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* Jeff Ignatius looks at another reason why the progressive “Fair Tax” proponents might be better off waiting until next year, if, of course, the 5 percent income tax is made permanent…
• Compared to the pre-2011 flat-income-tax rate of 3 percent, the Fair Tax represents a tax break for only those whose net income is below roughly $13,150. (Over-simplistically, net income is total income minus the standard deduction of $2,100 per person in a household. So for a married couple with two dependent children, $13,150 in net income would be the same as $21,550 in total income.)
• Compared to the 3.75-percent income-tax rate that is scheduled to take effect on January 1, the Fair Tax plan represents a tax cut to taxpayers with net incomes up to roughly $21,740.
• Compared to the 5-percent income-tax rate that took effect in 2011 and is scheduled to expire at the end of this year, the Fair Tax plan represents a tax cut for those with net incomes up to roughly $202,630. This is the comparison that Fair Tax advocates are making with the promise of tax cuts for 94 percent of Illinoisans. (You can see how your income-tax picture looks in this scenario at FairTaxCut.com. Be sure to enter your total income before the $2,100-per-person standard deduction.)
Yet even if one compares the Fair Tax plan to the 5-percent rate, the tax cut is modest. At $180,000 of net income, a taxpayer’s bill under the Fair Tax plan would be $430 less than it is now – a tax cut of less than 5 percent.
As a percentage of taxes owed, the Fair Tax plan would benefit lower-income taxpayers most, but even then it would amount to only a few hundred dollars. (The tax cut doesn’t reach $300 until $50,000 of net income.) Still, for taxpayers with net incomes below roughly $62,000, it is a tax cut of more than 10 percent from what they’re currently paying.
The lower-income tax cuts are offset by tax hikes for higher incomes. A taxpayer with $1 million in net income will see a tax hike of $15,150 (more than 30 percent) compared to the current 5-percent-flat-tax rate, and $27,650 (almost 74 percent) compared to the scheduled 3.75-percent rate. At $300,000 of net income, the tax hike is $1,850 (more than 12 percent) compared to the 5-percent flat rate, and $5,600 (almost 50 percent) compared to 3.75 percent.
Thoughts?
posted by Rich Miller
Friday, May 2, 14 @ 10:19 am
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Thanks for some real numbers. Maybe we can mitigate the dramatic posturing and conflicting claims.
It does appear that after the current rates are either reduced, or maintained, we can have a clearer discussion about a graduated system. I believe modern economic theories in a market economy, would argue for some income tax graduation, to optimize resources for the general economy and government. What the best rates would be, is another discussion.
Comment by Walker Friday, May 2, 14 @ 10:31 am
In regards to a graduated system, we only have forty plus other states in the country to look at and model after. None of those seem to be in as dire financial straits as Illinois.
Comment by Anonymous Friday, May 2, 14 @ 10:36 am
We already have a graduated income tax, when the earned income tax credit is taken into consideration.
Comment by john doe Friday, May 2, 14 @ 10:37 am
Fear of a graduated personal income tax has been the driver by the Civvies regarding pensions.
You’ll notice they’re not squawking about keeping the personal rate at 5%.
But if you’re in the $20 million club, and you’re rate goes to 8.98% like Iowa or 7.65% like Wisconsin, now you’re talking real money.
Comment by wordslinger Friday, May 2, 14 @ 10:42 am
word, I would still take the deal. How about you?
Comment by steve schnorf Friday, May 2, 14 @ 10:43 am
It appears Mike Madigan and gang are being constrained by what’s going on in others states. It’s hard to keep with Florida and Texas’ personal income tax rates. Very hard. Only if Illinois had California’s weather. Only if.
Comment by Steve Friday, May 2, 14 @ 10:46 am
Good to see others catching on and presenting factual data. The initial claims this was a “tax cut” conveniently omitted some crucial points, namely current law, and were quickly exposed.
The progressive income tax will have a much better chance next year if the tax increase is made permanent. Those claims about this being a tax cut for many will then be true.
Comment by Formerly Known As... Friday, May 2, 14 @ 10:48 am
Illinoisans do not seem to have enough faith in the current political leadership to trust them regarding taxes.
Our political leaders have worked hard to earn the public’s mistrust.
Comment by VanillaMan Friday, May 2, 14 @ 10:50 am
Steve, absolutely.
Comment by wordslinger Friday, May 2, 14 @ 10:50 am
Thanks for posting the numbers. I like the proposed graduated tax, but it might be very difficult to enact.
I learned a very important lesson about the so-called fair tax campaign. Count. Noses. First. Channel the inner Madigan. Know who will likely vote for it and who won’t. Why waste all the time and trouble on the campaign if it doesn’t have a snowball’s chance in Hades of passing?
It was kind of sad to see all the supporters in Springfield on the day the tax was shot down–twice. Ouch. That could have been averted with some realism and foresight.
On the other hand, since it is a good idea to have a progressive tax, the campaign may mitigate its losses by staying active and biding its time. That’s what happened with MMJ. It didn’t pass the first time or perhaps a second time, but it eventually passed.
Comment by Grandson of Man Friday, May 2, 14 @ 10:51 am
–Illinoisans do not seem to have enough faith in the current political leadership to trust them regarding taxes.–
The proposal would be put to public referendum, directly in the hands of voters.
As it stands now, the politicians have been entrusted via election to set taxes through the legislative process.
Comment by wordslinger Friday, May 2, 14 @ 10:54 am
……income tax rates like Iowa’s (great weather there!) 8.98 or Wisconsin’s 7.65 (not Florida weather either!)…
So, how are those states doing financially? They don’t seem to care about driving people out of their states to Florida!? Let’s be painfully honest. It is the civvies and their ilk that will dictate what you and I will pay. No point in even talking about it. Does your representative listen to YOU? Who does he/she listen to?
Comment by Geronimo Friday, May 2, 14 @ 10:55 am
A progressive state income tax is coming. The only question is how long the 1% can delay it.
Assuming the current 5% temp rate is made permanent, it will be a cleaner comparison next year and should be easier to sell … if they find a strong leader to support it.
Comment by RNUG Friday, May 2, 14 @ 11:01 am
So are the rates codified in the Constitution or does the amendment allow for the legislature to change them at any time?
If the rates can change, why not craft an amendment that is assured to pass at lower rates and then crank them up in subsequent years.
Comment by Jack Handy Friday, May 2, 14 @ 11:18 am
- Jack Handy - Friday, May 2, 14 @ 11:18 am:
Last time I read the proposal, the rates were left up to the discretion of the GA … which might be what scares people.
Comment by RNUG Friday, May 2, 14 @ 12:03 pm
There is one option which no majority politician, bureaucrat, or state employee has even considered: REDUCE SPENDING TO INCOME UNDER THE CURRENT LAW. Quinn lied to taxpayers about the amount of tax increase he would support (the last time he was running) and he lied about the increase being temporary. Why would this time be any different?
Comment by tberry Friday, May 2, 14 @ 12:33 pm
===- RNUG - Friday, May 2, 14 @ 12:03 pm:
- Jack Handy - Friday, May 2, 14 @ 11:18 am:
Last time I read the proposal, the rates were left up to the discretion of the GA … which might be what scares people.====
RNUG, what possesses you to use the word “might”. What scares the hell out of every one in this state is what “might” happen every session. The unpredictability is a huge problem here. Long term investments, personally or commercially are utterly allergic to “might”.
Comment by A guy... Friday, May 2, 14 @ 12:36 pm
- A guy… - Friday, May 2, 14 @ 12:36 pm:
Might leaves room for other scenarios.
As you said, the fact that the rates can be changed will scare some people.
Here’s an alternative scenario. The fact that the proposal would tax the high income earners at a greater rate than today will scare a different set of people, some of who will overlap with the first set.
Comment by RNUG Friday, May 2, 14 @ 12:48 pm
Good to see others backing up our math lol - https://capitolfax.com/2014/04/25/harmon-graduated-income-tax-vote-next-week/#comment-11497087
Comment by Formerly Known As... Friday, May 2, 14 @ 12:49 pm
===why not craft an amendment that is assured to pass at lower rates===
This and include the *initial* rates in the amendment and it might have a chance. Maybe even require a supermajority to change the rates, throwing a bone to the GOP. They may not like the progressive, higher rates but they’d be happy to have more influence in future rates.
Comment by thechampaignlife Friday, May 2, 14 @ 1:18 pm
it would be about as bad government and tax policy as one can dream up to put tax rates in the constitution
Comment by steve schnorf Friday, May 2, 14 @ 1:36 pm
–As you said, the fact that the rates can be changed will scare some people.–
Rates can always be changed, one way or the other.
Unless you do something crazy like set a tax rate in the Constitution.
Very hard to change the Constitution; you might need a little more flexibility in fiscal policy.
Comment by wordslinger Friday, May 2, 14 @ 1:53 pm
REDUCE SPENDING TO INCOME UNDER THE CURRENT LAW”
Funny, the constitution also says “Proposed expenditures shall not exceed funds estimated to be available for the fiscal year as shown in the budget.”
I don’t see what all the fuss is about. The Governor and the legislature ignore the parts of the Constitution don’t care about now.
It’s not a revenue problem. It’s a spending problem. No matter how much revenue is available, it will be consumed by the good intentions of the government.
Comment by Plutocrat03 Friday, May 2, 14 @ 1:55 pm
Big picture, the “Fair Tax” crew doesn’t seem to be as dumb or naive as the author and many of the commenters here suggested. Nope, didn’t happen this time.
But the proposal is now called “Fair Tax” - ask folks who fight vs. “right to work” how valuable that is - even by opponents. And as pointed out above, when compared to the permanent 5%, it’s a slam dunk.
Campaign wasn’t able to convince/communicate that they were essentially running a campaign against an inevitable 5% (instead of the 3.75% scheduled), but that’s not a problem down the road, and then the arguments that IPI/AFP/etc used to destroy it are bunk.
Comment by ChinaTown Friday, May 2, 14 @ 2:00 pm
The problem with a progressive tax is that those on the low end of the scale can always be counted on to support even higher rates on the “rich”-as long as they keep paying little or no income tax.
Comment by john doe Friday, May 2, 14 @ 2:11 pm
They will need a moniker other than “Fair Tax” to avoid polluting their message with a number of national groups and movements already in existence.
Comment by Formerly Known As... Friday, May 2, 14 @ 2:29 pm
Also, a very interesting piece just posted by Greg Hinz that also touches on the taxation issue and the bigger picture
“Toyota ignores Chicago and Illinois in HQ search — why?”
Comment by Formerly Known As... Friday, May 2, 14 @ 2:31 pm
“Big picture, the “Fair Tax” crew doesn’t seem to be as dumb or naive as the author and many of the commenters here suggested.”
It won’t be “dumb” or “naive” if it ultimately succeeds. If it stalls out after two embarrassing rejections by the legislature, on the same day that people were rallying for it, then people should question why such a large expenditure of time, money and effort was undertaken when the political environment was impossible to overcome.
We don’t even know if Madigan can muster the 60 votes needed to keep the 5% income tax. If that’s done this year, then it would be a great opportunity to push again for the progressive tax.
“Toyota ignores Chicago and Illinois in HQ search — why?”
Toyota also ignored other states’ attempts at luring the headquarters. On the other hand, the Chicago metro area outperformed every other metro area in corporate investment deals. One article I read states that Indiana’s low-tax/regulatory environment attracts corporate investment that is geared toward lower-paying jobs, and that Indiana’s corporate investment was the worst in the region.
Illinois is not Texas or Indiana. We have a lot of work to do to get better, but we’re a higher per-capita income state than either of the above states–much higher, as Texas was ranked 30th and Indiana 38th.
Comment by Grandson of Man Friday, May 2, 14 @ 3:36 pm
–The problem with a progressive tax is that those on the low end of the scale can always be counted on to support even higher rates on the “rich”-as long as they keep paying little or no income tax.–
Congratulation. Your comment is 100% wrong, as it relates to U.S. history.
Geez, do people think the charts just go away?
When you’re world view is based on willful ignorance, what, exactly, are you trying to accomplish?
http://www.ntu.org/tax-basics/history-of-federal-individual-1.html
Comment by wordslinger Friday, May 2, 14 @ 3:47 pm