Graduated tax gives regular working folks a rare break
Even when things start to sound better, regular working folks can't seem to catch a break. For instance, according to the most recent Bureau of Labor Statistics data, jobs grew last month - by some 1.4 million. Which sounds great, except most of that growth was made up of temporary Census positions that are about to go away. Meanwhile, the nation still has over 11 million fewer jobs now than in February. The BLS also reported that average hourly earnings were up last month, which again sounds good - until you analyze why.
See, most jobs lost due to COVID-19 have been low paying. In fact, during the first three months of the pandemic, employment positions for workers in the bottom quintile of the wage distribution declined by a whopping 30 percent, while jobs for those fortunate enough to be in the top quintile dropped by just five percent. Which means average wages aren't up because most workers got raises, but rather because a significantly greater number of lower-paid than highly-paid folks have lost jobs.
Times are certainly tough for low- and middle-income workers, but that's nothing new. Indeed, over the last 40 years, the annual earnings of the vast majority of workers - as in the bottom 90 percent - have been flat or declining in real, inflation-adjusted terms. This means their take-home pay hasn't grown at a pace needed to maintain, much less improve, their standard of living. Contrast that to the massive spike in the real incomes of the wealthiest one percent over that same sequence, which not only soared nationally, but also jumped by 254 percent in Illinois.
In what can only be described as piling on, the flat-rate income tax Illinois is constitutionally required to impose makes matters worse. Here's why. All other taxes available to fund public services are "regressive," meaning they take a greater portion of the earnings of low- and middle-income workers than affluent folks. The income tax is the sole tax that can be designed to offset the natural regressivity of every other tax, but only when levied using a graduated rate structure that comports with ability to pay, by imposing higher tax rates on higher levels of income, and lower rates on lower levels of income.
The state's income tax cannot perform this crucial function, because Illinois is constitutionally required to utilize one flat rate. The end result: Illinois is left with one of the most unfair, regressive tax systems in America. That sticks it to low and middle income workers in two key ways. First, it actually worsens the significant growth in income inequality that's occurred over the last 40 years. Second, it exacerbates the economic harm wreaked by the pandemic.
The reason for this comes down to simple math. See, the economy's driven by consumer spending - which accounts for roughly 67 percent of all economic activity. Since the annual earnings of low- and middle-income workers have been flat or declining after inflation, they tend to spend virtually all their after-tax income, which helps support jobs in the local economy. By imposing an unfairly high tax burden on low- and middle-income earners, however, Illinois reduces their capacity to purchase goods and services in the local economy, thereby diminishing consumer spending and impeding private sector economic growth.
The good news is this November voters will have the opportunity to ratify an amendment to the state constitution that will permit Illinois to replace its unfair flat rate income tax with a graduated rate structure. The better news is the new graduated rate structure the state will implement if this amendment gets ratified - which is frequently referred to as the "Fair Tax" by proponents - effectively eliminates many of the long-term structural flaws that not only make Illinois' overall tax system one of the most unfair in the nation, but also dampen economic growth. Finally, a real win for the working stiff.
Ralph Martire, rmartire@ctbaonline.org, is executive director of the Center for Tax and Budget Accountability, a fiscal policy think tank, and the Arthur Rubloff Professor of Public Policy at Roosevelt University.