The flat tax has exacerbated income inequality and worsened the racial wealth gap
A new study finds that over the last 20 years, Illinois’ tax system has effectively sapped $4 billion more from Black and Hispanic communities than it would have under the Fair Tax, while also allowing the state’s highest-income (mostly white) households to pay $27 billion less in taxes, the Institute on Taxation and Economic Policy (ITEP) said on Sept. 16, 2020.
ITEP’s new study examines the long-term effects of Illinois’s tax system on economic inequality and the racial wealth gap by looking at 20 years of data on personal income tax collections in the state. The analysis compares relative tax liabilities under the current flat tax rate system to what tax responsibility would have been under the proposed Fair Tax, a graduated income tax structure that voters will decide on Election Day.
It’s widely known that a flat rate personal income tax is inequitable and worsens income inequality. Families in Illinois earning less than $21,800 a year have 85.3 percent of their income post state and local taxes. Families with income over $536,400 keep 92.6 percent of theirs. In other words, the income gap is wider post-tax. Less known is how the tax system affects the racial income and wealth gap. This study provides some insight. It finds Illinois’ flat tax:
- Enables the rich to build even more wealth. Illinois’ highest-income households (top 3 percent) paid $27 billion less in taxes over the 20-year period than they would have under the fair tax. That tax savings allowed the richest households to build $50.2 billion in wealth.
- Exacerbates the racial wealth gap. Black and Hispanic households with income under $250,000 paid $4 billion more in taxes over 20 years than they would have under the Fair Tax. This was $4 billion that wealthy households did not pay. Compounded over time, this tax subsidy effectively enriched the state’s top 3 percent (a majority of whom are white) by an additional $7.5 billion in wealth.
Moving to the Fair Tax would change the overall distribution of the state’s tax system and require those with the highest incomes to pay more as a share of their income and as a total share of all taxes. In 2019, Illinoisans with more than $250,000 in taxable income paid 38 percent of all personal income taxes. Under the Fair Tax, that share would increase to 47 percent. Those with income of $250,000 or less pay 62 percent of all personal income taxes but would pay 53 percent under the Fair Tax.
“It’s no surprise that the flat tax has allowed the rich to get richer and required other Illinoisans to pick up the tab so the state can fund critical and basic services,” said Lisa Christensen Gee, author of the study. “The cumulative effect of this regressive policy allows the richest households to build even more wealth while depriving low- and moderate- income families the same opportunity, all while worsening the racial wealth gap.”
Here’s what some others have to say about the study:
“This analysis confirms what many of us instinctively knew: Over the past 20 years Illinois tax system has systematically stripped Black and Latinx people of billions of dollars in wealth,” said Jeremy Rosen, director of economic justice at the Shriver Center on Poverty Law. “The damage this has done to communities across the state has been severe. Importantly, this brief also points us to a solution: Passing a fair tax for Illinois in November 2020.”
“The data in this report proves what many families of color and low-income Illinois families have felt for years: Illinois’ tax system was built to benefit the rich at the expense of everyone else,” said Harish I. Patel, Director of Economic Security for Illinois. “If we in Illinois intend to close the racial wealth gap and give all our neighbors a fair shot, we must start by creating a fairer tax system.”
“I am in favor of the ballot proposal in Illinois to allow for a graduated income tax. As income inequality continues to grow in Illinois, a regressive flat tax makes no sense and is immoral,” said Michael Rothman, CEO of Conger Management. “I have done well, and I should pay my fair share to support the state where I live and work. Shifting more of the state’s tax burden on wealthy individuals like me will help our economy flourish, as we reduce the burden on startups and existing small businesses and provide a more level playing field for every Illinoisan.”