The States Launch The Flat Tax Movement

Feb 16, 2024 By Triston Martin

Wisconsin introduced the country's first statewide income tax at a flat rate of two percent in 1912. In 1917, Massachusetts implemented the nation's first statewide flat tax. In January of that year, two more states joined the ranks of those having income taxes when Massachusetts and Virginia did the same.

Only five years separated the introduction of the progressive income tax and the introduction of the flat income tax. In comparison, 75 years separated the introduction of the progressive income tax and the first transition from graduating to a single rate. Only three states had made the switch after more than a century, but four have passed legislation to do so this year alone. A fifth state has been given the green light to make the switch thanks to a court ruling, and two more are on the cusp of doing so.

Global Flat-Rate Taxation

Not having any "real-world" examples of working from was a major roadblock to tax reform. After extensive research, Armey concluded that Hong Kong was the only jurisdiction with a flat tax at the time. And although the Hong Kong economy expanded rapidly, legislators seemed to believe that the former British colony was an outlier and that it would be illegitimate to draw any conclusions about the merits of a flat tax in the United States from its experience.

The Flat Tax: What Is It?

The term "flat tax" describes a system in which all taxpayers pay the same rate of taxation. When it comes to a flat tax, typically, neither exclusions nor deductions are allowed. However, some lawmakers have suggested flat tax regimes that preserve existing deductions.

Realizing The Benefits Of A Flat Tax

Flat-tax proponents argue that, by shielding taxpayers from ever-increasing marginal rates, their increased incentive to work more is maximized (as with a progressive system where income falls into progressively higher tax brackets). And they claim that submitting tax returns is simpler under a flat tax.

Even if it reduces tax rates for the wealthiest, flat tax proponents say it unfairly hits low-income earners while benefiting the rich. Some skeptics argue that a progressive tax system is more equitable than a flat tax.

What Is The Rationale Behind A Single Tax Rate?

Regardless of their income, all taxpayers would be subject to the same "flat tax." In this sense, sales taxes are an illustration of a flat tax. When comparing the pros and cons of a flat tax to a regressive tax or a progressive tax,

Tax On The Poor

Many believe a flat tax is regressive since it taxes everyone at the same rate regardless of income. For clarity, regressive tax levies a bigger proportion of its revenue from those with lower incomes than those with higher incomes.

Regressivity occurs when a bigger share of a lower-income person's total funds goes to the tax. An individual with a higher income still pays the same percentage of their income in taxes as someone with a lower income, but their greater income/funds make up for the difference. They can more easily offset the tax burden than individuals with lesser earnings because of the higher amount of money they bring in.

Paying More In Taxes

Compared to flat tax rates, progressive tax rates have a greater impact on high-wage earners and less on low-wage earners. The United States employs a progressive income tax system with seven tax brackets and associated rates.

For example, in 2022, persons with taxable income of $10,275 or less will only be subject to a 10% tax. Taxes are charged at a progressive rate beginning with the lowest tax bracket and increasing through the next six brackets until the highest tax bracket is reached, at 37%, for those earning over $539,900.

Six States' Graduated Income Tax Rates Are Essentially The Same.

These states not only show the perils of failing to index a graduated-rate income tax but also provide an opportunity for change leading to a flat tax. In 1935, when Alabama adopted its graduated-rate income tax, most residents were exempt. Only a small percentage of filers faced the top marginal rate of 5 percent on income above $3,000 (equivalent to almost $63,500 in 2022).

This amount was significantly higher than the current median household income in the state and was considered quite a windfall during the Great Depression. Due to the failure to adjust tax rates for inflation, an increasingly larger share of taxpayers' earnings are now subject to the highest marginal rate. In Georgia, where a transition to a flat tax has also been imposed very gradually, the same is true. Since 1955, when $7,000 was worth roughly $75,000 in today's terms, Georgia's maximum rate has been in effect.

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