Illinois Fair Tax. Is it fair?

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Let’s conduct a thought experiment.  You and a friend go to dinner at Ruth’s Chris Steakhouse.  When you arrive, your friend tells you, “I’ve heard about this place.  I don’t think that I can afford to eat here.”  You tell your friend, “Don’t worry about it.  It isn’t that expensive.”

The two of you go in to dinner.  Your friend is looking at the menu and again says, “This is exactly what I thought.  These prices are pretty up there.” 

“Don’t worry about it,” your friend says again. 

Erring on the side of caution, your friend decides to order a small dinner salad, a Coke, and a slice of cake that amounts to no more than $25.00, which is all that your friend had on their credit card.  You decide that you haven’t been to Ruth’s Chris in a while and you are going to have a great dinner.

You order a porterhouse steak with grilled onions and mushrooms, a loaded baked potato, asparagus, calamari for an appetizer, a bottle of cabernet, a slice of the triple chocolate cake, and a double Black Label water back for your after dinner drink.

After about an hour, and a sumptuous meal, the waiter brings the check.  You turn to your friend and say, “Wow! Now that was a dinner.  Your portion of the bill is $175.00.”

“What?” your friend replies.  “I only had a small salad, a Coke, and a slice of cake.”

“I know, but the total bill is $350.00 and there are two of us.  That means that each of us owe $175.00 per person.”

“I only have $25.00 dollars on me.  That is why I only ordered what I did.”

“I don’t know what to tell you.  The bill is $350.00 and $350.00 divided by two is $175.00.” 

End of thought experiment.

It is pretty obvious what most of you are thinking.  The person who ordered and ate the most at dinner should pay their portion of the bill.  Most of you might even be thinking that the person who ate the most should go ahead and pick up the tab of the friend who only had the salad, Coke, and piece of cake.  It is obvious that the friend who had the entire meal could afford to eat there and had no hesitation on ordering whatever it is that they wanted.  It is also obvious that the other friend could not afford to dine there and even said as much.

This brings me to a touchy subject that I have discussed over and over again as of late: the Illinois Fair Tax proposal.  Whoa!  How did we get from a hypothetical conversation about dinner to a discussion about moving from a flat tax system that allows everyone to pay the same percentage of their income or the proposed tax system?

Before we delve any deeper lets first define two concepts:

Progressive and regressive taxes.  A progressive tax system means that the more money that you the more that you pay in taxes.  A regressive tax system collects that same percentage or amount from everyone regardless of how much money they earn.  Let me put a pin right here for the sake of this conversation.  This is not a conversation about whether or not you believe in taxes, or the hypothetical that taxes could be lower if government lowered spending, or spending priorities.  This is a discussion about if we as a society should have a progressive or a regressive tax system.

For the sake of making this conversation easy, let’s discuss this from the two extremes.  Let’s compare a single mother of two and an owner of a billion dollar corporation both in Illinois.  Under our present system both of these individuals pay 4.95% in Illinois state taxes.  Most people would say that is fair.  If the single mother makes $25,000.00 per year, then she pays 4.95% or $1,237.50 per year.  The corporation that makes $1B and pays 4.95% pays $49,500,000.00 per year.  Again, I know that a corporation pays on their profit not their revenue.  Let’s keep this simple and concentrate on the concept.

Most people would say that the corporation is paying almost $50 million dollars compared to the mother paying less than $1,300.00.  Based on the amount of money that the corporation is paying, and that they are paying more, the system is fair.  This is generally what happens when people change from percentages to raw numbers depending on which metric supports their argument.  I am going to approach this from a completely different perspective.

Let’s revisit the thought experiment.  Of the two people at dinner which waiter serviced more? Which diner used more resources from the kitchen: food, gas, dishwashers, etc.? Obviously the diner who ate more used more of the resources of the restaurant.  This is very similar to the large corporation compared to the single mother.

Let’s say for example that the corporation that we are talking about is UPS.  What resources do they use?  They use the highway system with their vans and trucks that create potholes and traffic.  They use the banking system to process their payments.  They use the airport infrastructure with the planes that they use to fly parcels around the world.  They use the internet with large amounts of bandwidth to accommodate their business.  They use the court system when they need to litigate. 

You might be thinking that everyone uses these things and you would be correct.  However, how much more does UPS use any of these services compared to an individual?  UPS uses the interstate, banking, airport, internet, and court infrastructures orders of magnitude more than any individual and more than some smaller states.  It is principally this fact, that UPS and corporations like them, that they use more of the infrastructure that they have a higher financial responsibility for its creation and maintenance.  If for no other reason than self-preservation UPS should pay more than the 4.95% that the average citizen pays.

As you get closer to the middle this concept gets more difficult to parse.  What about the small business owner who has a restaurant or a corner store?  They aren’t UPS.  Again, you are right.  That is why businesses pay taxes on their profit and not their revenue.  The same rule in Illinois will apply to business and individuals.  If you are a business, and your profit is less than $250,000.00 (based on the proposed bill), your taxes will not increase.  If your profit is greater than $250,000.00, you will pay nominally more.

And guess what?  The individuals on the lower end of the socioeconomic scale whose taxes will go down by a small amount (less than one percent), they will have more money to spend.  Where do those individuals spend their money?  With local small businesses. 

Progressive taxes are fairer than regressive taxes and there is one incontrovertible way to prove my assertion is correct.  The CEO of UPS is not going to trade places with the single mother making $30,000.00 per year because his Illinois state taxes went up 2%.  The small business owner is not going to switch places; neither will the doctor, the sales professional, the restaurant owner, or any other person who makes more than $250,000.00 per year.

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