Take all the trees. Put Ôem in a Tree Museum. Charge everybody $35,000.00 just
to see Ôem!!
a.k.a.
What IS my Fair Share?
a.k.a.
Are you a contributing member of
Society?
Almost
everyone, except our elected representatives see that there is a critical need
to narrow the budget deficit in fairly short order. With apologies to Joni Mitchell,
whose lyrics IÕve co-opted to suggest one means to close the gap, there must be
more rational ways than charging every US Citizen about $35,000.00, the amount
needed to pay off the US debt.
IÕll propose a fairly simple analysis to see what it would take to
simply close the deficit for ONE year. The readers will also be able to
propose their own alternative tax scheme to close the gap. Though IÕm technically not one of
the top 1%, you need to have an income of $384,000.001, I am closing
on it and I do wonder what people mean when they expect the rich to pay their
Òfare shareÓ. IÕve never seen
my fair share really described in terms other than ÒmoreÓ so this will allow
you to tell me, ne EVERYONE what you think their Òfair shareÓ is
quantitatively. LetÕs first look at
the magnitude of the problem (budget deficit), make some hopefully rational
simplifying assumptions and then let you, the reader play countless Òwhat ifÓ
games to close the deficit.
So, first, how big is the federal budget and where does it go. The simple answer is that in 2012
the US budget calls on expenditures2 of 3,728,690,000,000.00. ThatÕs 3.728 TRILLION dollars,
donÕt get lost in all the 0Õs – thatÕs 3.728 million million
dollars! People are usually
curious where it all goes so here is a fairly simple breakdown of how we spend
our money. You may need this
in a future installment if you decide to continue reading this series but for
now itÕs just for informational purposes.
These
expenses are offset by two sources, revenue and borrowing. Borrowing represents $1.1 Trillion
and revenues represent $2.6 trillion2. A similar analysis of revenue4
sources produces the following chart:
So $1.47 Trillion of the
$2.63 Trillion (or about 56%) comes from income taxes. IÕm going to make an assumption
now that to balance the budget we simply scale all sources of revenue by the
amount needed to balance the budget.
To accomplish this, income taxes will have to be increased (for now
– weÕll have other options in a phase II analysis) to $2.1 Trillion. To do that, letÕs first look at
our total collective income and how itÕs distributed amongst 6 groups of people. As a country our Total Income in
2006 (may need to update year) was
That income was distributed
amongst the following groups:
The 90% of incomes at the
bottom of the distribution
The next 5% of incomes (90%
- 95% of incomes)
The next 4% of incomes
(9%%-99% of incomes)
And then weÕll split the oft-mentioned
Top 1% into 3 further groups
The next .5% of incomes (99%
- 99.5% of incomes)
The following .4% of incomes
(99.5%-99.9% of incomes)
And the remaining TOP .01%
of incomes
That produces a distribution
of incomes chart as below that shows, for example, that the lowest 90% of
incomes comprise 50% of the total income in the US.
The cutoffs for those
incomes are as follows5 (see sidebar):
|
Group |
Cutoff Income |
Average Income |
Number of Incomes |
|
Bottom 90% |
$0 |
$30,659 |
133,524,900 |
|
Top 10% |
$104,366 |
$122,359 |
7,418,050 |
|
Top 5% |
$147,839 |
$207,707 |
5,934,440 |
|
Top 1% |
$376,378 |
$458,208 |
741,805 |
|
Top .5% |
$592,681 |
$956,460 |
593,444 |
|
Top .1% |
$1,909,872 |
$3,707,091 |
133,525 |
|
Top .01% |
$10,482,368 |
$29,726,899 |
14,836 |
So, in 2006, to be in the
ÒTop 1%Ó you needed an income of $376,378.
Another cut on this shows
the AVERAGE income for each member of this group and the number of people in
that group (note, this is much smaller than the total number of people in the
US as it is by number of tax returns and not all people file tax returns, legally
or illegal
Plotting this in the most
ÒinflammatoryÓ way I imagined to accentuate the ratio between the lowest and
highest incomes produces the following graph. WeÕll use this as a ÒguideÓ in assigning
tax brackets next. The chart also shows
the breakout by percentile into Òordinary incomeÓ and Òcapital gainsÓ as there
is considerable discussion concerning differing tax rates on these different
types of income.
Now that we have the
preliminaries out of the way, we can get to your portion of the fun and
frivolity!!
This link contains a
spreadsheet that will allow you to experiment with tax rates for ordinary
income and capital gains to answer some questions I (and hopefully you) may
find interesting. Again,
there are some simplifying assumptions in this spreadsheet. Firstly, it only allows tax rate
changes at the breakpoints I picked, not arbitrary ones. Secondly, there are no
ÒdeductionsÓ or ÒcreditsÓ or other attempts to encourage or discourage specific
behaviors. In 1913, when the income
tax was introduced, the law consisted of 400 pages of law, a substantial
tractable amount of law.
Today there are 70,0006 pages and Americans spend 7.6
BILLLION HOURS dealing with them.
There is a large outcry to simplify the tax code and what I have here
(just an explanation of the tax code) would take about a page, likely
less. (Editorial Comment: These
deductions and credits are a source of countless hours of amusement for all
involved as politicians endlessly debate how to encourage ÒinvestmentÓ in
certain areas of our society by providing tax incentives to do so and then
shamelessly lambasting Òthe richÓ for answering the call and jointly making the
desired investment while reducing their taxes. If disingenuous needed a
definition, politicians would clearly supply a superb answer here as well as in
most of their behaviors.)
The spreadsheet does allow
for differing tax rates for ordinary income and capital gains. This is a topic of considerable debate
as to ÒfairnessÓ and Òencouraging investmentÓ. This discussion doesnÕt address
either, other than to show my bias because the default tax rates represent my
personal answers to the tax debate question.
The inputs for the
spreadsheet are
Income Needed from Income Taxes – by default itÕs the scaled amount to be
raised by income taxes (in
discourse #2, weÕll take a journey into another way to close the budget deficit
– spending cuts!). If
you cut spending in discourse 2, you can enter a different number here.
14 tax rates – an Òordinary income rateÓ and a Òcapital gainsÓ rate for each of
the 7 income levels. There are sliders to adjust the 14 rates.
Income –
an input cell to calculate the taxes on any arbitrary income. This is in case you want to
calculate your own taxes with the system you devise or someone else
proposes. (Note: I keep no
history of entries. Your entries
will be completely private unless you decide to publish them.)
I encourage you to play with
the spreadsheet and post your preferred rates and the rationale behind them as
a reply to this post or to simply reply to me directly if you don't want your
answers to be ÒpublicÓ. I
welcome corrections to my data or suggestions for improvement to this
analysis. If the references
are wrong or more up to date, please provide better ones. If there are errors, please point them
out and correct them.
Thus far we have covered
Joni MitchellÕs solution – the tree museum. There is an opportunity for anyone to
tell me what my Òfair shareÓ of taxes might comprise. The remaining question may be
somewhat controversial in that it attempts to answer the question of who is a ÒContributing
MemberÓ of Society, as defined solely by their income tax contribution. Two thoughts have occurred to me
in this regard though undoubtedly there are many others and I solicit your
thoughts in this regard. My
two thoughts are simply as follows:
1) The lowest possible bound for contributing member as
defined this way is ÒSomeone who pays taxes.Ó If you pay no taxes it seems axiomatic
that you are not contributing, you are Òon welfareÓ.
2) The most stringent bound that I can think of is that
you pay more than the ÒaverageÓ tax burden. In other words if you take the amount
needed to be raised by income taxes and divided it by the total number of
taxpayers, you would be a contributing member of society if you paid more than
that amount. In this analysis,
it means that the $2.1 Trillion would need to be split evenly amongst all
taxpayers and only people paying more than $14,155 or so would be Òcontributing
membersÓ. All others are
subsidized.
The really interesting thing
about this analysis is that we can make more people ÒcontributingÓ members by
boosting incomes to get them over the hurdle. Or, and this appeals vastly more to me,
we can cut the budget and effectively lower the bar to becoming a ÒcontributingÓ
member. In the end game of extremely
low government spending, nearly everyone can be a ÒcontributingÓ member.
Future Rational Discourse Opportunities:
Cutting Expenditures – this analysis assumes spending as is. Taxes can be cut from this level
by spending cuts.
Target Inflation – currently this is set to zero and has no impact but I
welcome someone with a monetary background to propose a way to discuss and
arrive at a target inflation rate for a currency. My gut tells me 0 is the only answer
that doesnÕt effectively institute a Òcash taxÓ based on ones cash holdings and
income. Similarly, it
involves a fairly powerful means to transfer income to the rich as they seek
out inflation-protected investment incomes.
Target Growth - currently this is set to zero and does not allow the economy to Ògrow
itselfÓ out of debt in a % of GDP sense. Again I welcome someone with a
monetary background to propose a way to discuss and arrive at a target growth
rate for a society. I
personally am quite skeptical of this as it is the method used by politicians
to kick the can down the road but maybe someone can articulate a rational
reason to include it.
1) Footnote on breakpoint for the top 1% of wage earners
tax returns
2) http://www.usgovernmentspending.com/federal_budget_fy12bs12012n
3) http://quickfacts.census.gov/qfd/states/00000.html
4) http://www.usgovernmentrevenue.com/yearrev2012_0.html
5)
6) http://www.economist.com/node/15867984