Do Flat State-Income Taxes Produce Inequality? Would Progressive Taxes Ameliorate It?

Over at Center on Budget and Policy Priorities (CBPP), Nicholas Johnson implies that flat taxes on income at the state level produce—or at least facilitate—increases in income inequality. On top of that, he writes, flat taxes make it harder for states to cover budget costs.

When Illinois enacted [its] single-rate rule in 1970, the income gap between the wealthy and everyone else nationwide had been falling for several decades.  Since the 1970s, however, the top 5 percent of Illinoisans’ incomes have risen 123 percent — six-and-a-half times the rate for middle-income households (see chart)....

In part because of its limited revenue options, Illinois for many years did not raise enough tax dollars to cover its costs.  The state accrued nearly $10 billion in unpaid bills to doctors, child care centers, and other service providers, and it fell far behind on its pension payments. A temporary income tax increase enacted in 2011 has helped the state to slash the backlog of unpaid bills, but the state’s fiscal challenges remain large.

Illinois legislators are considering shifting from a flat or single-rate income tax to a progressive one, which Johnson supports.

Not so fast, says the Tax Foundation's Lyman Stone.

If tax structure had a major impact on inequality, it should show up in state inequality data. But if we compare the average Gini coefficient (a common measure of income inequality; a higher value means more inequality) among states with different tax codes, differences in inequality are quite small, certainly smaller than differences in income and employment (see Figure 1).

As or more important, says Stone, tax-rate structure has little to do with the fiscal health of a given state. Illinois is a basket case not because they can't generate revenue via a progressive income tax but because they spend too much money on too many things.

The flat tax is not the cause of Illinois’s imbalance between spending and revenue. Flat-tax states like Utah, North Carolina, and especially Indiana have all managed to pay their bills and retain AAA credit ratings, while highly progressive California had fiscal woes similar to Illinois and currently has a barely better credit rating.

Whole thing here.

The real problem with most states when it comes to spending was laid out in this 2009 Reason cover story on "Failed States":

In the five years between 2002 and 2007, combined state general-fund revenue increased twice as fast as the rate of inflation, producing an excess $600 billion. If legislatures had chosen to be responsible, they could have maintained all current state services, increased spending to compensate for inflation and population growth, and still enacted a $500 billion tax cut.

Instead, lawmakers spent the windfall. From 2002 to 2007, overall spending rose 50 percent faster than inflation. Education spending increased almost 70 percent faster than inflation, even though the relative school-age population was falling. Medicaid and salaries for state workers rose almost twice as fast as inflation.

Imagine that: If you consistently spend more than you take in, you'll go broke. Even if you bring in more money.

In a separate publication, the Tax Foundation's William McBride surveyed data on tax rates and economic growth and finds a strong consensus among academics "that taxes on corporate and personal income are particularly harmful to economic growth, with consumption and property taxes less so. This is because economic growth ultimately comes from production, innovation, and risk-taking." Read more about that here.

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  • Brett L||

    Let's see if we can't run off the last of the wealthy to Indiana! Then all Illinoisans can be equally miserable.

  • Swiss Servator ...nichts||

    We are working on it.

  • gimmeasammich||

    My BIL is a financial adviser. He is making more and more trips to Indiana to meet his clients because they keep moving over there.

  • Heroic Mulatto||

    The only inequality that matters is that before the law.

  • anon||

    Unfortunately we're trying to make that as "progressive" as possible.

  • sarcasmic||

    Progressive justice wears no blindfold.

  • Dances-with-Trolls||

    I'll admit I'm developing a Pavlovian response to the word "inequality," when referencing outcomes rather than rights. I have to work to suppress the urge to utter profanities upon hearing it.

  • Heroic Mulatto||

    Really? My response is a desire to purchase more ammunition and improve my preps.

  • anon||

    Really? My response is a desire to use more ammo upon those in the immediate vicinity.

  • Brett L||

    You should never say that out loud. In fact, you should make a point of saying that you don't have the first supply saved up for the bad times.

  • Heroic Mulatto||

    Well, y'all don't know exactly where I live.

  • anon||

    I don't believe it's individuals Brett is concerned about.

  • Brett L||

    Well, I guess I meant mobs, but I just meant in general, prepping is like How Not to be Seen.

  • Heroic Mulatto||

    Absolutely. Though, I agree with FerFal that fears of a Rawles-ian "Golden Horde" are mostly overblown.

  • Plàya Manhattan.||

    I have guns to defend all of my other guns.

  • Brett L||

    You may lack enough trigger fingers.

  • From the Tundra||

    Well, then there are the claymores...

  • Swiss Servator ...nichts||

    +1 FRONT TOWARD ENEMY

  • Mutt||

    I have a cyanide capsule secreted on my person.

  • Vampire||

    That's why I use my toes.

  • ||

    the income gap between the wealthy and everyone else

    Class envy obsession is so fucking tedious. It's so, so fucking tedious.

  • anon||

    But EVIL RICH PEOPLE AND CORPORASHUNZ!!!!!!!!!111111111eleventyone

  • sarcasmic||

    Ironic how crusaders against inequality call capitalism a race to the bottom, while what they themselves champion is the lowest common denominator.

  • anon||

    Hooray for the welfare state and its associated mentality/behaviors.

  • Pro Libertate||

    Capitalism gave us a bottom that doesn't involve near-to-actual starvation, serfdom, living in hovels, etc., etc., etc.

  • mr simple||

    The state accrued nearly $10 billion in unpaid bills to doctors, child care centers, and other service providers, and it fell far behind on its pension payments.

    Which are all totally legitimate functions of the state and of course should be paid by such. It's definitely an income problem caused by not taxing those greedy bastards enough.

  • sarcasmic||

    One of the first things our Republican governor did after winning the election was pay hundreds of millions of dollars owed to hospitals by the state for unpaid bills. Democrats are still fuming. I mean, he paid the bills! How dare he! He's such a terrible person! Bill payer! Bill payer!

  • Swiss Servator ...nichts||

    Our TEAM BLUE gov and legislature here in IL "temporarily" raised the income tax - in order to pay the past due bills.... ha. They spent the living shit out of it, and are even further behind on the past due bills and are talking of not only making the tax increase permanent, but increasing it too.... gosh, could not have seen that one coming!

    The laughter from Wisconsin and Indiana is getting deafening.

  • Anonymous Coward||

    Don't worry. We in MO are just politely chuckling behind your backs.

  • kinnath||

    Do Flat State-Income Taxes Produce Inequality?

    No. A combination of skill, effort, and dumb luck produces income inequality. Flat taxes merely don't punish the skillful, the industrious, or the lucky.

  • albo||

    I've noticed that when the media are presented with an unbalanced revenue-expenditure situation in government, the default is to focus attention to the revenue side, not the spending side. It's assumed that all the spending is already necessary and thus can't be changed.

    Conclusion: We're doomed.

  • Invisible Finger||

    It should be pointed out that the proposed progressive income tax in Illinois is actually a flat tax.

    The "progression" is this: If you make 5K, you get taxed at 3.5% and if you make more than that you get taxed at 5.75%. 95% of taxpayers would pay the same rate.

    In other words, progressives are LIARS.

  • Francisco d'Anconia||

    Um...

    The top 50% pay 98% of all federal income tax. The top 1% pay 36%.

    They want more? Oh, but of course they do. That's how socialism works.

  • Pro Libertate||

    The problem is obviously NOT REMOTELY about the "rich" paying their fair share. It's about them paying for everything. Not just the rich of today, but the rich of the next century.

  • sarcasmic||

    The rich need to pay their "fair" share, and they haven't!

    How do we know they haven't paid their "fair" share? They're still rich!

    As long as they're still rich, then they haven't paid their "fair" share!

    Taxing the rich isn't about revenue! It's about fairness!

    As long as they are still rich, then it ain't fair!

  • Pro Libertate||

    The mob talks about the same kind of fairness when it comes by for its protection money.

  • anon||

    Except the Mob's far more honest, and you aren't forced to do business with them usually.

  • Invisible Finger||

    Notice that the song lyric goes:

    "Tax the rich, feed the poor, 'til there are no rich no more"

    Perhaps the lyric would make more sense if it went "'til there are no poor no more" but perhaps leftards already know the stupidity/futility of their idiotic prescription.

  • Rob||

    The rich need to pay their "fair" share, and they haven't!
    How do we know they haven't paid their "fair" share? They're still rich!
    As long as they're still rich, then they haven't paid their "fair" share!
    Taxing the rich isn't about revenue! It's about fairness!
    As long as they are still rich, then it ain't fair!

    Much to my dismay this has been tossed at me in not-so-polite discussions on many occasions. My usual response is just to ask, "Wouldn't you like to be rich?" The joke being that under their proposed system they could never actually become rich.

  • waffles||

    Right. isn't it conclusive that you could tax the rich at double the effective tax rates and still not even come close to putting a dent in the revenue gap? Punitive tax rates also hurt compliance, while flat taxes the opposite.

  • califernian||

    "They want more? "

    Yes they do but they want more from the poor and middle class mostly, and all of this shit is a smokescreen for raising taxes IN GENERAL.

  • Rob||

    "this ... is a smokescreen for raising taxes in general."

    Much like the income tax was supposed to be on only the wealthiest citizens. Just like the alternative minimum tax originally targeted 155 high income citizens who paid no taxes in 1969.

    "Nothing is so permanent as a temporary government program." --Milton Friedman

  • Francisco d'Anconia||

    Flat taxes ARE progressive.

  • The Late P Brooks||

    Why don't they just cut some chicken gizzards open, and base their policy recommendations on that?

  • Lord Humungus||

    We need to tax the ever increasing supply of Derp. Only then can we meet our financial obligations.

  • califernian||

    they never EVER conclude that the tax structure is unfair we should REDUCE taxes on the poor. Never.

  • Restoring the Dream||

    Living in Illinois has taught me a valuable lesson. The takers WILL NOT STOP taking, even if only to fool people into thinking they're not thieves. I don't know if this is a matter of will, or if they have lost the ability to understand the consequences of their actions.
    A year ago or so, I was on the Chicago Skyway which leads to Indiana. There was a huge billboard with the governor of Indiana with a big smile on his face and the caption, "Had Enough Yet?" I almost drove off the road.

  • Invisible Finger||

    Go with "they have lost the ability to understand the consequences of their actions."

  • avocats||

    Do any of the chatterers who toss "income inequality" about so much have a uniform definition of the term? Because I cannot imagine what it means. But perhaps that's the result of my "white/ableist/genderist" privilege?

  • Vampire||

    Taxation is theft, and a fancy word for extortion. If it can not be acquired voluntarily, then it should not be acquired at all. Whatever would require coercive or violent means should not be, and be repelled shall any attempt be made to bring it into existence through such acts.

GET REASON MAGAZINE

Get Reason's print or digital edition before it’s posted online

  • Video Game Nation: How gaming is making America freer – and more fun.
  • Matt Welch: How the left turned against free speech.
  • Nothing Left to Cut? Congress can’t live within their means.
  • And much more.

SUBSCRIBE

advertisement