rich_and_the_poor_part

Here I continue my imaginary "social engineering" of our US tax policy, to tackle the increasingly widening gap between rich and poor. I promise this is the end of my journey into the subject – a rather long last look, a final outpouring. I just don’t have the stomach for any more…

I managed to find some newer IRS data summaries, these from 2002. I’ve been playing "what-if" games with these numbers for the last week, trying to come up with a scenario that addresses the issue in a "fairer" and "simpler" way. (Of course, I know that what’s "fair" in my mind is absolute, satanic Marxist anathema to others.)

I’m sure for anyone who still actually attempts to figure their own taxes, they’d accept this statement as a truism: The tax rules in this country are way too complicated. There has to be a better way of dealing with the way we get funding for government services.

If you read my previous pages (here and here) on the widening gap between the ultra-rich and the rest of us, you’ll see why I think the situation has gotten out of control. I won’t discuss the various theories explaining why the increase in income inequality over the last couple of decades has taken place, nor will I take (too many) cheap shots at the obvious and well-documented bent of the current Administration to further enrich those in the extreme upper echelons of wealth. Likewise, I won’t talk about the future burden we’re placing on our children via the severe deficits we’re running as a result of these policies. (Notwithstanding the fact that I personally don’t have any kids to worry about, I am cognizant that there are a lot of them out there. And I grant that there’s a chance that many of them may someday turn into actual thinking, feeling human beings – although often that’s a bit of a stretch for me to conceive.)

On another page, I took a first crude cut at thinking about imaginary changes to the tax structure. That was mainly to show what would happen if the rich were somehow made to pay their fair lawful share of taxes. I got some satisfaction in showing how you could really help the underclass in this society, and reduce the tax burdens of the middle class in a truly meaningful way. I limited myself to tinkering with the effective tax rates of each of the income groups in question. While that’s easy for anyone to do, it lacks a certain sense of "simple elegance" and doesn’t seem to get at the real questions: What magnitude of income disparity are we willing to tolerate in this country? How can we make the rich more mindful of the economic situation of the average workers that support them? And how can we better address this issue via a simple, straightforward, and consistent tax policy?

I think we need to somehow key the concept of taxation to how the average person is doing at any given point in time.

In 2002, the average US adjusted gross income for all household tax returns was $46,385. But this figure is significantly skewed by the large inequality of wealth distribution toward the upper end of the income scale. In data situations like this, it’s better to consider things in terms of the median. Based on IRS data, the median household reported only about $27,000 adjusted gross income. (To establish the median, you take the number of all the individual tax returns received, divide by 2 -- and that’s your median household, right in the middle of the entire tax-paying population.) So think of your "average Joe or Jane" as the person smack-dab in the middle: Half of everybody in the US earns less than their household, and the other half earns more than their household.

Before you weep too hard for that guy-or-gal-in-the-middle, realize that the lower 50% of all households paid less than 5% of total IRS tax receipts in 2002. We’ve long had a "progressive" tax structure in this land. Those of us who are better-off accept -- some of us more grudgingly than others -- this fiscal burden. We assign it to the providence bestowed on our lives, from whatever beneficent, unknown source it issues. That is a good thing; it registers a sense of social fairness that’s uniquely human, and humane. I perceive that the ultra-rich have more recently convinced the legislative powers-that-be (perhaps aided by political contributions and lobbying dollars) that their particular branch of providence should be reclassified as being exempt from this historical social pact. I cannot fathom the epistemological bent of their argument. But I do understand how money talks.

Nevertheless, to my mind, imposing any tax at all on the lower half of society is like beating a weary camel. So let’s go a step further. Let’s propose here and now that there will be no tax at all on that bottom 50% group. We can certainly make up that paltry 5% somewhere along the line, among the more fortunate members of society.

Now please internalize that 50% median income number, $27,000. In 2002, the average taxpayer in that category paid about $1760 in taxes. Let’s use that as a starting basis for taxation for the more privileged among us. Consider this: How much more than $27,000 does it take to make a "good life" for you and your family? Speaking for myself, I have a hard time imagining I could lead a good life at 1X that base salary. I could probably do OK at 2X, if I downsized significantly -- I would definitely have to make some budgetary sacrifices to handle that. What’s your answer?

For the average of the top 0.1% of people filing tax returns in 2002 (about 170,000 of them), their multiple of that basic unit of income was 104X, or $2,815,960. I think that annual income would provide a pretty darned good life for anyone. The average of the top 2% of returns had a multiple of 19X, or about $520,000 gross income. (We’re talking close to 2.5 million households, here. That sector actually starts at around $130,000 and Lord only knows where it ends.) That sounds like a mighty fine life, too.

How about we say that the demarcation line for "progressivity" in taxes starts at 3X of that median 50%-income bracket number. For purposes of argument, I will put forth the supposition that 3 times $27,000 = $81,000 is where "the good life" really starts. So up to 3X that reference $27,000 income, you’d pay taxes based on what the IRS took from that median-ranked household in 2002. In other words, at any income ratio up to 3X, you’ll pay that ratio times $1760. Anything beyond 3X, your ratio will get bumped up, to the extent of how much beyond the "good life threshold" you’re at. It turns out, if you make this "boost" factor 6.2 times any ratio over 3X, you’ll bring in the same total tax receipts as the IRS did in 2002.

Notice I didn’t say anything about graduated marginal tax rates. This scheme is based on individual household adjusted gross income, period – gross income net of any true losses. I don’t care if the income is from regular income or capital gains, rents, dividends or interest. No tax loopholes, no standard or special deductions. (We do have to allow for bona fide business expenses for non-incorporated, private businesspeople.) The idea is, you pay on what your household nets for the year. Go ahead and quibble about exemptions for kids, charities, and all the other things that make tax life so complicated. I say, lose ‘em all. This whole tax scheme is simply all about paying according to how much your income differs from the 2002 median taxpaying household. Period. It relates to the average Joe or Jane, nothing else.

Nice thing about it is, it has a progressive result that isn’t too awfully different than what we have in place now. There are no tax tables, no fine print. It’s simple. Everyone uses the same three calculations:

If your net income was less than $27,000, don’t bother doing the math, there’s no tax due. (But see the note below.)

Not only is this tax scheme simple, it makes everybody mindful of how our median American is doing, and how much that ordinary citizen shares in the overall wealth generated by our society. Also, there’s no "falling over into" a higher tax bracket. When you get past the 3X multiple, you do start to get exposed to the "multiplier boost" factor. But it starts slow and is a regular, continuously linear function thereafter.

You say you’re in the ultra-rich category and want to reduce your taxes? You can do it -- if you and your country-club cronies can figure out a way to improve the average Joe and Jane’s lot in life. Far be it from me to tell you how to do this, but perhaps you might want to think about giving your bottom-level employees a decent raise for a change, or putting on some underemployed people in your factories.

Next filing year, the IRS would keep those same base numbers, $27,000 and $1760, in play. Except for adjusting them for inflation, they are to be considered constants from their original point of creation, onward. The IRS would adjust the "boost" factor to yield the same tax receipts – that too indexed for inflation, of course. (Personally, I wouldn’t dick around with the "boost" factor until we achieved a balanced budget.) If the median adjusted gross income (after inflation) went up in the last tax year, the boost factor would go down for the next -- giving the "living well" folks (those making over 3X the median income) an automatic tax reduction. That would happen because everyone breaking over that original base income level would start to pay a tiny bit of taxes – since the "original median salary" on which this tax structure is based stays fixed. But in principle, there should be a whole lot of people paying this tiny bit more. Owing to the reduction in the boost factor, those people with more than a 3X multiple would start to enjoy a corresponding tax benefit – the more so, the richer they are. So the "progressivity" of this scheme is self-limiting . But that happens only if the median US income level rises more than inflation -- only if our median American household regains that wonderful dream of progress and opportunity that (before 1970) gave them succor. Could they perhaps come to believe once again that working hard was a worthwhile endeavor?

On the other hand, if the median income falls, the well-off get socked a bit harder – again, more so the richer they are. Remember, no one making under the $27,000 base income point gets taxed, and if more than 50% of the households end up under that fixed number, the top 50% (especially the very top echelons) have to make up the difference. Is this fair? If our average guy is suffering, why would we want to let him suffer alone? I would submit that the very wealthy are the ones that have the most influence over the way our business cycles churn. And if it became in their economic interest to worry more about the median American’s lot, they might better attend their grip on that churn!

Here’s a table showing the differences in the existing tax scheme, and the one I "what-if’d" above. Remember, the boost factor of 6.2 comes into play on any ratio above 3X of the median household’s (yellow) gross income. The table includes actual IRS data from 2002 household returns. (Corporate taxes are not dealt with here. Very complicated subject. Maybe I’ll tackle them at some later time…)

Adjusted Gross Income Category	Avg Gross Income	Cumula-tive % of Returns	Avg Tax Paid in 2002	Cum. % of All Tax Income	Basic Multiple of $27,000 Income	Boost Multiple (6.2X anything over 3X)	New Avg Tax Paid (Multiple times $1760)	Tax Benefit (or Penalty)
All returns (130,076,443 total)	46,385		6,380				6,422
No adjusted gross income	---	1.3%	0	0.0%	0.0	0.0	0	0
$1 under $10,000	5,145	20.0%	41	0.1%	0.2	0.2	0	41
$10,000 under $20,000	14,872	38.0%	465	1.4%	0.5	0.5	0	465
$20,000 under $25,000	22,386	45.7%	1,156	2.8%	0.8	0.8	0	1,156
$25,000 under $30,000	27,401	52.3%	1,759	4.6%	1.0	1.0	0	1,759
$30,000 under $40,000	34,742	63.1%	2,670	9.1%	1.3	1.3	2,232	438
$40,000 under $50,000	44,815	71.2%	4,039	14.3%	1.6	1.6	2,879	1,160
$50,000 under $75,000	61,311	84.6%	6,344	27.6%	2.2	2.2	3,938	2,406
$75,000 under $100,000	85,911	91.7%	10,673	39.5%	3.1	3.8	6,757	3,916
$100,000 under $200,000	131,751	98.1%	20,946	60.7%	4.8	14.2	25,012	-4,066
$200,000 under $500,000	287,569	99.6%	64,928	75.7%	10.5	49.5	87,063	-22,136
$500,000 under $1,000,000	674,354	99.9%	189,198	83.3%	24.6	137.0	241,095	-51,896
$1,000,000 or more	2,815,960	100.0%	818,143	100.0%	102.8	621.6	1,093,954	-275,811

You can see that there’s a nice chunk of change coming into the households earning less than $30,000, and significant net tax benefits accrue up to the $75,000-$100,000 income level. (I’m not too crazy about the "dip" in tax benefits for the $30-40,000 category -- must be a demographic quirk in the system.) Over $100,000, the tax penalties become more apparent. Let’s look at how "progressive" my scheme is, relative to the IRS’s, in the following table:

So, yes, it’s clear that this scheme is somewhat more progressive than the one we see in the 2002 IRS tax code. But remember, as recently as 1980, the top marginal tax rate (paid by those earning over about $500,000 in 2003 dollars) was 70%! Of course, I’m sure not many rich people – then or now -- paid their lawful share, since they’ve always been able find loopholes in our bewildering, cobbled-together tax code. (And if the loopholes aren’t there, they could always make a few calls and get ‘em put there!) Let’s do a fr’instance on a really supercalifragilisticexpialidocious rich guy who nets $100 million bucks in a good year. Using my scheme, his unadjusted multiplier is 3703X the base median income figure of $27,000, and his adjusted multiplier is 3 + (3700 X 6.2) = 22943. His total tax then becomes 22943 X $1760 = $40.4 million, or 40.4% of his income. Still a hell of a lot less than our old historical 70% top marginal tax rate, I’d say.

I have the tax data for the 170,000 people in the top 0.1% of the taxpaying population, but I don’t have the data for the super-rich class, say, the 17,000 households occupying the top 0.01%. It may well be that my scheme actually lowers their taxes, compared to what they’ve been paying. If that’s so, then my formula ends up transferring the tax burden from the super-rich to the merely very rich. Not a perfect situation, but I’ll take it. At any rate, my point is that the progressive effect of my proposed scheme is constrained, and doesn’t take off geometrically past any certain large value. So Bill Gates has nothing much to worry about. There’s still plenty of room left for really rich people to make lots and lots more money.

The progressivity in my scheme, on a large scale, has roughly the same "shape" as the traditional IRS scheme. In my scheme, if the income brackets were to be plotted evenly-spaced on the X-axis, you’d see one line at a shallow slope up to 3X income, then another straight line at a steeper slope beyond that, extending up to the moon. I think the IRS scheme would show several line segments at different slopes, on up to the top segments. However, thanks to the diddling of the last few political regimes, those top segments would certainly be a tad shallower than mine.