The Flat Tax, Economic Efficiency, and Ohio's Competitiveness in the Global Marketplace
HB 112 replaces the current Ohio income tax with a "flat tax" and results in an income tax cut for all Ohioans. The Buckeye Institute has a long record of advocating both flatter and lower income taxes.[1] Therefore, HB 112 is consistent with our long-held position.[2]
Ohio’s current income tax code is characterized by low exemptions and a steeply graduated income tax rate scale with rates going from 0.743 percent to 7.5 percent in nine brackets.
Since its creation, the Ohio income tax has mushroomed to become Ohio's most important source of revenue and has contributed to the overall growth of government in the state--a growth almost without parallel among the states. This government growth is without question a contributing factor in the slow economic growth of this state relative to other states.[3] It should be noted that most of our surrounding states have flat taxes or income taxes that are effectively flat.
In addition, inflationary bracket creep over the years has caused many Ohioans to face marginal tax rates intended originally only for high-income taxpayers.[4] Flat taxes, so long as the deductions/exemptions are indexed like HB 112 calls for, do not have a bracket creep problem.
The most significant complaint that will be heard about moving to a flat tax regime is that such a tax would be less "progressive" than the current tax--that it amounts to a give away to the rich. Ohio's current tax code with its steeply graduated rate structure is indeed one of the most progressive income taxes in the nation as shown in a recent Buckeye Institute study.[5]
But this is not a good thing. Progressive taxes, while achieving a certain sense of fairness in some people's eyes, punish Ohio's most productive citizens and harm our economic growth.
With a generous standard deduction and dependent exemptions, HB 112 will result in a tax cut for all Ohioans. Low-income Ohioans, who currently face tax liability, will find themselves owing no state income taxes whatsoever.
Furthermore, as the accompanying charts show, the flat tax with generous deductions proposed in HB 112 is in fact progressive. As income increases, the average tax rate increases; this is the very definition of a progressive tax. To be sure, this tax is less progressive than the current code, but this will improve Ohio's competitive position in terms of attracting and keeping productive human and physical capital in the state.
Furthermore, the equity differences between flat taxes and graduated income taxes virtually disappear when viewed over a lifetime as Ohio University economics professor Lowell Gallaway has shown.[6]
To summarize, HB 112 would:
- eliminate, once and for all, the threat of un-voted, inflation-driven tax increases, which challenge the very legitimacy of representative government.
- reduce the overall reliance on income taxation as a source of tax revenue and help stem the tide of rampant expansion in the size of state government, thus improving our competitive position in the global marketplace.
- reduce marginal tax rates on all Ohioans thus improving economic efficiency.
- maintain progressivity in the tax code by offering a large standard deduction and dependent exemption, which will have the effect of taking thousands (millions?) of lower-income taxpayers off the tax rolls completely.
HB 112 is the kind of fundamental tax reform that Ohio needs.
This article was given as testimony before the Ohio House Ways & Means Committee on May 8, 2003.
Notes
[1] See Robert Lawson, "Real Fundamental Tax Reform," Perspective on Current Issues (Columbus, OH: The Buckeye Institute, February 2003); and James Damask, et al., Tax Reform for Ohio's New Millennium (Columbus, OH: The Buckeye Institute, April 2001).
[2] The Buckeye Institute does not advocate for or against particular pieces of legislation, but rather argues for policies consistent with our mission. Nothing written or spoken here should be construed as an attempt to aid or hinder the passage of any legislation.
[3] Richard Vedder, Grinding to a Halt: Ohio's Tax Policy and its Impact on Economic Growth (Columbus, Ohio: The Buckeye Institute, September 2002.
[4] The Buckeye Institute expects to release a study about inflationary bracket creep in 2003.
[5] Russell Sobel and Robert Lawson, Income Tax Progressivity in Ohio (Columbus, Ohio: The Buckeye Institute, April 2003).
[6] Gallaway, Lowell, "The Distributional Effects of a Flat Tax," http://www.buckeyeinstitute.org/Articles/2003_2_21%20Galloway.htm
Robert A. Lawson, Ph.D. is Professor of Economics and George H. Moor Chair at Capital University in Columbus, Ohio and a Senior Fellow with The Buckeye Institute.
