Here's an idea.
Maybe there is a tax policy that would appeal to both Democrats and Republicans.
It would give a boost to low-income Americans -- a plan of wealth re-distribution dear to the hearts of Democrats. It would also put a low cap on tax rates paid by wealthy Americans, a longstanding Republican goal.
My college classmate Jim Stodder left college to travel the world and to work as a roughneck in the oil fields. He returned to school a decade later to finish up, then got a Ph.D. in economics at Yale. He argues we should re-visit an old idea for a tax plan. The tax plan is simple enough to describe in a few sentences. It gives an income floor to the poor and working poor. It removes the disincentives to work built into rising tax rates in a progressive tax system. By lowering the top tax rate the plan reduces incentives for the wealthy to find un-economic, wasteful tax shelters. The plan seems fair and equal at first glance, since everyone pays the same rate. Jim Stodder posts from time to time at www.jimstodder.com.
Guest Post by Jim Stodder
Reducing income inequality through the tax code could be made simple and virtually cheat-proof. It is so simple that the most famous left-wing and right-wing economists of the later 20th century -- James Tobin and Milton Friedman -- agreed on it.
It's called a fixed-sum transfer. Or to sound worse, a "lump-sum transfer" or, worse still, a "negative income tax" -- as George McGovern called it. It sure didn't help him in 1972 against Nixon. I think we can blame that name on Milton Friedman. Click negative income tax.
Here's an example of how it works. Total personal income before taxes is about $20 trillion. (Source: statista.) Let’s say taxes take 20% of that, yielding $4 trillion. Now instead of our current mildly progressive rate, based on tax "brackets" that rise with income, let's just give the average household $10,000. Say there are 100 million households, so that's $1 trillion.
To get the same net tax of $4 trillion we'll have to tax at a higher rate of 25%, yielding $5 trillion. So the rate has risen, but look what's happened to taxes relative to your income. If your family made $40K, you just broke even. $10K transfer minus $10K tax nets out that you get nothing and owe nothing. Above that income level you begin to pay a net tax. Below that level you get a net transfer.
So if your family made $20K, you'd pay 25% in tax ($5K) and get $10K in transfers, for a $5K net transfer. If you made $80K, you'd pay $20K in tax, and with a $10K transfer your net tax is $10K. So your net tax rate is not 25% but half of that:10K/80K = 12.5%.
Income taxes would approach the overall 25% pre-transfer rate only for the very richest households. So if your income was $4 million, you'd give the government $1 million minus the $10K, a post-transfer net rate of 990,000/4,000,000 = 24.75%.
Look what we've done. We've got a "flat rate" with no "bracket cliffs." You get to keep 75% of every dollar you make, plus a bit more after the transfer. But we now have a highly progressive tax system, where the post-transfer rate rises very gradually up to 25%. Basic economics says the tax rate won't affect your income-work decision because you can’t change your flat rate of 25%. And you can’t change that fixed transfer of $10K -- everyone gets it, rich or poor.
So the "Negative Income Tax" was a brilliant idea with a god-awful name. The public reaction to McGovern's plan was similar to what yours would be if a passer-by in a big city offered to take your wallet, put $100 inside, and then "give it right back" to you.
Fifteen years after he lost to Nixon, I went to a testimonial dinner for George McGovern. The Yale economist James Tobin, who had been my teacher, gave a speech. Tobin had been one of his advisors. He apologized for not having suggested a name change.
However, just because something is simple and helps most people doesn't mean it will happen. As Milton Friedman, one of the original advocates of the plan, recognized, the U.S. Congress lives and dies by crafting little tax favors for their wealthy donors.
Why should they give up that power by making taxes simple? As the billionaire publisher of Forbes magazine, Steve Forbes, once said, the tax form would be so short you could print it on a postcard. (Forbes loved the flat tax -- just not the inequality-reducing transfers!)
But just because people in power hate it doesn't mean it can't happen. That's been true of almost every good idea.
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14 comments:
It would be nice if the American people took power away from the ultra wealthy for a change. Revolution has occurred when people finally got fed up with the rich taking too much from the little guy. The lords of England taxing the peasants too much, the let them eat cake before the French Revolution, but on and on the rich keep successfully taking money from the average person. Let’s not forget the pharaoh of Egypt claiming they were really God. Yes, let’s do this tax thing. The problem is the rich won’t like the poor getting the 10k, they don’t share.
In other industrialized nations, such as Japan, doing one’s taxes literally takes minutes. In the U.S., we pay for tax preparers or tax preparation software and still spend hours collecting the data we need. In spite of this, the disparity between what the government collects and what it spends is so great that our national debt is now greater than our GDP. The interest alone in 2023 was $659 billion – the fourth largest government program. Something’s gotta give.
This post expects common sense out of political parties.
We are seeing the GOPee destroying the US (including advocating violence) just to maintain political power. They are terrorists, and you don't negotiate with terrorists (unlike Reagan).
What gives is compliance with the law.
And the GOPee wants to reduce enforcement to further protect the wealthy while screwing the rest of us.
Great idea, but only if politics were a rational phenomenon.
It might be nice to live in that world…
YES!
Is everyone aware of all the unreported income out there? The underground economy and people getting paid in cash. Also white collar criminals. Republicans, especially, like it that way. They hate the IRS for doing its job, which is collecting taxes.
This conservative has no problem giving $10,000 to everybody, and then implementing a flat tax on taxable income.
No tax on assets, property, or wealth.
No tax on Retirement savings or retirement income like pensions, social security, IRA/ROTH distributions, etc.
No tax on tax-free investments.
Everybody has the right to arrange their affairs to minimize what Uncle Sam is entitled to.
Unfortunately, there is an insatiable demand for more tax money. As things change, that tax collected revenue never seems to be enough.
I have met only a few uberwealthy people in my life. What I noticed is their aversion to spending money if there's nothing in it for them. (Often they have the first nickel they ever made.) They seem to expect the money in their wallet to continue to grow magically. Everyone of this limited group was tax adverse. Hated "welfare" and "handouts" but failed to realize the exceptional financial breaks they receive. They also don't seem to realize when people at the low end of the economic scale have money they spend it because living takes money (and reasonably good health). Spending money causes a constant churn in the economy. The movement of money itself generates wealth and a growing economy in which everyone benefits. But it appears upper income class looks in their wallet and says "I'm paying too much!" failing to see the churn of money allows them to receive the cream of the economy.
Economists are not politicians. If it can't be summarized and stated simply and clearly, it is not going to sell. I doubt that "conservatives" alive today will buy anything with the words income transfer, redistribution, etc. I know of at least one "Christian conservative" who thinks the earned income tax credit is welfare.
Probably most of them want either a low flat tax (same tax rate for everyone) with no enforcement or no income tax at all. At the state level, Tennessee has no income tax. Instead, they tax food. Not sure, but I think that a few other states also have no income tax, such as New Hampshire, Florida and Nevada.
Sorry, I did not read this entire blog, only the beginning. It is probably not going to happen and it is too boring.
There is no income tax in Florida. Still, the tax coffers are overflowing, by collecting tourist taxes and taxing businesses on their profits.
There is a sales tax, but not on groceries. There are sales tax holidays for school supplies and equipment like computers before the school year begins. There are also tax holidays for hurricane and storm prep, before the season begins.
We of course have property taxes, but millage is lower than I paid in Oregon. There is also a homestead exemption for your primary residence.
State spending is considerably lower per capita than Oregon.
We have programs for the poor. There is Medicaid for those who qualify.
Still, we have poor, middle class, the rich, and the very rich.
All this kind of info is readily available. Google makes it easy to research cost of living and benefits for residents of every state.
One can even find out that Oregon is quite expensive when compared to most other states. Harder to find out is why Oregon taxes you more than most other states, raising your cost of living and even dying.
How about this? We tax everybody at the same rate of 25%, and give everyone a stipend of $10K. Is that simple enough for you? I think the more interesting question is why many conservatives have moved so far to the right that they are no longer willing to consider an idea that is simple, endorsed by most economists, lowers inequality and poverty but at the same time reduces government programs and intervention in the economy.
James, simple at first, but some of those current assets are already protected from future taxes. Some are essential for federal, state, and local development - ie tax-free investments that build roads, buildings, and other infrastructure. Even at the private level, investment capital that developed our nation. Those investments have been taxed less to encourage business development.
That 25% "flat tax" on income, ignores the interconnection of everything driving our economy. Could 25% work? Perhaps, but there will be unintended consequences, and entirely predictable by those with any finance common sense.
For many 25% sounds easy to do, until it affects them personally, and they recall what they used to pay. That $10,000 paid up front will be soon forgotten.
Good points M2 in Florida. A basic idea of policy design is that you usually need a separate instrument for each goal of policy. Less unequal incomes one goal, and it is addressed by this simplification without the overhang of lots of complicated programs. It is unrealistic, I agree, to expect it to do everything that govt policies should address.
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