Blog note, Education, Linda Gorman, Taxes

Will increasing Colorado’s top income tax bracket by 27 percent affect incomes?

At present, everyone in Colorado pays the same marginal income tax rate, 4.63 cents out of every additional taxable dollar earned. Colorado officials and their allied interest groups support a constitutional amendment both to increase the state’s income tax and to create two tax brackets. They say the additional funding will improve K-12 education, although it is surprisingly difficult to find definitive evidence from other states showing that increasing spending from current levels will improve educational achievement.

What officials don’t talk about is the fact that higher state taxes may affect average incomes. The highest tax bracket would be 5.9 cents out of every additional taxable dollar earned by households with incomes above $75,000 a year. Households with taxable incomes of $75,000 or less will pay a marginal tax of 5 percent, 5 cents out of every additional dollar earned.

But people have all sorts of ways to adjust their taxable income. They can work less. They can increase mortgage deductions by buying a bigger house. They can shift their savings into tax-free bonds. And if one state’s income taxes are just too much, they can change their residence.

The following chart shows the historical relationship between federal marginal tax rates and average real income. It suggests that raising tax rates may affect income. When marginal taxes fall, average incomes tend to rise and vice versa. Given the strong correlation between parental income and school achievement, the children might be better off if their parents keep the money.

Source: Emmanuel Saez. 2004. “Reported Incomes and Marginal Tax Rates, 1960-2000: Evidence and Policy Implications,” Tax Policy and the Economy, 18, 117-173.

Linda Gorman is Health Care Policy Center Director at the Independence Institute, a free market think tank in Denver

 

 

 

 

 

 

 

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