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The Grad Tax Debate:
Down the Slippery Road to Serfdom

April 1994

Executive Summary

A proposal to adopt a graduated income tax in Massachusetts threatens to worsen the state's reputation for being hostile to business. The arguments made for the grad tax by its proponents are "sophistic" - based on conjecture, not facts.

Proponents insist that the grad tax would promote "fairness." But fairness is a relative term, and efforts to increase "fairness" by taxing the rich can end up actually hurting the poor. One study offered by proponents shows that, for Massachusetts, total state and local taxes represent a smaller fraction of income for the "rich" than for the "poor." But studies of this kind are meaningless because they compare tax burdens at a moment in time rather than over taxpayers' working lives, which is a more accurate measure.

If the current tax system is unfair, it is because it discriminates against savers in favor of spenders. The grad tax would worsen this discrimination. It may actually be unfair also to the "rich" and the "middle class," considering the way most spending programs disproportionally benefit the "poor."

Probably the worst deception lies in the claim that the grad tax would benefit the middle class. In fact, without any increase in future tax rates, many middle-income taxpayers could expect to pay more in state income taxes over their working lives under the grad tax than under the present law. Moreover, the grad tax would worsen an existing inequity in the tax-treatment of the self-employed.

Another deception is the claim that the grad tax would be revenue neutral. It appears that, if anything, the grad tax would be revenue negative -- that it would cost the state revenue. If so, its imposition would necessitate future tax-rate increases. By endorsing the principle whereby it is all right for the majority of taxpayers to reduce their taxes by making a minority pay more, the grad tax would also make it easier to raise future tax rates.

Finally, the grad tax would penalize investment, particularly investment by small business. It would reduce the after-tax profits of many proprietorships and S corporations and the after-tax dividends of many investors. By raising the capital gains tax for most investors, the grad tax would drive capital and jobs from Massachusetts. A planned capital gains tax exclusion can be expected to have little effect, except for encouraging Massachusetts investors to substitute low for high-wage jobs.

The grad tax is, in short, bad for the middle class and bad for business. Eventually, by necessitating as well as facilitating future tax-rate increases, it will be bad for almost all Massachusetts taxpayers.

Questions, comments or requests for this study can be made by contacting BHI at bhi@beaconhill.org, or by calling (617) 573-8750.

Format revised on 25-Jan-2007 3:29 PM

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