Graduated Income Tax Won’t Help Income Inequality

Average Gini coefficient is lowest in states with no income tax

Michigan has a flat income tax — where everyone pays the same rate (4.25 percent) — but there is a movement afoot to change that. One argument used by proponents of establishing a graduated income tax (different rates for different incomes) is that doing so would help alleviate income inequality. But the data doesn’t back this up.

Rep. Jim Townsend (D-Royal Oak) is supporting a constitutional amendment that would change Michigan’s flat income tax to a system with eight different rates. The plan is supported by most legislative Democrats and the state Democratic party.

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MLive notes that past proposals for a graduated income tax have been voted down by Michigan voters by wide margins. (The last one got only 28 percent of voters’ support back in 1976.)

“But supporters say income inequality has grown significantly in Michigan over the past four decades, making the case for a graduated income tax more apparent to the public,” the news site adds.

The most prominent measure of income inequality used by economists is the “Gini coefficient.” A Gini coefficient of 0 means absolute income equality (everyone has the same income) while a rating of a 1 means absolute inequality (one person has all of the income).

According to information from the U.S. Census Bureau, states with a graduated income tax system have more income inequality. The Gini coefficient rating for each set of states below is from 2013, the latest numbers available.

There are nine states with no general income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. Their average Gini coefficient is 0.45.

There are eight other states with a flat income tax: Colorado, Illinois, Indiana, Massachusetts, Michigan, North Carolina, Pennsylvania and Utah. Their average Gini coefficient is 0.46.

The other 33 states have a graduated income tax. Their average Gini coefficient is 0.47.

In other words, states with no income tax have less income inequality than states with a flat tax, and both sets of states have less income inequality than states with a graduated income tax. Proponents of a graduated income tax cannot claim that it will by itself reduce income inequality.

Of course, income inequality can be a poor measure of what actually matters in an economy. Job creation, economic growth, and where people choose to live are more important. The bulk of the research finds that higher taxes have a negative impact on economic growth — pursuing changes that lead to higher tax rates would be bad for Michigan’s economy as a whole.

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