10/5/20
For the last forty years, yours truly had supported many
political ideas and causes, but none so fervently and continually as term
limits and a flat income tax. Consequently,
it should come as no surprise that I vehemently oppose the proposed amendment to
the Illinois Constitution that replaces our current flat income tax and
replaces it with a progressive income tax that is being sold to us as the “fair
tax.”
Those of us who support flat taxes do so for a number of
reasons, including
·
A flat tax is more efficient and easier
to file and administer than a progressive tax.
·
A flat tax affords fewer opportunities for exemptions,
deductions, and other loopholes, thus, at least in this sense, rendering it “fairer”
than a complicated progressive tax riddled with tax breaks for those who
are able to catch the ear, usually with the help of generous campaign contributions
and other financial inducements, of a sufficient number of public servants.
·
A flat tax presents far fewer opportunities
for the government to allocate capital and direct human behavior.
·
A flat tax is far more, to use what has become a
sickeningly trite adjective of late, transparent and hence makes it harder
for our public servants to raise taxes, i.e., if there is one rate and few,
if any, deductions and exclusions, the only way to raise taxes is to increase
that one, highly visible, rate. As much
as they love raising tax revenue to spend as they please, public servants
detest the political consequences of raising taxes.
While the flat tax currently in place in Illinois is not the
ideal of those of us who have championed flat taxes for at least the last forty-five
years, it does contain many of these features and thus should be kept in
place. Given the outrageous property
taxes, cavernous unfunded pension liabilities, and general fiscal profligacy that
prevails in the state, our flat income tax is one of the only things Illinois
has going for it on the fiscal front; to dispense with it now would serve to
court further financial disaster and hasten the exodus of productive citizens
fleeing from the Land of Lincoln with nearly the sense of urgency of
those fleeing the Lady Elgin, the Eastland, or any number of other
Chicago area shipwrecks that serve as useful analogies for our fiscal
situation.
The argument for dispensing with the flat tax is the specious
and simplistic plaint that “people who make more should pay more.” Who
doesn’t agree with that statement? Of
course people who make more should pay more taxes, or at least more income
taxes, than people who make less than they do.
And, under a flat tax, “rich” people (As yours truly has noted on
numerous occasions in the past, the use of the term “rich” to describe people
who should more properly be described as “high income” is not only obnoxious
and silly, but shows a complete misunderstanding of economics, finance, and accounting,
subjects on which one should be at least vaguely familiar before opining on
matters of such great import and detail as tax systems, but I digress.) do pay
more than, shall we say, “not so rich” people.
4.95% of a $1 million is a lot more than 4.95% of $50 thousand. The proponents of the fairness argument will
disingenuously (or maybe just ignorantly; it’s hard to tell sometimes) counter
that, of course, they understand that under a flat tax “rich” people pay more
in dollars than do “middle-class” people and they don’t mean to convey the impression
that they don’t. But they continue to
run commercials in which people who reflect the upper-class conception of
working-class people argue that “’rich’ people should pay more” without the “rate
vs. dollar” qualifier. Don’t think for
one moment that these ads aren’t trying to convince people that, under the
current system, “rich” people pay the same amount in taxes as they do, and also
don’t doubt for one moment that, in perhaps enough cases to sway an election, these
ads don’t succeed. To put it nicely,
not everybody pays attention, and many of those who don’t pay attention
vote. How’s that for a scary story during
Halloween season?
While the argument that “the ‘rich’ should pay more” is a
complete canard, there is, on the surface, something to the slightly better
argument in favor of the “fair tax,” to wit, that “working people” pay at the
same rate as “the rich,” this is somehow wrong, and the progressive tax system
that should replace our current flat tax will remedy this situation. Reading directly from the booklet “Proposed
Amendment to the Illinois Constitution” issued by Jesse White, our highly
popular Secretary of State, under “Arguments in favor of the proposed
amendment,” one finds the following more or less encapsulating statement:
“Under the Illinois ‘flat tax’ structure, a nurse
making $50,000 per year pays the same tax rate as an executive making $4
million per year. A graduated tax rate
would have the executive pay more.”
Once one leaves aside the “pay more” at the end of this
argument, which, again, one suspects is an attempt to catch the, er, less alert
members of our electorate off-guard, this argument should appeal to yours truly,
whose family is loaded with nurses.
However, as one who prefers thinking and analyzing to emoting, yours
truly finds this argument nearly equally specious as the “’rich’ people should
pay more” slogan. Why? Because the underlying assumption of this
argument is that a progressive state income tax will necessarily address this
perceived inequity, but an examination of the progressive rates in effect in
comparable states counters that argument.
Please don’t get lost in these numbers; if your eyes glaze over, just
continue reading to the punch line.
Let me interject here my thanks for a young and brilliant
family member who pointed yours truly in the following direction. I will not use his name because I have not
cleared such usage with him, he works for a big corporation, and who knows what
hellish consequences could ensue from advancing common sense arguments in a
large and visible corporate entity in these febrile times?
Let’s examine the personal income tax brackets prevailing
in those states that geographically border the Land of Lincoln and the same
brackets in two obvious comparison states, New York and California. We’ll confine our examination to the
brackets for “married filing jointly” returns in order to keep the numbers from
becoming stultifying; the brackets for individual filers tell the same story.
Here are the top tax brackets, and the income at which
those brackets come into effect, for those state:
Wisconsin 7.65% $ 345,720
Iowa 8.53% $ 73,170
Missouri 5.40% $ 8,424
New York 8.82% $2,155,350
California 12.30% $1,181,484
Indiana, Kentucky, and Michigan have flat state income
taxes at the following rates:
Indiana 3.23%
Kentucky 5.00%
Michigan 4.25%
All three of the flat-tax states have local income taxes
collected on the state form. Note that only
one of those three flat state taxes has a rate that exceeds Illinois’ current
4.95% rate.
What is interesting here is that, among those states
listed with progressive tax brackets of the kind Governor J.B. Pritzker
and his allies would like to install in Illinois, one “pays the same as the
millionaires” at relatively modest incomes…$73,170 in Iowa and, for those who argue
that $73 grand makes one rich and, presumably, worthy not only of higher
taxation but also of scorn and derision, $8,424 in Missouri. Even if you double that income to allow for
some eccentricities in Missouri’s state income tax, less than $17,000 in income
puts you the same bracket as, say, the head football coach at the University of
Missouri. Also, those highest tax rates
at relatively modest incomes, 8.53% in Iowa and 5.40% in Missouri, are higher than
Illinois’ current flat tax rate of 4.95%.
In fact, Iowa’s rate is higher, at the margin, than the highest proposed
rate in Illinois of 7.99%, which is supposed to kick in at $1mm. The actual top average rate in Illinois is
much higher, however, because, at incomes greater than $1mm, ALL income, not
only income greater than $1mm, is taxes at 7.99%. Somebody wasn’t thinking when that provision
was added; the marginal tax rate when one’s income goes from $999,999.99 to
$1,000,001 is in the quadruple digits and falls very gradually from there, which
doesn’t do much for incentives, but I digress.
And another caveat: the tax
rates proposed by Governor Pritzker and his allies in the House are not
included in the proposed Constitutional Amendment itself; the Amendment
authorizes a progressive tax but includes no rates. The rates can be whatever the legislature
and the governor want them to be.
One might contend that my argument falls apart because
Wisconsin, New York, and California, three of my five comparison states with
progressive taxes, really do “stick it to the man,” if one assumes such
sticking is a good thing, because one has to be making a lot of money to be in
the highest tax bracket in those states.
That’s not a bad argument until you consider how much you have to be
making in those states to be paying at a higher rate than one is currently
paying in Illinois, i.e., 4.95%. Here
are the incomes one needs to achieve in those states to reach a tax rate higher
than 4.95% along with those rates: (Again, I am using “married filing jointly”
rates in the interest of simplicity; using “single” rates would only enhance my
argument.)
Wisconsin $15,680 5.04%
New York $23,600 5.25%
California $65,920 6.00%
So these three states with progressive tax systems,
akin to that the proponents of the “fair tax” amendment want for Illinois, tax
relatively, or, in two cases by any measure, modest incomes at higher rates
than does Illinois at the moment.
In what bracket would the nurse, cited in the arguments
for the progressive tax, who earns $50,000 per year, find herself in these
progressive tax states that Governor Pritzker, et. al., so desperately
want to imitate?
Wisconsin 6.27%
Iowa 7.44%
Missouri 5.40%
New York 6.21%
California 4.00%
So the nurse would indeed pay at a lower rate than do the
millionaires in three of these progressive income tax states. S/he would actually get a break on his or her
income taxes in California vs. Illinois.
However, s/he would pay more at the margin in all the progressive tax
states, save California, and much more in all cases except possibly Missouri,
than she currently does in Illinois.
We should also point out that, under the plan of Governor Pritzker, et.
al, she would get a huge tax cut since the rates of those making under
$100 thousand are being cut…from 4.95% to 4.75% for the first $10 thousand and from
4.95% to 4.90% for incomes between $10 thousand and $100 thousand. In the case of our $50 thousand earning
nurse, that is a whopping cut of $40.
Thanks, Governor. We will also
point out that in the flat tax states of Indiana and Michigan, our nurse’s
taxes would change as indicated:
Indiana reduced
by $860
Michigan reduced by $350
Kentucky increased
by $25
No wonder people of relatively modest incomes are fleeing
Illinois before Governor Pritzker, House Speaker Mike Madigan, Senate President
Don Harmon, and their henchmen install the prairie version of the Berlin
Wall to keep us here. But I
digress.
So why are tax rates so much higher in states with
progressive income taxes than they are in flat tax states? It goes back to one of the virtues of flat
taxes I listed at the beginning of this admittedly overly lengthy post: it is harder to raise a flat tax than it is
to raise a progressive tax. With a flat
tax, our public servants have to raise one highly visible number, i.e., the
state income tax rate, in order to raise state income taxes. With a progressive tax, they can engage in
all kinds of subterfuge and chicanery.
A particular favorite among our devoted public servants is to increase tax
rates on “the rich” while leaving the “working poor” and the “middle class”
alone but deciding what level of income makes one, in a complete bastardization
of the term, “rich” and therefore subject to higher taxes along with vitriolic expressions
of hatred and becoming the object of purportedly populist pernicious pabulum. This can even be done without raising a
single tax bracket by letting inflation render the tax brackets nearly
meaningless; how do you suppose the top tax bracket, subject to a near
eye-popping 8.53%, got as low as $73,170 in Iowa? Not all that long ago, $73,170 was a handsome
salary allowing its earner most of the trappings and benefits of being upper
middle class. Once upon a time, an
income of $73 grand made one “rich.”
But now making $73 grand makes one “rich” only in the eyes of our public
servants.
The only thing on the upcoming ballot yours truly really
cares about is this tax amendment, and my elevating this issue above anything
else we are voting on transcends my ambivalence toward half the candidates on the
ballot and my near revulsion at the other half. Yes, I have been a devotee of flat taxes
nearly my entire adult life, but you don’t have to share my ideological
affinity for this approach in order to oppose Governor Pritzker’s “fair tax”
amendment. You only have to
realize that a progressive income tax will make raising taxes far easier than it
is under the existing flat tax framework.
The experience of comparable states with progressive taxes, and
consequently higher income taxes than those in Illinois, puts the lie to the Governor’s
arguments that our tax system will be more “fair” and that the tax burden will
consequently be lightened on the “middle class” and the “working poor.” Even if you wind up paying taxes at a lower
rate than does the millionaire next door (to Governor Pritzker), would paying taxes
at a higher rate than you do now make you, or the state of Illinois, better
off?
Our property taxes in this state are outrageous. Our fiscal picture is horrifying. The only thing we have going for us on the
fiscal front, the only public policy that could keep businesses in this state
and possibly attract new businesses, is our flat tax. Don’t throw it over the side for the pipe
dream of a “fair” progressive tax!
See my two books, The Chairman, A Novel of
Big City Politics and The Chairman’s Challenge,
A Continuing Novel of Big City Politics, for further illumination on
how things work, or at least used to work, in Chicago and Illinois
politics.
