Seth Colby July 6th, 2017 Input Taxes on outputs are less likely - PowerPoint PPT Presentation

Tax Research & Planning, DOTAX Seth Colby July 6th, 2017

Input Taxes on outputs are less likely  Labor Capital to distort economic behavior than taxes on inputs Capital gains 7.25 % IIT: 6.4%-11.0% Labor and capital are inputs ◦ The is one rationale behind ◦ consumption taxes Firms Taxing income may lead to  inefficient outcomes Taxing income discourages work. ◦ Less labor leads to a decline in economic output Income tax is a disincentive to save ◦ GET 4.0% because income tax penalizes consumption and savings Output Goods

 Capital is mobile whereas labor is more domiciled  Capital accumulation is strongly correlated with growth (promote investment)  Most governments tax capital (capital gains and corporate income) less than labor  However, labor more mobile between states than internationally, especially with the e-economy

 Economic literature is divided on the optimal marginal rate of taxation ◦ Range is somewhere between 0 and 100% ◦ As income taxes get higher, more likely that people leave the work force or leave the tax jurisdiction  Consideration: as you raise income tax, people may substitute labor with capital ◦ Receive equity compensation (taxed at capital gains) ◦ Increase use of C and S corporations (Gordon and Slemrod '00)  There is a trade off between equity and efficiency

 Income tax allows authorities to apply different rates according "ability to pay"  Graduated tax schedules help reduce inequality However,  Income is not wealth. Wealth inequality tends to be more severe than income inequality  It is possible to "hide" income, especially for wealthy individuals that receive most of their income for capital and engage in tax planning

Individu dual Income Tax Consum umpti tion on Tax Equity Tend to be more Regressive (less in life progressive (using cycle terms) graduated rates) Efficiency Moderate to high: Taxation Minimal: If applied of input reduces work, equally to all depends a lot on rates. consumption goods Discourages savings Administrative Easy to moderate Easy Burden Avoidance Moderate to high Low

Ineqaulity (Gini coefficient) After taxes and transfers 0.450 0.400 0.350 0.300 0.250 0.200 0.150 0.100 0.050 0.000 Source: OECD (2015) In it Together: Why Less Inequality Benefits All

Wealth Redistribution of Tax System 50 1.60 45 1.40 40 1.20 35 1.00 30 25 0.80 20 0.60 15 0.40 10 0.20 5 0 0.00 Share of taxes of richest decile Share of market riches decile Ratio of shares for riches decile Source: OECD (2008) Growing Unequal? Income Distribution and Poverty in OECD countries

Source: OECD (2008) How much redistribution do governments achieve?

The impact of taxes and transfers on income inequality in 25 countries

Hawaii is the third most equal state in the country according to GINI Coefficient  Hawaii is the second most equal state based on the ration of top1% to bottom 99% of income  Global economic forces have led to outsized economic gains for top income earners since the  1970s but the gains have been less dramatic in Hawaii relative to other states. Hawaii: +54% Income change for top 1 percent of household since 1979. All others saw -9% ◦ New York: +273 Income change for top 1 percent of households since 1979. All others saw +5% increase ◦ 0.55 Income Equality by State 0.5 0.45 Gini Coefficient 0.4 0.35 0.3 0.25 0.2 Utah Alaska Hawaii New Hampshire Wyoming Iowa Wisconsin South Dakota Vermont Nebraska Minnesota Indiana Delaware Maine Maryland Idaho Nevada Washington Colorado West Virginia Kansas Oregon Montana Missouri Ohio North Dakota Michigan Virginia Pennsylvania South Carolina Arizona Oklahoma Rhode Island Mississippi Arkansas North Carolina Kentucky Tennessee New Mexico Georgia Alabama Illinois Texas New Jersey Massachusetts Florida California Louisiana Connecticut New York Source: American Community Survey (2015) Includes all cash income

 The top 1% takes home 11.9% of all the income in Hawaii, compared to an average of 20% In the US Share of income captured by the top 1%, 1917-2013 Source: Economic Policy Institute

Income me thresho hold of top 1% of filers by st state $64,859 Rank State Income thresh shol old d of top Median HH income in 1.0% 1.0% Hawaii (6 th highest in 1 Connecticut $659,979 nation) 2 New Jersey $547,737 3 Massachusetts $539,055 $121,860 4 New York $517,447 Income threshold of 5 North Dakota $481,188 top10% of filers in Hawaii 6 California $453,772 7 Texas $424,507 Avg United States $389,436 Source: American Community 45 45 Hawaii $281,620 20 Survey and DOTAX Source: Economic Policy Institute

 Hawaii revenue share of individual income tax is close to the national average Composition of state and local taxes Hawaii aii U.S. . Avg Property 17% Other Taxes Other Taxes Corporate Property Corporate 22% 19% Income 31% Income 4% 2% General Sales Individual Individual 38% Income Income 21% 23% General Sales 23% Source: Tax Foundation

Composition of State Revenues 100% 90% 80% Other Corporate Income Tax 70% Cigarette & Tobacco Tax 60% Unemployment Insurance Tax Public Service Companies Tax 50% Insurance Premiums Tax Motor Vechicle Taxes & Fees 40% Fuel Tax 30% Transient Accommodations Tax Individual Income Tax 20% General Excise and Use Taxes 10% 0% FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016

Tax Stability of GET and IIT 1.10 1.00 0.90 0.80 0.70 0.60 0.50 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 IIT/Hawaii GDP GET/Hawaii GDP

 Very progressive relative to other states  Brackets not indexed to inflation (like federal rates)  Relatively low personal exemption compared to federal (Federal $12,600, HI: $4,400)  Refundable credits offset burden for lower income individuals  Hawaii exports a large amount of tax burden to federal government, particularly at high income levels  The largest state specific exemption is pensions and social security, the cost of which is expected to grow with time

Compos ositi tion n of federal al Individual idual Income me in Hawai aii i Interest & Captital gains dividends 3% Income Source Rate Social security Self-employment 2% 4% income Wage & Salaries Variable (See tax 6% bracket) Pensions & IRA 0% (Employer distributions contributions exempt) Pensions & IRA Self-employment Variable (see tax distributions income bracket) 12% Social security 0%, (exempt) Wages & salaries Capital Gains 7.25% 73% Interest & Dividends Variable (see tax bracket)

Highest Marginal Tax 43 states levy individual incomes taxes • Bracket 1 California 13.30% 8 states have a single-rate structures • 2 Hawaii* 11.00% 3 Maine 10.15% 4 Oregon 9.90% Hawaii will have the most brackets in the • 5 Minnesota 9.85% country with 12 (currently has 9). 6 Iowa 8.98% California and Missouri have the second 7 New Jersey 8.97% most tax brackets with ten 8 Vermont 8.95% 9 DC 8.95% 10 New York 8.82% Hawaii has the second highest income • 11 Hawaii 8.25% tax rates of any state 11 Wisconsin 7.65% 12 Idaho 7.40%

Tax bracke kets ts for S Selecte cted States (Joint nt Filers) Colorado Virginia Maryland California Hawaii* 4.63% of federal 2.00% > $0 2.00% > $0 1.00% > $0 1.40% > $0 taxable income 3.00% > $3,000 3.00% > $1,000 2.00% > $16,030 3.20% > $4,800 5.00% > $5,000 4.00% > $2,000 4.00% > $38,002 5.50% > $9,600 5.75% > $17,000 4.75% > $3,000 6.00% > $59,978 6.40% > $19,200 5.00% > $150,000 8.00% > $83,258 6.80% > $28,800 5.25% > $175,000 9.30% > $105,224 7.20% > $38,400 5.50% > $225,000 10.30% > $537,500 7.60% > $48,000 5.75% > $300,000 11.30% > $644,998 7.90% > $72,000 12.30% > $1,074,996 8.25% > $96,000 13.30% > $1,074,996 9.00% > $300,000 10.00% > $350,000 11.00% > $400,000

Rates on Taxable Income for selected states (married, filed jointly) Adjusted Gross Income 50,000 75,000 100,000 150,000 350,000 Ratio 350,000/ Marginal Effective Marginal Effective Marginal Effective Marginal Effective Marginal Effective 50,000 Hawaii 7.60% 5.72% 7.90% 6.36% 8.25% 6.76% 8.25% 7.25% 8.25% 7.82% 137% Hawaii (2018) 7.60% 5.72% 7.90% 6.36% 8.25% 6.76% 8.25% 7.25% 10.00% 7.93% 139% California 4.00% 2.16% 6.00% 3.17% 8.00% 4.21% 9.30% 5.86% 9.30% 7.83% 363% Maryland 4.75% 4.64% 4.75% 4.68% 4.75% 4.70% 5.00% 4.71% 5.50% 5.13% 110% Colorado 4.63% 4.63% 4.63% 4.63% 4.63% 4.63% 4.63% 4.63% 4.63% 4.63% 100% Virginia 5.75% 5.23% 5.75% 5.41% 5.75% 5.49% 5.75% 5.58% 5.75% 5.68% 109% Year 2016 Using standard deduction and no dependents