Why a progressive income tax is a bad idea
EDEN MARTIN email@example.com July 23, 2013 9:14AM
Updated: July 23, 2013 12:56PM
Democratic legislative leaders in Springfield reportedly plan to propose a state constitutional amendment that would permit “graduated” rates in income taxes imposed on individuals and corporations. The proposed amendment would be put to the voters in November 2014.
If approved, the legislature could then — for example — charge a 3.5 percent rate on income up to X, and 7 percent on income over X. And maybe 12 percent on income over 2X.
Such “progressive” income taxation is said to be fairer because higher-income folks would pay not just more in taxes (they do that now) but higher rates than lower-income folks.
Such “progressive” taxation is also thought to be politically easier on Democratic legislators because they can avoid offending large numbers of people (lower income) while offending smaller numbers (higher income) – many of whom would vote Republican anyway.
As a Democrat myself, I’m not against progressivity as a concept. Taxing higher-income folks at higher rates does seem fairer, in the sense that they’ll feel it less than lower-income folks would. Graduated rates probably would inject fewer “distortions” into the economy than non-graduated taxes. (The curious reader may wish to google Frank Ramsey’s theory of optimal taxation.)
But I think this proposed amendment is a really bad idea, for a number of reasons.
1. Progressivity may be a good theoretical way to spread a fixed revenue need over a group of diverse taxpayers. But this proposed shift would not wind up being “revenue neutral.” Indeed, the point — the entire purpose — of the proposal is to raise and spend more money. Graduated rates would make it far easier — less politically risky — for legislators to satisfy the eternal itch to make themselves popular with constituents and donor groups by spending more of the taxpayers’ money.
2. More revenues to spend would mean more and bigger payoffs to the public employees and teachers unions.
3. More revenues would also mean less pressure to reform our over-the-top public pension systems here in Illinois and Chicago. Instead of real reform, we’d likely see enactment of the union version of “reform” coupled with state contractual assumption of the obligations of the state pension funds — and perhaps even those of Chicago. This wouldn’t be just a home run for the unions. It would be the ultimate grand-slam.
4. More revenue means less pressure to control other costs of government, or to negotiate more balanced collective bargaining agreements. Instead of the “last resort,” raising more tax revenue would become the “first resort.”
5. The result would be worse than just “more revenue.” It would in effect give a blank check — signed by the taxpayers — to a small handful of professional pols in Springfield. No limits — and no political constraints. Just “Trust us!”
6. It would also be a blank check authorizing the transfer of unlimited state tax dollars drawn from suburban and downstate taxpayers to bail out Chicago, whose operating costs and unfunded pension liabilities — through no fault of our current Mayor — are as inflated as those of Illinois as a whole.
With recent political history indelibly etched in their memories, Illinois voters may not have enough trust in Springfield to sign that blank check when they go to the polls in November 2014.
But the immediate question is: will Illinois legislators even dare to ask for that blank check.