Thursday, April 17, 2008

Tax Policy for Dummies

During yesterday’s meeting of the Senate Executive Committee, Sen. Kwame Raoul referred to Illinois’ current income tax system as “unfair and regressive.” While the Senator is certainly entitled to his opinion as to the fairness of a flat tax (which is what Illinois, in fact, has), his assertion that it is “regressive” is troubling. A man in his position should have a better understanding of fundamental tax policy. For his benefit, I thought I would provide a primer on the definitions of the three basic types of taxes:

Progressive tax: a tax imposed so that the effective tax rate increases as the economic well-being increases. In other words, people higher on the income scale pay a higher percentage of their income in taxes than people lower on the scale. The U.S. federal government currently has a progressive income tax system.

Flat tax: is a tax system with a constant rate. In other words, everyone pays the same percentage of income in taxes. The State of Illinois currently has a flat tax for income.

Regressive tax: is a tax imposed so that the effective tax rate decreases as the amount to which the rate is applied increases. In other words, people higher on the income scale pay a lower percentage of their income in taxes than people lower on the scale. I am not aware of any jurisdiction in the United State that has a regressive income tax system, although many taxes, especially so-called “sin taxes” on things like liquor and cigarettes, are, in effect, regressive because the per item amount represents a smaller and smaller percentage of income for people as they move up the income scale.

2 comments:

Juice,  3:23 PM  

And if you take into account all of the taxes that the people of this state pay, Illinois does, in fact, have a regressive tax system.

Dan Johnson-Weinberger 11:45 PM  

I think Senator Raoul called Illinois' package of state and local taxes as regressive (which it certainly is). I understand the Trib reported his comments as characterizing the state income tax as regressive (and it's possible that Senator Raoul inadvertently said that), but his many public speeches on the matter make it clear that Senator Raoul understands that the total levy of state and local taxes in Illinois are regressive -- particularly when you consider the heavy excise taxes we impose on many goods.

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