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Tax Plan

tl;dr

For those who struggle with reading

 

One of the biggest issues in devising a tax plan is addressing income inequality. Those of you who felt the Bern earlier last year might be touting his Robin Hood strategy of attacking the 1% to feed the 99. I’m not saying that’s a bad idea (yet), but I will start with the assumption that capitalism is the way to go, and as a natural side effect, some people will have more money than others. Some of you stopped reading just then, but for those of you who aren’t communists, let me introduce you to something called the Pareto Principle.

Pareto Principle

Also known as the 80/20 rule, the Pareto Principle states that for any given system, 20% of the inputs are responsible for 80% of the outputs. This has applications in fields ranging from statistics to biology, but it’s most commonly used in economics. The most salient example being that 20% of people own 80% of the wealth. And 20% of that 20% own 80% of that 80% and so on. This means that, ideally, “the 1%” that everyone’s talking about should own 53% of the wealth.

To calculate the wealth controlled by the top x% of people, the formula is given by x1-1⁄α, where α is an arbitrary constant which for the Pareto distribution equals log45≈1.161.

It’s important to use wealth and not income here, since anyone who makes $100 million a year is not going to be able to spend it all. Applying the 80/20 rule to income will result in rampant wealth inequality as the wealth begins accumulating among the rich. Of course, you can’t tax wealth. Well, you can; but if you try, you’re only creating business for the Cayman Islands. To create an 80/20 wealth distribution, income taxes are taxed according to a different curve, whose calculations I will leave up to the more qualified economic counsel that I’m sure congress listens to diligently.

So instead of provding solid numbers like you would expect, I’m going to cop out and merely indicate who has more money than they should:
  • Top 1% – Actually not a problem. Sure tax loopholes should be eliminated, but their effective tax rate should remain the same, or even decrease (in the unlikely event the government has a surplus of money)
  • Top 5%, exclude 1% – They have over twice as much wealth as they should. Establish a bracket targeting this group and raise their taxes.
  • Top 10%, exclude 5% – Same as top 5%. Raise taxes.
  • Top 20%, exclude 10% – Also increase taxes, but less aggressively
  • Top 40%, exclude 20% – They’re about where they should be. Leave this group as is.
  • Top 60%, exclude 40% – This is where we start having people with less money than they should. Taxation should be minimal, if present at all.
  • Bottom 40% – Here should be the taxation cutoff. These people have an average net worth in the red because of mortgages and student debt. The standard deduction for filing jointly should be increased to $25,000, and the deduction for filing singly to $12,500. These impoverished individuals shouldn’t need to pay taxes at all. The majority of them don’t anyways, due to food stamps and social security, so why the extra paperwork? I know that “eliminating taxes for anyone making less than $25K/year” sounds eerily similar to something the annoying orange once said, but if you say enough things, some of them are bound to be right.

Minimum Wage

I’m one of the “teach a man to fish” type of people. I also recognize that stagnated wealth turnover is an issue and some families may be stuck at the bottom of the food chain for generations. The primary goal of my tax plan (next to funding the government) is to stimulate wealth turnover. In lieu of welfare programs to increase the wealth of the bottom 60%, there’s several mechanisms for fomenting wealth turnover: inheritance taxes, increased spending on education, eliminating taxes on the bottom 40%, and increasing minimum wage, which hasn’t been raised since the Bush administration.

(To clarify, the last increase was in September 2009, but it was mandated by a bill passed in 2007)

The biggest argument against minimum wage is that it’ll increase unemployment, because supply and demand. First, we must more clearly understand unemployment.

A naive assumption is that the best unemployment rate is 0. However, we need a pool of unemployed job-seekers to act as a buffer so that new positions get filled relatively quickly. Granted, when they stay in that pool for too long, you get homeless people. But as long as the turnover rate of the unemployment pool is sufficiently quick, the pool should make up anywhere anywhere between 3-6% of the total worker population, depending on who you ask. An employment rate of 0% is also impractical as it leads to rampant inflation since all the workers with their fancy jobs start asking for raises.

I get not-so-secretly annoyed every time someone says to me “The economy is horrible!”. Oh really, uninformed individual? Why is that? To which they reply with something of the effect “uh… unemployment is through the roof”. Yet last month (Dec 2016), the Bureau of Labor Statistics reported an unemployment rate of 4.7%. It is at this point my misinformed interlocutor will insist that Trump said those numbers are fudged and the actual rate is 42%. Of course, that’s based on a different (and unused) measure of unemployment which has always been ~40%. But speaking of fudged statistics and assorted bullshit, we come to the issue of unemployment vs underemployment.

Here’s an example. Fast food companies participate in a disgusting practice. Arguably more disgusting than the cockroaches in the kitchen. Instead of hiring 1 employee to work 20 hours/week, they will hire 2 employees to work 10 hours each. Why? Flexibility. If an employee quits, there are fewer holes in the schedule. And if someone wants to drop a shift, they now have a plethora of other workers dying for more hours. This practice amasses a group of people who are technically employed, but don’t work enough to provide for themselves.

Thus we have the problem of underemployment. The definition varies, but in the widest scope applies to any worker being underutilized. This can mean busboys working only 10hr/wk, but also janitors with a PhD. Ideally, the underemployment rate is equal to the unemployment rate, but right now it is roughly twice that. I say roughly since the Bureau of Labor Statistics doesn’t have an explicit definition. One of these vague definitions is “any part of the workforce that doesn’t make enough to support themselves”. Which brings us back to the issue of minimum wage.

The largest argument for a minimum wage is that people shouldn’t have to work 40hrs a week and be unable to support a family. But I’m of the opinion that anyone who decides to have children when they are not financially able are guilty of child abuse. I realize this is an unpopular opinion, but that’s why I’m not running for office. Before anyone else points out the obvious, I will mention it myself: yes, shunning poor people from having children when certain ethnic groups disproportionately fall into lower economic brackets is an indirect form of eugenics. So my ideas aren’t perfect. Bite me.

Sanders and his ever diligent army of college students have been famously touting the $15/hr minimum wage. Seattle has already passed legislation to increment their minimum wage law to $15/hr and even commissioned a study from the University of Washington to study the effects. The study found during the first year (increase to $11/hr) that while the employment rate of lower-wage workers did decrease slightly, the economy of the area as a whole became stronger. So a drastically increased minimum wage works in the city (for now), but what about workers who don’t live in LA or NYC? A $15/hr minimum wage for a small town in Mississippi seems likes a fortune.

If minimum wage is decided upon a living wage, then the federal minimum wage should match the lowest living wage in the country. This happens to be Logan County, Arkansas, where a living wage is $8.64, according to MIT’s Living Wage Calculator. So that settles it. We need another minimum wage hike. But is there anywhere a $15/hr minimum wage is justified? The most expensive place to live in the country is Honolulu, where the living wage is $14.92. It comes close, but not even the most expensive place in the country justifies $15/hr.

To end this recurring debate, all municipal organizations should be required to implement a living wage law that automatically adjusts the minimum wage with a change in the cost of living.

But I have to ask myself: “Self, how will companies pay for this increased wage?” To which I would reply: “Looking out for corporate interests? Self, you’ve changed. But there’s a way…”

Corporate Tax Rate

Did you know that Walmart paid $7.6 billion in taxes in 2015? (SEC Filing form 10-K) Walmart also employs 1.5 million people in the US. Even if we assume worst case scenario where all of those people are minimum wage full-time workers (they’re not), eliminating the corporate tax rate means Walmart could afford a $2.43/hr raise for every employee without decreasing profits. And that’s worst case scenario I made up because I didn’t want to do anymore math. The actual raise would be higher.

Don’t get me wrong, I’m all for taxing rich people. And I am one of the few liberals who thinks corporations are people. Or at least 3/5ths of a person. Sorry, racism. #CorporateLivesMatter Anywho, despite corporate personhood, the corporate tax rate doesn’t tax rich people, it taxes innovation. If you want to prevent a CEO from buying another Lambourghini and use that money to repair a road, then tax the CEO. Don’t tax the construction firm helping you to build the road. A corporate tax is an unnecessary middleman.

Mortgage Interest Deduction

American tax code has a clause, 26 U.S. Code § 163(h), that allows people to deduct their mortgage interest from their taxes. So you don’t have to pay taxes on any money that you’re putting towards a mortgage. The argument for this deduction is that it encourages people to own a home. The counterargument is that it disproportionately benefits the wealthy: the larger your home, the more interest you pay, and the larger your tax refund.

It also inflates home prices, making it an indirect subsidy of the real estate market. Yet no politician would dare eliminate this tax, because home prices would drop. Meaning homeowners could lose tens of thousands of dollars each. The only people who this would benefit are potential homeowners, like college students. And we couldn’t even get Bernie the nomination.

Inheritance Taxes

The core principle of capitalism is that a man is entitled to enjoy the fruit of his labor. If a person does honest work and becomes exceedingly wealthy, they should be allowed to enjoy their wealth. But as usual, kids enter the picture and ruin everything. To combat the plague of heir and heiresses who never worked a day in their life, I want to institute copious inheritance taxes. Allow for a $5.93 million deduction per heir (ideally for education and capital investment, should they turn to entrepreneurship) and beyond that, I’m not opposed to a 100% tax rate. Of course, in the sense of pragmatism, we have to understand that this would only work if the inheritance was purely monetary. Property becomes more complicated and I am not qualified to speak on that matter.

The $5.93 million allows each heir to invest their money in semiannual treasury bonds and live on a comfortable $80,000/year off the coupon rate (yes, I took inflation into account). Sure, $80k may not match the sumptuous lifestyle they’ve grown accustomed to, but laziness is not deserving of lavishness. They can get a job. The $80K figure comes from a Princeton study on whether money buys happiness. It does (sort of), but the effect wears off after about $80K.

Debt

Not taxing enough will create a deficit that will slowly (or quickly) add onto the ever growing behemoth that is the national debt. The uninformed individual I was conversing with earlier also has strong opinions about this. They think that we owe $17 trillion to China who is going to call us on our debt and then we’ll all be speaking Mandarin. This dystopian image implies that we borrow money by getting on our knees and pleading with the loan shark that is China. In actuality, we open an offering of treasury bonds. Then countries, corporations, and private individuals flock to us to buy them. This is because, short of an underground vault of cash, US treasury bonds are the most risk-free form of investment. From this perspective, it becomes clear how silly the idea of “China collecting our debt” is. You can’t demand Uncle Sam to refund the premium on your bond, and neither can China.

Now we need to establish exactly who we owe debt to. The Government Accountability Office (GAO) released a report in 2012 that may be a couple trillion dollars short in terms of size, but is still accurate in terms of proportion. According to the report, 21% of the national debt is owed to the government itself. Why? When the government has money sitting around, it invests that money into itself. If that sounds financially recursive, that’s because it is. Another 31% of the debt is owed to private American citizens. This means over half of America’s debt is owed to America. The remaining 48% is owed to assorted international interests, the largest of which is the Chinese government, who we owe $1.3 trillion to (c. 2012). Nothing to shrug at, but not exactly monstrous. We borrow that much every 2½ years.

Graphic Courtesy of NPR

Also deficit spending is not necessarily bad. The perks of being the richest country in the world is the superb interest rate. If you can borrow money at 3% interest and invest it at 5% interest, it makes perfect sense to borrow all you can and invest it in your economy, so long as we can pay for the essential government programs without deficit spending, should push come to shove. Deficit spending should be reserved for the special extras. Those programs that aren’t strictly essential, but still help make america great ag- wait! I didn’t mean it, come back! And they’re gone.

 

Links:
2007 Minimum wage Act
Planet Money Episode 387
GAO Report on Federal Debt
The Asset Price Meltdown and the Wealth of the Middle Class (data is in the appendices)
Census Bureau Report on Earnings
Walmart 2015 SEC Filing form 10-K
Princeton study on money and happiness
University of Washington study on the minimum wage hike in Seattle

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