Tax rates and employment in Illinois

Above is a chart from the Illinois Policy Institute, based on US Department of Labor Statistics, showing employment in Illinois since January 2010. In the article accompanying the graph, the Institute authors note that Illinois lawmakers approved a tax rate increase in January, and point out that the employment gains in Illinois turned around the same month.

The tax rate hike raised individual income tax rates by 66% (from 3% to 5%, still well behind California) and corporate tax rates by 45% (from 4.8% to 7%). The rate hikes were retroactive to the beginning of 2011 and were designed to last for five years, in order to help pay off budget deficits, after which they expire at the end of 2015.

While some may argue that other factors may have caused employment to turn around, and that the graph above does not necessarily prove cause-and-effect, we believe that people do indeed modify their behavior in response to changes in tax law and tax rates. In particular, venture investors become less likely to risk capital to fund new companies, because the risk-reward equation changes (the potential reward is reduced), companies become less likely to expand (leading to fewer employment opportunities than would otherwise take place), and individuals who have the option of working or not working weigh the costs and benefits differently (because the costs have increased and the benefits decreased).

This whole discussion goes back to a very important post we published back in 2010 entitled "Growth is the answer: the primacy of human creativity." Ironically, that article featured a quotation from a professor of finance from the University of Chicago (in Illinois) who said, "Countries only pay off debts by growing out of them." We would add that the same thing applies for states.

In the same post, we cited sage words from George Gilder, who argued that the two most important ingredients for innovation and growth are low taxes and sound money. Creating conditions that do not impede growth will ultimately lead to greater tax revenues and the ability to pay off debts.

We hope that other leaders around the world are paying attention to the evidence from Illinois.