The whole report is at the link above, or get the pdf from the direct link here, provided by the Executive Service Corps. It seems that a summary would be: “Raise taxes and make them more complicated, then give more subsidies to favored interests.” Among the tax increases are higher individual and corporate income taxes, and a broadening of the sales tax to include more services.

Those of us with a sound understanding of economics will be shocked discouraged to find that there is no mention of increasing the taxes on land value as a way of encouraging development and easing taxes on productive activity.

I’m not likely to review the whole report in detail, and doubtless it contains a few sound recommendations. I’ll just mention two other things that struck me.

First, we all know about TIF’s which divert real estate taxes to private pockets, and there are quite a few TIF’s that divert sales taxes, but this is the first I’ve heard of a TIF that diverts state income tax:

The CenterPoint Intermodal Center in Joliet, a 3,900-acre state-of-the-art, integrated intermodal center,  represents a $2 billion private investment. The center also will receive State investment under theIntermodal Facilities Promotion Act, signed last year. Designed to encourage business development along the freight rail systems of Illinois, the Act authorizes income taxes from jobs created at the facility to be placed in an Intermodal Facilities Promotion Fund. DCEO will administer the fund to reimburse CenterPoint for infrastructure improvements. DCEO will award an annual grant of up to $3 million in fiscal years 2010 to 2016.

Second, among the recommendations is an increase in the public employee retirement age to 72. I am no expert in retirement ages, and probably it’s appropriate to push the age up from 60 (which I believe it is now, and younger in many cases), but 72? No basis is given for choosing this age (other than the obvious fiscal benefits of more workers and fewer retirees. My guess is that nobody takes this recommendation seriously; had they recommended 65 or 67, there’d be a danger that the change might actually happen, but there are probably enough stories of senile 72-year-olds to prevent anything from being done.

There are good arguments why legal services oughta be exempt, but the same can be said about all other services and all goods, too.  So I was kind of pleased to note that the Province of Ontario will now apply the 13% “harmonized sales tax” to legal services, while continuing to exempt newspapers and shoe repairs.  (British Columbia will do the opposite.)

The concept is at least a little bit promising.  I guess we had about 600 people, assigned to tables of a dozen or so each, and we talked about how the Federal financial situation might be improved.  But first we had a very loud presentation from Philadelphia. (Philadelphia is apparently standing in for Washington and New York, so we won’t suspect that political professionals and Wall Street are involved in the effort.) We were told that, yes, the deficit is a big deal(as described in this pdf). And before talking about the options for reform, we were directed to determine our values.  The “values” are listed below (and on worksheet #3 of this document), along with the reasons that they make no sense at all.

What is our priority for attending to the needs of the “current generation,” vs. those of “future generations?”

If people have the opportunity to attend to their own needs, then they are better able to attend to the needs of future generations.

How much should the burden of reducing the deficit be shared “equally,” vs. being more heavily borne by those more able to bear it?

The logical and moral approach to this issue is to ask why we have the deficit.  Once we understand that the deficit is mainly due to private collection of economic rent (and failure to allow labor to collect all of its own income, more details here), we see that the burden of the remedy should be borne by those who are currently taking the rent that belongs to the community. As it happens, these people are probably among those best able to bear the additional burden, but the objective here is equality of opportunity.

To what extent is it the government’s responsibility to take care of the vulnerable, vs. people being responsible for themselves?

Of course people should be responsible for themselves, but there are so many ways that misgovernment makes it difficult for them to do so.  The vulnerable need opportunity more than the powerful do.  I believe that the “community” (not necessarily the government) does have the moral obligation to take care of those unable to take care of themselves, who would be quite few in number if everyone had equal opportunity.

The preliminaries out of the way, this booklet (pdf) was loudly read to us by the folks in Philadelphia, and we were asked to select options totalling $1.2 trillion.  The biggest problem is that, on the one hand, few of the options provided enough detail for one to really understand what they involved, while, on the other hand, a few provided great detail, the significance of which went well beyond what most of us participants were able to absorb.

As we finally got to have some actual discussion among the people at my table, it was encouraging to hear that some of us are seriously concerned about the fate of the nation and want to understand our fiscal options (tho others are mainly concerned about how they personally would be affected).  It would have been nice to have time to explore some of the economic fundamentals, but that was not the purpose of this session.

And thru the twin magics of computers and simplification, there preliminary results are already in.

“‘We The People’ have prioritized what is most important for America’s future: creating equality of opportunity for future generations, maintaining a free country where individuals can maximize their potential, guaranteeing children receive a quality education, securing prosperity for future generations and ensuring a stable economic environment.”

Specifically, “we” want to

• Raise the limit on taxable earnings so it covers 90% of total earnings. [I believe this item refers to FICA tax.  90% was the only option offered, and the idea of paying for social security by collecting economic rent was not presented.]
• Reduce spending on health care and non-defense discretionary spending by at least 5%. [Of course, the specifics for achieving this were not discussed.  I suspect much of it could be accomplished by breaking the drug patent monopoly, but I have no figures.]
• Raise tax rates on corporate income and those earning more than $1 million. [These being, of course, the folks who can afford good lobbyists to prevent the change, or good accountants to make it ineffective.]
• Raise the age for receiving full Social Security benefits to 69. [This actually makes some sense, to the extent that Social Security itself makes any sense. The story, as I heard it, is that when Social Security was first established, half the population was expected to die before becoming eligible for full benefits at the age of 65.  Today most folks live beyond age 69, so an even higher age could be justified.]
• Reduce defense spending by 10% – 15%. [Surely this could be done without reducing the ability to defend the homeland, but an awful lot of defense contractors and other interests have powerful lobbyists, so it's hard to expect that the cuts will be wisely made.]
• Create a carbon and securities-transaction tax.[Interestingly, the materials provided did not mentione global climate change.  Yet unless one is persuaded that carbon emissions under the control of humans are causing difficulty, it's hard to justify a carbon tax.  The securities-transaction tax has theoretical appeal as a way to reduce high-frequenty trading and damaging speculation, but I think it would be difficult to enforce.]

So, what was the purpose of this event?  The organizers say it is “a national discussion to find common ground on tough choices about our federal budget.”  That may not be entirely false.  But I think it would be better-described as “an attempt to justify major cuts to popular (if ineffective and/or damaging) programs, and increases in taxes, without risking radical reform that might actually move us toward equal opportunity for all.”

But that, like everything else here, is just my opinion.

Of course, if this reform got serious support, I suppose the TIF authorities would promptly find it necessary to sign long-term contracts with connected developers or consultants, to be paid out of anticipated cash flows, so it might take quite a while to have any effect.  And anything beyond the next election is too far away to see.

Mayor Daley, being in a taxing mood, might want to consider this, if his obligations to the billboarders aren’t excessive. Chicago Reporter has found many illegal billboards in the city, and that politicians receive, not only free space, but cash contributions, from the billboarders.

ht Frank Dejong

(And in the process of locating the video link, I found a couple about Walt’s late brother and fellow geoist, “Dental Farmer” Art Rybeck.)

In fact, a new-to-me report shows that among the richest (top quintile of income), effective average tax rates range from less than 3.8% (for the cleverest 10% of these affluent taxpayers) to 18.6% (for the most tax-burdened tenth of this group).  For the “middle class” (third quintile), the range is from -4.5% (meaning that refundable tax credits exceed otherwise-taxable income) to 9%.  (Exactly what definition of income applies here is not clear; it’s based on the “Urban-Brookings Tax Policy Center Microsimulation Model (version 0509-4),” which I haven’t examined.)

Of course this weirdness is the result of many “loopholes” and special provisions.  In theory it would be possible to eliminate them and come up with a simpler tax, but in front of each loophole stands a lobbyist (and/or a legislator favored by a lobbyist).  U S Senators Ron Wyden (D-Oregon) and Judd Gregg (R-New Hampshire) have introduced S-3018, which will do away with many(pdf) (but not all(pdf)) of these provisions.

The mortgage interest deduction stays, which maintains a subsidy for real estate speculation. The deduction for corporate-paid interest would be limited to the amount in excess of inflation, which appears to mean that a corporation, upon issuing fixed-rate bonds, would have no way to know in advance how much interest they’ll be able to deduct.  Perhaps this will encourage inflation-indexed bonds?  Also, it is not clear what the effect  would be if we enter an (unlikely) deflationary period.

I see this as simply one more illustration that the tax on earned income (including revenue from investments in real capital) is a hopeless mess.  A tax on privilege (or, what is effectively similar, on the income from privilege) would be much more straightforward and encourage balanced economic growth.  Unfortunately, those who hold privilege have great resources to fund lobbyists and other professionals to block to adoption of such a tax.

ht Forbes via Yglesias (indirectly from Felix Salmon)

The report, funded by some of Chicago’s wealthiest foundations, recommends freezing or cutting funds for  State programs, reducing pension obligations to the extent possible, raising the personal income tax 67% and corporate tax 33%, and removing a few relatively minor tax breaks.  It also suggests that pension income be taxed and that the State move toward taxing consumer services.  Despite these tax increases and ongoing national economic difficulty, it pretends that the income and sales tax bases will not decrease.

Of course this is a dumb plan.  Frozen or reduced expenditures will be inadequate to meet the State’s needs. Increased rates of tax on productive activity will cause some of that activity to leave Illinois, or simply not to occur.   When they see their income become subject to tax, some pensioners will choose to move out of state– and the ones best able to leave are the affluent ones, who pay sales and property tax and don’t so much burden public services.

But the State is in a fiscal hole, so if I don’t like the Civic Federation’s plan shouldn’t I suggest one of my own?  Despite the lack of foundation funding, that is what I shall do.

I won’t comment much on the expenditure side. Probably some pension cutbacks are appropriate, and there is surely plenty of fraud and waste in many programs (tho catching it is difficult).   Some programs certainly could be eliminated, but the big ones– education, transportation, aid to those unable to work– are necessary in some form.  Also, there is an existing debt of about  $25 billion, plus $66 billion in unfunded retiree liabilities (for past years). So we need a lot of revenue.  How to get it?

What about a land value tax? Now, nobody knows what the land of our State is worth, but we know for sure that it isn’t moving away.  It might be $2 trillion.  Suppose we were to tax that at, say 1% of value.  That’s $20 billion/year, more than the total raised by the State sales, corporate and personal income taxes. That bails us out of the debt in a few years, allowing eventual elimination of these other taxes.

Is it fair? It’s more fair than asking hardworking people to share their salaries with the State, then pay again when they purchase things.  (The Illinois sales tax originated, in 1933, as a way to eliminate the real estate tax.) It’s not just fairer, but also smarter, than telling employers and retirees that if they stay in Illinois, the State will take a share, an increasing share, of their income..

I have a special affinity for taxing farmland, because I look at listings like this 210-acre farm where real estate tax is only 1/10th of 1% of value.  Others pay even less.  It’s quite legal, tax preferences for “farmland” even tho the owners in most cases are investors, not farmers.  There are plenty of urban examples, too, some illustrated here.

Although Civic Federation’s recommendations are foolish, I think descriptive portions of the report are pretty good.  Two things I learned are, first, that the number of State employees has dropped about 20% in the past decade, and second, that expenditures on “Corrections” are only about $1.1 billion/year. It still would be a good idea to let all the innocent people out of prison, but that’s not going to solve our budget problem. However, if we raise taxes as the Civic Federation suggests, those released, as well as the rest of us, are unlikely to be able to find jobs.

Is it inevitable that anything like a tax on earned income must become so complex that it virtually can’t be fixed, even when “everybody” agrees how it should be done?