Consider progressive taxes

May 25, 2009

They went home without passing a budget. They will return. They are the members of the Indiana General Assembly, 150 citizens but just a few individuals. Adherence to party discipline is their major concern; neither good policy nor the welfare of the people is even a tangential consideration.

I had written these lines when Myrtle my muse appeared at my side.

"So, what are you going to write next?" she asked. "Do you have anything positive to add to the discussion? Aren't you tired of just complaining?"

"You want my program? I challenged. "I'll give you my program, but I haven't worked it out so this is just a beginning."

"Skip the apologetic disavowal and get on with it," she said.

"OK," I said. "The personal income tax should have progressive rates rather than the flat 3.4 percent rate now in effect. I have mixed feelings about the county option income tax."

"Go on," she urged.

"Dump the corporate income tax," I said. "It would make us look pro-business. We would eliminate a complex tax with multiple loopholes (excuse me-multiple deductions, exemptions and credits) that generated only 4.7 percent of the state's tax revenue last year."

"And how do you propose to make up those dollars?" Myrtle asked.

"Raise the nominal individual income tax from 3.4 percent to 3.9 percent," I responded. "Today, Hoosiers pay less than 3.4 percent with all the deductions, exemptions and credits that apply to the individual income tax. Just getting rid of the deductions and exemptions would put another $179 million into the state's pocketbook.

"Then," I continued, "if we put some progressivity into the tax rates ... "

"Hold on," Myrtle said, "what's this 'progressivity'?"

"Simple," I replied. "The rates rise as income increases."

"That's demonic socialism!" Myrtle cried and moved from my side.

"Easy," I said, trying to soothe her rattled nerves. "The United States already has a progressive personal income tax. In 2006, Indiana residents with incomes below $10,000 paid about 3 percent in federal taxes, while those with incomes of $200,000 or more paid Uncle Sam about 23 percent. That's a progressive tax."

Myrtle backed away from me. I rose from the computer keyboard and moved toward her.

"Stay back, you redistributionist, you!" she wailed.

"There's nothing about progressive income tax rates to get you agitated," I said quietly.

"They are," she replied stiffly, "the incarnation of evil, for they do not treat all people the same."

"Myrtle," I said sharply, "for whom have you been musing? How do you get such nonsense in your head?"

"We," she said primly, "have a flat tax in Indiana."

"No, we don't," I said. "We provide a basic $1,000 exemption for individuals ($2,000 for spouses in legally recognized marriages) and $1,500 for each dependent. That means a family of four gets $5,000 off their taxable income. If one of those people is over 65, they get another $1,000. For a tax to be truly flat, it must have a flat rate and a flat base, no exemptions.

"Idaho," I continued, "is a very conservative state and it has personal income taxes ranging from 1.6 percent to 7.8 percent applying to eight income brackets. Then it has a very progressive base that gives a married couple over age 65 an $11,000 exemption (compared to Indiana's $4,000)."

Myrtle looked sad.

"We've never argued like this," she said. "I'm here to help, but if you're going to spou ... "

"Spppout?" I stuttered. "Is Idaho a 'liberal' state?" "No," she murmured, "potatoes are very conservative."

Marcus taught economics for more than 30 years at Indiana University and is the former director of IU's Business Research Center. His column appears weekly. He can be reached at mmarcus@ibj.com.

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