By John F. Di Leo -
Reflections on the latest tax hike request from the City of Chicago...
Chicago Mayor Rahm Emanuel has asked for a massive tax increase. No surprise there.
Massive tax increases have been the stock-in-trade of the Democratic Party for a century, so it barely merits comment nowadays. It’s what you expect when you elect Democrats (the sad thing is that you expect an equal level of opposition to taxes when you elect Republicans, but contrary to the laws of physics, such an equal and opposite reaction rarely appears).
The oddity of this new one – worthy of note – is the nature of the tax increase, as presented. It’s estimated to be a $600 million property tax increase, but even before it was announced, the Mayor started lobbying Springfield for a broadened homeowner exemption to dampen its effects. He’s simultaneously reaching into your pocket with his left hand, while his own right hand slaps away his own left hand as he does it. Why not just ask for a smaller tax increase and be done with it, you may ask? Ah, that would be too easy.
Also, he designed it as a partially income-based property tax. Huh? Well, Chicago isn’t legally allowed to collect an income tax, but it can collect a property tax, so perhaps factoring the homeowner’s income into his property assessment might be a way to square the circle, he figures? Oh, how clever is the modern liberal mind, when seeking a new and creative way to take other people’s money…
The Laffer Curve
Almost 40 years ago now, so the story goes, a brilliant young economist named Arthur Laffer was at lunch, when he explained the problem of diminishing returns in tax policy. To illustrate his point, he scribbled a graph on a nearby napkin: as tax rates go up from zero, they collect more and more revenue… but only to a point. At some point – which varies from market to market – you reach the point of diminishing returns, because people will finally either consciously decide that taxes are too high and leave or stop acting, or people may not even notice, but economic activity will begin to drop just because there’s less money left in the market to spend or invest. So when you pass that point, higher tax rates actually produce ever less revenue, not more, as the tax base shrinks.
The Laffer Curve made this economist a household name. It’s a simple concept, and a logical one, easily understood in a thousand applications. Every store and restaurant raises its price only to the limit that the market will bear; beyond that point, they lose market share, so they drop their prices back a bit. In the business world, you’re always keenly aware of that point of diminishing returns out there, and you pull back from it. It’s only natural.
But government doesn’t respond to market forces that way, analogous though they may be. Government is run by politicians, often elected by people who don’t understand economics, and by bureaucrats, people who think they’ve never needed to either. So when government passes the point of diminishing returns, it just “keeps on, keeping on.”
Every Tax Is Different… To A Degree
Take the sales tax. Four or five or six percent of a purchase, collected by the retailer, visible on the receipt, divvied up by the state to the various taxing bodies that participate – some to Springfield, some to the county, some to the town. It’s a memorable number, and the bigger the delta between your sales tax and the next county’s or the next state’s, the farther you’ll drive to avoid it.
If your purchase is a small one, and you’re in the middle of the taxing district, it may not be worth a long drive to avoid it. But if your purchase is a large one, or you’re close to a border, it may be worth the drive. So it is that Chicagoans shop locally for small purchases, but go to suburban Cook County for larger purchases, to the suburbs outside Cook County for even larger ones, even to Wisconsin for much larger ones. And so it is that south siders and south suburbanites, living only a few minutes from the Indiana line, do so much more of their shopping in Indiana, more and more every year.
This process is easy to track, and the taxing authorities agonize over it, every time they contemplate raising the sales tax. As they should.
Our other taxes are different. The state income tax is high and getting higher. Nonexistent when this writer was born in 1962, we had a personal income tax of 2.5% by the 1970s, then 3% in the 1980s, then 6% in the 2000s. The increases start out temporary, then finally get locked in as permanent after a few years (a struggle at the heart of the 2015 Springfield budget debate). Our corporate income taxes are worse: not only are they higher, but the employee doesn’t see them, only the employer does, so their increases go largely unnoticed by the electorate.
Year after year, tax collections have increased, and businesses do what businesses must: they flee. Faced with an unrelenting government that refuses to acknowledge the Laffer Curve, a government that refuses to lower taxes when they pass the point of becoming destructive, there is but one option left: to leave the jurisdiction. To move out of Chicago, or Cook County, or Illinois, or even to leave the United States entirely. When you are robbed again and again, every year, every month, every day, you eventually say “I’ve had enough.” And who can blame you?
Property taxes are both entirely different, and no different at all.
With a sales tax, you can stay where you live, but change where you shop. With income taxes, you’re stuck, unless you move, but you can choose to earn less, even eventually choose to retire. Not so with property taxes. As long as you live there, you pay whatever property taxes are assessed. They’ve got you.
But you can appeal, and if you have friends in a corrupt government, you have a better chance of winning the appeal. And yes, you can always move if you don’t. So it is that Chicagoans move to the suburbs, and suburbanites move to more distant suburbs, when $3000/year becomes $6000/year, and when $6000/year becomes $12,000/year, and when $12,000/year becomes $24,000/year. Why stay? Eventually, mustn’t you reach that point of diminishing returns yourself, where the expense of living here is higher than the benefit? Sure, you can enjoy Chicago’s great restaurants, great theaters, great nightclubs. But when you can’t afford to GO to those restaurants and theaters and jazz clubs, because you’re spending ever more money on your property taxes, other towns begin to look more appealing.
Fifty years ago, Chicago was it, for the Midwest. Every other Midwest city was limited in these areas. Fewer jobs, fewer choices of cuisine and entertainment. But you can now live in Indianapolis, or Milwaukee, or Des Moines, and choose Italian or German or barbecue or Szechuan or Indian cuisine. You can see world class live theater in Grand Rapids, or Madison, or Minneapolis.
What was once the Second City is becoming the Second-Rate City, as its citizens can no longer afford to enjoy its many options. Sure, nobody has museums like we do, but how often do you go to the museum anyway? You can live in Indianapolis and just come to Chicago for the weekend if you need a Field Museum fix.
And this drain – a residency drain, an employment drain – has yet another effect on property taxes. As property taxes climb too high, and the other costs of living in the city climb along with them, it becomes less desirable to live there. Property values start to drop. And what happens then? Property tax revenues fall as well.
The Unsustainability of the Welfare State
The current budget crisis in Chicago doesn’t have a single driver, it has many. The problems aren't even all Chicago's own doing, as the problems have been caused by the county, the state, and the federal government over generations... but always by the same political party as Chicago's, so they don't deserve TOO much of a break here.
The list is endless, but here are a few:
- Population: Chicago has lost approximately a million people since the 1950s, plummeting from a high of 3.5 million to approximately 2.5 million and falling today. We have roads, schools, firehouses and police stations built for a city 30% more populous, so their cost must be divvied up among far fewer people.
- Crime: All cities have always had crime. The more people there are, the more targets the mugger or burglar sees. But fifty years ago, when we would catch a criminal – after his third or fourth or fifth crime – we put him away for a long, long time. Fifty years of liberal criminal justice policies have resulted in an environment in which those criminals commit dozens of crimes before they do any time at all. This lack of incarceration increases costs for everyone – you need more police and more courtrooms to process the system’s revolving door; individuals and businesses alike must pay ever higher property and auto insurance, and finally give up and leave.
- The Welfare State: In these past fifty years, the cities – but especially the liberal ones like Chicago – have increased assistance to unprecedented levels. Housing aid, food stamps, free education, free healthcare. In 1958, liberal icon John Kenneth Galbraith laid out his expectations for what “The Affluent Society” should be forced to selflessly give to the poor, and Chicago bought it, hook line and sinker… inflating the cost of government, exactly as the population was leaving. They never thought ahead, to what would happen when the government of that affluent society could no longer afford such generosity. As it turns out, the myth of the cornucopia is, in fact, just a myth.
- The Welfare-Mindset Bureaucracy: After government employees realize what society is giving away for free to the “undeserving,” they understandably begin to expect more themselves, being, after all, “deserving.” So government has spent a century trying to pay government employees better and better, giving teachers better hours, giving bureaucrats better perks, giving them all better pensions. Governments – especially in the state of Illinois, particularly in the city of Chicago – grew so generous they promised the impossible. Pensions of 80% of salary? Why not? We can barely find the money to pay them when they’re working, let alone for the twenty or thirty years when they’re not. But we’re “an affluent society,” so a century of Democrat rule will promise it anyway. It’s paid with “other people’s money,” after all.
- Employment: At its peak, Chicago was the employment capital of the Midwest. We had the offices, the factories, the distribution network, and the restaurants and dry cleaners and shops to support all those people. But we’ve seen a flight to the suburbs over the past fifty years. So many of those jobs, and the corporate and personal tax revenues that they produced, are gone for good. And these leaves ever fewer behind to pay the bills. The faster their costs go up, the faster they’ll leave. And who can blame them?
As we can clearly see, the welfare state is unsustainable. It builds impossible promises based on a momentary appearance of largesse, and these promises themselves undermine our ability to meet them.
As crime increases, the cost of containing it increases. As more people are out of work, the government’s share of supporting them increases. And as the taxes climb to meet these obligations, both the residential and employer tax base flees.
The Result and the Solution
The results of the latest plan, like every plan the Democrats come up with to save the city, should be obvious to anyone who’s been paying attention for the past fifty years. They will fail, because they neither acknowledge economics nor human behavior.
- The property tax hike won’t produce as much revenue as expected, because property values will fall – no, not everywhere, but in enough parts of the city to negate a good part of the hike.
- The city will continue to bleed jobs. For every corporate headquarters that they lure to the city with a tax-free gift period, they will lose other businesses to other states and countries. This will leave an ever smaller pool of businesses to pay property taxes on their office, retail, and factory space.
- The city will continue to attract the most undesirable kind of new residents. Sorry if that sounds unkind – yes, people are people, and all that – but from the perspective of the health of the city of Chicago, we just don’t need more unemployed and unemployable people who’ll be a drain on the welfare state. All that unemployed or low-level employed new immigrants, new illegal aliens, and other chronically unemployed folks bring to a city is new costs. They don’t bring new revenue. So Chicago’s funding hole won’t go away, it will get worse and worse. Chicago doesn’t have a revenue problem; it has a spending problem.
So what is the solution to this budgetary whirlpool, a drowning city that threatens to pull the county and even the state down with it in a never-ending downward spiral?
The solution is to let the free market work its magic.
- We need so many police, so many courtrooms, so many parole officers, because once we catch and convict criminals, we let them out. We need to return to long imprisonment – and judicious use of capital punishment as well – not only to protect the law-abiding citizenry, but because it costs a lot less to keep a thug in jail than it does to catch him and try him, catch him and try him, catch him and try him, again and again, especially when he and his buddies are driving out the cities’ employers and residents at a record clip!
- We need to charge such high taxes to the taxpayers because there are so few of them, and so many non-taxpayers to support. We need to return to the successful welfare reform steps of the 1990s, and ramp them up – requiring work by the able, ending the rules that reward mothers for having more children out of wedlock and punishing marriage. Drug and alcohol tests, as a requirement for collecting benefits, would go a long way. Make Chicago a less desirable place for the welfare class, and maybe they’ll get a job, or at least, move away and be somebody else’s problem.
- We need to make Chicago a magnet for employers again. No, not by offering special breaks to big name headquarters every time a Boeing or Miller-Coors is in the headlines. We need a lower real tax rate level, so that companies all over the country want to move here. We have unemployed people who need work, and a functioning mass transit system to get them to jobs… we just need the jobs! Cutting our corporate tax rates, ending our crime problem, and most of all, shredding the bureaucratic red tape that scares businesses out of locating in Illinois… that’s what we need to solve our problems.
We have had economists and think tanks focusing on Illinois for decades, offering advice that’s never been taken.
Professor Milton Friedman brought so much attention to the University of Chicago’s economics department, his “monetarist” approach became known as the Chicago School. Chile invited his students to retool their economy in the 1970s, but Chicago never listened.
The Heartland Institute has operated in Chicago for over thirty years, proposing rational solutions to the problems of the Midwest from their offices downtown. Surrounding states have listened and learned, but perhaps the good Book is right: a prophet is least welcome in his own town.
The Illinois Policy Institute offers white papers, lectures, seminars, everything an interested alderman or legislator could need, on the obvious solutions to Chicago’s, Cook County’s, and Illinois’ many problems. How many Chicago aldermen and mayors, how many other Chicago pols, have even attended their sessions and offered an open mind?
And since much of this is out of the city’s hands, how often have the politicians of Chicago pled the case of Chicago – in needing to curtail the influx of aliens from abroad and thugs from our prisons, and in needing to encourage entrepreneurship, and welcome manufacturing back from abroad? How often have Chicago pols done anything but beg and demand more tax hikes, more state revenue sharing, more federal grants? When have Chicago politicians ever tried to actually fix what’s wrong at its heart?
Chicago can be saved, but not by yet another crippling tax increase.
The Free Market can work magic, in any state, any country, any city, any time.
But only if it’s given the chance.
Copyright 2015 John F. Di Leo
John F. Di Leo is a Chicago –based international trade compliance lecturer. A president of the Ethnic American Council in the 1980s and Chairman of the Milwaukee County Republican Party in the 1990s, he has been a recovering politician for over eighteen years.
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