Talk:WG/Strategies/Economic Regulation/Tax Reform

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Negative Income Tax

user:reyraton Oct 13, 2011 11:08 am

I'm working on a negative income tax (NIT) proposal with an inherent guaranteed minimum income (GMI). It replaces all welfare programs other than SNAP as well as Social Security with a GMI of 90% poverty-level (with SNAP of 20% poverty), functionally meaning that household income for every household in America is 10% over poverty.

...

The current tax and benefits system is needlessly complex and wasteful. Social Security is designed to regressively pull money from and then pay back a flat amount to every American, whether they need it or not. Welfare programs attempt to alleviate symptoms of poverty such as food insecurity and support for dependents without addressing the root cause of poverty. Income and deduction calculations are ridden with entrenched interests. Earned Income Tax Credits incentivize fraud and allow employers to offer inadequate wages otherwise untenable, creating welfare traps. The system is inefficient and broken and needs to be scrapped. Luckily, there is a solution which has been proposed and even promoted by economists of all stripes: the negative income tax (NIT), as endorsed by the Keynesian Tobin, the Austrian school Nobel winners Hayek and Friedman, and a host of others. In its simplest and best form, a target income is set; in practice this would be a function of individual poverty levels arising out of members and dependents in a household, though for this proposal roughly $35k/yr was used as it represented an American average of the double of (the average poverty threshold plus 10%). Citizens earning less than their target amount in gross income have half the difference awarded to them by the NIT, while citizens earning over that amount pay according the usual American progressive bracket system. For example, a person who has no gross income for the year (a retiree or disabled person), is awarded half the difference between their gross income and their target income, or $17.5k (mean poverty level plus 10%, a bare minimum amount sufficient to live without savings and just a little more). Someone making $30k/yr is awarded an additional $2.5k (half the difference between $30k and $35k). Someone making $50k per year is taxed on the $15k they made over the target amount of $35k. Fundmentally, the negative income tax would replace all welfare programs and Social Security, all deductions, and corporate income tax, ultimately scrapping all those programs, and more importantly their administration and compliance costs. • Expenses for Social Security and other welfare programs for 2009 was roughly $1.2T. • The amount of money required to ensure that every American household was guaranteed at the poverty threshold is approximately $800B. • Removing all welfare programs and the current income tax filing requirements, replacing them with the NIT, saves the government $400B and ensures that no American lives in poverty. • All other expenses, excluding Medicare and Medicaid but including discretionary spending, were $1T. • Medicare and Medicaid and associated medical expenses carried by the government cost $1.3T; universal health care would cost an additional $0.3T more (see the section on Wage Stagnation) • With these adjustments, target revenue for the government, assuming all programs are maintained, is therefore $3.4T. • All other taxes, excluding Social Security, corporate taxes and personal income tax (i.e., excise taxes and duties) were $0.2T • Therefore, setting corporate tax to 0% and maintaining other taxes sets the total target revenue for the NIT at $3.2T.

• Universal healthcare should increase realized wages by approximately $700B (see the section on Universal Healthcare) • Elimination of the Social Security payroll tax increases realized wages by approximately $890B.

...and the real LOL at this point is that even with WW2-era marginal rates I can only get to $2.2B revenue while still maintaining a net household income increase for households making $100k or less.

Reductions in discretionary spending (Dept of Defense, mainly) can reduce the revenue target by about $200B to only $3B, but that's still $800B short.

Anyone want to play, "cut the budget"?

re: Negative Income Tax

user:Stewart76 Oct 16, 2011 8:09 am

So let's say you reach the target income of 35k, are you still taxed at the same rate as someone making 100k, 250k, or 1M?

re: Negative Income Tax

user:reyraton Oct 16, 2011 1:26 pm

It's a marginal tax system; my own figures are initially guesstimating the first bracket runs from $35k to $70k with a marginal rate of 50%.

So, someone making $50k pays ($50k - $35k)*(50%) = $7.5k in income taxes, or an effective 15% tax rate. Right now they're paying an effective (after deductions) $2.5k (a 5% tax rate). It looks like they're getting hit harder but...

That's an intense increase over current marginal rates, but with Social Security eliminated and subsumed into this (and therefore no more payroll tax), everyone making less than $100k a year is taking home 15.7% more; universal healthcare means that they're grossing another 10%. Together, that means earners making under $100k are probably looking at a 25% increase in income.

So that $50k earner, pre- all this, ends up making $62.5k. His final, post-tax net income would be $48.75k, whereas right now he's netting $42.4k.

So he's paying more in taxes, but he's making more. It's a win-win.

Those are averages... but based on what I have right now, only those making $125k+ have a net income loss after the changes.

That said, I'm still only up to $2.2T in revenue and I figure I need at least another $1.1T, so... yeah. Might be a pipe dream anyway. :p

re: Negative Income Tax

user:reyraton Oct 16, 2011 1:30 pm

I should add that it's not only a win-win between government making more revenue AND more takehome pay for individuals, but there's also the fact that you've secured a guaranteed minimum income for everyone AND there's universal healthcare. So there.

re: Negative Income Tax

user:pcovery Oct 16, 2011 1:52 pm

Sounds lovely. Do you have links to publications on this topic? It's so big and complicated that I'd like to get a second opinion. Thanks for the thoughtful proposal!

re: Negative Income Tax

user:reyraton Oct 16, 2011 2:01 pm

I'm pulling from a half-dozen sources. :p

http://en.wikipedia.org/wiki/Negative_income_tax http://stats.oecd.org/Index.aspx

- Health/Expenditure and Financing/Health expenditure by financing agent, with Units = % GDP (based on $14.1T GDP)

http://www.irs.gov/pub/irs-soi/09inalcr.pdf http://www.census.gov/prod/2008pubs/p60-235.pdf

- multiply families in poverty (by size) by poverty thresholds for size
- guesstimate (!) their current income to determine poverty shortfall; I used FairTax estimates

I think that's the major data sources.

re: Negative Income Tax

user:http://stats.oecd.org/Index.aspx http://www.irs.gov/pub/irs-soi/09inalcr.pdf

For the peanut gallery, that win-win comes from reallocated money normally given to the health insurance industry as part of employee compensation packages and out-of-pocket expenses, which reverts (eventually) to income after implementation of universal healthcare.

re: Negative Income Tax

[[user:
         ]] reyraton

I'm sure the Mises Institute (an Austrian economist school critical of anything remotely compassionate) has plenty bad to say about the NIT.

Googling it will certainly turn up results; I imagine most criticisms have to do with incentivizing work.

re: Negative Income Tax

[[user:
         ]] reyraton

Forgive me for not checking all the links but work is very busy and I want to make a point.

I have a problem with corporations going untaxed. The issue is around their use of the commons. It's not really fair to ask the public to fund the courts, patent office and/or enforcement of patents, and other business-related expenses without getting revenue from them. It ends up making our society a giant welfare system for corporations that have no fealty to us.

re: Negative Income Tax

[[user:
         ]] gwiech

Did you include swapping capital gains to be counted as income? That's an extra $291 billion right there.

The problem is the corporate profits don't typically get extracted as US income, so if you do not tax them directly (and ideally in ways to keep them from playing their current shell games) they end up not paying at all. See all those company apartments, cars, planes, schools, personal security, etc.

Personally I would love to see corporations taxed the same way individuals are; I think it would level the playing field between labor and capital-owners. I would also like to see additional taxes paid on profits in the case of government-subsidized industries (patents/copyright/trademark/government guarantees or regulation as in oil and banking/government contracts like the military industrial complex.)

We could also instead lower the NIT cut off, which would encourage people relying on it to move to cheaper parts of the country. It's one of the advantages of a large country with no internal immigration controls.

I would advocate either a VAT (automatically taken into account when calculating the NIT cut off) or straight-up corporate taxation to make up the difference. We should reexamine the budget separately and then figure out what revenue-raising measures we should be looking at.

re: Negative Income Tax

[[user:
         ]] StargazerA

Sorry - check the Page for an update... otherwise I'd edit the original post.

Corporate tax is generally at 10%; marginal rates and all that imposed, but low corporate taxation still.

I've started thinking of a VAT for all non-mandatory services...

Ending Social Security is Political Suicide - as it should be

user:WayneKleinPhD Oct 16, 2011 6:56 pm

Ending social security - because some who don't need it get it - would redistribute wealth from many who scrimped to save for retirement and give to those who didn't. A better proposal would be to have no upper limit on the social security tax, but to have an upper limit on what can be collected.

re: Ending Social Security is Political Suicide - as it should be

user:gwiech Oct 17, 2011 1:50 pm

There's an argument against means testing Social Security. It's because when it becomes a welfare program it becomes a target for cuts. If you cut the rich out of the program, the less inclined they will be to want to preserve it.

IRS Internal Taxpayer Advocate says

user:AriaLItthous Oct 17, 2011 12:28 pm

..Zero-Sum Budgeting, that is starting from scratch, with no exemptions is the way to being reforming the tax code. If we try to write tax code, we'll be arguing for years. Best to get the ball moving on the process by telling Them to start with a blank slate and react to what They say.

Cut the budget and reduce revenue targets

user:reyraton Oct 13, 2011 11:13 am

Okay, what can we cut out of non-welfare-related discretionary spending (ie., not Medicare, Medicaid, Social Security, SNAP, disability payments or the like) in order to reduce revenue targets?

My NIT target is $1T, so... let's get at it. :)


$200B from Dept of Defense $70B from the War on Drugs

What else?

re: Cut the budget and reduce revenue targets

[[user:
         ]] WayneKleinPhD

How about taking a good look a government (fed, state, municipal) pensions & benefits and cutting those that may be unjustly high?

a Boston College study found that spending more than 50 percent of one’s career as a state-local worker is associated with 11 percent to 18 percent more wealth at age 65.” Private sector employees now rely on their self-directed 401(K) defined contribution accounts and Social Security payments, whereas public employees rely on defined benefit pension payments.

Beginning 1980, there has been a rapid shift away from private sector employer-based defined benefit pensions to employee-controlled personal retirement accounts. In 1980, approximately 92 percent of private retirement saving contributions went to employer-based plans; 64 percent of these contributions were to defined benefit pension plans. However, by 1999, about 88 percent of private sector contributions went into defined contribution plans, the vast majority of personal retirement accounts being set up as 401(k)s and Individual Retirement Accounts (IRA). Private sector workers with 401(K) and IRA personal retirement accounts were advised to invest in the stock market to earn high returns plus a hedge against inflation, while public sector workers’ defined benefit pensions generally guaranteed returns of approximately 10%, including 8% on investments and an on-average 2% cost of living inflation hedge. see Comparing Wealth in Retirement: State-Local Versus Private Sector Worker

re: Cut the budget and reduce revenue targets

[[user:
         ]] WayneKleinPhD

How about taking a good look a government (fed, state, municipal) pensions & benefits and cutting those that may be unjustly high?

a Boston College study found that spending more than 50 percent of one’s career as a state-local worker is associated with 11 percent to 18 percent more wealth at age 65.” Private sector employees now rely on their self-directed 401(K) defined contribution accounts and Social Security payments, whereas public employees rely on defined benefit pension payments.

Beginning 1980, there has been a rapid shift away from private sector employer-based defined benefit pensions to employee-controlled personal retirement accounts. In 1980, approximately 92 percent of private retirement saving contributions went to employer-based plans; 64 percent of these contributions were to defined benefit pension plans. However, by 1999, about 88 percent of private sector contributions went into defined contribution plans, the vast majority of personal retirement accounts being set up as 401(k)s and Individual Retirement Accounts (IRA). Private sector workers with 401(K) and IRA personal retirement accounts were advised to invest in the stock market to earn high returns plus a hedge against inflation, while public sector workers’ defined benefit pensions generally guaranteed returns of approximately 10%, including 8% on investments and an on-average 2% cost of living inflation hedge. see Comparing Wealth in Retirement: State-Local Versus Private Sector Worker

re: Cut the budget and reduce revenue targets

[[user:
         ]] reyraton

This is a little tricky; I'll have to dive into data to get a better handle on it.

The short-hand version ( http://crr.bc.edu/images/stories/Briefs/ib_9_5.pdf ) is that retirement accounts lost 40% of their value in the crash of 2008, and even then there's not enough money in there to retire on, as a factor of poor investment knowledge and a desire to consume over save.

I'm also aware that the pension shortfall is something like $1T ( http://www.cepr.net/documents/publications/pensions-2011-02.pdf ). In some sense, non-employee-contribution pensions will eventually get an unfortunate haircut eventually just based on the budget shortfalls.

With 401k's underperforming their purpose - providing for retirement - whether by personal investment ignorance, too-large managing fees, and stock market vagaries; AND pension shortfalls...

It basically looks like no one in America is allowed to retire.

More and more I am appreciating the idea of the GMI and NIT.

re: Cut the budget and reduce revenue targets

user:http://crr.bc.edu/images/stories/Briefs/ib_9_5.pdf http://www.cepr.net/documents/publications/pensions-2011-02.pdf

What if instead of deciding how much we want to spend ahead of time, we evaluate each program on the basis of the benefits it provides vs the additional tax dollars it requires and the marginal value/Laffer curve implications of raising that tax revenue?

Right now we are on the side of the Laffer curve where raising taxes raises revenue, so there is no reason to cut for cuts' sake as long as the resulting government spending is productive. Any government cuts should be justified on the basis of improving the net utility of people living in America, not because of an arbitrary number we are seeking to hit.

The idea that we can break contracts with public employees because we now don't want to pay I find disingenuous. They accepted their jobs on the basis of the total wage package, including pensions, often accepting lower salaries than private-sector jobs because they valued the long-term stability more. If we are worried about property rights or the sanctity of private contracts we should not be rushing to take away things already promised. We can reduce future benefits, but we will probably need to increase base salaries to compensate, unless we are willing to accept a smaller candidate pool.

A Simple Equitable Reform

user:Tonesvette Oct 13, 2011 1:55 pm

Various forms of income are taxed differently.

Income from real estate is practically zero.

Income from capital is 15% to 28%

Income from labor is taxes at over 50%.

Income should be taxed the same regardless of source.

re: A Simple Equitable Reform

user:WayneKleinPhD Oct 16, 2011 7:08 pm

Not sure about your numbers but you make a very very good point. Here is a first draft of the soundbite:

Don't tax those would work for a living at a higher rate than those manipulate money for a living.

Tax all financial transactions

user:WayneKleinPhD Oct 16, 2011 7:03 pm

Occupy Boston will accomplish nothing unless we focus on demands with legs. I believe that a huge proportion of the electorate could get behind a tax on every Wall Street transaction.

A Simple Equitable Reform

user:Tonesvette Oct 13, 2011 1:55 pm

Various forms of income are taxed differently.

Income from real estate is practically zero.

Income from capital is 15% to 28%

Income from labor is taxes at over 50%.

Income should be taxed the same regardless of source.

re: A Simple Equitable Reform

user:reyraton Oct 13, 2011 2:01 pm

I agree that any tax reform should unify the treatment of income.