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Competition. Businesses can locate their automobile, semiconductor, and pharmaceutical plants in any of dozens of countries today. America needs to compete to attract these investments, but the Democrats’ proposed corporate tax increase from 21 percent to 26.5 percent would push them away. With the increase, our combined federal-state corporate tax rate would be 30.9 percent, and thus much higher than the global average of 23.6 percent.

Investment. Corporations invest to earn after-tax profits. Higher taxes would reduce profits and thus undermine investment in factories, machinery, and other assets. Ironically, the Democrats want to boost infrastructure investment, but two-thirds of America’s infrastructure is owned by the private sector and would be harmed by the tax increases.

The idea that the agenda of Joe Biden would be positive for the economy is taken to mean that his plan to increase taxes would also be positive for the economy. However, it is a mistake to think the corporate or individual income taxes can be raised without negative effects.

His campaign recently told the New York Times, “Tax increases now would accelerate growth by funding a stream of spending proposals that would help the economy.” So the argument seems to go that because higher tax rates could fund new programs, higher tax rates would help the economy. But as noted by Douglas Holtz Eakin, “The taxes are bad but all the better news for growth, if there is any, is in the spending proposals.” That means tax increases on business and higher earners would inflict damage on the economy no matter how the revenue would be spent.

The American safety net is not perfect – not by a long shot – but it does a good job of ensuring that low-income Americans have enough support to meet their basic needs. The data are clear about that: Consumption poverty, which measures the wellbeing of the poor after accounting for safety net assistance provided by the government, declined to an all-time low of 3 percent in 2016. Thanks to a good economy and strong public assistance programs, very few Americans live in deprivation.

Universal Basic Income (UBI) would be an unaffordable way to undermine our social safety net’s successes. UBI would transfer money away from those who need it most, change the distinctly American relationship between citizen and government, and sharply raise taxes or the national debt (or both). And critically, it would fail to improve upon our current safety net’s biggest weakness: UBI would destroy – not improve – incentives to work.

There are over 300 million Americans today. Suppose UBI provided everyone with $10,000 a year. That would cost more than $3 trillion a year — and $30 trillion to $40 trillion over ten years.

This single-year figure equals more than three-fourths of the entire yearly federal budget — and double the entire budget outside Social Security, Medicare, defense, and interest payments. It’s also equal to close to 100 percent of all tax revenue the federal government collects.

Expanding Social Security in the way Democrats are proposing would harm Americans in multiple ways

It will expand government (both spending and taxes) to historic proportions

Important to note, however, is how the legislation would fund this expansion: increasing taxes.

The Social Security program limits the amount of earnings subject to taxation in a given year, currently set at a taxable maximum of $147,000 in 2022. The tax rate for wages is set at 6.2%, or 12.4% split evenly between employers and employees. The Social Security Expansion Act would amend this payroll tax and subject all income over $250,000 to the tax. The bill sponsors estimate that 93% of American households would see no increase, but high-earners could see a substantial impact in their net pay.

As if all these consequences were not bad enough, such a program will be ripe for corruption and political interference at the government, provider and individual level. Senator Sanders’ plan would be administered by the Department for Labor, with local and state governments submitting projects to regional offices for consideration. There’s a huge question mark on whether projects will be considered on economic grounds, when there might be an incentive for make‐​work schemes to aid particular politicians or indeed to put resources towards “public good” causes or NGOs more in line with the ethos of the governing party. For Democrats this might be for environmental issues. For Republicans it might be, say, for a wall on the southern border.

NGOs and local public bodies themselves will have incentives to apply for federal funds for projects that would otherwise have occurred anyway, and to maximize the number of applications. Pork barrel projects would proliferate. What is more, at the individual level, the guarantee coupled with the purported unwillingness to judge worker performance on a commercial basis will incentivize low levels of work effort on the margin.

Next, we require a policy lever for the government to mitigate inflation. In standard models, a Taylor Rule mechanism is implemented by a passive central bank. That solution is not an option in this case because MMT explicitly rules out nonzero interest rates (Mosler & Forstater, 2005) and we are interested in the case of an active government. This leaves fiscal policy as the main mechanism by which the government can affect inflation, so we model this as a lump-sum rather than distortionary tax for several reasons. First, we want to study one particular aspect of MMT in isolation and it would distract from the analysis if some results were seemingly driven by distortionary taxation. Second, we understand that in practice governments cannot have perfect foresight over the level of tax revenue collected but we model the fiscal authority as if they do. We view this as uncontroversial largely because tax authorities tend to act as if they have a certainty-equivalent level of tax revenue, otherwise budgeting would be impossible. Third, note that our model is an adaptation of the Barro-Gordon model, which collapses a dynamic choice problem into a one-shot decision when economic dynamics are ignored and the economy is in steady state from the start. Hence the same decision rule can be applied across all future periods, so there cannot be a concern about the level of tax revenue collected from lump-sum taxes changing over time. Finally, as noted above, there is significant textual evidence from MMT economists that this is exactly how policy is supposed to be done. When inflation rises, the role of the fiscal authority is to manipulate fiscal policy settings “to reduce the level of private sector demand. Labor is then transferred from the inflating private sector to the fixed wage JG sector and the BER (the ratio of JG employees to the total labor force) rises” (Mitchell et al., 2019, Ch. 19).

The imperative for fiscal action within the JG model also follows from the game theoretic hypothesis that a rational firm may in general want inflation to be lower, but will not take the necessary steps to reduce inflation themselves. If prices and wages are rising at approximately the same rate, then there is little private incentive for firms to discard their workers and hence make themselves less competitive. This introduces the need for fiscal policy to step in and take steps to slow the private sector and move workers to the JG.

Though no doubt there would be some demand spillovers from well‐​paid jobs, the net consequence is highly likely to be weaker private sector job creation in poor regions, which has been the experience of countries such as Britain with a nationwide minimum wages and public sector national pay bargaining. Proponents of the scheme see “higher labor standards” as a good thing, but absent productivity improvements, policies which raise labor costs significantly will reduce the quantity of workers demanded.

There’s good reason to expect the policy will reduce the efficiency and productive potential of the economy too. Taxes will eventually need to be raised to cover the net cost of the program. In infrastructure and care giving provision, costs will rise – because nobody would now work in these directly substitutable sectors for less than the wage and conditions offered in the job guarantee program. This will waste resources, and there’s highly likely to be overinvestment in lots of relatively low value ventures and programs to ensure workers are employed, especially given the explicit aim is to provide employment rather than deliver projects at low cost.

This reframing raises the question: does a Job Guarantee require higher taxation? The answer, using MMT reasoning, is “Almost certainly, yes”.

Suppose the economy initially has two groups of workers, employed and unemployed. Employed workers produce some quantity of marketed goods and services, as well as freely provided public services. They receive a wage, while unemployed workers get a (low) benefit. As well as workers, there are people receiving profits, interest and so on.

The policy upshot of this observation about sovereign currencies is that countries like Japan and the United States are free to spend more. How much more? More than might seem prudent, at least to those accustomed to using debt-to-GDP ratios as a metric of fiscal sustainability (Summers and Furman specifically reject this way of measuring fiscal prudence). MMT advocates and their mainstream colleagues increasingly insist that U.S. deficits are too small, especially relative to the needs of American citizens and the economy in which they live.

MMT has some interesting things to say about taxes. Most basically, it challenges the idea that taxes are linked to spending in any meaningful way. Under traditional ways of thinking, the government collects money through taxes and then decides how to spend it. Under an MMT way of thinking, the government decides how to spend money and then just goes ahead and spends it. Whether the government decides to levy taxes depends on other factors, not on the need to raise money for its spending priorities.

We already have two examples of a single-payer system in the U.S. The Veterans Administration (VA) health care system is a socialized, single-payer program. Taxpayers fund the system, hospitals are owned by the government, and providers are all government employees. Although the VA system has offered good health care to many veterans, we have learned that on balance the system is plagued with cost overruns, inefficiencies, and prolonged wait times for care.

The second example is Medicare, which began in 1965 and is a single-payer system for seniors, 65 years of age and older. Funding is through payroll taxes, premiums, and an ever-increasing percentage of money from federal general taxes. By 1990, spending in Medicare was seven times over the original budget. Medicare is not financially sustainable in its present form.

Right now, the federal government pays for a big chunk of the nation's health care bill. But families and employers do, too.

A “public option” plan would probably not change total spending much, and it would preserve the current system’s basic structure.

Ever since I wrote Work for All with Australian MP John Langmore back in 1994, I’ve been pushing the idea that a path to full employment requires an expansion of publicly provided services. For about the same length of time, Bill Mitchell (also an Australian economist has been putting forward similar (but not identical) proposals. At some point in this process, Bill became one of the advocates of what’s called Modern Monetary Theory, which makes the point that taxes don’t (directly) “fund” public expenditure. Rather, they ensure that the total demand for goods and services (for consumption and investment) don’t exceed the productive capacity of the economy, thereby generating inflation. This reframing raises the question: does a Job Guarantee require higher taxation? The answer, using MMT reasoning, is “Almost certainly, yes”. Suppose the economy initially has two groups of workers, employed and unemployed. Employed workers produce some quantity of marketed goods and services, as well as freely provided public services. They receive a wage, while unemployed workers get a (low) benefit. As well as workers, there are people receiving profits, interest and so on. Now we introduce a Job Guarantee in which all unemployed workers are hired, at the minimum wage or more, to produce public services (say, extra contact tracing for pandemics), that would otherwise not be provided. The newly employed workers spend their wages (over and above previous benefits) on marketed goods and services. But where are these goods and services to come from? It can only be from reducing the consumption of those who are already receiving wages or other market incomes. Shifting the consumption to public use is the job of taxation (alternatively, the government could cut existing services, freeing the workers there to produce market goods and services, but I won’t explore this). We can refine this a bit by allowing for a multiplier effect. Instead of employing all the previously unemployed workers, the Job Guarantee would only need to employ some. Their demand would increase employment in the market sector, providing jobs for the remaining unemployed workers. But it would still be the case that the additional output of marketed goods and services from those workers would be less than the total wage being paid to all formerly unemployed workers. The only exception is in situations where the unemployment benefit is very high relative to the minimum wage, so that the extra consumption of all the newly employed workers is less than the extra output of those who go to work in the market sector. That doesn’t mean a Job Guarantee is a bad idea. The newly employed workers would be better off, and those already employed would get additional services in return for their higher taxes. But this isn’t a free lunch. As Oliver Wendell Holmes put it, taxes are what we pay for civilized society.

1.4 Million Jobs Lost, $3.9 Trillion Hit to Economy As mentioned in a FAQ sheet attributed to Ocasio-Cortez’s office, “a carbon tax would be a tiny part of a Green New Deal.” Nevertheless, modeling a “tiny part” and showing the high costs of that “tiny part” demonstrate just how economically devastating the Green New Deal would be. Our tax begins in 2020 at $27 per ton of carbon dioxide emissions, increases to $54 the following year, and subsequently increases annually by 2.5 percent. In our simulations, we rebate the revenue collected from the tax back to consumers. In addition, we included carbon-based regulations on the manufacturing industry as well as mandates requiring the country to use significantly more renewable forms of energy than current projections. To quantify the economic impact of the Green New Deal, we used the Heritage Energy Model, a derivative of the Energy Information Administration’s National Energy Modeling System. According to the Heritage Energy Model, as a result of the taxes and carbon-based regulations, by 2040 one can expect: A peak employment shortfall of over 1.4 million jobs. A total income loss of more than $40,000 for a family of four. An aggregate gross domestic product (GDP) loss of over $3.9 trillion. Increases in household electricity expenditures averaging approximately 12 to 14 percent. Unquestionably, these projections from the Heritage Energy Model significantly underestimate the costs of the Green New Deal’s energy components. As Ocasio-Cortez’s Frequently Asked Questions sheet notes, the carbon tax is only one of many policy tools Green New Deal advocates hope to implement. In the same FAQ sheet, Ocasio-Cortez’s office argues that massive amounts of spending are necessary—and “government is best placed to be the prime driver.” In other words, the resolution’s co-sponsors expect the taxpayers to pay for a massive, economywide transition. If policymakers spent, taxed, and regulated to achieve greenhouse gas-neutral energy, agricultural, and industrial sectors, the costs would be several orders of magnitude higher than those projected in the Heritage report.

Indeed, by most accounts current inflation was ultimately caused to a large extent by spending—the federal government spent more than $5 trillion, or 27 percent of GDP, during the pandemic, on top of the usual spending, in the form of stimulus checks, enhanced child credits, and other benefits. The splurge was debt financed, with the Federal Reserve purchasing much of that debt through money creation, without a state plan to repay the debt. As a result, we are now in a world of hurt that cannot be easily unwound. As we warned in January, the Federal Reserve is raising interest rates to address the inflation but that generally brings about a recession. After four rounds of interest rate hikes among many more expected, the Atlanta Fed already forecasts a shrinking economy in the second quarter, and about half of forecasters are expecting a recession in the next 12 months. In such conditions, it would be extremely unwise to raise taxes, especially the type of taxes advocated by this administration, which would do excessive harm to the economy. For example, applying the Net Investment Income Tax (NIIT) to active passthrough business income would reduce incentives for those companies to invest, grow, hire, and raise wages. Likewise with attempts to raise the corporate tax rate or target U.S. multinational corporations and certain industries with a complex set of minimum taxes. Clausing claims otherwise, stating “the proposed tax increases will reduce after-tax profits for corporations and for certain wealthy individuals with pass-through businesses, but they won’t change the incentive to produce goods and services.” So then are we to believe companies produce goods and services out of the goodness of their hearts? Entrepreneurial spirits aside, economists largely agree that companies are in business to earn money. Cutting into those earnings with higher taxes on normal returns will reduce incentives to produce goods and services and reduce associated income for owners and workers. Similarly, efforts to penalize drug companies by controlling drug prices will have the undesirable effect of reducing drug innovation over time, ultimately reducing access to life-saving treatments and cures. The general push to raise capital gains and other taxes on high-income earners effectively discourages saving in favor of consumption, harming long-term economic growth and aggravating inflationary pressures. In a time of economic weakness and inflation, it would be better to pursue tax reforms with a proven track record for growing the economy over the long run, as we propose in our Growth and Opportunity Agenda. These include better treatment for capital investment, reducing the layers of tax on corporate income, reducing tariffs, broadening the individual income tax base and lowering marginal tax rates, and expanding savings account options. While pro-growth tax reform is key, the country should also grapple with the unsustainable trajectory of debt by reining in spending. According to the latest forecast from the Congressional Budget Office (CBO), federal spending will reach 23.5 percent of GDP this year and grow to 24.3 percent over the next 10 years—a level only exceeded during the pandemic and World War II, and far above the 50-year average level of 20.8 percent. Meanwhile, tax revenue is expected to reach 19.6 percent of GDP this year, nearly an all-time high, and projected over the next 10 years to remain well above the 50-year average of 17.3 percent. Look to the last time this country dealt with such high inflation combined with slow economic growth, some 40 years ago. While Paul Volcker’s Fed gets a lot of the credit, it was also Reagan-era tax and regulatory reforms that set the economy on a long-term growth trajectory, contributing to a virtuous cycle in which the economy boomed, inflation came down, and spending growth slowed, ultimately resulting in budget surpluses by the late 1990s. Note that deficits and debt actually increased in the 1980s, during the steepest decline of inflation, so it was not deficit reduction that directly led to reduced inflation. Rather it was faster economic growth that did it. As the economy continued to grow into the 1990s while federal spending growth slowed, deficits came down. Then as now, the solution is a long-term focus on stronger economic growth and sustainable federal budgets.

3. High taxes discourage work and investment. Taxes create a “wedge” between what the employer pays and what the employee receives, so some jobs don’t get created. High marginal tax rates also discourage people from working overtime or from making new investments. It’s true, as some critics say, that our current marginal rates of 39.6 percent (somewhat higher when combined with other taxes) do not depress economic output as much as the 70 percent rates that taxpayers faced in 1980. But most economists now agree that a reduction in marginal tax rates will increase output to some degree. 4. Income taxes should be cut because the overall tax burden is quite high right now. As of the third quarter of 2000, federal revenues as a share of the gross domestic product hit a peacetime high of 20.8 percent. Prosperity has made Americans more accepting of the rising tax burden, but the current economic slowdown will make high taxes harder to bear. 5. If we don’t cut taxes, Congress will spend the money. If one thing is certain in Washington, it is that Congress will spend every dollar it can get its hands on. Every interest group wants something–a road, a dam, a social program, more teachers, more policemen, more corporate welfare–and members of Congress want to be liked. The only way to “put the surplus in a lockbox” is to let the taxpayers keep it.

A substantial minority of economists, including myself, opposes high marginal tax rates on philosophical grounds. Also interesting is that the majority of Americans, if they understood how high are the tax rates that high-income Americans pay, would favor substantially cutting tax rates on the top earners. Economists often come up with cumbersome terms to describe important concepts. But “deadweight loss” is not one of them. Rather, it beautifully describes one of the big harms from taxation. The deadweight loss from taxes is the loss imposed on some that is not a gain to anyone. So, for example, a typical estimate of deadweight loss from taxes is 30 percent of revenue raised. That means that if the government takes $1 million in additional taxes, there is an additional $300,000 cost imposed on players in the economy. Where does this deadweight loss come from? It exists because people try to avoid taxes. So, for example, an increase in the marginal tax rate might cause people to work less. Or it might cause them to buy a more expensive house so that they can deduct the additional interest on the mortgage. Those are just two of the ways people can adjust. They might also evade taxes by understating income or overstating expenses and deductions. Why do we call the result deadweight loss? Because in each case, the tax system gives people an incentive to do something that they would not have chosen to do at a lower tax rate. The increased tax rate causes them to engage in behavior that otherwise would be inefficient for them. This can best be illustrated with an extreme hypothetical example. Imagine that the federal government imposes a $2,000 additional tax on everyone, but gives them a way out: they can avoid the tax if they fly to Alaska and back. For those who would have flown to Alaska anyway, there is no deadweight loss. But for those who would not have, there is a deadweight loss. As long as the cost of flying to Alaska—including the cost of your time minus any “disvalue” you put on going to Alaska—is less than $2,000, you will do it. Imagine that the cost is $1,900. Then you will fly there, and the deadweight loss from your adjustment will be a whopping $1,900. The fact that taxes cause people to adjust to avoid some or all of them is one of the reasons that many economists oppose high tax rates. And here’s the kicker. A theorem in economics says that the deadweight loss from a tax is proportional not to the tax rate, but to the square of the tax rate. Consider the 37 percent top federal tax rate. Some economists, such as MIT’s Peter Diamond and UC Berkeley’s Emmanuel Saez, have advocated that it be raised to 70 percent or higher. To make the math simple, imagine that the Congress and President were to double it to 74 percent. The deadweight loss wouldn’t double. It would quadruple. In the 1970s, when the top marginal tax rate in the United States was 70 percent, economist Art Laffer drew his famous Laffer Curve. He showed that tax rates could be so high that cutting them would actually increase revenue and raising them could decrease revenue. And even if raising tax rates doesn’t decrease revenue, what’s clear from both basic economics and empirical studies is that raising tax rates by x percent will raise tax revenues by less than x percent. Why? It’s because of the adjustments people make to avoid taxes. So, for example, consider a high-income Californian who is currently paying 50.3 cents in federal and state taxes on every additional dollar earned, which means that he’s keeping 49.7 cents. Then imagine that the advocates of higher tax rates get their way and raise his federal tax rate to 70 percent. Now he’s paying 83.3 cents on every additional dollar earned and keeping only 16.7 cents. Put aside all the other ways he might adjust, and consider just his decision about how much to earn. His incentive to earn an additional dollar has fallen from 49.7 cents to 16.7 cents, a drop of 66 percent. Is it hard to imagine that that Californian will work less? Economist Paul Krugman, in his January 5, New York Times column, admits that high tax rates reduce the incentive to work but says it doesn’t matter for anyone other than the people who are taxed. Perhaps you think that I’m exaggerating his point. But here’s what he wrote: In a perfectly competitive economy, with no monopoly power or other distortions – which is the kind of economy conservatives want us to believe we have — everyone gets paid his or her marginal product. That is, if you get paid $1000 an hour, it’s because each extra hour you work adds $1000 worth to the economy’s output. In that case, however, why do we care how hard the rich work? If a rich man works an extra hour, adding $1000 to the economy, but gets paid $1000 for his efforts, the combined income of everyone else doesn’t change, does it? Ah, but it does – because he pays taxes on that extra $1000. So the social benefit from getting high-income individuals to work a bit harder is the tax revenue generated by that extra effort – and conversely the cost of their working less is the reduction in the taxes they pay. Or to put it a bit more succinctly, when taxing the rich, all we should care about is how much revenue we raise. The optimal tax rate on people with very high incomes is the rate that raises the maximum possible revenue. Krugman’s denial of basic economics is stunning. The fact is that there are gains from trade, and the fewer people there are producing things, the less trade there is. So the losers from higher tax rates are not just those who are taxed but also those who don’t get to buy the goods and services that those higher-taxed people stop producing. There is no contradiction between the idea that people are paid their marginal product and the idea that when they produce, other people benefit. (For more on this, see the essay by Robert P. Murphy titled “Does a Worker Help the Rest of Society?”) Notice something else that Krugman seems to believe: rich people literally don’t count. He writes, “[T]he social benefit from getting high-income individuals to work a bit harder is the tax revenue generated by that extra effort.” That’s true only if rich people aren’t part of society. And in case you thought Krugman was just being careless, look at another line above: “[W]hen taxing the rich, all we should care about is how much revenue we raise.” He seems to regard “the rich” as cattle to be raised and exploited. That’s a very negative view of humanity. It’s also a strange view. Krugman, who is quite rich whether measured by income or wealth, is excluding himself from society. Some might say that I care more about Paul Krugman than Paul Krugman does. Fortunately, I’m not alone. Guess who else cares about rich people, whether we measure “richness” by income or wealth? The vast majority of Americans do. If you poll people about whether the rich should pay more in taxes, the majority will typically say yes. But then ask them what percent of their income the rich should pay in taxes, and the vast majority will give a number that’s below the percent they currently pay. In a 2012 poll conducted by The Hill, 75 percent of respondents thought that the rich should pay a rate of 30 percent or lower. So they don’t forget about fairness when they consider taxes on the rich, and they don’t, like Krugman, seem to regard the rich as cattle. Unfortunately, the poll specified neither whether the question was about marginal tax rates or average tax rates, nor whether it was about income taxes or taxes in general. Still, the data are striking. And they’re consistent with data from a Reader’s Digest poll in the 1990s. The poll asked what percent of their income a family of four making $200,000 should pay in all taxes to all levels of government, including income taxes, Social Security, sales taxes, and property taxes. The median response of almost all income and demographic groups was that the maximum should be 25 percent. That is well below the percent of income paid in taxes by actual families making $200,000 then (which is approximately $320,000 in today’s dollars.) Even noted activist Al Sharpton thought the rich should be taxed less. In a 2004 interview with John Stossel, Sharpton said that the rich should pay their fair share of taxes. Stossel asked him what percent of total federal income taxes the rich should pay. Sharpton’s answer: at least 15 percent. At the time, noted Stossel, they paid 34 percent of all federal income taxes. All the rich people I know, except for Paul Krugman, would take Sharpton’s deal in a New York minute. The simple fact is that people are ignorant of the tax structure and don’t understand how a progressive income tax works. In the 1990s, a petitioner asked a high-income friend of mine to sign a petition to put a progressive income tax on the ballot in Massachusetts. The state constitution required, and still requires, a proportional state income tax. My friend asked the petitioner why she thought higher-income people should pay higher tax rates. She answered, “Because people who make more money should pay more in tax." My friend agreed, saying, "If I make five times as much as you, then my taxes should be five times as high as yours." "We agree," said the woman. "Now will you sign my petition?" Of course he refused. She didn’t understand that with Massachusetts’ proportional tax on income, she had already achieved what she claimed to want. In short, the economics, the polling data, and basic fairness say that it’s a bad idea to raise taxes further on high-income people. That probably won’t stop many advocates from pushing for higher taxes. But it should.

Illinois Gov. J.B. Pritzker claims one of his core motivations for scrapping Illinois’ constitutionally protected flat income tax – aside from raising $13-$18 billion to pay for campaign promises – is to reduce income inequality. Unfortunately for Pritzker, states with progressive income taxes have higher income inequality and have failed to slow the rise in inequality. Before the Great Recession, states with progressive income taxes had higher income inequality, measured by the Gini coefficient, than states with flat or no income tax. A decade later, not only do states with progressive income taxes still face higher income inequality, but the difference in income inequality between them and states without progressive income taxes remains the same. In other words, the progressive income tax has had no effect at combatting income inequality. That probably explains why the academic literature remains divided as to whether progressive income taxes have any effect on income inequality. While the progressive income tax hasn’t had an effect on income inequality, the expert academic literature is clear that a progressive income tax is far more harmful to the economy than a flat income tax. Because progressive income taxes have such a negative effect on the economy, they tend to make everyone worse off. Even those who may see a tax cut suffer when the progressive tax leads to fewer jobs and decreased productivity because investment shrinks. The taxes cause incomes adjusted for the cost of living to decline, leaving everyone worse off than they would be under a flat tax system that raises just as much tax revenue. The trade-off between equity and efficiency of progressive tax systems has received considerable attention among economists and tax experts. However, progressive taxation has failed to reduce the gap between the rich and the poor, while still distorting market activity. The last state to introduce a progressive income tax was Connecticut. More than two decades later, inequality in states with a progressive income tax is still higher than in other states. In 2017, Connecticut was the state with the second-highest income inequality as measured by the Gini coefficient. Evidence from Connecticut suggests the state experienced significant harms by switching from a flat income tax to a progressive income tax. In the years after adopting a progressive income tax, the poverty rate in Connecticut rose 47 percent. Meanwhile the poverty rate in other states fell by 10 percent. The progressive income tax accounted for 73 percent of that increase in the poverty rate. Nation's poverty dropped but Connecticut's poverty rose with progressive tax The Connecticut progressive income tax was also sold with the same false promises used by Pritzker in Illinois: middle-class tax relief, property tax cuts and reduced income inequality. Progressive income tax states have higher income inequality and have been unable to slow the rise in the income gap. After adopting the progressive income tax, Connecticut saw a rise in the poverty rate, middle-class income taxes rose by more than 13 percent and property taxes as a share of income have risen by more than 35 percent. Connecticut is the only state to move toward a progressive tax in the past 30 years. That state’s bad experiences should tell Illinois leaders there are better solutions than further damaging Illinois’ economy.

Since the 1980s, policies in countries like the United States have often been based on arguments that higher taxes on the wealthy have a negative influence on economic growth.5

Tax Cuts and the Economy