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1 Lyman Stone, Response to CBPP: Flat Income Taxes Don't Endanger Public Finances or Create Inequality 1 (2014)

handle is hein.taxfoundation/taxfaam0001 and id is 1 raw text is: TAX ADON Response to CBPP: Flat Income FOUNDATION: Taxes Don't Endanger Public Apr. 2014 Finances or Create Inequality No. 426 By Lyman Stone Economist A recent blog post by the Center on Budget and Policy Priorities (CBPP) suggests that adopting a constitutional amendment to allow a progressive tax in Illinois would benefit the state due to the state's high and rising inequality and its chronic budget problems.' While CBPP is correct that a state's tax structure can have a powerful effect on quality of life and business activity, the economic evidence shows that low, neutral taxes on consumption typically have the least damaging impact on the economy, while high, progressive income and corporate taxes damage economic growth the most.2 But CBPP's argument is somewhat different. They assert that higher income taxes don't harm growth (even claiming that Minnesota's recent income tax increase is part of a recipe for future growth') while simultaneously suggesting that taxes perhaps do affect inequality. CBPP points to the faster growth of high incomes in Illinois since the state adopted its current flat income tax in 1969- 1970, as well as Illinois' continuing inability to pay its bills, as evidence that not having a progressive income tax has been a fiscal and economic failure. MYTH: States with progressive income taxes have lower inequality. FACT: Inequality varies little between states, and states with highly progressive income taxes are actually associated with higher inequality. The facts do not substantiate CBPP's implications. If tax structure had a major impact on inequality, it should show up in state inequality data. But if we compare the average Gini coefficient (a common measure of income inequality; a higher value means more inequality) among states with different tax codes, differences in inequality are quite small, certainly smaller than differences in income and employment (see Figure 1). What difference does exist suggests 1 Nicholas Johnson, In Illinois, a Chance to Fix a Constitutional Flaw, CENTER ON BUDGET AND POLICY PRIORITIES OFF THE CHARTS BLOG, Apr. 23, 2014,_t 2/uw, h Igu orQ'/ 2 See, e.g., William McBride, What is the Evidence on Taxes and Growth?, TAx FOUNDATION SPECIAL REPORT No. 207 (Dec. 18, 2012), . 3 Michael Leachman, Minnesota's Tax Plan a Recipe for Future Growth, CENTER ON BUDGET AND POLICY PRIORITIES OFF THE CHARTS BLOG, May 21, 2013, httD:/www offtabiQZQor,-I

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