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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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