Wisconsin, the progressive income tax hell

Luke Hilgemann of Americans for Prosperity repeats something this blog noted last week:

What if I told you that as a typical, middle class Wisconsinite, playing by the rules and working hard to support your family and live a comfortable life in the Badger State, you are paying a larger percentage of your income than a millionaire in Illinois – would you be shocked, amazed, and distraught?

The stark reality is that an individual that makes just over $11,000 in Wisconsin pays a higher income tax rate than a millionaire in Illinois.

In fact, four of our five tax brackets are higher than the 5% flat income tax rate paid by our neighbors to the south.  And while most Wisconsinites know that Illinois has higher taxes and a lesser professional football team, what they don’t realize is that Wisconsin’s long time progressive tax code is much more unfair to low to middle income families than those living in the “tax hell” Land of Lincoln. …

The good intention of a progressive system has turned into a code that picks winners and losers and makes the government the arbiter of right and wrong. Over the last 100 years, our tax system has become a complicated web of loopholes, credits, exemptions and exclusions.

Overturning the complicated weave of 100 years of political tinkering by our politicians in Madison isn’t going to be easy.  It will take years to unravel the web of our tax system, but we can’t wait any longer to start that process.  Gov. Walker’s budget reforms have helped stabilize Wisconsin’s state budget that was riddled by deficits and debt under both Republican and Democrat administrations.

Wisconsin is on sound financial footing having started the budget process with the first surplus in decades. This is the perfect platform to start the work on reforming how we collect taxes and how the government treats individuals and businesses.  The key word in this process will be “fairness”.  …

Our economy is showing steady signs of improvement, but to continue on the path to recovery we need to create a system that allows small business to grow and attracts new employers to Wisconsin.  We have to remind our legislators that additional credits and exemptions are not the path to bringing employers to the Badger State.  A fair, flat and predictable tax code is what will attract businesses and create jobs.

Why don’t you hear Wisconsin Democrats talk about income tax reform? John Torinus has an answer:

You want progressive taxes? You want to sock it to the rich?

Well then, you should be right at home in progressive Wisconsin. The 3940 fat cats with more than $1 million in income in 2011 (.1% of the total taxpayers) paid 11.5% of the state incomes taxes that year. That’s 115 times their population weight

Those with incomes above $500,000 (.4% of the total) paid 17.3%. They are punching 43 times their weight.

In contrast, at the other end of the income scale, filers with incomes of $30,000 or less – about half of all filers – paid just 3.8% of all state income taxes.

These numbers from the non-partisan Wisconsin Taxpayers Alliance showed that taxpayers in the high income brackets paid at an average rate of about 6.5%. The top rate is 7.75%.

These high rates explain why we have so few rich people in Wisconsin. When they retire, they move to Florida or Arizona for at least six months and one day to avoid the 6.5% hit. Wouldn’t you if you were in their shoes? …

The high end taxpayers in Wisconsin won’t be impressed by small cuts in the middle and lower brackets. Their attorneys and accountants will be advising them to take up residence in states with no or low income taxes. Florida and Texas are at zero, and Arizona’s top rate is 4.54%.

I disagree with a few of Hilgemann’s points. When you have a single-budget-cycle surplus, that’s a sign that taxes are too high; it is not necessarily a sign of economic “recovery.” (The more accurate term for the current economy is Recovery In Name Only.) The state surplus could be called a Surplus In Name Only, because the state continues to run a nine-figure deficit under the correct measure of government finance, Generally Accepted Accounting Principles.

I’m not a fan of the political concept of “fairness.” Hilgemann wrote:

It’s not fair for politicians to force average Wisconsinites to pay more taxes while providing loopholes for certain corporations to pay less.  Often times these decisions are made not based on who provides the best product or service at the best prices, but instead on who cuts the largest check to their political campaigns. We need to get our elected officials out of the business of handing out favors.

You can agree with his last sentence and the premise of the second sentence without necessarily agreeing with the first sentence. Tax breaks to businesses mean businesses are more profitable, and profit is always good no matter where profit goes — to the business’ owners in dividends, to employees in higher compensation, or back into the business. Business taxes are part of the cost of a product or service, so businesses do not pay taxes; their customers do. The way to increase business profits and simultaneously simplify the tax system is to not tax business profits. The correct corporate income tax rate, in the U.S., Wisconsin or anywhere else, is zero.

The purpose of a tax system should be to raise necessary revenue for the functions of government, not for any other purpose, including “fairness.” A system where everyone pays the same tax rate is “fair” because people with more income or who spend more pay more in, respectively, income and sales taxes.

Reducing income taxes is necessary but insufficient by itself. This state is a tax hell because government spends too much money. Hilgemann wrote about taxes, not what taxes pay for, but a tax cut is useless without permanent (that is, as permanent as possible in our flawed democratic republic) controls on spending, specifically restricting government spending increases from one budget cycle to the next and requiring taxpayer approval of tax increases. If this state had restricted government spending increases to the inflation rate plus population growth, for example, since the late 1970s, state and local government today would spend half as much as it does now.

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