15 September 2011

Imagine I am Running for Congress - 6

So, last time I started talking about taxes, about which everyone has strong feelings and often inchoate reasons for said feelings. 

My idea was to begin over with a simple notion – that people should pay in federal tax in proportion to what they receive of the national income. 

Not hard to understand, but tricky to implement because it means knowing the combined national income and the combined national income tax.  Fortunately, we can know previous national income and federal tax.  All we need do is use those figures.  To make it simple, I say divide the national income into percentiles.  Those at the top will be few, so they will have to pay more per person.  Those at the bottom will be many, so they will be less. 

According to Prof. Wm. Domhoff (citing E.N. Wolff) the top 1% earned 21.3% of the national income in 2006.  The next 19% earned 40.1% of the national income, the remaining 80%, earned 38.6% of the national income.  No doubt if you broke those latter groups out by percentiles the amounts would be even more disparate. 

Now, those at the bottom edge of the 1% are actually closer to the bottom 80% (in income) than they are to the top of the 1%  That’s how steep the curve is.  So we would have to subdivide the top 1% into tenths at least. 

It all sounds very elaborate, but if you presume that there would be no ‘adjustments to income’ or ‘deductions’ because we are being asked to pay our share of taxes based on our share of the income, then all one would need would be W2s and 1099s and other records.  Add them up, plug in the right number that is your position in the national income, and out comes your tax. 

This obviously means we no longer use the tax code to accomplish political purposes, like charitable giving, home ownership, child rearing, and so on.  As a clergyman, homeowner and parent I am a little nervous about this, but the end cost to me will likely be but a little higher than it is now, not vastly.  And it would truly be my share of the common burden. 

With so many feeling so little connection to community and country, one way to remedy that would be to make sure taxes truly exemplify the idea of universal, equitable, responsibility.  If we knew our taxes expected equitable, not equal but equitable, shares from everyone it would be a step, a big one, in the right direction.

So it seems to me. 


David in Alto said...

I like the idea of equitable taxing, being the mathgeek that i am, it makes sense to me. How do you think this might impact charitable giving?

Tom Wilson said...

Your initial statement isn't elaborate at all. But I'm not sure it's what you intend. You don't have to go through all the percentile stuff. If my taxes are proportional to my share of national income - then twice as much income = twice as much tax which means a flat tax rate. We would all pay something like 19% of our income. (That's the current Federal revenue as a share of GDP, see http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=205). But our current tax code is (intended to be) more progressive, with a higher rate for higher incomes. Although given the various tax breaks and loopholes, it's not clear how that really works out in practice.

So if you still want to keep it really simple, I suggest a tweak on your formulal: the first X$ of income doesn't get taxed, then it's a flat rate - still simple math but takes less money from the poorest.

Joel Monka said...

I don't understand why the concentration on income, rather than wealth. Suppose I inherit, after taxes, %50 Billion. I quit my job, and, not caring about earning more, I don't play investment games- I put it all in my checking account just to see jaws drop when they run a credit check. What is my taxes owed next year?

Nothing. Not one penny. No income, therefore no income tax. Go ahead, make the top rate 100%- it doesn't matter, there is no income to tax!

I do not understand why we do it this way. What we are saying is that old money is fine; if you're a Rockefeller or a Walton or a Kerry, keep your money, you're cool- but if you WORK for it, you owe it- hand it over!

How about taxing net worth, rather than income? If you really resent somebody's big paycheck that much, you can take solace in the fact that this year's income is next year's net worth. But the only way to touch the mega-fortunes is by taxing worth rather than income. Unless you think it's fair that someone who is being productive should pay more than a legacy brat who hasn't worked in three generations.

WFW said...

Joel, I think that was what estate taxes were about. I remember the term 'inheritance tax,' which is what it really is, tax on the income you get from an inheritance.

Now, those who oppose such things claim it is double taxation, as the money was taxed once before when it was first earned by the decedent.

But the same could be said for any money when it changes hands. My income (taxed) pays for stuff others sell, which is now their untaxed income. Income tax is really a form of value added tax, assessed when something of value changes hands - stuff or money.

Privileging the estate process, like taxing capital gains for less, essentially privileges those forms of income. Again, we are using taxes both to raise money and accomplish other goals. That's what makes our current taxes so annoying, because it distorts one goal with another.

If we took a portion when the money changed hands, when receiving the inheritance in your case, things would be simpler and fairer.