EYE ON THE PIE: Time for progressive Indiana income tax?

December 11, 2006

There is growing agreement that the rich are getting richer faster than the poor are improving their lives. If you believe the trickle-down theorists, the poor will get the runoff as wealth is showered upon the few. If you look about, however, you will question this charming opinion held by the comfortable.

At the same time, policies at the national and state levels continue to emphasize cutting the most important means we have of correcting this growing imbalance in America. Governments (federal, state and local) create and support the instruments and institutions by which all of us live better lives. Governments operate or regulate sewers, water systems, roads, street lighting, airports, utilities, communication systems, police, fire and public health agencies that make all of us better off.

Governments also establish the means whereby the less wealthy can improve their economic status. They support the schools, libraries and public-transit systems that provide alternative opportunities for those with talent and skills to succeed. Taxes are the means by which the more wealthy support governments and thereby help reduce (not eliminate) the disparities of life.

What is happening these days? The Bush administration and a compliant Congress gave us tax reductions and vast military spending increases that have reduced the funding for essential public services. With less money flowing to states and localities from the federal government, cities and towns are deferring necessary infrastructure repair and development. Transit systems are being constrained (strangled) at a time when they most need revitalization. Health and welfare services are being reduced to "save" money.

Yet the political leadership of Indiana's Legislature persists in giving "tax relief" to homeowners. We all know there is no tax relief here. There is only a shifting of taxes from homeowners to those who pay sales and income taxes. Our Indiana sales and income taxes have exclusions that help low-income households and individuals, but these are minimal. Basically, both taxes are proportional. The sales tax is a flat rate of 6 percent. The income tax is a flat rate of 3.4 percent.

Is now the time for the Indiana General Assembly to consider a progressive income tax? When Gov. Mitch Daniels proposed a one-year higher tax rate for upper-income households, his idea died faster than the annual hopes of a Cubs fan.

More than 30 states already have some form of a progressive income tax. Carefully used, the progressive tax helps build government reserves in good times that can be used when revenue declines in bad times.

Have we studied the implications of a graduated income tax? Perhaps this has been done by the Department of Revenue, the State Budget Agency, the Legislative Services Agency or some other group. Let's find out. Let's not starve government services while maintaining a system that fails to tax according to the ability to pay.

If we want to help low-income people and protect the lives and property of the wealthy, we need revenue to support (not cut) government services. This implies that wealthier citizens accept their responsibilities to offer a larger portion of their incomes to society.

Of course, the chronically dyspeptic will argue that government services are of low quality or run inefficiently. Then improve them, don't destroy them.



Marcus taught economics more than 30 years at Indiana University and is the former director of IU's Business Research Center. His column appears weekly. To comment on this column, go to IBJ Forum at www.ibj.comor send e-mail to mortonjmarcus@yahoo.com.
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