Way to go Jesse Paul of the Colorado Sun for finally getting around, in the 19th and 20th paragraphs of his report, to explaining the details of the proposal to increase marginal state income taxes.
Right now, we have a “flat” tax of 4.4%, except that, because of standard deductions, the first fraction of income is not taxed. In this sense, we already have a progressive income tax. A proposed ballot measure would drop the rate to 4.2% on the first $100,000; keep the current rate of 4.4% on income between $100,001 and $500,000; and increase the rate to 7.5% up to $750,000, 8.5% up to a million, and 9.5% over a million.
So people of modest means get a tax break of 0.2%—wow, how generous. Meanwhile, the top earners in the state see their marginal tax rate more than doubled.
The problem with screwing the rich
Such screw-the-rich policies bring at least three problems. First, rich people don’t have to live here at all, and they certainly don’t have to move here. They can move to someplace like Texas, Florida, or Wyoming and pay zero state income taxes. ChatGPT thinks the tax hike would have only modest effects in pushing out the rich, but the problem would be real, and it would compound over time.
Second, rich people don’t have to produce as much. Do we really want to discourage people from producing more than a million dollars of wealth in a year? Third, I don’t know if you’ve noticed this, but rich people can hire fancy accountants who are good at slipping around stupid laws. At the margins, a higher marginal tax encourages businesses to pay out people in untaxed benefits (including plush working conditions) rather than salary.
Granted, state income taxes are light relative to the federal burden. For 2024 federal tax rates topped out at 37% for income over $609,351 (nice round number there). We must look to Congress to address such absurd and economically damaging rates, along with the underlying overspending. But state changes do matter at the margins.
Opportunity costs are real
Notice that it would be possible to implement more-progressive rates in a revenue-neutral way. Tax cuts for the relatively poor could be covered by tax hikes for the relatively rich. The purpose of the proposal is not only to redistribute the tax burden but to raise an additional $2 billion in annual tax revenues, per Paul’s account.
As Bastiat showed a century and a half ago, we can’t just look to the benefits of government spending the extra tax dollars. We also have to contemplate the lost opportunities of sucking that money out of the private economy. When people spend more on taxes, they spend less on business expansion, housing, education, restaurants, health care, vacations, cars, and so on. The people working in those downstream industries then suffer a hit. Do you really trust politicians and bureaucrats to spend that $2 billion more intelligently than the people who earn the money? I don’t!
I don’t know exactly what a revenue-neutral change would look like, but try these progressive rates on for size. Income up to $75,000: 0%. Up to $100,000: 2%. Up to $500,000: 4.4%. Over that: 6%. See, I’m willing to compromise! That represents a marginal tax hike of 36% for higher incomes, hardly trivial. And that would give a real tax break to Coloradans of modest means, not a paltry 0.2%.
I’d also be willing to accept a revenue-neutral increase in personal income taxes in order to eliminate corporate income taxes. As people on the left constantly are telling us, corporations aren’t people. True! So let’s stop taxing them as if they were. Zero corporate income taxes would promote business growth and relocation here.
Nothing ‘liberal’ about it
The Sun story six times refers to the effort to impose net tax hikes as a “liberal” policy (once in the headline, four times in the story, once in a correction). But there’s nothing liberal about threatening to lock people in a cage if they do not help fund your pet political projects. A more apt adjective is “statist” or “leftist.” I’d allow “progressive,” even though I think many so-called progressive policies actually are morally and economically regressive.
True, the term “liberal” can mean a lot of different things, depending on context. But the most apt meanings via the etymology dictionary are “of freedom, pertaining to or befitting a free person” and “free from restraint in speech or action.”
The actual liberal policy, as Jefferson said, is to “restrain men from injuring one another,” to “leave them otherwise free to regulate their own pursuits of industry and improvement,” and to “not take from the mouth of labor the bread it has earned.”
Ari Armstrong writes regularly for Complete Colorado and is the author of books about Ayn Rand, Harry Potter, and classical liberalism. He can be reached at ari at ariarmstrong dot com.
