New Report: The Case for Lower, Flatter Income Taxes

Adam N. Michel

Over the past decade, state income tax policy has moved sharply in two directions. Hawaii, Maine, Massachusetts, and New York raised their top rates by 2 percentage points or more. Meanwhile, seven states converted to a single-rate flat tax, and 21 cut income tax rates.

In a new Cato Briefing Paper, I find that states adopting flat taxes experienced roughly 1 percentage point faster annual growth in per capita income and state GDP by the fourth year after reform. If that income advantage persisted for five years, it would amount to nearly $4,000 more income per resident.

Colorado was the first state to convert its graduated income tax to a flat tax in 1987, and it provides a useful case study. Compared with 13 similar graduated-rate states, Colorado’s per capita income was about 5.3 percent higher a decade after the reform, equivalent to roughly $4,600 per person in today’s dollars. In November, Colorado voters will consider replacing the state’s 4.4 percent flat tax with a graduated-rate system. 

These results are consistent with substantial empirical literature linking lower marginal income tax rates and flatter tax structures to stronger economic performance. Across jurisdictions and research designs, lower, less progressive income taxes are frequently associated with stronger growth, higher incomes, and better economic conditions.

Graduated rates also do not appear to deliver the fiscal stability their advocates often promise. In 2023, graduated-income-tax states had a median fiscal liability of $1,400 per taxpayer, while no-income-tax and flat-tax states had median budget surpluses of $2,900 and $1,500 per taxpayer, respectively. Whatever additional revenue graduated-rate systems make available, these data do not show any support for better fiscal outcomes. 

One reason may be political, because a flat rate constrains the tax-setting process. Raising a flat tax means raising the rate on everyone, keeping campaigns for additional revenue from proceeding incrementally, one bracket at a time. The pressure often runs in the opposite direction. All four states that converted to flat taxes before 2023 now tax income at rates below where they started, and across more than 50 countries, governments with graduated rates have been nearly four times as likely to raise them.

The states are showing the way on tax reform. A flat tax was mainstream enough in 1992 that Jerry Brown made a 13 percent flat federal tax a centerpiece of his campaign for the Democratic presidential nomination. Federal tax reform has since moved away from structural rate simplification, in part because of claims that flat taxes are politically unpopular, regressive, or not worth the effort. 

The experience of states moving toward flat taxes provides new evidence against that conventional wisdom. Lower, flatter income taxes can coexist with fiscal responsibility while supporting higher income and economic growth. As Washington looks toward the next round of tax reform, states offer an increasingly important model for what broader federal reform could look like.