Nobody likes paying taxes. I prepare my own returns with pen, paper and calculator, mainly so I can understand exactly how my tax burden is determined. Like many people, I wish the tax code were simpler.
The complications result from hundreds of individual Congressional decisions. Depending on whether you have other income, Social Security benefits could be tax free or up to 85% of them could be taxed. If you itemize deductions, you can deduct medical expenses that are more than 10% of your gross income, unless you are a senior, in which case anything over 7.5%. You can deduct business costs incurred as an employee that are more than 2% of your income.
Some parts of the tax code are so complicated that the IRS recommends not doing it yourself. If you have earned income from which payroll taxes were not deducted, the total amount withheld for federal taxes might be much less than what you owe. In that case you have to pay a penalty determined by form 2210, about which the instructions say, “Because Form 2210 is complicated, you can leave line 79 blank and the IRS will figure the penalty and send you a bill.”
It’s hard to see the forest for the trees in our tax system. We can miss the big issues, because the details are so convoluted. Why are we allowed to deduct fewer medical expenses than employee business expenses? If your income is $50,000, you can only deduct medical expenses more than $5000, but employee expenses over $1000 are deductible. That’s a benefit for high-spending professionals who can deduct travel expenses, while poorer families might face crushing medical bills with no tax break.
One feature of the forest that we often miss is the presence of other taxes. Illinois has a flat income tax of 3.75% and a state sales tax of 6.25%. Even the website Investopedia considers the sales tax regressive, meaning it “takes a larger percentage from low-income people than from high-income people”.
Nearly all the discussion in Illinois is about the income tax. Across the nation, and in Illinois, income taxes are the only tax that is not regressive. The proportion of their incomes that poor people pay in sales taxes across the country is an amazing eight times more than the proportion paid by the top 1%.
A non-partisan study of each state’s tax system finds this: “Combining all state and local income, property, sales and excise taxes that Americans pay, the nationwide average effective state and local tax rates by income group are 10.9 percent for the poorest 20 percent of individuals and families, 9.4 percent for the middle 20 percent and 5.4 percent for the top 1 percent.” That is, at the state level, total taxes fall heaviest on the poorest people.
Illinois has the fifth most regressive state tax system in the nation. We have the third highest effective tax rate on the poorest fifth of the population, 13.2%. Illinois taxes its poorest residents nearly 3 times as much as its richest 1%.
Republicans have made taxes into enemy #1 of Americans. But the policies they propose mainly help the wealthy. They always attack the income tax, the most progressive tax. They mock the work of the IRS and keep cutting its budget for enforcement, which means less ability to catch wealthy tax cheats. And they try to substitute sales taxes for income taxes.
The tax proposals of Ted Cruz show what conservative tax reform means. He would shift the burden of taxes onto the shoulders of the poor. No more corporate taxes at all. No estate taxes, a boon for the rich passing their wealth to the next generation. No more progressive federal income tax, instead a flat rate of 10%. The wealthy would gain enormously from that provision. And a new 16% sales tax, the most regressive of all taxes.
Overall tax revenue would decline, what Republicans always point to first about their tax plans. That decline, however would come from cutting the yearly burden of the richest taxpayers about $2 million EACH. Middle income taxpayers would get an average cut of about $1800, and over the long run, the poorest 20% would see an INCREASE in their total taxes.
Bruce Rauner won election as Governor of Illinois by demanding that the recent tax hike from 3% to 5% be rolled back. But he doesn’t really believe that Illinois can live with our new lower rate of 3.75%. He admits the need to raise the Illinois income tax again. He just won’t agree to a tax hike unless it is paired with anti-union labor reforms he wants. In his budget speech in February, he said that: “Let’s work together to enact a bipartisan, balanced budget with a mix of reforms, cost reductions and revenue.”
It turns out that even Rauner recognizes that taxes are necessary. The budget impasse in Illinois has mainly hurt the poor, by reducing their social services, by cutting MAP grants which help poor kids go to college, by threatening the existence of Chicago State University, whose students are the least advantaged.
Nobody is proposing reducing the burden on the poor. In that way, the Illinois tax system and the larger federal system are bipartisan and tilted toward the rich.
Published in the Jacksonville Journal-Courier, May 3, 2016