Myth: States With Progressive Income Tax Have Lower Inequality

The progressive income tax holds a Robin Hood reputation for being an economic tool that taxes high-income earners more to fund services for low-income earners.

How this makes you feel generally comes down to your political views and where you fall on the income-earning spectrum. After all, if you’re a higher earner, you’d pay more with progressive taxes but potentially benefit less, and if you’re a lower earner, you’d pay less but potentially benefit more.

Even though policymakers like to sell progressive taxes by claiming they alleviate inequality, they actually end up doing just the opposite.

What Is a Progressive Income Tax?

In systems that employ a progressive income tax, higher-income earners are taxed more than lower-income earners.

To better illustrate this with numbers, let’s look at the federal tax system. U.S. residents are living in a progressive federal income tax system, meaning that the percentage of taxes you’re required to pay increases with your income. Individuals who earn up to $9,225 are taxed at 10 percent, for example, while those who earn between $90,751 and $189,300 are taxed at 28 percent.

At the state level, California and New York have two of the highest progressive income tax systems in the country: California takes between 1 and 13.3 percent of your income, and New York takes between 4 and 8.82 percent. Conversely, nine states have flat tax systems that charge everyone the same amount, including Utah (5 percent), North Carolina (5.8 percent), and Indiana (3.4 percent).

The Myth Revealed

When comparing the average Gini coefficient (a measure of income inequality) of nine states with the highest progressive tax rates, eight states with flat tax rates, and nine states with no broad-based income taxes, the Tax Foundation found that there isn’t much difference in inequality rates among states with different tax codes.

In fact, the small differences reveal that states with high progressive tax rates have higher inequality than states with no income taxes.

California and New York: Progressive Tax Inequality

Besides their high progressive taxes, California and New York have one large problem in common: population out-migration. People vote with their feet, and high-income earners who disproportionately pay a larger part of the tax revenue are more likely to move out of a state with a progressive income tax system. As high-income earners leave these states, public service programs that help low-income earners lose funding. Simultaneously, a larger percentage of the population left within the state may need these services. Let’s look at the numbers:

• New York: In the Empire State, 61 percent more people are moving out than are moving in. A “Wealth of States” analysis of adjusted gross income (AGI) per tax return between 1992 and 2010 reveals that New York is disproportionately losing higher-net-worth and high-income earners to other states (p. 122–3).
• California: According to data from the U.S. Census Bureau, California ranked 49th for net domestic migration in 2011. Like New York, the “Wealth of States” data shows that higher-net-worth and high-income earners are moving out of California and to other states (p. 122–3).

As states such as Illinois debate whether to introduce a progressive tax system to fund their bankrupt services, we can only hope they take into consideration the real effect doing so can have on out-migration and it’s brother, inequality.

[cf]skyword_tracking_tag[/cf]