Colorado, the graduated income tax has emerged as a front runner proposal. Of course, the idea of having those with the most income pay the highest percentage of income tax has set off a series of claims about how destructive a graduated income tax is to long-term business activity. The debate about the economic impact of a flat income tax compared to a graduated income tax is worth having, if the discussion is grounded in facts. Before it occurs I suggest that we establish a few ground rules.
Ground Rule 1: The first step in the debate is to answer the question “How do you measure state economic performance?” By GDP? Median income? Unemployment rates? Poverty Rates? Measures of inequality? The Colorado Fiscal Institute believes that traditional indicators like GDP only address economic transactions and ignore social costs. A complete debate will address an income tax’s effect not only on broad economic factors but also on factors that capture quality of life.
Ground Rule 2: Teasing out the complex impact of tax policy on state economies is not simple. It cannot be done by simply saying “this state has highly progressive income taxes and its economy is stalling, therefore progressive taxation causes economic stagnation.” This would be like claiming someone is bad at basketball because they are short while ignoring speed and shooting percentage. The fact is, credible academic literature that includes control variables often finds that state income tax structure—rates and levels—have little impact on growth. There are just too many other factors that influence economic health.
Ground rule 3: No cherry-picking allowed. Both opponents and proponents of a graduated income tax can selectively choose data to support their case. Opponents of a graduated income tax often cite California whose progressive income tax allegedly drove away business as a warning. While proponents of a graduated income tax can simply counter showing that Oregon has the 4th highest personal income tax burden and one of the most progressive income taxes in the country, yet it has experienced one of the highest growth rates in real GDP per capita in the country the past decade. The debate must compare a variety of factors, including issues of equity.
Ground rule 4: A truly genuine discussion about income tax must also address both incidence and adequacy. The discussion of tax system structure is incomplete without considering the economic impact of public investments in both education and infrastructure as well as the economic cost of shifting more taxes onto middle and low income families. Counting total jobs and broad GDP measures doesn’t reveal how the typical family is fairing.
A robust discussion of income tax structure is long overdue in Colorado. Our single rate structure is unique; only seven other states use a single rate structure. Unique doesn’t necessarily mean better.
Let the discussion begin about the best way, economically and socially, to provide the education system our kids need to be prepared for the challenges of a world economy; let’s just do it based on facts not fear.
