Why the rich should be taxed more (Part 3)
Cliff Kang
1

That’s a valid question, which is really asking the question, “Do we want government involved in our lives?” I do, because I don’t think pure capitalism works. I am not for a small government, but I am for a smaller government at the margins.

Government would be involved in our lives whether we go with your concept or mine. Government would be involved differently, but it’d be there.

My circumstances argument is saying that those in poverty have a harder time getting out of poverty compared to their wealthy similarly hard working (or not so hard working) counterparts, in part due to their circumstances.
But it would be a more purely income based system than on any other characteristics.

Therein lies my problem with your concept. You want to recognize that the disadvantged have a harder time but when you base income taxes purely on income, there is no actual link between the two. If someone came from “bad” circumstances and manages to earn $200K/year, you’re taxing them at the same rate as someone that had all the advantages and earns $200K/year. You are wanting to use advantages/disadvantages as a justification for varying tax rates but when it comes time to apply those taxes to individual people’s returns, you throw all of that out the window and only look at their income.

Your concept is much like being blindfolded, led into a room, handed 3 darts and being told that there is a dart board somewhere in the room. Throw the darts and see if you can hit it. Then if you don’t hit it with your allotted 3 darts, you’re saying “Hey, give me someone else’s darts and let me keep trying!”.

Wouldn’t it be easier if there was some “government” person in that room with you telling you which way to turn so that you were facing the wall where the dart board is? You throw the first dart low so they tell you how far off you were and tell you aim 3 feet higher?

But I don’t think the solution is keeping the status quo or giving a huge tax break to the rich (as we’re very close to doing :\). Cause going back to my original post, there’s no correlation between tax reform (cuts or raises) leading to economic growth. So all it’s going to do is to increase income AND wealth inequality.

I don’t think the solution is to maintain the status quo either but reality is that we’ve been playing the social engineering thing in the way you propose for as long as we’ve had income taxes. Have we eliminated income inequality? Have we gotten rid of those “disadvantages”? If that had worked we wouldn’t be having this conversation! ;) We’ve been doing what you want for over 100 years and it isn’t working!

How about a much simpler system?

I’d propose that “the government” apply some science and and find causes (instead of correlations), and build social programs to address those causes. Hire real people to go out and work with people to teach them how to over come their disadvantages and make good decisions with the choices they have.

Then you figure out how much those programs (along wit all other Federal spending) will cost and you collect enough taxes to cover the cost of those programs. You calculate that number by figuring out the total national income and divide it by total National spending. If total national income is $20 trillion and total national spending is $4 trillion, then you set a national “standard rate” of 20%. (That percentage would change by a point or two each year.)

Then tax system could be based on 4 simple levels:

Level 1 would be those earning below the poverty level (about $12K for a single person) would get a negative income tax — an EITC — that would pay them the difference between what they earn and the poverty level. Someone earning $6K/year would get a check back for another $6K.

Level 2 would be those earning between the poverty level (~$12K) and the national median income (~$60K/household). The people in this group would pay taxes on a sliding scale between .1% and the “standard rate”. Someone earning $13K might pay .5% in taxes ($65) and someone earning $59K might pay 19% ($11,210). A household earning $40K would pay a tax at ~11% (~$4,100).

Level 3 would be people earning above the national median (~$60K) up to the break point for the top 20% of income earners (for 2015 that was those household earning over ~$202K/year.). A household earning $65K would pay $13,000 and a household earning $202K would pay $40,400.

Level 4 would be households in the top 20% of income earners (~$202K/year and up). They’d pay the same “standard rate” on their income up to that $202K and then pay 22%-23% on all income above that amount. A household earning $1 million would pay $215.960 (using the 22% figure). Someone earning $20 million would pay $4,395,960.

The extra 2%-3% those in level 4 would be paying on their income above the $202K amount would cover the taxes not being paid by the households in levels 1 and 2. (That extra 2% on one household paying $4,395,960 in taxes covers a full 100% EITC of $12K for 33 households.)

So you’d still have progressive tax rates. But I’d eliminate ALL credits (other than the EITC) and deductions and all income would be taxed at the same rates. The government wouldn’t be rewarding people for buying a house with a mortgage interest deduction. There would be no rewards for unearned investment income vs. earned income. The “benefit” to the disadvantaged is that they would get a team of government advisers to help them work through the maze instead of throwing money at them and hoping for the best.

This sort of a system would move all of the social engineering to the actual social programs and leave the tax system as a simple means of paying for it. (I’d also push for all of the States to tie their tax system to the Federal system so that instead of having 50 different ways of filing State taxes, they all follow a standard process.)

The other thing I’d like to mention is that yes, there is (and should be) movement between quintiles of income. I think the more apt comparison would be to see how much mobility we have versus other countries. Why? Because I think that shows how much that country rewards hard work.

I think you are over-stating and misinterpreting what those quintiles and mobility figures represent.

Personally, I don’t care if someone is doing better than their parents did. I care if they are doing better than they did last year and whether they will do better next year than they did this year.

Here is the flaw in looking at quintiles. Let’s say you have a country of 100 people with 20 people representing each quintile. Because it’s a quintile, you can only have 20 people in each. If you are #20 and at the very bottom of the top quintile and someone else below you suddenly earns more than you, you drop a quintile.

We tend to think that income mobility is a “good” thing but because of the nature of measuring by quintiles, the only way for someone to climb up the quintile ladder is for someone else to drop down that ladder. There are only 20 seats in any quintile. So low mobility does limit one’s ability to move up but it also provides a lot of stability and stability is a good thing too.

So yes, it is easier to “move up” in Denmark. It is also easier to drop down. It isn’t a measure of how hard someone “works” at all.

I’d be more concerned with the income disparity between quintiles than the relative ease of moving between them.

I think my larger point here is that just because there aren’t that many great solutions out there, doesn’t mean that we should exacerbate the problem further by giving more money to the rich as this “tax reform” will do.
But I really do wish that we could improve our government.

Want to improve out government? Then reverse the process. The current tax reform proposals and what you’ve suggested both have the same problem.

They both perpetuate a system where we set tax rates based on a lot of poorly constructed assumptions (aka correlations!) and then look to see how much revenue those taxes provide and then we figure out what amount of “government” we can pay for.

Why not figure out what amount of “government” (i.e. regulation, intervention, etc..) we need and then base our taxes on collecting enough revenue to cover those costs?