Junjie Guo and Ananth Seshadri
Executive Summary:
- Individual income tax rates are higher in Wisconsin than in most other states. The
state’s statutory rate for the bottom income bracket is the 19th highest among all
states, and its statutory rate for the top income bracket is the 9th highest. The tax
has also become more progressive: The difference between the top and the bottom
statutory rates has more than doubled since 2000. - We estimate the economic impact of lower income tax rates in Wisconsin using a
model that accounts for behavioral responses from households and firms. In particular,
we allow (1) the tax rates to affect the amount of skills accumulated by individuals,
(2) the effective tax rates faced by households to be different from the
statutory rates due to exemptions and deductions, and (3) the government to adjust
the composition of its expenditures as well as the tax rates. - We find that lowering income tax rates has a significantly positive impact on Wisconsin’s
economy.- Moving to a flat statutory rate of 4.25% (as in Michigan) increases output and
household consumption by more than 2.4%, and the impact is greater when the
rate is lower, for example, 3.05% as in Indiana or 2.50% as in Arizona. - Since the effective tax rate is higher than the statutory rate for most middleincome
households due to the sliding scale standard deductions, moving to a
flat effective rate of 4.25% requires a larger reduction in the second highest
statutory rate and has a larger impact on output and household consumption. - When a larger share of government revenue is transferred back to households,
it raises the disposable income for each dollar of gross income earned by a
household. This has a positive effect on labor supply and the economy. - Increased economic activity leads to a larger tax base in the long run. The
negative impact of lower tax rates on tax revenue in the long run is 20% smaller
than in the short run.
- Moving to a flat statutory rate of 4.25% (as in Michigan) increases output and