Guaranteed safety net and a regressive tax

Great Debates
#1

In another thread, I put forth the idea of a guaranteed safety net for all Americans, in the form of government-issued food, clothing, shelter, and medical care for everyone. (Period.) I postulated that this could be paid for out of general revenues, as my (very rough) calculations indicated that to maintain everyone at at least the federal poverty level would consume 19% of GDP. This figure may be wildly inaccurate; I don’t wish to pick over that at the moment.

I also said that one’s earnings should be taxed at 100% until they reached the contribution threshold, at which point one’s earnings would be taxed at a flat percentage, necessary to pay for all the other functions of government. This percentage would certainly be less than the existing percentage levy, because it would only have to fund the non-social-services portion of the budget; SSI, Medicare, etc. would have been replaced by the basic contribution tax.

Now, this would be a strongly regressive tax, in that the highest tax rate would be on the smallest amounts of earnings. Traditionally, we’ve had a “progressive” tax structure, in that the largest earnings are taxed at the highest rates. Many have objected to this method on the grounds that progressive taxation serves as a disincentive to investment: the better you do, the less of your money you get to keep. Certainly, corporations are now keeping huge cash reserves rather than investing them in capital improvements or new hiring. To what extent this is caused by progressive taxation is debatable (I include S corporations in the above), but it seems to me that a regressive tax might actually serve as an incentive to investment.

Certainly, a flat tax is unworkable, because the amount that would need to be collected from each individual would exceed many persons’ incomes. The current taxation structure, many conservatives in particular will tell you, inhibits growth. So what do you think about a regressive tax where earners pay for the national safety net program first? (The 100% initial tax can, of course, be modified in any one of a dozen ways; the idea is that ALL tax revenues collected first go to the national safety net.) Would a regressive tax structure serve as a stimulus to investment and growth, and would the automatic funding of a national safety net answer most of arguments for a progressive tax structure?

#2

That sucks for high school and college students that want to work to earn spending money as well as everyone else that has their basic needs already provided for but wants to earn money above that.

“Mom, can you drive me to my job at McDonald’s. I feel obligated to support the national welfare fund even if it doesn’t help me personally.”

#3

This makes no sense. A flat tax is a certain percentage taken from the public, not a certain amount.

#4

Yeah, and not just them. Anyone who can’t immediately find them a job that pays them significantly more than the level of provided benefits has little incentive to work.

OP, Acquaint yourself with the economic concept of the Deadweight loss. All taxes suffer from this problem to some extent. 100% taxation regimes (even if they only apply to some income) run into it as into a brick wall.

#5

This would provide a huge disincentive to work unless you’d be making more than the 100% tax. Otherwise you’d be working for free. The only people who’d do that are those gaining experience, entrepreneurs hoping to grow a business, and the terminally bored.

Plus it would be a pretty hard blow to the entertainment, fast food, and travel industry since people wouldn’t have any spare income to spend on them.

If the tax were even 90%, then it would still provide an incentive. For instance, if you made let’s say $5 an hour, then at a %90 tax rate you’d have around $80 a month spending cash. Which is pretty darn small, but since your basic needs are already fully paid for you could spend it on optional good much more easily.

#6

I believe the OP actually means a Poll Tax (Tax per head).

Of course, we all know how popular Poll Taxes became in Thatcher’s UK - Poll Tax Riots

#7

I figure January will become a real jerk-off month; people just showing up, going through the motions, not bothering to exert themselves… because the money they earn that month is going straight to the government anyway.

#8

I did say this could be tweaked in any number of ways. There’s no functional difference, though, if you pay 100% of your contribution obligation first, or 50% or 90% of it: at the end of the year, you’ll have earned a certain amount, $X of which will have been taxed. Getting the initial contribution out of the way would create a rising curve of disposable income, so that people had virtually no spending money in January but lot and lots in December. While this might not be a bad thing for the economy around Christmas, it could be avoided by having taxpayers’ fiscal years start at different times.

I think the so-called “disincentive” would be balanced by peoples’ realization that once you got past the threshold, you would be earning at a very low tax rate. If you thought in the long term (I realize many people don’t), you could see this as very beneficial.

I do agree that if you had a projected income so low that you wouldn’t earn more than the threshold amount, you MIGHT not care to work as the outcome would be the same for you either way. But laying around on the couch all day doesn’t appeal to everyone. The problem could be addressed by a negative income tax, similar to the Earned Income Credit.

#9

A person thinking in the long term (probably not a teenager :rolleyes:) might consider the value of gaining experience in terms of future earning potential.

Also, a negative income tax could provide incentive to work. Since a dependent wouldn’t receive a housing allowance, you could award that amount to anyone working full-time who was reported as a dependent, and use that to finance a payment to him similar to the current Earned Income Credit.

#10

But if what you say is true, December would become a veritable frenzied beehive of activity that would just about exactly balance out January’s lethargy. Merry Christmas :smiley:

You could also put taxpayers on their own individual fiscal years to smooth out this effect. Starting dates of 1/1, 4/1, 7/1, and 10/1, for example.

#11

Well, yes–a per-head tax (as good a name as any for it) is the fairest tax of all, and therefore the most unpopular.

The rich man doesn’t need more army and navy to protect him, more post office to deliver his mail, more FDA to make sure his food doesn’t kill him, more Homeland Security to make sure no one blows him up, etc. doesn’t breathe more air or produce more poop, than a poor man does–so there is really no more justification for taxing him far more than the poor man except that the federal budget would instantly collapse if we didn’t do that.

#12

Oh good grief. Return on investment is covered by a capital gains tax, which is not progressive, which is how Mitt gets to keep so much of his money.

Debatable is putting it mildly. I might note that the tax rate has not changed in a while, so the change in investment before the recession to after the recession cannot be the cause. Capital investments have certain tax advantages in terms of depreciation, but I’ll leave it to someone who knows more about this than I do to enlighten you.

BTW, the psychological and philosophical justification for a progressive tax rate is that the incremental value of an extra dollar of income to a person declines as income increases. If you think about this you will see it is correct even from your own point of view. If you tax to equalize pain, progressive is the only way to go.

#13

And all the flat tax proposals I’ve seen have some kind of floor, under which the person pays no taxes. Flat taxes become regressive at higher income levels, not lower.

#14

Some are interpreting “flat tax” as a flat PERCENTAGE of income. Let me clarify that what I meant was a per-head tax. But anyway, I dismissed that as unworkable and it was peripheral to my point. Forget I mentioned it.

#15

Well, good grief, there’s nothing in the system I propose that says that capital gains would be treated as anything other than ordinary income.

There’s actually very little justification for treating capital gains differently anyway. It just moves investment from a goal of producing “earned” to “unearned” income, as the IRS classifies it. And invested funds that produce unearned income create less wealth because they don’t produce the economic multiplier effect, because they aren’t “working” in the economy. So those funds produce less social benefit. Let 'em produce jobs, not just earn interest.

#16

That’s true. But even conservatives have figured out you need to cut the lower earners some slack. I get what you are proposing - it is even a worse idea than a flat tax.

#17

Then don’t blame the current doldrums on a tax policy which does not exist. I agree that capital gains taxes should be made more progressive, and raised, but that is another matter entirely.

#18

??? When and where did I say that ??? I said that corporations were holding large cash reserves, but that it was debatable whether current taxation policies were the cause of that.

#19

OK–why? Or is that just a gut feeling on your part?

The lower earners could be cut some slack by a negative income tax.

#20

I am, of course, familiar with the concept of diminishing marginal utility. However, taking money from one person and giving it to another because that money is ostensibly worth more to the latter is an argument that is only likely to appeal to the person who is given the money. The milllionth dollar a person earns may have less utility for him than the first, but if that dollar is taken away from him, it has no utility for that person.

The regressive tax only makes sense in the context of a universal safety net. Using your argument, the utility of a taxed dollar become less even to the lowest earners, because their income floor is $X (the basic maintenance amount) rather than $0.