There’s been a lot of discussion around taxation lately, with some advocating a flat (and fair) tax, and others saying we need to eat the rich, so to speak. I am one of those who used to advocate for a luxury tax – a flat tax based on sales of luxury items – but thinking through the psychology of such a tax has made me question that advocacy.
On Facebook, then, a discussion around a flat tax rose, with me gently advocating a progressive tax rate, using the phrase “we are our brothers’ keepers, in a way,” and the response to that got me thinking about the actual numbers involved in a progressive tax: could I actually model it?
TL;DR: no, I couldn’t. The model I came up with shows some interesting data, but it doesn’t factor in different types of taxes or tax jurisdictions, nor does it accurately model (in any way) population demographics. I still thought it was interesting – as shown by the next 1300+ words – but is it “accurate in any way?” No. Economists wouldn’t even find it funny; they’d find it sad.
I actually worked up a spreadsheet, with which I could put in some numbers to try to work out a balance between supply and demand from a taxation basis.
I created six people, starting at a 10k/year income, doubling for each person (so “John” makes $10k/year, and “Donald” makes $320k/year.) I assumed a flat tax rate of 10% on each person. I also assumed a representative expenditure rate (based somewhat on where I live) which works out to a single-bedroom apartment outside the city center, with groceries, utilities, and phone, which total up to an unrealistic $9336. No car, and no insurance costs were factored in.
If you can survive where I live on that budget, that’s FANTASTIC. Most people I know who work in the food industry, etc., have multiple jobs and roommates.
I’m assuming, for these six people, an average of the incomes for infrastructure – in other words, I’m assuming I need $105k a year for fire, road maintenance, schools, police, the works. I don’t think this is accurate; I think the actual need is much higher, but we’re working with a tiny sample.
At a flat 10% rate, our 10K earner – Joe – is in awesome shape, losing $336 a year before he purchases anything. He’s got $10 a day allocated for food and clothing. He does have a phone, though, so there’s that, and I’m hoping he has a pawn shop television or something, and God forbid that he drink or do drugs. He can’t afford them – or anything – unless he has an illegal source of income. A purchase of a McDonald’s meal is splurging for him. With a negative net income, anything that happens to affect his income is catastrophic: the flu, a work-related accident, a death in the family where he has to miss work to go to a funeral, or having to get a bus ticket to ride to work.
Betty, our $20K earner, is in much better shape, as long as she has exactly the same expenses as John does; she’s making $8664 a year. She has something of a safety net; she might own a TV, maybe internet along with her phone, all of which add up – she can afford public transportation, maybe even a car. Her car might cost her $150 a month plus a let’s-be-kind $80 a month for insurance on it – so that’s an easy $2760 a year out of her $8664 disposable income for the year. She can get her McDonald’s meal if she wants it – and even can save enough for a decent dinner date, or some clothes. (Remember, John is on $10 a day for everything, including clothes and food.)
Franklin, our lucky $40k earner, is sitting pretty; he has $26664 as a base disposable income after taxes, so he could have a catastrophic injury after a year of careful saving and live at least as well as Betty. (Even after a catastrophic injury, he’d be far ahead of poor Joe.) Realistically, he’s going to have a much nicer apartment, perhaps a newer car. He can afford to eat out every day, should he so choose, although he’d be well-advised to skip the steakhouse, if only for economy’s sake.
Let’s skip over Muffy and Stewart, who make $80K and $160K respectively (with $62664 and $134664 liquid assets after they have a Joe-level apartment, which surely wouldn’t be the case in real life, but they could easily rent houses for $2K a month and still be living much better than even Betty or Franklin.)
Let’s look at Donald, who makes $320K a year. His tax base is $32000, and he therefore has a net income of $288k; if he lives as austerely as Joe has to, he’s got $278664 a year to spend as he likes. “New car, caviar, four star daydream,” indeed. (A football team, sadly, is still going to be beyond his means.)
For Donald, eating at the Steak House every night would be ill-advised – but mostly because of his waistline and cholesterol, not because of his expenses. What’s more, Donald is not even particularly upper-class yet.
Here’s the thing: at a 10% tax rate, with Joe losing money every month, the tax base is only $63k – our fine six here are going to live very different lives (with Joe not even making it hand-to-mouth, and realistically, Betty’s not doing that well either), with Muffy, Stewart, and Donald all being able to afford quite comfortable lives, with no worries about what’s going to happen if they need a new pair of shoes. (Joe gets to … not eat for a couple of days, or purchase very carefully at the second-hand store.)
Our tiny culture here is losing money every year, but everyone is paying a “fair share” based on their income.
If we change the tax rate slightly – to be more progressive – things change dramatically. Going to a 20% tax rate for everything over $100K/year (which includes Muffy and Donald) means that Joe still has nothing. Muffy and Donald now pay $32k and $64k in taxes – double what they would have under the flat 10% rate – which leaves poor Muffy with only $118664 a year to dispose of, and Donald is going to have to get by with $246664.
However, the tax base is now fixed: we now have $111k in taxes for the year.
But Joe is still screwed over. If we lower his taxes to 0% – he’s below the poverty line in a big way, after all – we lose his $1k contribution to the tax base (lowering it to $110k/year) but the big win here is that Joe is finally looking at having $664 a year as disposable income! Don’t spend that $55 each month in one place, my friend. In fact, you might want to save it, as it’s almost a month’s expenses.
Realistically, we’d need to change this calculation quite a bit; there are a lot of Joes in the real world, and that all adds up to the tax base need. The question of fair taxation really centers around what’s fair to all of those Joes and what’s fair to Donald and Muffy.
This is where my model broke down drastically; it has one Joe, not one hundred of them. I could change that, I guess, but I don’t think it’s necessary to do that to see the dynamic at work.
A fair tax doesn’t actually legitimately affect Muffy’s or Donald’s lifestyles; they’re still looking at fairly large disposable income levels. It does affect them, of course; it might mean the difference between a new car and two new cars.
A “fair tax” (meaning a “fairly non-progressive income tax” in this context) destroys all of the Joes out there, who don’t necessarily have the upward mobility that Franklin or Stewart have. When you’re living on the edge of bankruptcy (or past it, as Joe would be) there is no upward mobility; education is beyond reach, and the overall sense of desperation (in a Maslovian sense) is crippling.
An unfair tax – or a progressive income tax, if you like – addresses the tax base’s need, while freeing Joe from some of his burden. It can mean a difference to the lifestyles of the more financially enabled, but I don’t think it actually converts the upper crust to anything resembling the middle class; they’re still upper-class, just without quite as much, and realistically, I don’t think they’d actually miss the additional funds, with the result being that people like Joe can actually survive. (Who has ever really had to struggle with wondering which of the Maseratis to take to the golf course? If this is a real struggle for you, then you have an awesome life, and no idea of the desperation out there.)
I’m not willing to dress up the terms, personally; the right term is, I think, a “progressive” income tax (because it “progresses” higher as the income levels grow.) I think it almost has to be an income tax, for reasons I’ll explain better when I reach the discussion of the actual Fair Tax proposal.
I think the progressive income tax is an unfair tax structure, and that’s what I call it.
However, I don’t think being “unfair” matters; if Joe has value, then Donald and Muffy actually do have some responsibility in a human sense (not a legal sense) to share in his struggle, if only obliquely (remember, Donald could pay Joe’s tax burden for a year and not even notice, in a real sense. If he has to pay for two thousand Joes, on the other hand…)
Joe is actually responsible for himself, no matter where he started from, of course; given drive and dedication, he can improve his personal situation. But that is an individual motivation; we’re still going to need janitors, restaurant line workers, and other people whose jobs simply don’t pay enough to move them well past Joe’s circumstances (which is the basis for the “higher minimum wage” efforts going on – they’re trying to make it where people like Joe are forcibly given higher wages.)
The difference is, though, that easing the burden from a taxation standpoint is far, far, far easier and more fair for Donald than it is for an army of Joes, each one of which would have to face that loss per month. For Donald, it’s the loss of some optional expenditures – that third car, perhaps. For Joe, it’s life and death if he gets ill.
To me, I’m far more willing to suggest that Donald not have that car. A fair income tax, from a humane standpoint, is not an even tax; it’s a progressive income tax, even at its flattest.
There is, of course, a “fair tax” initiative, that is based around an idea that I like quite a bit: it’s a pure sales tax, with a “prebate” that offsets the cost of the tax, especially for lower incomes.
As I understand it, the idea is that what you buy determines your actual taxes. There is no income tax. If you buy only food and clothing below a certain amount, the prebate would offset the taxes associated with those items, such that your actual tax rate would be 0%. If, on the other hand, you bought large screen TVs, a yacht, a new car, and a new Mac Pro, you’d exceed what the prebate would cover, and your tax rate would be close to 23% (the proposed tax rate is 23%, but the prebate applies to everyone, so you’d never quite reach 23%.)
If you’re thrifty – if you’re Donald from my progressive model, but live as if you’re on Joe’s means – your tax rate might actually be 0%, because you’re only taxed on what you spend, not what you make.
This is, in fact, what I consider to be a fair tax, and the libertarian in me loves it (not least because I try not to buy stuff I don’t need.)
But it has a severe weakness; the wisdom of its citizens.
The fair tax relies on people, especially the well-heeled, to be big spenders. It means that Joe is desperate for Donald to buy a yacht if he can, because otherwise the tax revenues that the region needs aren’t going to be available. It ties the supply of tax dollars strictly to the wisdom and austerity of the citizenry; any kind of local recession would have catastrophic effects on the tax base, because the revenues needed to keep the local services running during the recession would dry up further because of the recession. (In a local recession, people would save their money, which would dry up the fair tax revenues, which would make the local recession more powerful, which would cause people to save even more money, which would…)
From a personal, selfish perspective, I love the idea of the fair tax, because I have no problem not spending what money I have (or so I think). However, from the perspective of the society in which I live, a fair tax means that I, and people like me, could easily become predators on our fellow taxpayers, because we’d be hoping they’d be out buying boats, cars, televisions, and other such things to make up for the taxes that we’d be trying hard not to offer.
That’s human nature, and I think that a tax code that relies on greed to succeed is, while fair, not good enough to be workable.