Our analyst and commentator Lloyd McAulay writes: Discussion of the increase in economic inequality became noticeably more frequent recently. The best selling Thomas Piketty book on “Capital” has prompted much of the discussion. A main technique for reducing inequality has been through the tax code. This article discusses the personal income tax code with reference to the United States. Other articles will discuss the business tax code, the inheritance tax, an asset tax (which is proposed by Piketty) and non-tax matters, such as the minimum wage, relevant to income inequality. I do not know enough to be sure of the thresholds or even of the rates set forth in the following. But with that caveat, I can structure an approach and assume thresholds. The biggest unknown is the amount of income that is now free of taxes or , like capital gains, subject to reduced tax rates.
1. A No Tax Threshold of $60K. I suggest a family income of up to $60,000.00 as the starting point for income tax. This means no income tax on the first $60K of any family’s income. I think in our amazingly prosperous economy, that those who are in the lower half of income should pay no income tax. Remember that they pay Social Security, sales tax and those taxes, such as corporate and real estate, that are part of the cost of doing business and thus incorporated in the price of goods and services. My $60K suggestion recognizes that median family income is about $55K. I up that threshold by about 10% to cover the fact that I propose no deductions for anything, including charitable contributions, mortgage interest, local income tax, and medical expenses. The $60K threshold might be affected by what is collected by items 2 and 3 below. We should consider a single rate structure for individuals and do away with head of household and married filing jointly forms. This would reduce the threshold under which no taxes are paid.
2. All Income Fully Taxable. This is just what it says. I urge no special treatment for dividends, capital gains, local bond interest, inheritance and other so-called “unearned” income. The $60K threshold means some unearned income would not be taxed anyhow. How much tax this approach produces affects the threshold and the tax rate.
This unearned income should be subject to withholding. Since I treat dividends as fully taxable personal income, I would treat them as a corporate expense.
3. No Deductions. The $60K can be looked at as including a modest standard deduction since median family income is probably under $55K. Eliminating deductions is tough to achieve politically. This proposal eliminates a vast amount
of so called tax compliance. There will be no deduction for charitable giving, mortgage interest or medical care. I have read that there are 300 items now covered by deductions and special tax treatment.
4. No Charitable Deductions. One advantage is that it gets the government out of the business of deciding what is a charity. Why is the Metropolitan Museum a charity and Bartlett Farms not? Why is it a charitable act for MOMA to show films and it is not for Loews to show films?
5. Inherited Income. All inherited income should be treated like any other income and taxed at the rate which applies to the individual getting that income. This means no separate estate tax. Briefly: employ an inheritance tax and not an estate tax.
6. A “sort of” Flat Rate. On income over $60 thousand and up to about $2 million, I suggest a flat rate at an amount to cover tax requirements. I wildly guess that this will mean a rate below 40%. It is a function of how much is pulled in by taxing all income. There may be some trade-off between threshold and this rate. Because the
threshold is high, this kind of flat rate becomes what is called “progressive”. (i.e. mathematically progressive). If the “flat” rate is 40%, a person earning $120K, would pay $24K (0.4 times 60K); an overall rate of 20%.
7. A Millionaire Rate. The amount over $2 million, could be taxed at a maximum feasible rate. Going over 50% probably results in too much tax avoidance. This is hard to gauge. The federal rate should take into account state and city rates so that the tax payer’s top dollar rate for all three income taxes will not exceed 50%.
8. Increase the Ceiling for paying S.S. Tax. The S.S. tax and Medicare tax should extend to all income up to where the millionaire rate kicks in. These taxes are essentially a flat tax rate component of income tax.
9. Negative Income Tax. Keep this tax for the lowest earned-income group. It is also called the earned income tax credit.
The above would reduce the tax code enormously . It would reduce efforts now made that distort economic decisions in order to gain legal tax advantage.
Policy Considerations that are relevant to the above:
1. Those who benefit most should pay for that governance structure which protects the benefit.
2. There is an aesthetic, ethical and even moral impulse against great inequality.
3. It is efficient and thus good for the economy to have a simple system.
4. It aids public acceptance for the system to be simple. I suspect that the personal income tax code could be written in a few pages.
5. It rewards work by low income workers.
