Daily Debunk: Tax income where it's growing — with the wealthy

Some are profiting mightily during COVID collapse

Protesters call for the Fair Tax Amendment to be ratified a month ago in a demonstration outside the offices of Kenneth Griffin’s Citadel Investments in Chicago’s Loop. (One Illinois/Ted Cox)

By Ted Cox

Today, we’re going to return to the commonly repeated assertion that government mustn’t raise taxes during a recession.

To a certain extent, that’s sound fiscal policy. It makes no sense to additionally remove money from an economy that’s contracting. Anti-taxers have even taken to repeating President Obama’s quote from the first year of his presidency in the midst of the Great Recession that “normally you don't raise taxes in a recession.”

But the economic collapse brought on by the COVID-19 pandemic isn’t normal by any means. And data released earlier this month by none other than the U.S. Federal Reserve prove just how different things are.

The Fed found that wealth contracted across all demographics in the first quarter of the year, after the novel coronavirus gripped the economy in March. But, helped by the Fed’s own moves to backstop corporate debt and otherwise bolster the stock market, the top 1 percent of all Americans, as measured by wealth, saw almost all those losses regained in the second quarter, to a total of $34.2 trillion.

The rest of the top 10 percent regained all the losses from the first quarter and more, achieving a total value of $43.1 trillion. The rest of the top 50 percent, meanwhile — 40 percent of the U.S. population — had amassed $32.7 trillion through the first half of this year, while the bottom 50 percent of all U.S. citizens had a combined wealth of just $2.1 trillion.

Forbes magazine reported that means that the top 1 percent hold 30.4 percent of all household wealth in the U.S., while the bottom half have just 1.9 percent of all wealth. Let’s say that again in a different way: the top 1 percent of Americans by wealth now own 15 times the combined wealth of the entire bottom half of U.S. citizens. Bloomberg reported that the 50 richest people in the nation were worth $339 billion at the start of the year, before the coronavirus hit, but through the midway point of the year they’d grown that combined fortune to a total worth almost $2 trillion.

Pandemic or not, People magazine reported that “billionaires like Tesla's (Elon) Musk and Amazon's (Jeff) Bezos have seen their pockets grow as the year stretched on — Musk’s wealth increased by 242 percent over the year’s first eight months, while Bezos became $65 billion wealthier this year.”

Federal Reserve Chairman Jerome Powell told Bloomberg: “The pandemic is further widening divides in wealth and economic mobility. A long period of unnecessarily slow progress could continue to exacerbate existing disparities in our economy.”

So is now the time for a tax hike solely on the rich and wealthy, making more than $250,000 a year? Absolutely.

Ralph Martire, executive director of the Center for Tax and Budget Accountability, said almost a year ago in a debate over the so-called Fair Tax that one of the key elements of a graduated income tax is that it enables the government to target revenue where the economy is growing. “You have to raise revenue from where the economy is growing, not declining,” Martire said, adding that the Illinois flat tax rate was “missing where all the growth in the economy is occurring.”

Have Illinois’s wealthiest residents likewise shared in that nationwide boost to the top 1 percent? Certainly, and if there’s any doubt about it just look at the way they’re throwing money around in an attempt to defeat the Fair Tax Amendment on the ballot in the general election.

Over the weekend, billionaire Kenneth Griffin, founder of Citadel Investments, contributed another $7 million to the Coalition to Stop the Proposed Tax Hike Amendment, meaning he has now given almost $54 million to the effort to defeat a progressive income tax at the ballot box.

If you’re sick and tired of TV ads about people spreading false claims about the Fair Tax — that it will target small businesses, say, or potentially lead to a tax on retirement income — you can thank Ken Griffin, along with former Bruce Rauner bankroller Richard Uihlein, who’s likewise contributed, and former Chicago Tribune owner Sam Zell, who’s given more than $1 million to the coalition. They’re the ones paying for the ads to run on TV.

Why? As Daniel Biss pointed out, it’s simple business accounting, as Griffin stood to pay an extra $26 million in taxes in 2018 alone under the tax brackets to be established by the Fair Tax Amendment.

But there are other reasons that “now is precisely the time to move to a progressive income tax,” as Martire wrote just last weekend in a column printed in the Daily Herald. Martire cited how “Nobel Prize-winning economist Joseph Stiglitz reviewed how the various states dealt with their respective deficits caused by the Great Recession” a decade ago. “He found that those states which closed deficits by raising taxes progressively — and used the new revenue from such progressive tax increases to maintain or enhance funding of core services — realized a positive private sector multiplier of up to $1.50 for every tax dollar so raised and spent. This helped their economies recover faster from the Great Recession than states which relied on spending cuts to resolve budget deficits.”

Martire went on to explain that has largely to do with a statistic called “Marginal Propensity to Consume,” basically meaning the likelihood that a dollar will be spent by someone, to the benefit of the overall economy, which draws about two-thirds of its overall vitality from consumer spending. “The best spenders are low- and middle-income workers, whose earnings have been flat or declining after inflation over the last 40 years,” Martire wrote. “That just means their spending generally increases or decreases in proportion to increases or decreases in their incomes. So when these workers receive a tax cut, as they would under the Fair Tax, they're likely to spend every dollar of that tax relief buying stuff in their local economies.

“The best spenders are low- and middle-income workers, whose earnings have been flat or declining after inflation over the last 40 years.”

Ralph Martire, executive director of the Center for Tax and Budget Accountability (One Illinois/Ted Cox)

“Conversely, affluent individuals have very low MPCs — meaning an increase or decrease in their incomes does not generally result in a corresponding change in their consumption patterns. Which isn't surprising,” Martire added, “once you consider the tremendous growth in income they've realized over the last four decades. For instance, the average, inflation-adjusted income of the wealthiest 1 percent in Illinois ballooned from $411,177 in 1979, to over $1.4 million by 2017. In fact, the wealthiest 3 percent in Illinois — who are the only folks who would pay more under the Fair Tax — saw their disposable, after-tax incomes grow by over $16 billion between 2016 and 2017 alone. So it's easy to see why taxing them more won't reduce their spending.”

In fact, Martire pointed out that the $3.5 billion estimated to be raised through adoption of a progressive income tax for the most part “will go to the four core service areas of education, health care, human services, and public safety, which collectively account for over 95 percent of all state spending on services. Given that all of these service areas are labor intensive, that spending primarily goes to cover the wages of the teachers, social workers, health-care providers, and correctional officers who provide those services in communities across Illinois.”

Because those workers are likely to spend that money, again due to their relatively high MPCs, it will have an exponential effect on the overall Illinois economy, speeding the recovery from the COVID collapse.

We’ve said it before, and with just over a week to go before the issue is decided Nov. 3 we’ll say it again: anyone fortunate enough to make more than $250,000 in the COVID economy ought to pay slightly more in taxes, to the benefit of the other 97 percent of taxpayers, many of who are struggling just to stay afloat.

Now is the time — a recession is especially the time — to draw revenue from where it’s growing in the economy and use it to fuel the economic recovery.