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Illinois Fair Tax Vs. Flat Tax: The Flaw In The Tax On Success Argument Against Progressive Taxes
Written by Ken Gaebler
The Illinois Fair Tax initiative is great for Illinois entrepreneurs and small business owners. Monied interests would like you to think the incumbent Illinois flat tax is better. It's not.
In Illinois, where I live, whenever taxes are discussed, there's a common argument made against any tax that taxes the wealthy.
"You don't want to put a tax on success," the Opposition says. "If you tax the wealthy, you are effectively disincentivizing entrepreneurship."
From there, the Opposition transitions to the usual, stale add-on arguments that if the wealthy are disincentivized, they will leave the State. If that happens the argument continues, jobs won't be created and you will lose out on a valuable tax base.
It's a compelling argument...if only it were true.
Why the Illinois Flat Tax Has Failed Its Residents
As an Illinois entrepreneur who has had more than his share of struggles, failures and successes, I can tell you how the world actually works, and when you have that context, you'll see that this tax on success argument is flawed to the point of being 100% wrong.
In my first startup, in 1993, my business partner and I ran up our credit cards to grow the business. I earned next to nothing, and things were difficult for my wife and our new child, born in 1994.
Did Illinois' flat tax system motivate me to chase success?
No, it did the opposite.
It penalized me for being a young, struggling entrepreneur.
I realize this now, only in hindsight, because entrepreneurs don't think about state income taxes when they are chasing an entrepreneurial dream. It's only now, as I'm thinking about Illinois' upcoming referendum to get rid of the Illinois flat tax that I'm thinking about income taxes.
But let's think back to 1994 Me. Maybe I earned $25,000 then, best case. It was a massive drop from my salary of a few years earlier as a management consultant at one of the top consultancies in the country. My wife and I were eating into our family savings to make ends meet, as I chased an entrepreneurial dream.
When Illinois income taxes were due, however, I was told to pay the same rate that billionaires like Sam Zell and other rich people were paying.
Had Illinois had a progressive tax system, Zell and friends would have paid proportionately more than me, allowing me to pay proportionately less, and my entrepreneurial venture would have in effect been helped out since I would have more money in my pocket on April 16 than the flat tax system left me with.
I considered giving up on my first venture several times because of the financial strain on my family. A flat tax system exacerbated that strain.
If you're following along, you'll understand that, relative to a progressive tax system, a flat tax system discourages entrepreneurs.
It's Completely Wrong to Say a Progressive State Income Tax Is a Tax on Success
This is the opposite of what the opponents of the Illinois Fair Tax are saying. They say that the flat tax encourages entrepreneurship, and a progressive tax discourages entrepreneurship.
Based on my own personal story, you can see that they've got it completely backwards.
Now, fast forward to 2020. I've had two successful entrepreneurial ventures, and while I'm nowhere near being in Sam Zell's class, I've done reasonably well.
Have I done well enough that I'm able to pay a higher tax rate than a struggling entrepreneur? Yes.
Would I happily be willing to pay a higher rate than a struggling entrepreneur to let them do better? Definitely.
Is my paying a higher tax rate going to stop me from creating jobs? Do I view a higher rate for me as a tax on success?
It's a ridiculous proposition. Once you are comfortable with your finances, unless you are pathologically greedy, you can afford to be generous. (And, you should be generous. Give back, my friends.). As a real-world entrepreneur, I'll happily pay the higher rate and I will still create jobs as best I can, and, no, I don't view it a tax on my success; I view it as doing the right thing.
If there's somebody like 1994 Me out there, who is operating a startup company, underpaying themselves, and so close to the brink that they are thinking of calling it quits, well, the least I can do is do a little bit more heavy lifting than them on my Illinois individual income tax obligations.
Personally, I don't mind paying taxes, especially state taxes.
So many people just hate taxes outright, without really thinking of what we get from them.
I couldn't have been a successful entrepreneur in Illinois if it were not for the many state services that we all take for granted that help us all to be successful. I don't buy into the negativity about Illinois that is venomously spewed by those with a hidden agenda (not so well hidden, guys!), powered by their GPS (Greed Propaganda System).
An Illinois Fair Tax Will Create More Jobs, Not Fewer Jobs
Let's take stock of what I've covered so far. I've demonstrated, through my own personal history, that the flat tax system discourages entrepreneurship by not giving a break to struggling entrepreneurs.
If my personal story isn't convincing, you might also want to look at the tens of thousands of entrepreneurial success stories in other states that moved away from a regressive tax structure or were smart enough to start with a progress tax structure in the first place. Only eight other states still have a backwards, racially-prejudiced, entrepreneurially-stifling flat income tax system like Illinois put in place, way back in 1969.
We'll continue this discussion by asking a related question with job creation in mind: who should be taken care of most by the tax system? Struggling entrepreneurs like me back in 1994? Or a (modestly) successful businessperson like me in 2020?
At 56, and 112 in entrepreneur years, I'm not likely to create a ton of new jobs going forward. Young Me created hundreds of them.
When I was lower-income, even middle income, that is when a tax break would have helped me to be a better job creator. Instead, I paid the same rate as Sam Zell (although of course his effective rate was much lower due to many deductions and loopholes that are only available to the uber-rich. Yes, it turns out the flat tax system isn't that flat after all.).
What I'm trying to say here is that when you tax the wealthy, you are not taxing success. You are moving away from a system that discourages young people from pursuing success. It is the flat tax system that taxes success, limiting its full potential!
And these young people are the engine of your economy, not old farts like me. A flat tax system is a job killer, and lord only knows how much better the Illinois economy would have been had we not floundered in the dark for 50 years with an ill-conceived flat tax system.
Let's be honest. Even within a successful company, the owners, who are often wealthier than the employees, are typically not driving the growth of the company. It's the midldle class managers and workers who drive growth, who create jobs and build wealth for others. The current flat tax system penalizes them. It stunts growth in Illinois.
What does a wealthy owner do with the money he gets because the young entrepreneurs pay taxes for him in a flat tax system? It goes to a stock index fund most likely, which is equity funding that goes primarily to companies outside of Illinois.
Don't Let Illinois Fair Tax Opponents Take Advantage of You
Again, the flat tax system steals from the young Illinois entrepreneur, discourages her success and sends that precious money out of state, ultimately to fund what? An inheritance to the wealthy family's children, which, by the way, has a snowball's chance in you know where of being taxed.
So when some knucklehead tells you "Don't vote for the Fair Tax in Illinois. It's a tax on success, and you don't want to discourage entrepreneurs, do you?" you now can respond, by educating them on how the real world works.
Simply respond: "I don't think that's how things really work. The people who are pursuing success now, who earn much less than $250,000, are the ones we are penalizing. The flat tax discourages entrepreneurs, and a progressive tax would actually help them. You're just twisting words to make me think illogically, but I know how the real world works, and you've got it all wrong. I'm voting YES on the Illinois Fair Tax. Nice try, though."
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