Flat income taxes: Biggest winners and losers

Updated
sureeporn / Getty Images/iStockphoto
sureeporn / Getty Images/iStockphoto

From Kansas to Wisconsin to Nebraska, the conversation surrounding a flat tax has picked up as of late, with more state legislators pushing for as much. According to The Tax Foundation, this is the scenario “when all taxable income is subject to the same tax rate, regardless of income level or assets,” rather than a graduated rate income tax system.

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Per the Institute on Taxation and Economic Policy (ITEP), there are currently 11 states that have a flat income tax — Arizona, Colorado, Idaho, Illinois, Indiana, Kentucky, Michigan, Mississippi, North Carolina, Pennsylvania and Utah. As well, Iowa and Georgia will transition to a flat income tax in the coming years.

But, as more states push towards a flat income tax — and some even question if federal taxes should also follow suit — critics say instituting a mass flat tax would hurt poor and middle class families while benefiting the country’s top earners.

“Critically, a flat tax guarantees that wealthy families’ total state and local tax bill will be a lower share of their income than that paid by families of more modest means,” ITEP indicated. ITEP suggested that, under a graduated rate model, the more you earn, the higher your effective tax rate — making it more equitable for those with less income.

“Property taxes on homeowners, rental property, and motor vehicles tend to affect low- and middle-income families most as a larger share of their net worth and income is tied up in these assets,” added ITEP. The organization also gestured towards sales and excise taxes as being disproportionately hurtful to low- and middle-income earners, who must purchase essential goods and services at a dearer cost to their finances than those who “have the luxury of spending only a small portion of their income each year.”

The organization tackled a prospective rationale flat tax proponents may offer up — that flat taxes boost small businesses and the economy. Because most small businesses are S corps or sole proprietorships, per ITEP, that means the individuals behind them are generally beholden to the personal income tax system, rather than corporate tax structures. And, unless they’re earning millions like a large corporation might, they also will be disadvantaged by a flat tax rate.

Massachusetts Ends Flat Income Tax

The idea has become so contentious that, in the case of Massachusetts, that state recently effectively ended its flat income tax. A narrow majority of residents, in the latest election of Nov. 2022, voted for a tax measure that focuses on those making $1 million or more. “The measure, which took effect this year, adds a 4% surtax on income above $1 million to the current 5% individual income tax rate,” CNN reported.

That state’s move is part of a push from many Democrats to introduce a “wealth tax” in which the highest earners are taxed at a greater rate. Bills have recently been introduced in California, New York, Illinois, Hawaii, Maryland, Minnesota, Washington and Connecticut state legislatures, per the Associated Press.

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Previous measures of the same sort have been met with swift dismissal in many cases. Organizations such as The Tax Foundation have argued that so-called wealth taxes are “economically destructive” and would encourage high earners to leave their current state. Conversely, Democratic lawmakers claim that they have not seen people move en masse when a stricter state tax code is implemented.

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This article originally appeared on GOBankingRates.com: Flat Income Taxes: Who Are the Biggest Winners and Losers?

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