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Income inequality

Policy areas: 
Social welfare
Rick's thoughts: 

Income inequality - there's a lot of it, isn't there? My neighbor obviously doesn't have as much money as me, because he never mows his lawn. My other neighbor might have more than me, because his motorized toys are so much bigger than mine.

But what is it, anyway - income inequality? Should each of us start the day with the same pocket full of money? Or perhaps start our lives with the same balance in our bank accounts? Or is it some point in between - redistribute everything once a year, like I was told some Inuit's do (this could be apocryphal, as I can't find anything on the first Google search page)?

We just got started on this and already there seems to be the possibility of a wide range of opinions.

Perhaps we should ask a different question - how much is too much? A million dollars? A billion? Or is it only Bill Gates who has too much money, since his $76 billion gives him $18 billion more than number two Warren Buffett?

Or perhaps the opposite question - how much is too little? If you have enough for lunch, should you be complaining? Or enough to pay your rent for one more month - do you need more?

There have been countries which claimed to want equal wealth (or should it be income? not the same thing at all) for all members of society. That idea didn't end up working out so well.

I'm not inclined to think there is an obvious answer to all these questions, but I do have some thoughts. First of all I don't really care about the people at the top. Between Warren's $58 billion and Bills substantially greater $76 billion I don't see any reason to compare or complain. They can take care of themselves, and unless they are stuffing it under their mattesses it is hard at work for the rest of us. Either they are spending it, in which case it produces jobs for other people, or they are saving it, in which case it is available for other people to borrow. Nice work, boys.

For those of us in the middle - let's say 80% of us, with household incomes ranging from $11,904 to $138,923 - we could obviously shuffle our money around a bit to make life 'fairer' for the $11,904 crowd, but these days $138,923, while certainly adequate, doesn't really jump out as being 'rich' or 'overresourced.'

And for those at the bottom, well there are some anomalies down there, too. Some of us (why call other people 'them'? aren't we all in this together?) are simply poor this year and rich the next - shifting it around avoids the tax man you know. And some hide all of it - we call that the black market. And then there are the students, who are always broke, but hopefully on their way from rags to riches in the near future. Did I mention we would have to argue about the definition of the words 'household income' before we could even start to have a conversation? It all gets very complicated, very fast.

I don't feel any need to be a fountain of wisdom here, however. A little thought experimenting can go a long way toward getting a start on the conversation.

So let's dive in.

Imagine, if you will, someone working for minimum wage (see my views on minimum wage here). That would be $7.25 per hour today, $14,500 at the end of the year. Can a person live on that? Yes, of course. My friend Russell does, and has for many years. But Russell is my 'special' friend and is hardly representational of an average American. He is a vegan and cooks all his own food, for instance. Has a truck but doesn't drive it. Buys his clothes at the thrift store. Turns his thermostat way down when it's cold and way up when it's hot. Doesn't have a TV. Uses the public library. Buys his own health insurance. Uses his neighbor's wifi connection. Owns his own $40,000 condo. Did I mention he graduated from Caltech?

Come to think of it, every poor person could do what Russell does, in which case that $14,500 would be about $2,500 extra every year. They could invest that in index funds, like Russell does, and eventually they could stop working altogether and live off the return on their investments, like Russell does.

But most poor people aren't like Russell, and don't do what Russell does. They spend all their money, and at the end of the week they come up short for the rent. Not because they are irresponsible, but because they are neither as dedicated, nor as skilled, as my special friend Russell. [I am not maligning poor people here - they perform miracles to make ends meet. Every day. Definitionally, however, they don't have that index fund growing bigger and bigger every year, and they get labeled as poor people.]

So how much money do not-special people need, to live at least as well as Russell does? Of course there is no answer to that question. Let's agree, however, to say it's about 50% more than they currently get. In fact, to make things easy, let's agree they need an extra $4.00 per hour. Tax free. That would be $7.25 plus $4.00 equals $11.25 per hour, or $22,500 per year. People currently calling for a minimum wage of $10.10 should be happy with that, and if they're happy I'm happy.

Diving a little bit deeper let's think about a household of four. Two adults and two children. Two adults working, bringing home $45,000 per year between them. I'm not going to claim that's a lot of money, but it does seem to me it should be enough to cover the rent, food, utilities, transportation, clothing, health insurance, health care costs not covered by insurance, education, and all the other basics. With hopefully enough left over at the end of the paycheck to buy at least a thin slice of the American pie - live bait for a fishing weekend, opera tickets, rides for the kids at the county fair, a twelve pack of watery beer, a new video game, piano lessons, whatever it is that trips their trigger. 

Quick gut check. In Alaska, that $45,000 would be 51% higher than the 'official'  poverty level (if I sound a tad sarcastic, it's because I still don't know the name of that genius in Washington who knows all this stuff and blesses us with his belevolent wisdom on all things universal). Everywhere else it would be even more.

The question then becomes - how to get it to them. Where is that $8,000 going to come from?

And the answer is - taxes. You didn't think there was anywhere else government money could come from, did you? 

What my Smart Bonus and Smart Tax program does is balance itself every year. The total amount of Smart Bonus paid must equal the total amount of Smart Tax collected. Some quick math - $8,000 times about 132 million working Americans is about $1.1 trillion dollars. A bunch of bucks. Fortunately the American economy is a big one, too, and generates about $13.4 trillion in personal income per year. So let's take 10% of it, roughly, call it a Smart Tax and use it to pay the Smart Bonus.

I can see many of you pulling your hair out, which is sad, because you have so little of it. Please be patient. This is a new tax, yes, but it replaces old taxes, so it isn't more tax. Is that clear?

Of course my numbers are conceptual much more than real. Did you think I had a mole in the Congresional Budget Office? Or enough time to flush the numbers out myself? Wrong on both counts. What I am presenting is a way to think about reducing income inequality, by slanting the playing field just a tad to the left (for some reason poor people are always on the left side of a graph, and rich people on the right). And a Smart Bonus/Smart Tax system does that by ... let's do some more math.

You work 2000 hours a year at $7.25 per hour and get a $8,000 Smart Bonus. But, on that $14,500 you were paid by your employer you paid a 10% Smart Tax, which would be $1,450. You came out $6,550 ahead. Or, you work 2000 hours a year at $40 per hour and get a $8,000 Smart Bonus. But, on that $80,000 you were paid by your employer you paid a 10% Smart Tax, which would be $8,000. Your bonus and your tax were a dead wash. Or, you work 2000 hours a year at $1,000 per hour and get a $8,000 Smart Bonus. But, on that $2,000,000 you were paid by your employer you paid a 10% Smart Tax, which would be $200,000. You came up short $192,000. I hear the world's smallest violin playing faintly ... oh so faintly.

Are you getting a feel for it? Everybody gets the $8,000, which makes a big difference to the poor guy but is diddly squat to the rich one. And everybody pays the 10%, which pinches the poor guy but kicks the rich one in the butt, although correct me if I'm wrong he still drives home with $1,808,000 in his pocket.

And now back to that $1.1 trillion we need to find, without raising total taxes. Is it there? Yes it is. The big chunk comes from the $0.9 trillion in employment taxes we now pay. In fact, since that tax rate is 14.3%, people earning less than the maximum $117,000 will actually have their taxes lowered. Yippee! And people earning more than $117,000 will have their taxes raised. Booooo! 

There are any number of ways to find an additional $0.2 trillion in taxes to eliminate, but most of it will come from means tested poverty reduction programs. Of course they won't be needed any more since everybody will be pocketing an extra $8,000 from their work, so there won't be any complaining. May I restate that ... there won't be any complaining, will there! And yes, the money is easily there. 

Half of it can come from the Department of Agriculture alone, which won't have to spend $0.1 trillion to keep people's bellies full (SNAP and WIC program). Now that people will have paychecks big enough to buy enough food, free food won't be necessary. Find another $0.045 trillion in housing assistance that won't be needed when people can afford to pay the rent. And ending the Earned Income Tax Credit is another $0.055 trillion ... which pretty much covers the whole ball of wax. [Please rest assured - nothing needs be done that would actually hurt the people at the bottom. The total amount any of them will 'lose' will be less than they gain. Or I'll chain myself to the speaker's podium and fillibuster until they club me senseless and have the Marines drag me out still gurgling venom at my fellow senators through my nostrils.]

Am I committed to any of these numbers? Absolutely not. I'm just using a very few minutes of very precious campaign time to prove that the Smart Tax doesn't have to mean more tax, it just means current taxes are thought about in a different way, poverty reduction and income inequality are thought about in a different way, and there is more than enough money already sloshing around in the federal coffers to make the entire plan feasible with no additional overall tax burden.

Is all this too complicated to understand? Yes and no. Untangling the web of lies our politicians have sold us every year since 1928 (we love Calvin! we love Calvin!) is complicated. That's why they write 1,000 page laws - so you won't understand what's in them.

But the Smart Bonus and Smart Tax program is easily understood, and will be completely understood by every working American, once it is in place. Here it is, in its entirety. You get a $4.00 Smart Bonus for every hour you work, maximum of 2,000 hours per year. You pay a flat 10% Smart Tax on all your earnings, no limit. $4.00 and 10%. You and Bill Gates. And everybody in between.

Smart Bonus. Smart Tax. Smart Thinking. Paradigm Shift.

 

Comments

David Wade's picture

Rick, I am certainly fan of the plan. Am I right in thinking that the amount recieved would be determined by the amount collected? So that in times of prosperity we'd all get more and in downturns in the economy we'd get less? Which wouldn't bother me as it would give all of us a tangible measure of both how the economy is doing and how well our fellow citizens are doing.
Beverly Gerdts's picture

What are you going to do with the growing number of people who make no effort to support themselves and live generation to generation off my tax dollars ( welfare). Find an answer to getting the lazy off welfare and you have my support.

When we end the 93 federal means-tested anti-poverty programs (as a Senator, I won't be able to change state laws, but hopefully we can provide a good example), the people you are talking about will have three choices. 1) work, 2) live off their savings, or 3) seek private charity. This is exactly the way the world was in 1925, before the Hoover/Roosevelt idea of 'managing the economy' came along. Of course the country wasn't as rich then as it is now, but still it was a pretty good system, and if we had just let it run as it was our country would not only be perhaps twice as wealthy, per capita, as we are now, but we wouldn't even have a 'welfare state' at all. Of course we can't run the experiment now, but it is highly likely the least-skilled among us would be earning perhaps $30,000 per year from their own labor, sufficient to pay all their own bills. My Smart Bonus/Smart Tax plan is intended to get us back to that world - people aren't forced to work, of course, but if they don't, well, they can't look to taxpayers to take care of them.
Lauren Wernau's picture

Hi Rick, What would you say about people with mental illness that cannot work? I have a stepmother who can't function in a work environment and is raising four boys since my dad died four years ago. I am a full-time student and working full-time with two jobs, but I clearly don't make enough to help them if they didn't have the support from the government. They don't have extra money, but they have the food stamps to allow them to be fed daily. I wouldn't feel comfortable voting for you if that meant my little brothers weren't going to be fed, clothed, and sheltered due to their personal situation.

I cannot diagnose any individual case, of course, knowing very few of the facts and having no relevant qualifications, but as a general rule I believe we have 'incapacitated' far too many Americans. There are 14 million people receiving disability checks every month, over 10% of the actual workforce. Just a little head scratching will cause most people to agree that is far too many. Were we to reduce the number of people who absolutly 'can't work' to a reasonable level, why would private charity be unable to handle the burden? I am optimistic we can, and they could.

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