A specter is haunting Illinois — the specter of communism.
Although the governor of Illinois, Jay “J.B.” Pritzker, said earlier this summer, upon signing the state’s $40 billion budget for the 2020-2021 fiscal year, that the budget was balanced “for the first time in decades,” according to the state’s own actuarial calculations, the budget is actually billions in the red. It turns out there is quite a difference between how lying politicians account for the state’s retirement debts and how financial professionals do.
Every year, the state’s actuaries determine what amounts the state should contribute toward state-worker retirement benefits. And every year, Illinois lawmakers underpay those amounts because statutory contributions set by previous Illinois lawmakers are much lower than what’s actuarially required. This time the shortfall was $4 billion. Payments for state-worker retiree health insurance are also grossly underpaid. All of those underpayments make the state budget look far better than it really is. Over the next twenty-five years, Illinois pension costs are expected to consume 25 percent of Illinoisans’ tax dollars. No other state in the country is in worse financial shape. The Mercatus Center at George Mason University ranks Illinois dead last in its annual Ranking the States by Fiscal Condition report. And no wonder, since “Illinois performs poorly on just about every metric that goes into calculating its overall rank.”
So what do state governments do when they “need” more revenue? They raise taxes. And what is the easiest way to sell a tax increase? Promise to raise taxes on “the rich,” or, in the case of Illinois, on the top 3 percent. When faced with a deficit of more than $1 billion, Illinois adopted a state income tax in 1969. The first income tax was at a flat rate of 2.5 percent. It was flat because the attempt to impose a graduated state income tax in the 1930s was struck down by the Illinois Supreme Court as unconstitutional under the state’s 1870 constitution. A flat-tax requirement was enshrined into the state’s new constitution in 1970: “A tax on or measured by income shall be at a non-graduated rate” (Art. IX, Sec. 3). Naturally, the initial 2.5 percent rate has increased over the years. The Illinois legislature most recently raised the rate from 3.75 to 4.95 percent in 2017. Corporate income taxes were also raised from 5.25 to 7 percent. And now Illinoisans can expect even higher rates.
The state budget wasn’t the only thing that Governor Pritzker signed into law earlier this summer. After the Illinois House and Senate passed — on a strict party-line vote — a proposed amendment to the state constitution to remove the flat-tax requirement, the governor signed it into law, thus setting the stage for Illinois voters to approve a change this November in the state’s income tax from a flat tax to a graduated tax. Remarked Pritzker,
Our effort to restore firm fiscal footing for Illinois continues in November of 2020, when voters will have the power to say yes to a fair tax system that will improve the trajectory of our state’s finances forever.
They will have an opportunity to vote to make sure that 97 percent of Illinoisans pay the same or less in income taxes.
It’s official: the Fair Tax will be on the ballot in November 2020. Today’s vote is a giant leap forward for the middle class and those striving to get there.
Illinois voters won’t actually be voting on a tax increase, just on allowing the legislature to make the state’s income tax progressive or graduated in nature. A progressive or graduated tax imposes lower tax rates on low-income earners and higher tax rates on those who have higher incomes. And why would Illinois voters want to go along with that? Because then the state can slightly lower taxes on “the poor” while significantly raising them on “the rich.”
Under Pritzker’s “Fair Tax for Illinois” proposal, the existing single 4.95 percent flat income rate would be replaced with a six-bracket progressive tax. The graduated rates would be 4.75 percent on income up to $10,000; 4.9 percent on income between $10,000 and $100,000; 4.95 percent on income between $100,000 and $250,000; 7.75 percent on income between $250,000 and $500,000; 7.85 percent on income between $500,000 and $1 million; and 7.95 percent on income exceeding $1 million. Those in the top bracket would also be subject to a recapture provision wherein their entire income, not just their marginal income, would be subject to the highest rate. Only the states of Connecticut, Nebraska, and New York have similar rate-recapture provisions. The corporate income-tax rate would rise to a flat 10.45 percent while “pass-through” business income would have a top tax rate of 9.45 percent. The Chicago Sun Times editorialized that this was “a tax for Illinois that, thankfully, puts the middle class first.”
Progressive taxation
What does the potential change in Illinois’s state income tax have to do with communism? At the end of section two of Karl Marx’s Communist Manifesto, in addition to calling for the abolition of private property and the centralization of the means of production in the hands of the state, he called for “a heavy progressive or graduated income tax.” This is based on the Marxist dictum (that many Americans think appears in the Constitution), “From each according to his ability, to each according to his needs,” and on Marx’s mistaken notions about the unjustness of the unequal distribution of wealth in society.
A progressive tax is based on the nebulous concept of fairness. “It’s wrong that I would pay the same tax rate as someone earning $100,000 or, even worse, pay the same tax rate as someone earning $30,000,” said Pritzker, a billionaire, echoing another billionaire, Warren Buffet, who has repeatedly urged Congress to raise taxes on “the rich” like himself, lest they pay a lower tax rate than their secretaries. In reality, progressive taxation is the means by which wealth is transferred from “the rich” to “the poor” by the welfare state, after it is funneled through the federal bureaucracy. Progressive taxation punishes productivity and success, while reducing capital formation and economic mobility. Progressive taxation is based on envy of “the rich,” who don’t “deserve” their wealth because it comes at the expense of “the poor.” And besides, “the rich” can “afford” to pay more in taxes.
Pritzker’s main selling point is that 97 percent of all Illinois wage earners will get a tax break under his “Fair Tax” plan, while only “the rich” (in this case, those making more than $250,000 a year) will see higher taxes. And as Austrian economist Ludwig von Mises explained in his work Human Action, “Nothing is more calculated to make a demagogue popular than a constantly reiterated demand for heavy taxes on the rich. Capital levies and high income taxes on the larger incomes are extraordinarily popular with the masses, who do not have to pay them.”
Although no Illinois Republicans voted in favor of the proposed amendment to the Illinois constitution to remove the flat-tax requirement, their central argument against it was not based on the evils of progressive taxation. Following the House minority leader, many maintained merely that it wasn’t needed to balance the budget. Illinois Republicans, like Republicans in other state legislatures and in the Congress, generally have no philosophical objection to progressive taxation.
Illinois will not be alone if it changes its income-tax system to a progressive one. According to the Tax Foundation, forty-three states levy individual income taxes. Forty-one of those states tax wage and salary income, while two states (New Hampshire and Tennessee) tax only dividend and interest income. Seven states have no state
income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Of the states taxing wage and salary income, eight of them besides Illinois have a flat tax: Colorado, Indiana, Kentucky, Massachusetts, Michigan, North Carolina, Pennsylvania, and Utah. The thirty-two states with progressive, that is, Marxist, income-tax rates include Kansas, with three tax brackets, and Hawaii, with twelve tax brackets. Top marginal tax rates range from 2.9 percent in North Dakota to 13.3 percent in California. The highest rate kicks in at just $7,000 in annual income in Georgia, but not until one’s income reaches $5 million in New Jersey.
The Marxist federal income tax
It is not just state income taxes that are Marxist in nature: The United States has had a Marxist tax code from the very beginning of the income tax under the Sixteenth Amendment, which applied to the years 1913–1915, up to and including the latest major reform of the tax code, Donald Trump’s Tax Cuts and Jobs Act, which first applied to the year 2018.
The income tax began with a 1 percent tax on taxable income exceeding $3,000 followed by a series of surcharges up to 6 percent applied to higher incomes. The maximum rate of 7 percent was applied to taxable income exceeding $500,000. In addition, there was an exemption of $3,000 for a single person and $4,000 for a married couple. The highest tax rate then rapidly increased. After rising to 67 percent in 1917 and 77 percent in 1918, it reached 81 percent in 1940, 88 percent in 1942, and a whopping 94 percent in 1944. After dropping briefly, the top rate stayed near or higher than 90 percent between 1950 and 1963. Under Ronald Reagan in the 1980s, the top rate fell from 70 percent down to 50 percent, and then down to 38.5 percent before stopping at 28 percent. The tax brackets were also eventually reduced from fifteen to just two. After both the rates and brackets increased under George H.W. Bush and Bill Clinton, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) — signed into law by George W. Bush — instituted six brackets of 10, 15, 25, 28, 33, and 35 percent. They were augmented by a new top rate of 39.6 percent with the passage of the American Tax Relief Act of 2012. The Tax Cuts and Jobs Act changed the tax brackets to 10, 12, 22, 24, 32, 35, and 37 percent. For tax year 2019, the top rate kicks in once one’s income reaches $510,301 ($612,351 for married filing jointly).
The tax brackets tell only part of the story. Another way that “the rich” are targeted is through the phase-out of tax deductions and credits. That means that the value of the deduction or credit is reduced as one’s income rises. And in some cases, they are disallowed altogether. Just to cite a few examples: No American Opportunity Tax Credit (AOTC) for qualified educational expenses can be claimed if one’s modified adjusted gross income exceeds $90,000 ($180,000 for married filing jointly), and a phase-out of the credit begins once one’s income exceeds $80,000 ($160,000 for married filing jointly). No student-loan interest deduction can be claimed if one’s modified adjusted gross income exceeds $80,000 ($165,000 for married filing jointly), and a phase-out of the credit begins once one’s income exceeds $65,000 ($135,000 for married filing jointly). The amount of the child and dependent care credit decreases as one’s income rises. The Child Tax Credit (CTC) begins to phase out for taxpayers with modified adjusted gross incomes exceeding $200,000 ($400,000 for married filing jointly). No Earned Income Tax Credit (EITC) can be taken unless one’s adjusted gross income, for those with three or more children, is less than $50,162 (single) or $55,952 (married filing jointly), and the limits are even lower if one has fewer than three children.
But the tax code is even more progressive than it seems. While “the rich” are punished through the phase-out of tax deductions and credits as their income rises, “the poor” receive tax refunds from the government of money that they never paid in, in refundable tax credits. Those are tax credits one can take even if one has no tax liability. An amount up to $1,000 of the AOTC is refundable. An amount up to $1,400 of the CTC is refundable. All of the EITC is potentially refundable, the amount of the benefit depending on the recipient’s income and number of children. The maximum credit for tax year 2019 is $529 with no qualifying children, $3,526 with one qualifying child, $5,828 with two qualifying children, and $6,557 with three or more qualifying children.
The result of progressive tax rates, phase-outs of deductions and credits, and refundable tax credits is that a minority of Americans pay the majority of federal individual income taxes. According to the latest figures available (2016) from the Internal Revenue Service (IRS), the top 50 percent of all taxpayers (in terms of adjusted gross income) pay 97 percent of all individual income taxes, while the bottom 50 percent pay the remaining 3 percent. The top 1 percent of taxpayers pay a greater share of individual income taxes (37.3 percent) than the bottom 90 percent combined (30.5 percent). The top 1 percent of taxpayers pay a 26.9 percent individual income-tax rate, which is more than seven times higher than taxpayers in the bottom 50 percent (3.7 percent).
The phony flat tax
Ostensibly recognizing the nature of progressive taxation, some conservatives have proposed that the federal income tax be changed to a flat tax — like the one Illinois and eight other states currently have. There is just one problem: The flat tax they propose is not flat.
Conservatives talk about the need to shift to a flat tax that is “fair,” “efficient,” and “simple,” yet still raises enough money for the federal government. The idea of a flat tax has been around a long time. Economist Milton Friedman actually proposed a flat tax back in 1962. The idea was resurrected in the 1980s by Hoover Institution economists Robert Hall and Alvin Rabushka. A few bills based on the Hall-Rabushka plan were introduced in Congress. Various think tanks and tax-reform organizations have come out with some form of a flat-tax plan to reform the tax code.
The typical flat-tax plan taxes all income at a flat rate (there is no consensus on the rate), often with the exceptions of capital gains, Social Security benefits, interest earned, and dividends received. A flat tax generally includes generous personal and dependent allowances. However, the number of tax credits and deductions is greatly reduced. Some plans would limit deductions to just medical expenses, home mortgage interest, and charitable contributions. Some plans retain refundable tax credits. The result is that, in some cases, the flat tax could be just as progressive as the current system. Progressivity doesn’t require graduated tax rates. Just ask Hall and Rabushka. They maintain that the flat-tax system they propose is both “fair and progressive — the poor pay no tax, and the amount that a family pays rises with income.”
Even though everyone pays the same tax rate, the Social Security tax is not a flat tax. In fact, it is actually quite regressive in nature. A regressive tax takes a greater percentage of income from those with low incomes than from those with higher incomes. The Social Security program is funded by a 12.4 percent payroll tax (split between employer and employee) on just the first $132,900 of an employee’s income. Self-employed persons pay the full 12.4 percent.
The closest thing to a genuine flat tax is the Medicare tax. It is funded by a payroll tax of 2.9 percent (split between employer and employee) on every dollar of an employee’s income. Self-employed persons pay the full 2.9 percent. There are no deductions, exemptions, credits, exclusions, or wage bases. Every American who earns income — from minimum-wage fast-food workers to the CEOs of every Fortune 500 company — pays the same rate regardless of his marital status, age, number of dependents, medical bills, home mortgage interest paid, or donations to charity. However, even the Medicare tax is no longer a true flat tax. Thanks to the Patient Protection and Affordable Care Act (Obama-care), the Additional Medicare tax is a tax of 0.9 percent imposed on earnings exceeding $200,000 (single) or $250,000 (married filing jointly). It took effect in 2013, and is fully paid by employees.
The libertarians
Liberals and conservatives both accept a Marxist-inspired tax code. They differ only in the particulars. In contrast to both are the libertarians. They not only reject the Marxist progressive income tax, they reject the income tax altogether. A progressive tax merely adds insult to injury.
The libertarian view of the income tax is not that it should be fair, adequate, sufficient, constitutional, uniform, flat, simple, efficient, equal, or low. There is no “optimal” tax rate. Because libertarians believe that taxation is government theft, they don’t believe that anyone should be paying some arbitrary “fair share” of the income tax. As Frank Chodorov explained in his book The Income Tax: Root of All Evil (1954), the income tax means that the state says to its citizens,
Your earnings are not exclusively your own; we have a claim on them, and our claim precedes yours; we will allow you to keep some of it, because we recognize your need, not your right; but whatever we grant you for yourself is for us to decide.
The amount of your earnings that you may retain for yourself is determined by the needs of government, and you have nothing to say about it.
If government spending were limited only to that which is authorized by the Constitution, the federal government wouldn’t “need” an income tax.
But since the United States has an income tax, libertarians reason that anything that keeps more money in the hands of Americans is a good thing. Thus, tax increases of any kind, revenue-neutral tax reform, tax-base broadening, replacement of one tax with another, the elimination of tax deductions, and tax shifting from one group of taxpayers to another are not in the least bit desirable.
This article was originally published in the September 2019 edition of Future of Freedom.