Saturday, February 12, 2005

Blagojevich, Roeser and our undertax of the wealthy

Thomas Roeser likes Rod Blagojevich. In his latest Sun-Times column here, he praises Blagojevich for raising fees instead of the income tax or the sales tax.

He unfavorably compares our governor with the Indiana Governor, Mitch Daniels, who seeks to raise the income tax from 3.4 percent to 4.4 percent on any income earned over 100 large.

The part that Roeser is missing is a concept called the federal offset.

That's the amount of state taxes paid that is effectively subsidized by the federal government.

I'll bet Mitch Daniels understands that very well, as President Bush's former budget chief.

Basically, if you tax high incomes, the federal government subsidizes those taxes paid by about a third. If you tax low incomes, the feds do not.

That's because of the following federal income tax rate table (read it from the IRS here).

$0 $7,300 10% of the amount over $0
$7,300 $29,700 $730 plus 15% of the amount over 7,300
$29,700 $71,950 $4,090.00 plus 25% of the amount over 29,700
$71,950 $150,150 $14,652.50 plus 28% of the amount over 71,950
$150,150 $326,450 $36,548.50 plus 33% of the amount over 150,150
$326,450 no limit $94,727.50 plus 35% of the amount over 326,450

Which basically means for income over $150,000, the feds tax a third of that.

Keep in mind the main reason why the federal government is running massive deficits is because the tax rate on income abover $326,450 went from 39.6% to 35%.

That's the change.

Those people are the Republican base.

And if you are paid less than $350,000 a year, it is in your economic interest to vote for Democrats who will raise the rate back to 39.6% -- you won't pay any of that. And then we won't have to pay the interest on the debt for the next 40 years from the wealthy refusing to pay their fair share of government during this decade.

But, back to the state government.

If your state government levies a tax on the people with a federal tax rate of 33% or more, then for every dollar those guys pay in state taxes, they pay 33 cents less in federal taxes (because state taxes are deductible off federal taxes paid).

That's a huge bargain for the state, and a way to keep wealth in the state instead of exporting it to D.C. (where it gets sent to Iraq).

Indiana is making a smart move by taking their high-income people at a very reasonable 4.4% -- because that state tax increase will be offset by Indiana residents sending less money to D.C.

Too bad Blagojevich -- or Thomas Roeser -- doesn't seem to grasp the power of the federal offset of state taxes.

Representative Will Davis
does. He's got a bill (disclosure: I'm working on it with him) to raise our income tax rate to 4%, but alleviate the burden on lower-incomes by raising the standard exemption and the earned income tax credit. The bill is HB 155 and it is here.

This bill needs co-sponsors. Call your state representative and ask him or her to co-sponsor HB 155. And let's keep our wealth in Illinois.


bsullivan said...

Greetings, Dan-
Why is the proposal 4% across the board? You're arguement seems to imply keeping the current 3% in place and establishing a progressive tax for higher incomes. Is there some political reality I'm missing?

Dan Johnson-Weinberger said...

Hi Bridget -- two things. One is that the state constitution mandates a flat tax. So Governor Daniels in Indiana can propose a 4.4% rate on income earned above $100,000, but we can't. We can amend the state constitution, and come to think of it, we should get a bill filed to do that. Until that happens, we're stuck with raising the rate, and then to make it more progressive, raising the personal exemption and the earned income tax credit so the non-subsidized low-incomers pay less, not more.

FightforJustice said...

Dan claims people with incomes above $350,000 are the Republican base?? Bush won a majority of the vote. Just how many Americans enjoy incomes that high? One percent? Let's not perpetuate the canard that the rich are all Republicans. Democrats garner more $million+ donations than Republicans.

Vasyl said...

Dan, you raise a great point about the interplay betwen federal taxes and state income tax rates.

Let me raise a broader point of political philosophy. Moving away from broad based, equitable taxes (such as an income tax) to fees destroys the notion of the public good. If we are offering government services on a pay-per-use basis, why use government resources to offer those services? The private sector is probably better at delivering services on a pay-per-use basis.

The answer, of course, is that there are some services that benefit society so broadly that we decide to offer them as a public good. We may charge fees to offset costs or as a method of allocation, but those services should nevertheless be heavily subsidized. Fundamentally, I think there's something wrong when government services are viewed as revenue enhancing opportunities.

The movement by this Governor to increase fees in order to make the political claim that he didn't raise taxes is altering the role of government. If the trend continues, government simply becomes another corporation offering services.

Dan Johnson-Weinberger said...

FightforJustice -- the taxc cut on incomes over $350,000 is the core Bush tax policy. That's the biggest fiscal difference between Clinton and Bush -- the change from 39.6% to 35% for those earning more than 350K. That means Bush and the federal GOP consider those who earn more than 350K their base (or at least, part of their base). It's hard to run away from the 'party of the rich' label when the electeds push so hard for laws that benefit the rich at the expense of the rest of us.

N. Y. Krause said...

I don't get it, Dan. This federal subsidy is supposed to be a good thing? It's U.S. taxpayers that pay for it, and that includes Illinoisians.

Dan Johnson-Weinberger said...

From the perspective of an Illinosian, this is a very good thing. From the perspective of the other 49 states, not so good. So when New York, California, Massachusetts and the rest of the high state income tax states get their state budgets subsidized by the feds, we should look at them as an example to follow. Because we're paying more. It's like trying to get a federal project in your state. It may or may not be good federal policy, but from the state's perspective, it's good to get those dollars in your state. So we're shooting ourselves in the foot by not putting more of our state government's budget burden on subsidized taxpayers.

Anonymous said...

I thought toothless rednecks in Jesusland were the Republican base. I suspect that Americans who make $326,450 or more are divided pretty evenly between the GOP and Dems. The "core" of Bush's tax plan were cuts in dividend and capital gains rates. But as fightforjustice points out, the canard that the GOP is the party of the "rich" is indestructible.

N. Y. Krause said...

My point, though, is that it doesn't seem very cool to look at things from the perspective of an Illinoisian. I thought you lefty progressive were supposed to be all about holding hands with the global village and against the "us vs. them" mentality! What's with these recent posts calling for Illinois to extract as much as possible for itself from the other states, or calling for hoarding our wealth in America?