Thursday, April 10, 2008

Cayman Islands-style economic development by tax haven

How are we going to generate more wealth in Illinois, create more jobs and otherwise strengthen our economy?

The best way is to develop a workforce that is the smartest in the world. It's also very powerful to invest in our infrastructure so our transportation network is strong.

That costs money. And the way to spend that money is with taxes.

There's an alternative strategy for economic development, and the substantive and rich (no pun intended) debate on the Mike Smith Amendment (HJRCA 42) illuminated this strategic difference on economic development policy. The alternative strategy is to attract the wealthiest people possible to live in your state by serving as a tax haven and not taxing them.

That's what the Cayman Islands does, which is why lots of corporations decide to legally move there and avoid American taxation.

And that's essentially what Illinois has been doing, because we soak the poor and middle class with our state and local government. We tax low income people much more than high income people.

Well, that's hasn't been working so well. Our job growth hasn't been as good as it should be. And in my view, that's because about half our schools are dramatically under-funded (or at least, the outcomes aren't very good) and our infrastructure is falling apart. It isn't because we've been taxing high income people too much, because we don't. We have the lowest tax rate of any state in the nation that has an income tax.

So, HJRCA42 would fund education and a capital bill by putting a moderate income tax rate (relative to other states) of 6% on anyone earning $250,000 a year. It would also cut taxes by an average of 12% on everyone who earns less than $250,000.

During debate on the floor today and in the State Government Administration Committee yesterday, several legislators who opposed the amendment felt that this would hurt economic development. Why?

Because by taxing people who have a good year and earn more than $250,000, that could induce them to move somewhere else. And the best way to generate jobs and wealth and economic development, in that view, is to induce wealthy people to live in Illinois by not taxing them much at all.

That's better than investing in a smarter workforce and better schools.

That's better than a modern transportation network.

It's better to keep taxes on the wealthiest low -- like a tax haven, really -- than it is to invest in all of our people through better schools and better public services.

That's the core of the economic development strategy advanced by opponents of this amendment.

And that sure seems like a lame economic development strategy to me.


JB Powers 5:11 PM  

On the other hand, having a flat income tax might be the only thing keeping the economy afloat, despite the best efforts of our politicians to wreck it with their criminality and greed.

How is it again that "We tax low income people much more than high income people"? Say you make $250,000 per year and pay 2% taxes. That is $5000 in tax. Say you make $25,000 per year and pay 2% taxes. That is $500 a year in tax. $5000 is larger than $500.

We are not going to tax our way to economic growth anytime soon.

Dan Johnson-Weinberger 6:48 PM  

Here's how:

We also have a sales tax and excise taxes.

So the $20K annual income guy pays $2000 in sales and excise taxes every year. That's 10% of his income.

And the $500K guy pays $10,000 in sales and excise taxes every year. That's 2% of his income.

So we tax the low income guy at 10% and the high income guy at 2%.

If you factor in the 3% tax that each of them pays, that means we tax the low income guy at 13% and the high income guy at 5%.

We tax the poor and middle class guy more than the high income guy in Illinois.

And if you believe in tax cuts, then support the part of the Smith Amendment that raised the personal deduction of $2,000 to $4,000, because that's a tax cut that helps the low income guy much more than the high income guy.

And purchasing power is how we get more economic growth. That's why the feds are sending checks to everyone to put money in the hands of people who will spend it.

Really wealthy guys don't spend it. They invest it, usually elsewhere. Regular guys spend it. And poor people most definitely spend it.

Anonymous,  7:39 PM  

Well, Dan, how has this strategy worked in the Cayman Islands?
Has it created any new jobs (outside of banking) and improved the standard of living of the "average" resident?
Or are the islands now populated only by super-rich people and their super-rich bankers, with everyone else reduced to working as maids, gardeners, nannies and hotel attendants? Can anyone other than the super-rich people and their maids, etc. afford to live there? Are the people who were poor before still just as poor?

Cal Skinner 7:58 PM  

The rich will spend more than the poor, hence, pay more sales taxes.

Buster,  1:40 AM  

If the increase in state income tax you're talking about was accompanied by repealing the state corporate income tax and personal property replacement tax, then that would be good pro-growth policy.

JB Powers 6:59 AM  

Anyone who thinks that rich people don't spend money has not been to Lake Forest, The Gold Coast, Winnetka etc.

If a guy in Lake Forest buys a $90,000 Mercedes, he pays more sales taxes than a guy in Peoria that buys a $15,000 Hyndai. Whoever lives in Harold Ickes $6.25 Million house in Winnetka is certainly paying more in property tax than someone in public housing.

Dan's statement is obviously and quantifiably wrong. It serves no purpose to make such wild flames, other than to demonize one group or another.


Anonymous,  7:25 AM  

Suppose I am rich. And suppose I am rich because I earned it instead of winning the lottery or inheriting it.

Suppose my annual income (via investments and what not) is $1,000,000, and Illinois' income tax is 6%, resulting in an annual $60,000 tax bill.

What should I do?

A. Get the checkbook out and write Illinois a check.

B. Buy a $600,000 house/condo/land in a state with no income tax such as Nevada, Texas, or Florida and declare residency there.

(Hint: For plan B, the investment will be paid off and I'll be free and clear in 10 years)

Illinois had 29 electoral votes in the 1940s. It now has 21, and is probably going to drop 1, possibly 2 in the next decade. Should we be giving the most productive, savviest investors a good excuse to leave?

Anonymous,  8:57 AM  

I did some perfunctory research online and discovered that the Cayman Islands do reportedly have one of the highest standards of living in the world. I did find one article from 2005 stating that many residents were still economically strugging in the aftermath of Hurrican Ivan, however.
The islands are a British protectorate with no "direct" taxes on incomes or corporate earnings. However, they make up for it by taxing hotel stays, cruise ship dockings, real estate transactions and a bunch of other stuff that relates directly to their tourism and financial industry.
Also, bear in mind that Caymanians (as they are called) have to import more than 90 percent of their food and consumer goods. And, it goes without saying, they are a small country in both size and population (less than 50,000permanent residents).
Being attractive to business is a good thing. However, unless your state or country has a tropical or desert climate, a coastline or other scenery that fosters a really huge tourist industry, I don't think that state is going to be able to survive on sales and service taxes alone.

JB Powers 10:53 AM  

I wouldn't sweat Illinois as tax haven too much. We have one of the highest property tax burdens in the country. The comparison is absurd.


Anonymous,  8:56 PM  

Property Taxes are super high so don't just look at the state income tax because that is where the action is at.

Is Dan Johnson Weinberger going to make sure that Victor Reyes gets taxed on all his ill gotten wealth.

Steve Bartin 10:10 PM  

Why compare Illinois with the Caymen Island's? Illinois is a high tax state,when one combines all the taxes.If you compare Illinois to Texas you see the difference.Texas doesn't have a state income tax or unions artificially driving up costs.That's why Texas is growing while places like Cook County are in decline.Recent,census estimates suggest Chicago has lost 63,000 since 2000.You can't say that about Houston.It's hard to compete with Houston when they can operate much cheaper.Houston has a middle class.Chicago doesn't.Chicago has a lot of overpaid,greedy,government workers that expect taxpayers to fund their generous retirements.That's why Chicago has the highest retail sales tax in the country.Your tax increase is the Cook County Democratic machines pay raise.To be for higher taxes in Illinois is to be a reactionary defending the status quo.

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