BHI Policy Study Executive Summary

The Graduated Income Tax: Winners and Losers

Executive Summary

July 1994

The graduated income tax (GIT), slated for voter approval this November [1994], promises tax relief for all but the richest 8 percent of Massachusetts taxpayers. What it would do, instead, is cause thousands of middle-income taxpayers to pay more in taxes over the course of their working lives. By offering a quick fix in the form of tax relief for 1995, the GIT saddles the middle class with the prospect of paying higher rates in the future when they enter their prime earning years and when they are likely to be faced with their most pressing family needs.

Discussion of the GIT so far has ignored the future, focusing, instead, on 1995 alone. Even the Massachusetts Department of Revenue reported on the economic effects of the GIT after assuming away almost all the adverse economic effects that the GIT might be expected to impose.

GIT proponents try to distract voter attention from the future by emphasizing 1995, by dismissing middle-class aspirations toward a higher standard of living, and by promising that the GIT will be indexed against inflation. But indexing protects wage earners from higher tax rates only if they are limited to cost-of-living raises or worse. It does not protect them from higher tax rates if they get merit raises; if, through education or hard work, they earn their way to higher levels of responsibility and commensurate levels of pay; if they save and invest; if they make two incomes; if they start a business or if they do any of the numerous things they might do in pursuit of a higher standard of living.

For every Massachusetts taxpayer who does aspire toward a higher standard of living, the GIT offers no guarantee of tax relief. Indeed, for many such taxpayers it guarantees a tax hike. Until now, it was difficult to determine how much that tax hike would be. This is because a statute that would implement the GIT contains a number of sweeteners, like an increase in the dependent deduction and a child-care credit, that complicate the problem of analyzing its tax effect on the individual taxpayer.

To fill this void, the Beacon Hill Institute created a tax simulation model for the express purpose of showing how the GIT would affect the combined state and federal tax liabilities of Massachusetts taxpayers over the rest of their working lives. This report contains our findings, based on the application of that model to taxpayers filling selected Boston-area occupations and based on our assessment of the outlook for those occupations. The following table summarizes those findings (positive amounts indicate that the taxpayer pays more under the GIT; negative amounts that he pays less).

Changes in Tax Liability for Selected Boston-Area Taxpayers Under the GIT

Occupation Age in 1995 Age at Retirement Filing Status Current Income Total Change in Tax Liability
Accountant 25 65 Single $27,094 $8,121
Teacher 22 65 Single 28,750 -3,717
Teacher 22 65 Head/House 28,750 -10,260
Teacher & Teacher 22 65 Married 57,227 2,553
Accountant & Secretary 25 65 Married 51,160 7,163
Buyer & Engineer 25 65 Married 58,250 46,758
Technical Engineer & Computer Programmer 25 65 Married 53,146 -2,244
Technical Engineer & Computer Programmer 25 70 Married 53,146 2,580
Systems Analyst 25 65 Single 42,164 26,368
Personnel Manager 35 65 Head/House 56,204 10,561
Personnel Manager & Secretary 35 65 Married 85,027 18,942
Accountant 45 65 Single 50,975 3,300
Accountant 45 65 Head/House 50,975 -933
Secretary 45 65 Single 34,374 -3,590
Accountant & Secretary 45 65 Married 85,001 3,663
Accountant & Accountant 45 65 Married 101,653 16,886

Future Shock
What we find squares with common sense: Under the GIT, some middle-income taxpayers would pay less over their working lives, but others would pay more. A school teacher, age 22 and filing single, would pay $3,717 less, while an accountant, age 25 and filing single, would pay $8,121 more. A technical engineer and a computer programmer, age 25, married and planning retirement at age 65, would pay $2,244 less, while a personnel manager and a secretary, age 35 and married, would pay $18,942 more.

As it happens, how much more or less you would pay may have less to do with what you make now than with what you are likely to make in the future. Two accountants, age 45 and "rich" by GIT standards, would pay $16,886 more, while a buyer and an engineer, age 35 and currently only about half as rich, would pay $46,758 more. How much more you pay also depends on how hard and long you work. The above-noted technical engineer and computer programmer would end up paying $2,580 more if they postponed retirement to age 70.

You often pay more if you get married. A 45-year-old accountant and a 45-year-old secretary who marry would increase their combined working-life taxes by $3,953. Two Boston school teachers, both 22, one filing single, the other head-of-household, would increase their working-life taxes by $16,530 by getting married.

Why Many Will Pay More
One reason the GIT harms certain middle-income taxpayers is that, besides replacing the existing flat tax with a graduated rate structure, it phases out the personal exemption for taxpayers whose income exceeds a certain threshold. Another is that it raises dramatically the tax rate on most capital gains. A third is that it creates a new head-of-household filing status that generously rewards single-parenthood while imposing a significant marriage penalty.

The GIT is being promoted as "guaranteeing" tax relief to all but the very rich and as offering a host of family-friendly benefits. What it guarantees, in fact, is tax increases for many middle-income taxpayers, particularly young, professional, double-income families. The principal winners, under the GIT, are single parents who can look forward to only cost-of-living raises or worse. GIT proponents would make these taxpayers "winners" by having Massachusetts voters adopt a tax law that punishes marriage and occupational success.

A copy of this study can be purchased by e-mailing the institute at or by calling (617)573-8750.


Format updated on 19-Apr-2005 1:53 PM