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How a graduated rate income tax would help reduce after-tax income inequality in Illinois

How a graduated rate income tax would help reduce after-tax income inequality in Illinois

RELEASED: 

May 22, 2019

Since 1979, the nation has seen a rapid and significant increase in income inequality between low- and middle-income Americans on the one hand, and the wealthiest one percent on the other. Over that time span, the bottom 99 percent of American households saw their incomes increase by an average of just 14 percent after inflation. Meanwhile, the wealthiest one percent saw their inflation-adjusted incomes balloon by 175 percent on average—or fully 12.5 times more than the income growth realized by everyone else.

Illinois not only followed this trend, but when compared to the other 49 states, experienced one of the greatest increases in income inequality over this sequence. In fact, between 1979 and 2015, the top one percent of households in Illinois realized a 177 percent jump in inflation-adjusted income on average – which is almost 20 times greater than the nine percent average income growth experienced by the bottom 99 percent of Illinois households. And that’s before the impact of Illinois’ regressive tax system is taken into account.

Because Illinois’ tax system is “regressive,” meaning lower- and middle-income people pay a larger proportion of their earnings in state and local taxes than do higher-income people, income inequality in the state is even greater on a net, after-tax basis. 

If properly designed, however, income tax policy can help lessen after-tax income inequality. In fact, the income tax is the only tax which can be broadly used to lessen net, after-tax income inequality, because it is the only tax that can be designed to correspond to ability to pay. This is best accomplished through the implementation of a graduated rate structure that imposes lower tax rates on lower levels of income and higher rates on higher levels of income – which is precisely what Governor Pritzker has proposed doing in Illinois. And in a state like Illinois, which has to increase tax revenue to address the multi-billion dollar long-term structural deficit in its General Fund, creating a graduated rate income tax is one of the few ways the state can generate new revenue without worsening income inequality.

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Topics:Tax and Budget, Illinois Budget, Income Tax, Revenue Policy

Tags:Graduated Income Tax, Income Tax, Fair Tax, Inequality

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