Taxes and Jobs – Do High Marginal Rates Make a Difference?

On April 24, 2006, RIPEC released a report examining the state’s current income tax structure in order to answer the following question: Do high marginal income tax rates make a difference in attracting jobs to the Ocean State and retaining high income residents?  

The House leadership has introduced legislation that would reduce the state’s top marginal rate over a five year period in order to transform the state’s current tax structure in an effort to attract and retain jobs and higher-income residents.  The proposal creates an alternative tax rate for top earners, whereby these taxpayers could choose to either pay income taxes under current law, which translates to a top marginal rate of 9.9 percent of their federal taxable income, or a flat rate of 8.0 percent of their adjusted gross income (AGI) – primarily without any reductions to the federal AGI. The new alternative tax structure would commence in 2006 and over the course of six years, would reduce the flat rate to 5.5 percent for tax year 2011.

To further inform the debate over the impact marginal tax rates have on job growth and investment, it is necessary to review surveys and econometric studies that have been prepared by economists.  Therefore, the objective of this discussion paper is to go beyond the predictable positions advocated by interest groups and briefly summarize the trends presented in the academic literature on effects tax policy has on creating good jobs and growing the Ocean State’s economy.

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