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A Flat Tax Means Keeping More of Your Money

Another round of tax reform was introduced in the state House this past week, and chances are it would lower your tax bill.

Following two steps taken in 2018 – and a third abandoned in 2020 as the global pandemic threatened to wreck the state’s finances – Georgia House leadership’s new plan would make the tax code flatter, simpler and lower than ever before.

The tax code would transform from six brackets that top out at 5.75% to a single rate of 5.25%. Importantly, more income would be exempted from taxation. For example, a typical family of four would have $30,000 shielded from taxation compared to $20,500 today.

“We believe this tax cut will make us more competitive for wage earners at every income level,” said Rep. Shaw Blackmon, the Republican from Bonaire who chairs the House’s tax-writing committee. “This plan lowers the rate and significantly raises the standard exemption.

“It’s simple, it’s fair, and it allows Georgians to keep more of their money.”

Opponents of a flat tax often question how the policy can possibly be fair to low-income workers. They say it will hurt poorer taxpayers to pay the same rate as wealthier ones. But the numbers don’t support their arguments in this case.

To evaluate the proposal, I calculated tax bills for Georgians living at the poverty line today, and what they would pay under the new bill. I assumed they claimed the standard deduction rather than itemizing deductions, which is a safe assumption at their levels of income.

I found a single taxpayer at the poverty line, with income of $13,590, would see his tax bill cut almost in half. He’d owe less than 1% of his earnings in state income taxes.

I then looked at married couples with zero, one or two dependents living at the poverty line – meaning they earned $18,310, $23,030 or $27,750, respectively. All owe state income tax today. Under the new legislation, they would owe none.

That’s right: zero state income tax.

Taxpayers filing as head of household – think of single parents with children under 18 – would see less dramatic decreases. But their tax bills would still be lower.

Then I doubled each example’s earnings so that they were twice the poverty level. They saw cuts in each case, ranging from about $100 to more than $400.

Here’s another way to think about the changes: Many taxpayers could earn more money than today while paying the same or less in taxes. That’s a powerful incentive, because it means workers keep more of their money when they earn a raise. It’s the opposite of the “welfare cliffs” problem I wrote about recently, where higher wages lead to even steeper losses of public assistance.

Viewed that way, taxpayers at these lower levels of income could earn hundreds, and in many cases thousands, of dollars more and have the same tax bill they have today.

One example: A married couple with no kids earning poverty-level wages of $18,310 today would pay about $74 in state income taxes. Under the new plan, they wouldn’t owe $74 in taxes until they hit $25,410 of income – an increase of more than $7,000.

Why does the math work out this way? One reason, as I’ve already mentioned, is that the increase in non-taxed income is so large. The more income you earn that isn’t taxed, the better off you’ll be. And lower-income workers have a larger share of their income shielded from tax.

But another reason is that our current tax code is just barely progressive. Single taxpayers hit the top rate after only $7,000 of taxable income; for families, it’s $10,000. Those income levels were set years ago when they were relatively larger amounts of money, and then never adjusted for inflation. Georgia has been operating a quasi-flat tax for a long time.

Making it officially flat will save money for Georgians of all income levels.