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.
Thank you for sharing this idea. I'm no economist, but it seems worth investigating further.