It is that time of year again, when many us of us send off 20% or more of our hard earned dollars back east and another substantial hunk to Springfield hoping those in charge will use it as wisely as possible. It is also our first filing under what is called “The Tax Cuts and Jobs Act," which allowed many to file their return on a mere postcard. Here in Illinois we have one party in firm control of Springfield, and it has strong notions about what is fair taxation. Time for reflection.
Our politicians deserve a couple of points on the postcard, but simplicity is another matter. The old 1040 form was one sheet of paper, front and back. The new 1040 form is in two sections that would fit front and back on an ad-sized postcard that I routinely get in the mail.
The first page is standard information including name, address, dependents and signature. The second page includes wage information from the W-2, plus retirement income, adjusted gross income, the generous new $12,000 single standard deduction ($24,000 married) and on down through federal withholding and on to “Refund" in large print. “Amount you owe” is below, in smaller print.
New Schedules 1 through 5 that begin if you have a little savings account interest. Our farm income begins on Form 4835 rolls over to Schedule E, on to Schedule 1 and finally the 1040. Saving one page for the postcard-size 1040 is clearly a gimmick but the higher standard deduction will make things much easier for millions who won’t have to itemize all those deductions. Also it will be a real break for many with lower incomes.
Meanwhile, let's move from procedure to substance. In the past two years the Dow has gone from the 17,000s to over 26,000. Something is definitely going right. Business is the engine of wealth creation. Our Illinois State business grads are on good-guy teams. How do we create a tax and regulatory climate to best help?
The view of a typical business professor view like me is to have rates as low as possible with the trade off being an elimination of loopholes. My favorite loophole plug, although it is costing me several thousand dollars, is the $10,000 cap on state and local tax deductions. It was a double-dip for high tax states because the deduction allowed these states to send less money to Washington. The other was the half-step of reigning in the very popular home mortgage interest deduction - from home loans up to $1 million down to $750,000.
Other countries with similar home ownership percentages don’t have this massive revenue loss.
The corporate tax rate was cut from 35%, the highest in the world, down to a very competitive 21%, is said to only benefit rich stockholders. But consider that while the total value of publicly traded stocks is about $30 trillion, pension funds are worth about $27 trillion. Where do you think they put their money? Most all large American corporations are majority-owned by investment institutions. Bill Gates owns only a tiny fraction (1.3%) of Microsoft and the richest person in the world, Jeff Bezos, owns just 12% of his mighty Amazon.
American corporations have legally socked trillions overseas to avoid our high taxes. This new climate will bring much of that home.
Now to let's examine Illinois. The framers of the 1970 state Constitution knew what they were doing. State governments have no end to schemes to spend other people’s money, but the framers made it difficult. They said our income tax must be flat which means everyone pays the same percentage. For many years this was 3% and now, rounded a bit, 5%.
But amending the Constitution is not easy. It requires the support of 60% of the House and Senate, both currently controlled by Democrats, and then either a majority of people voting or 60% of those voting on the issue. Socially liberal but business friendly, the state of Washington has no income tax. The voters rejected a “fair” income tax that would be imposed only on the rich. It would be bad for business and the rich today — and us tomorrow.
Beware of schemes that promise benefits paid for by others.
Illinois tax law is riddled with loopholes. Mine is Schedule M, line 24. I have an investment in Chicago sub zone Z-26. My income from that is about $5,700 tax-free Illinois dollars. Others in that sub zone receive a lot more. Schedule M has 39 other lines and each one is a loophole.
Next, I have my little $200 property tax credit. You probably have yours, too, and we all love our loopholes. Think of the state revenue hemorrhage from huge property taxes around Chicago. Every loophole has a lobby group behind it. Legislators want to be reelected, but a profile in courage or two might be in good order.
Tax-the-rich schemes currently touted as fair are not in the interest of Illinois’ future. In anticipation of this, friends of mine will move to their weekend home just over the Wisconsin line. They will continue to work here. Northwest Indiana is an easy commute to Chicago and how many high-income retirees might think a bit more time in Florida would relieve them of all state income taxes?