Who Pays Ohio's Income Tax?
The principle of vertical equity – the idea that high-income individuals are in a position to pay higher taxes and therefore should do so – is the theoretical underpinning of any progressive tax structure. [1] According to former chairman of President Clinton’s Council of Economic Advisers, Joseph Stiglitz, one of the problems with the concept of vertical equity is even if we can determine who is in a position to pay a higher rate we still have to decide how much more they should pay. [2] Currently, how much more those deemed rich should pay is a hotly debated topic in our political system.
Who Pays Ohio’s Income Tax?
A useful starting place for such a debate would be to examine how much the rich actually pay now.
The accompanying chart shows the difference in the share of the Ohio income tax borne by the top 50 percent of Ohio taxpayers (ranked by income) and the bottom 50 percent of Ohio taxpayers. The top 50 percent of Ohio taxpayers paid 94 percent of all Ohio income taxes in 1998, compared to only 6 percent for the bottom 50 percent of tax filers.
Broken down even further, the 1998 share paid by the top one percent of taxpayers paid 20 percent of the state’s income taxes. The top 5 percent paid 44 percent and the top 20 percent paid just over half at 51 percent.
Additionally, income earners pay different marginal tax rates. High-income taxpayers face marginal income tax rates as high as 7.5 percent on their income while others face much lower marginal rates. The state government in fact levies nine different tax rates, more than all but two states. [3]
The Impact on Income Tax Cuts
These data reflect the steeply progressive nature of Ohio’s income tax and should be considered before any evaluation of the distributional effects of an income tax proposal is made. Tax cuts, by definition, must go to those who pay taxes. Accordingly, any across the board income tax cut under such a progressive income tax structure would appear skewed towards the "rich." By looking at data on the share of taxes paid before and after a tax change we can conduct an appropriate analysis of an income tax cut proposal.
Notes
[1] On this point, see Joseph E. Stiglitz, Economics of the Public Sector (1986, 2nd edition, New York, NY: W.W. Norton, 1988), 400.
[2] Ibid.
[3] Information on tax rates is for tax year 2001. See the Federation of Tax Administrators, available on-line at http://www.taxadmin.org/fta/rate/ind_inc.html.
