What, actually, is a “fair tax”?

Not the Pritzker proposal for an Illinois tax hike, despite his and his supporters’ claims, actually.

After all, we intuitively know what’s fair and what’s not.  Rules which, in theory and in practice, treat everyone evenhandedly are fair.  Rules which are arbitrary, or penalize or advantage some people or groups over others, other than for appropriate reasons, are unfair, and all the more so when they are set by a minority without a democratic process (or subverting/manipulating a nominally-democratic process).

The pop tax?  Intuitively, it was clear that it was unfair.  One group of people (pop-drinkers) was asked to pay a disproportionate share of the county’s taxes, and within that group, some were burdened more than others — those without cars, without storage space, too far towards the center of the county, or otherwise less able to drive elsewhere to get their pop.  (Yes, at the time my husband worked in Lake County and until the tax was rescinded he bought the Family Pop Supply on his way home from work.  And, yes, if the tax was applied nationwide this specific complaint would be mitigated, but not that of the unfair targeting of pop-drinkers.)

Or consider the gas tax:  people are reasonably OK with it if it actually funds road repair.  But tell them that the gas tax is being used for entirely unrelated purposes that are nominally transportation-related (Cato reports that Kansas, Maryland, New Jersey, Minnesota, Connecticut, Texas, and Rhode Island each divert over 50% of these taxes in some fashion or another) and taxpayers are less happy.

So what of the Pritzker tax proposal?  (For a refresher on the particulars, see my prior article; the latest update on its status comes from today’s Tribune, which reports that the State Senate’s Executive Committee voted along party-lines to approve placing the tax-enabling amendment on the 2020 ballot.)  This proposal is being marketed as a “fair tax” to such a degree that the original language of the proposed amendment even used this phrasing.  It was cringeworthy:

There may be one tax on the income of individuals and corporations. This may be a fair tax where lower rates apply to lower income levels and higher rates apply to higher income levels.

(Thankfully, the proposal was amended to remove both the current constitution’s restriction on graduated income taxes and this new language about a “fair tax.”)

To begin with, there is nothing intrinsically fairer about a graduated income tax than a flat tax.

What’s more, specific elements in the tax as proposed tend to move it to the “unfair” category.  The lack of separate brackets for singles vs. married couples mean that a married couple at a certain income level will end up paying more in taxes than if they had not married.  The “millionaire’s tax” that applies for one’s entire income rather than at the margin means that anyone earning $1,000,001 will pay a patently unfair penalty for that last dollar in income.  (Comically, the original childish language about the “fair tax” would have prohibited this anyway.)  The very fact that the brackets are structured with a dramatic jump in rates, and with a nominal tax cut for moderate earners means that it is being promoted to voters not as the most appropriate way to solve Illinois’ perpetual finance woes, all things considered, but as a way to get something for nothing:  “you get all the state spending you want while we ensure that only a tiny minority of people will have to pay.”

I should add that I am increasingly having misgivings about the labelling of this sort of tax as “progressive” and the inevitable pairing with other types of taxes for which lower-income folk pay relatively more, as a share of their income, as “regressive,” because it is becoming clear that these are not descriptive, but are their own forms of value judgements.  And, while it might, generally speaking, for taxes to fall disproportionately on those who can better afford to bear their burden, tax terminology should be descriptive, not loaded.

On the other hand, strictly speaking, it might not even be accurate to call the Pritzker proposal a “graduated” tax at all.  There are functionally only two brackets, “somewhat less than 5%” and “somewhat less than 8%”, so that there isn’t anything gradual about it.  But, yes, that’s a nit-pick.

And practically speaking, I don’t know where the proposal is headed.  Certainly it’s not being rubber-stamped, or if it is headed toward such, the process is, at any rate, taking longer than for, say, the minimum wage hike, though it may be that this is just a matter of the lack of urgency (regardless of how quickly or slowly the bill passes, the election at which the amendment would be voted on would take place in 2020) rather than lack of votes.  Strategically, on the one hand, it seems a mistake to have a specific proposal rather than saying, “the Illinois constitution wrongly handicaps the state in making its determination of the best type of taxation at any given point in time.”  Yet the fact that our state government is so perpetually untrustworthy meant that, practically speaking, no voter in their right minds would accept a plea of “trust me.”

What’s the alternative?  Obviously, I’m in favor of a pension-related amendment, and pairing the two would have better enabled politicians to make the claim that these amendments are about long-term good governance rather than short-term coffer-filling.  The Tribune went a step further in an editorial today:

Today, a new world: Pritzker would “Let the people vote.”

So how about a package deal, Governor, of amendments or statutory changes: Let the people vote not just on taking more billions of dollars a year from wallets — an amount sure to grow and grow as tax rates rise and rise. Let the people also vote on rewriting the rigid pension clause of the constitution. Let the people vote on term limits. Let the people vote on creating a fair remap scheme.

The pension clause, manipulated by lawmakers eager to reward their cronies in public employee unions, has created much of the financial misery that confronts Pritzker. Lack of term limits has entrenched many of these same lawmakers. And the current remap scheme assures their re-election in perpetuity.

So we’re all agreed, Governor? Taxes, pension reform, term limits, a fair remap scheme. “Let the people vote.”

Sounds good to me!

 

Image: https://media.defense.gov/2019/Feb/12/2002088973/-1/-1/0/181206-A-UM169-0001.JPG; https://www.dover.af.mil/News/Article/1755127/what-you-should-know-about-filing-2018-taxes/ (public domain/US gov)

Not every disparity is discrimination, car insurance edition

Here’s a Pew report from back in February that I recently came across:  “What? Women Pay More Than Men for Auto Insurance? (Yup.)”  Here are some of the key bits:

It’s a widespread belief that men pay more for automobile insurance than women. But that’s only true for young adults.

Several studies in 2018 and 2017 revealed that women over 25, particularly those between 40 and 60, often pay more than men — not less — for auto insurance, all other rating criteria being equal. . . .

In an interview, [former California Insurance Commissioner Dave] Jones said it’s fair for insurance companies to set premiums based on a driver’s accident history, number of speeding tickets and other factors that are under the driver’s control. But using gender is unfair because a person has no control over that, he said.

What’s going on?  The report indicates that there was no seeming consistency across insurers.  It cites a 2017 Consumer Federation of America study, in which, among 60 year olds, differentials ranged from a premiums 4% higher for men at Liberty Mutual to a 12% higher for women at Geico.  For 40 year olds, the differences among 6 insurers studied were -1%, 0%, 5%, 8% and 16% higher premiums for women.  And, oddly, for 20 year olds, premiums were higher for men, ranging from a 5% to a 16% difference, except at Geico, again, where women had 6% higher premiums.

Is this discrimination?  Are women being charged more than men, for no particular reason except that rate-setters want to give advantages to men because of the patriarchy?  The Pew article suggests, in the midst of a broader discussion around rate-setting processes, that there’s something nefarious going on:

But a professor at University of Minnesota Law School, Daniel Schwarcz, said if companies are not allowed to use “outdated stereotypes based on generalities” about men and women, the insurers will have to consider “more directly” such measures as the actual number of miles driven, the number of years customers have been driving and where they live.

Really?  A lawyer is asserting that actuaries develop rate models which add in some sort of factor based on the “women are bad drivers” stereotype their fathers or grandfathers might have believed, and that’s worth referencing in an article put forth by an organization as respected as Pew?

It should go without saying that actuaries price insurance premiums based on the totality of the data available to them.  Price a rate too high for a given rate class (age, sex, residence, driving history, etc.) and you lose a sale.  Price a rate too low and you lose money on that sale.  Especially now when customers are able to comparison-shop far more easily, insurance companies’ actuarial departments want to get this right.  At the same time, I suppose, if a company has identified a demographic which it believes to be particularly susceptible to marketing and less likely to comparison-shop, they might focus more on marketing to that group and worry less about the competitiveness of their prices.  (Heck, are women less likely to comparison-shop insurance and more likely to choose a brand that gives them warm fuzzies?)  And all of the above is true even with the disparities in pricing among various insurers, simply because each of them will have different pricing models, and will have different claims experience even for the same demographic group (and an objectively similar demographic group could differ if different insurance companies attract different types of customers) — complexities of business operations which these companies are under no obligation to disclose to the general public any more than KFC must provide its secret recipe.

But the 2017 Consumer Federation of America study the Pew study references takes its claims even further, writing

The inconsistent pricing decisions of these insurance companies illustrates CFA’s concern that tying auto insurance rates to factors that a customer cannot control and have nothing to do with their driving safety record – such as one’s biological sex – leads to unfair discrimination and indefensible claims of actuarial soundness. . . .

“Every state but New Hampshire requires drivers, regardless of their sex, to buy auto insurance, so regulators and lawmakers have a special obligation to make sure coverage is priced fairly,” said CFA insurance consultant Douglas Heller, who conducted the study with CFA Research Advocate Michelle Styczynski. “What we have found is that insurance companies punish female drivers with perfect records more often than men, and far more often than we expected. We also found that the insurance companies’ use of sex as a rating factor does not seem to reveal much in the way of a consistent risk assessment, and regulators should reconsider allowing companies to continue using it at all.”

But let’s back up:  should insurance rates be only about those characteristics which customers can “control” — in this case, driving history and maybe residence?  Based on this rationale, there shouldn’t be any differentiation by age, either, but no one suggests that 16 year olds and 36 year olds should have the same rates, because it is generally acknowledged that teens, as new drivers, are less skilled, even though these are both items that cannot be “controlled.”  (And, quite honestly, I find it believable that men, once they outgrow their impulsive years, might be more likely to be better drivers; in terms of external factors, women might be more likely to be distracted by kids they’re transporting somewhere, and, besides, it is not out of the question that men could have a better awareness of their environment, spatial awareness, following distance, reaction time, whatever, in the way that there are simply differences between men and women.)

What if a state mandated that, since it’s unfair to charge young adults more for insurance when they can’t “help it” that they’re inexperienced drivers, insurers couldn’t differentiate but had to wait until a driver got into an accident or got a ticket?  (Yes, I know, exactly the demographic with the most political power would be disadvantaging itself, so it’s purely hypothetical.)  Would it be fair to say that any subsidies young people receive would be evened out by paying relatively more than otherwise when they get older?  After all, they’ll earn more then, too, on average.

But intuitively we know this is not actually fair. It is true that all drivers are required to have basic levels of insurance, but there is discretion in terms of the deductible amount and whether, in addition to state minimums, one elects collision/comprehensive insurance.  Plus, of course, drivers purchase the cars they do in part knowing that insurance premiums vary among cars (due to the age and cost of the car plus relative repair expenses and risks of theft).  What happens if these optional coverages become subsidized for some groups?  

Now, that being said, it would genuinely be interesting to see what’s driving the rate disparities (no pun intended).  But suggesting directly or indirectly that insurance companies are anti-woman isn’t helpful.

 

Image: https://pixabay.com/photos/traffic-highway-car-driving-road-966701/

Pritzker’s tax plan: now we know

So, readers, I had every intention of keeping this space nonpartisan, so I’m going to say this in the most nonpartisanly-way possible:  the just-released Pritzker tax plan (as linked to at CapitolFax.com) is terrible.

I should preface this by saying that I have no objection to graduated income taxes in principle.  They give due recognition to the principle that everyone should pay into the system to at least some degree, but that it’s appropriate for those who can pay more without being deeply burdened, to do so.  But at the same time, a graduated income tax should not be so imbalanced as to create a situation of excessive dependence on the wealthy for tax revenue, a dependence that puts the state at risk of substantial revenue volatility (as, for example, California experiences with half of its income tax revenue coming from people earning $500,000 or more, or 1% of its population), and simply creates a tendency to see government spending as “free money” rather than funded by taxing and spending decisions made in the best interests of state residents.

With respect to Illinois in particular, I have been distrustful of claims that our state will solve its financial woes with a graduated income tax because of the promises being made by Gov. Pritzker that only “people like me” (that is, the insanely wealthy) will be affected, and therefore no particular sacrifice is required on the part of any real people — and that’s on top of a generalized distrust of our elected officials.  And no where in any of the discussion is there any statement made that there will be any efforts made to ensure that our tax money is spent wisely and as effectively as possible.

That being said, let’s look at the proposal, bearing in mind that the current Illinois personal income tax rate is 4.95% for all income above a personal exemption of $2,000.

Income up to $10,000 (27.2% of taxpayers) – 4.75%

Marginal rate up to $100,000 (58.9% of taxpayers) – 4.90%

Marginal rate up to $250,000 (11.1%) – 4.95%

Marginal rate up to $500,000 (1.9%) – 7.75%

Marginal rate up to $1,000,000 (0.6%) – 7.85%

Total rate for taxpayers with income above $1,000,000 – 7.95%.

So what do you notice?

In the first place, the incessant promises of “tax cuts for the middle class” may be literally true insofar as 4.90% is 0.05 percentage-points less than 4.95%.  But these trivially-reduced rates demonstrate more than anything else the foolishness of having promised a “middle class tax cut” in the first place.  It would have been far better for Pritzker to have acknowledged this (and better still not to have promised it); to hold to his campaign promise in this manner treats Illinoisians as fools, really.  It also feels a bit like the game of pricing ending in .99, what with these brackets that are basically 5% and 8% but rely on residents thinking of 4.95% and 7.95% as meaningfully less than that, and having the multiple brackets with nearly identical tax rates makes no sense either.

In the second place, the proposal makes no differentiation between single and married taxpayers, imposing a substantial marriage penalty on upper middle-class earners.

And in the third place, the “millionaires’ tax” is astonishing.  Here’s the math:  a household with $1,000,000 in earnings would pay $70,935 in Illinois taxes.  A household with $1,000,001 in earnings would pay $79,500, or $8,565 more for a single dollar more in income.  Yes, I know, world’s tiniest violin, etc., but it makes no sense.  It seems to be a matter of proving that you’re serious about sticking it to the wealthy, perhaps with some notion that there is no such thing as being “just a little bit rich.”  But as an actuary, it makes me question whether these people can do math, and it also reeks of hubris, that is, a conviction that Chicago(land) is so indispensable, its economy so strong, its quality of life and cultural institutions so irreplaceable, that its denizens cannot possible leave for greener pastures.

Or has Pritzker intentionally omitted single/married brackets and intentionally added the all-income tier so as to subsequently eliminate these to proclaim that he’s compromising?

Again, I’m not going to burst into a rage or start using ALL CAPS but here we are.  Democrats hold not just a majority but a supermajority in the General Assembly so they can afford to lose the votes of a few of their members in swing districts worried about re-election, and there’s no reason not to think they’ll steamroll this through just as quickly as the minimum wage hike, then present voters with the amendment as practically a done-deal.

 

Image: https://media.defense.gov/2019/Feb/12/2002088973/-1/-1/0/181206-A-UM169-0001.JPG; https://www.dover.af.mil/News/Article/1755127/what-you-should-know-about-filing-2018-taxes/ (public domain/US gov)

Chicago’s Mayoral Election – A Call For Ranked-Choice Voting

https://commons.wikimedia.org/wiki/File:University_at_Buffalo_voting_booth.jpg; public domain

The election in Chicago, dear readers, is half-over and headed to a run-off in April.

The results, per Chicago Tribune reporting:

Self-declared reformist progressive Lori Lightfoot, 17.5%.

Union and machine-backed, machine-disowning self-declared progressive Toni Preckwinkle, 16%.

Tribune-endorsed and business-backed Bill Daley, 14.7%.

Self-made millionaire businessman Willie Wilson, 10%.

Followed by assorted technocrats, community activists, anti-machine/anti-corruption activists, law-and-order candidates, and the like with lower vote totals.

Now, I am not a Chicagoan, but the well-being of the city affects the rest of us, too, not least because of the inevitable squabbles between city and state about money.  And the race has been discouraging for multiple reasons, among them the fact that the sheer number of candidates involves an awful lot of the game of supporting multiple candidates from a constituency not your own, to dilute their vote.

And the end result: the top two vote-getters are, in many ways, clones of each other.  Oh, I don’t mean the fact that they’re both black women.  That doesn’t particularly interest me.  But the very headline on today’s Tribune article speaks for itself:  “Hours after historic election, Lori Lightfoot and Toni Preckwinkle each argue they’re more progressive than the other.”  Perhaps readers who are wiser than I will have a better sense of how they fit into the overall political landscape, and maybe it is indeed the case that Chicago voters are indeed so ready for a progressive that they are largely happy at the choice between machine progressive and non-machine progressive.  As far as I could tell, the only difference between the two on their websites was the exact year by which they intend to convert the city into all-electric buses, and whether they promise all-renewable or merely all-clean electricity for the city.   Perhaps, again, Chicagoans can identify nuances important to them that I don’t see.

Here’s another Tribune article, by columnist Dahleen Glanton, “Two black women will face off in Chicago’s mayoral runoff, but mostly white voters put them there.”  What’s she mean by that?  She writes:

What makes this mayoral race so unique is that neither of the black women heading to the runoff was the first choice of voters in wards where the majority of the city’s African-Americans live.

Preckwinkle won only four of the city’s predominantly black wards, according to unofficial results. Though she emerged as the front-runner, Lightfoot didn’t win any.

Voters on the South and West sides overwhelmingly supported Willie Wilson, a black self-made millionaire who never had a real chance of winning citywide support. But Wilson won 14 predominantly African-American wards.

Instead, Preckwinkle’s base was Hyde Park and the neighborhoods surrounding it, and Lightfoot “won with the help of affluent white voters on Chicago’s North Side lakefront.”  Now, Glanton continues by lamenting (if I follow her correctly) that there was not a single candidate supported by a unified black community, but what I’m taking from her column is that neither of these finalist-candidates had strong support among the black community, despite their race/ethnicity.

And here’s a fourth article, “A broken alliance: Did Jerry Joyce spoil Bill Daley’s mayoral bid?”  Billy Daley had 7,000 fewer votes than Preckwinkle; cop and firefighter-heavy wards from which Daley had hoped for support instead swung to Jerry Joyce, who picked up 7% of the vote in total.  The article doesn’t definitively deem Joyce a spoiler, and quotes a supporter who rejected that claim.  But the math checks out:  if Joyce supporters would uniformly, or even partially supported Daley, he would have been in the run-off rather than Preckwinkle.

Which brings me to ranked-choice voting, or preferential voting.

Here’s the description of this voting method at Fairvote.org:

With ranked choice voting, voters can rank as many candidates as they want in order of choice. Candidates do best when they attract a strong core of first-choice support while also reaching out for second and even third choices. When used as an “instant runoff” to elect a single candidate like a mayor or a governor, RCV helps elect a candidate that better reflects the support of a majority of voters.

The system is used in a growing number of municipal elections (as listed by Fair Vote), and was also used in Maine for their 2018 congressional elections.  But it’s not an experimental system — ranked-choice voting has been in place in Australia for over 100 years.

And, courtesy the website ChickenNation.com and author Patrick Alexander (and explicitly made available for sharing when not for commercial use), here is an explanation of that system:

http://www.chickennation.com/voting/?fbclid=IwAR2vl7IM9kJqUy-0_K6rJjrODDUx9RdaHDa-SGONeFVuG_RZ97NdgxdH5mY
http://www.chickennation.com/voting/?fbclid=IwAR2vl7IM9kJqUy-0_K6rJjrODDUx9RdaHDa-SGONeFVuG_RZ97NdgxdH5mY
http://www.chickennation.com/voting/?fbclid=IwAR2vl7IM9kJqUy-0_K6rJjrODDUx9RdaHDa-SGONeFVuG_RZ97NdgxdH5mY
http://www.chickennation.com/voting/?fbclid=IwAR2vl7IM9kJqUy-0_K6rJjrODDUx9RdaHDa-SGONeFVuG_RZ97NdgxdH5mY

So I find myself thinking of all the ways in which this system (however much it might take some getting used to) would have led to a different dynamic in the Chicago election.  Yes, there are risks that voters would find the system too confusing (but they’d surely get used to it) and, yes, voting itself would take longer, but it might well have led to a very different outcome, and in any event would have meant that Chicago’s voters could have had a much more meaningful say in their next mayor.

 

Minimum wage, median wage: some data and thoughts

So, readers, I would love to pound out an article about Illinois’ recent minimum wage hike and its future effect on the state economy.  For reference, here’s the Chicago Tribune’s summary:

Under the law, on Jan. 1 the statewide minimum wage increases from $8.25 to $9.25 per hour. The minimum wage again will increase to $10 per hour on July 1, 2020, and will then go up $1 per hour each year on Jan. 1 until hitting $15 per hour in 2025.

That’s a big jump.

Minimum wage supporters cite all manner of beneficial effects — a New York Times article floating around twitter today claimed that

A $15 minimum wage is an antidepressant. It is a sleep aid. A diet. A stress reliever. It is a contraceptive, preventing teenage pregnancy. It prevents premature death. It shields children from neglect. But why? Poverty can be unrelenting, shame-inducing and exhausting.

Its supporters also marshall studies to claim that it will have only beneficial effects on the economy — but skeptics point to the fact that studies finding this are unsatisfactory for a variety of reasons, for instance, a boost in the minimum wage in one locality in a region where wider economic effects might be offset by lower minimum wages in surrounding areas.  And I’m not going to try to produce an analysis of the literature, nor to make any particular claims of expertise as an (armchair) economist.

But I do want to use my platform, however small it is, to point to the magnitude of the increase.  To be sure, in the event that there is significant inflation, some of that increase will be moderated, but at today’s low inflation rates, $15 per hour in 2025 dollars won’t be that much different than $15 per hour in 2019 dollars.

So consider this:

The median wage in the Chicago metro area is $19.67.

In Springfield, Illinois:  $18.35.

In Peoria:  $18.14.

Decatur:  $16.80

Rockford:  $16.55

Carbondale:  $15.77

West Central Illinois nonmetropolitan area:  $15.41

(You can use the main BLS link to view all all metro area median wage data.)

In other words, once you leave metro Chicago and the midsized cities of Illinois, median wages drop to very nearly the level of the future minimum wage.

The BLS link also provides median wages for particular occupations — and the occupations with median wages below the new minimum extend far beyond fast food and retail workers.

In the West Central Illinois nonmetropolitan area:

Ushers, Lobby Attendants, and Ticket Takers earn a median wage of $9.10.

Childcare workers, $9.38.

Hairdressers, hairstylists, and cosmetologists:  $9.74.

Court, Municipal, and License Clerks:  $10.43.

Tax preparers:  $11.12

Nursing assistants:  $11.54.

Pharmacy aides:  $11.77.

Tellers:  $12.72.

Butchers and Meat Cutters:  $13.50.

Emergency Medical Technicians and Paramedics, $14.30.

Phlebotomists, $14.91.

and so forth.

What happens when the state mandates a minimum wage in excess of the wages that each of these occupations, at median, actually pay in this part of the state?  I simply lack the imagination to forsee the impact, but it’s surely not as simple as each of these occupations in fact paying $15.00.   These are in many cases jobs requiring specialized training; I find it difficult to imagine that EMTs would accept a wage that’s equal to what a McDonald’s worker gets the first day on the job, without specialized training.  And I likewise can’t fathom a situation in which every wage-earner’s wages are simply boosted by $6.75, across the board, and prices similarly simply reset at the level necessary for businesses to cover their costs.

Now, looking at this list of occupations, I seem to have selected service occupations which are connected up with the local economy, rather than the sorts of jobs associated with manufacturing or other industries which stretch beyond the local area.  And I am limited in my understanding of the nature of the economy in these sorts of small towns and rural areas, but — well, to the extent that it depends on the sorts of small manufacturing facilities scattered throughout middle America, those manufacturers will have to cope with a changed dynamic that could well lead to them leaving or automating, and to the extent that they provide a support structure that ultimately works its way down to the family farm, well, farmers are self-employed, aren’t they?  And their earnings won’t increase as a result of a minimum wage law, only their costs.

And, yes, I have selected the lowest-wage region from which to list by-occupation median wages.  Of course those numbers are higher in Springfield and Peoria, for example.   Childcare workers in Springfield, for example, earn $10.75 at median, pharmacy technicians, $13.77, and phlebotomists, $16.66.

So I don’t have an answer.  I’m not going to and I’m not able to build out a model of precisely which bad things will happen.  But I do think that looking at these sorts of BLS listings is a useful way of, even as a non-expert, getting a sense of the magnitude of the increase, and the potential for far-reaching unintended effects.

 

Image:  Marseilles, Illinois, population 5,094https://commons.wikimedia.org/wiki/File:Marseilles_IL_downtown1.jpg; IvoShandor [CC BY-SA 3.0 (https://creativecommons.org/licenses/by-sa/3.0)%5D.