Twenty-two years ago, when I previously ran for US Senate and began writing about reviving the idea of full support of persons legally in the country to the poverty level, we were in much better overall financial shape. An actual maximum tax would have been possible with some budget discipline. Eventually and philosophically, I think that is still the goal. If everyone made enough money to pay an equal share of the country’s budget and still be above the poverty level, that is what we should do. The philosophy is clear: One Person, One Vote; One Person, One Tax.
But of course we live in a world where many make close to zero and an arguable number somewhere around 50 million make less than the poverty level. Currently federal welfare spending is about $514 BILLION dollars. Unfortunately only about half of what we spend reaches recipients as cash. We have a lot of programs, we force a lot of people to grovel before civil servants to get money, and we try to control what welfare recipients are allowed to spend money on. That is all very expensive. Even if we say it would cost the IRS $14 BILLION dollars a year to distribute economic aid directly as a cash negative income tax payment, we would still have $500 BILLION dollars to give to those 50 million. If we group those 50 million as households of 4 (which is a pretty good weighted average and close enough for first order estimates), then we have 12.5 million households under the poverty level. Most of them don’t actually make zero income, but even if we pretended they did, 500 billion divided by 12.5 million is $40,000. The benchmark “poverty level” for a household of 4 is under $24,000. So there is something very wrong with our welfare system.
Now, with a bit of editing to current numbers and acknowledging that a maximum equal tax has become a future goal rather than a near term reality, here are my thoughts (only a few of them original) that have not changed much in twenty-two years:
One Citizen, One Vote; One Citizen, One Tax
What the heck is an Equality Tax, and why the heck should You support it? (Eventually, as a goal)
Let’s change the main tax basis altogether: Take the budget, subtract off the items you plan to pay for with taxes on easily metered use (such as gasoline taxes to pay for roadwork or a direct fee to businesses hiring non-Citizens legally in the country), and call that the net budget to be raised. Now take the number of Citizens aged 23 to 62, and divide. There is your equal tax. (Why only people aged 23 to 62? Well I think that forty years is enough to pay tax. Any younger, and you start making it hard to get a good start on adult life. Any older, and I start getting uncomfortable about putting death and taxes too close together. I know I can’t avoid either, but I’d prefer not to have them at the same time.)
Okay, so there is your equal tax. Well, almost. The problem is, some Citizens make no money at all or earn less than the poverty level, and I don’t want to tax any Citizen into poverty. While I disagree vehemently with success penalty taxes that attempt to transfer income from the top earners to others (including many well above the poverty line), I find support to the poverty line to be qualitatively different and I believe it is a legitimate public policy. In fact you can make a strong case that by supporting Citizens universally to the poverty level you eliminate justification for crimes of necessity (my children were hungry, what else could I do?) and probably you save money over all. Besides that, we are a great country and we just should not have Citizens living in poverty. Of course this means that you’re going to have to add the required funds to raise Citizens to the poverty level to the net budget, but the result is that every Citizen above the poverty level pays the same tax and shares the burden equally. No citizen is left below the poverty line, so instead of arguing about each possible social program, such as subsidized health care insurance, we just debate raising or lowering the poverty level and let individual families make their own decisions on which things to buy. Since it is pretty easy to get a head count and an estimate of poverty level support costs, the cost to each Citizen of each government program becomes transparent and easy to calculate. Suppose there are 100 million taxpayers. Then a billion dollar program is going to cost ten bucks each. Simple! You can directly assess whether a given program is worth it to you and so advise your representatives.
There is one more slight complication for dealing with the Citizens that are in the age range being taxed who earn more than the poverty level but not enough to reasonably pay the full equal tax. These Citizens should not be faced with a penalty for earning more. In fact we want them to earn more so they can strive toward paying the equal share instead of being subsidized. So let them keep seventy-five cents of each dollar they earn up to the point where they are paying the full equal tax. If you make more than four times the poverty level plus the equal tax, then you can just pay the equal tax and be done with it. At that level you are off the dole, you have paid your equal tax, and you are free to use your prosperity for yourself and the charities of your choice.
So, in summary, Citizens start at a minimum of the poverty level. Citizens get to keep 75 cents of every dollar they earn until they have defrayed the poverty level subsidy and paid the full equal tax. Once the net tax payment reaches the full equal tax, you are done paying that year and you get to decide what to do with the rest.
What else happens? Well, for starters, there is no need for a minimum wage. Instead of marginal small business owners being squeezed between working themselves to death and hiring a Citizen at the minimum wage, they hire at the wage the work is worth to the business. The business owner wins, because it makes economic sense. The government wins, because the Citizen hired at a value based wage otherwise didn’t have a job and the taxed Citizens were paying the whole tab to the poverty level. And the hired Citizen wins, because the Citizen below the full equal tax gets to keep 75 cents on the dollar of what is earned so it does not cut into the poverty level support the Citizen receives.
This is just one example. The list of things that just fall into place with almost no effort is nearly endless. How about the third rail? Well guess what – if Citizens get a base line of the poverty level then you really don’t need social security, do you? Of course we have to pay off our moral obligation to everyone who thought they were paying into a retirement plan (when in fact they were paying benefits to current recipients). So if the social security payment you are due tops the poverty level, then you should continue to get that excess. But we should stop collecting payroll taxes for two reasons: First, payroll taxes distort the flat tax above the intended rate and make cash under the table arrangements profitable. Second, collecting payroll taxes creates the impression that the government is saving your money for your retirement and your healthcare.
So what should your benefit be if you’re somewhere in the middle when the funding source is no longer a payroll tax? Well we can argue a bit about the calculation, but currently you are required to earn 40 quarters (10 years) to qualify for normal retirement benefits and in a working life of 40 years you would earn 160 quarters. So one way is to divide the number of quarters you have earned by 160 and pay you that quotient (with a ceiling of 1) times the benefit you would otherwise have received. That way people over, say, 60 won’t be caught by surprise and people who have paid in for a few years expecting a benefit have plenty of warning but don’t lose everything.
Another huge advantage to the baseline safety net of the poverty level for persons legally in the country is that it creates a price advantage for employers to hire persons legally here in the recorded economy instead of to persons who are not here legally as cash under the table. The net effect is that we reduce the illegal immigration magnet. With this price advantage in effect, it once again becomes more profitable to hire Citizens than persons here illegally. This is the way to get immigration reform by economic force. With the diminished demand for workers it will no longer be profitable to engage in sophisticated human smuggling operations. This, combined with ending the war on drugs (a separate lengthy post in its own right) will return the upper hand to our border patrol without exorbitant capital expense. Tunnels and armed parties just won’t be worth it.
Equality taxation, where all of us who have enough share the burden equally, results in a simple and elegant framework where everything else just makes sense. There is nothing particularly magic about the 25 cents on the dollar flat tax in the range where you have income but not enough income to be unsubsidized. Any number in the range where effort to earn the next dollar is incentivized will do, but 25 cents makes the readily understood word formula “four times the poverty level plus four times the equal tax” true as an easy to express formula of the income level you need to pay your equal share. At which point the government should not have to be told how much you actually make, since you are not asking for any subsidy. Equality taxation can be implemented with or without ending corporate taxation, which would also be a smart move both for efficiency and to get corporations out of the business of deciding social charitable priorities in the course of tax avoidance.
Unfortunately, as I noted in the lead paragraph, capping at the top Equality Tax is an eventual goal. Currently we have too big a national debt. We’ve been digging a hole of obligations since 1935 and it will take a while to whittle that down. In the short term, not only is it unlikely we will be able to cap taxes at the theoretical Equality Tax, if we intend to start paying off the debt we might need to go a little bit “progressive” on the top end. By a little bit, I mean no more than 35% percent. Why? Because that is about the rate above which the rich will fight back to keep more of their earnings!
The fact that some folks have figured out a way to earn a lot of money brings forth a lot of greed and jealousy on the part of some of our biggest political airbags. “The income gap is horrible and unacceptable!” they scream. Well folks, they are worried about the #WRONG_GAP. The #CORRECT_GAP for the government to concern itself with is the gap between the poorest and the poverty level. Persecution of the wealthy not only fails to close the #CORRECT_GAP, it causes many of the wealthy to tighten their grip on the money they have earned. This does not help the poor. When we shift to a predictable flat tax rate that is reasonable (at most 35%) the wealthy tend to react in charity beyond their taxes. And they both have a right to choose and choose better than the government.
Of course it is far better if we can keep the rate down to a flat 25%.
Using current figures with a little rounding, that means a family of four with zero income will get $24,000. Not pleasant perhaps, but not in poverty. Earn a dollar and this family’s new net is $24,000.75 and the subsidy is down to $23,999.75. Please notice that the net income always goes up for a dollar earned and the subsidy always goes down (and eventually becomes a net tax.) This is why this plan is sometimes called the “negative income tax.” So, using these current figures, when your earned income reaches $96,000, your subsidy reaches zero. Above that, you actually start paying net taxes, but only at the rate you have been paying all along. Perhaps above $200,000 we might raise the rate a bit if we cannot balance the budget over the business cycle. But even at the 25% rate, someone earning $200,000 will pay $26,000 net in taxes. (Being the $50,000 in taxes on earned income minus the $24,000 baseline).