THE “FAIR TAX” IS A REALLY LOUSY IDEA EVEN BY ILLINOIS STANDARDS, AND HERE ARE THE NUMBERS TO SUPPORT THAT STATEMENT

 

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.