* David J. Roberts, an associate professor of accountancy at DePaul University, writes in the Tribune that the governor’s graduated income tax proposal is “severely flawed and would have serious negative consequences.” How? Well, the “millionaire’s tax” for starters…
Think of this as a progressive rate structure with a cliff. At the million-dollar threshold, one extra dollar of income puts you over the cliff. Ignoring the effects of any other tax provisions, that one dollar of income would cost $8,565 in additional tax, an incredible marginal rate of 856,500 percent on that dollar. Imagine the efforts that taxpayers would go through to avoid being taxed on extra income if they were close to that threshold. And a tax like this might cause some wealthy individuals to flee Illinois altogether.
“Oh, please, won’t anyone think about the millionaires?!” /s
Loo, somebody obviously didn’t run the numbers. As we’ve already discussed, the tax avoidance window is a mere $9,305…
The cutoff point above which tax avoidance wouldn’t make sense would be $1,009,305. State taxes would be $80,239.75 for an after-tax income of $929,065.25 - exactly what you would’ve paid if you made a million dollars.
Increase that income by just a dollar, to $1,009,306, and your state tax would be $80,239.83, with an after-tax income of $929,066.17 - 92 cents more than you’d have made with a million dollars in earnings. After that, the gravy gets thicker.
* Back to Associate Professor Roberts…
Under the proposal, the same rates apply to both single and joint filers. So, for example, two single individuals who each have $250,000 of net income would each pay at a rate of 4.95 percent on income above $100,000. If they marry one another, their combined $500,000 of net income means that the second $250,000 would be taxed at 7.75 percent. Ignoring the effects of any other tax provisions, this results in $7,065 of extra tax, a giant marriage penalty.
* I asked the Pritzker administration the other day about this “marriage penalty” issue…
Current Illinois tax code does not distinguish between married and single filers.
There’s little to no evidence to support the claim that people base their decision to marry on tax rates.
More married couples - especially low-income married couples - receive marriage bonuses at the federal level because of the structure of the federal tax code.
The wealthy - not low-income working families - are more likely to benefit from a higher income threshold for married filers.
Doesn’t sound like the governor is much interested in this particular topic to me.
* Roberts again…
If the plan would double the size of the rate brackets on a joint return, that would eliminate the marriage penalty, but it would result in much less tax revenue. And it would create big potential marriage bonuses. A single person with high income might marry someone with little or no income, and that couple could benefit from lower brackets.
Um, what? A bunch of rich people are gonna suddenly rush out and marry poor people so they can lower their state income tax bills? That’s… not how real life generally works.
A good rule of thumb is that if you have to stretch reality that much to make a point, you should probably avoid making the point.
Instead, perhaps the Republicans could simply demand during negotiations that married couples be allowed to file separate state tax returns or new married filing jointly rates are devised. That is, if they don’t walk away from the talks.