The Negative Income / Perfectly Progressive Flat Tax

cpwill · Sep 17, 2012

Alright, I gave up on trying to recreate family structure inside of the income statistics, and finally just went ahead and assigned the standard sized family equally to all income strata. That's the biggest methodology criticism I have off the top of my own head for this work. but here it is.

Currently, the tax and welfare structure of this nation are costly and self-destructive. They represent needless harm that we as a people inflict upon ourselves, and worst, they disproportionately harm those in our society who are most vulnerable. In order to achieve the goal of a tax/welfare reform effort that accomplishes the three goals laid out:

1. It should not place undue burden on the poor or provide them with incentives to engage in self-destructive behavior.
2. It should retain a progressive approach while eliminating the ability of politicians to take advantage of it to set bloc against bloc in a cynical search for power, and
3. It should encourage growth that raises all boats and provides opportunities especially to the poor to escape their station.)

I propose the following: TANF, SNAP, and the EITC will be replaced with a negative income tax of 50% on all income not earned below 200% of the poverty line, with a simple poverty line of $5K per adult and $2500 per child being assigned. If you earn precisely zero dollars, then you are raised precisely to the poverty line - in this manner we can ensure that not a single man, woman, or child in the United States lives in poverty. In addition, a 25% flat tax should be applied to all income earned over 200% of the poverty line. This will make the actual effective tax rate perfectly progressive. Instead of our current system, in which the marginal tax rate on each dollar earned between $218,000 and $388,000 is flat, with the perfectly progressive flat tax, the effective rate increases for each dollar earned, as that is a dollar further away from the 200% of the poverty line. I have run the figures and created the presentation below on the effects, comparing a perfectly progressive flat tax of 20% to a perfectly progressive flat tax of 25%, to the current system.

SOURCES:
TANF Calculator: TANF Calculator
EITC Calculator: Earned Income Tax Credit Calculator
SNAP Calculator: https://dss.sc.gov/content/customers/food/foodstamp/foodstampcalc.aspx
Effective Tax Rates: Warren Buffett’s Tax Story Is Bogus | Cato @ Liberty
Negative Effective Tax Rates: Free 2011 Tax Estimator & Tax Return Calculator - H&R Block®
Current Poverty Line: http://coverageforall.org/pdf/FHCE_FedPovertyLevel.pdf
Population and Income Data derived from the US Census
Program Cost derived from 2012 Budget Proposal

cpwill · Sep 17, 2012

Under the negative income tax rate of -50% on all income earned below the poverty line, poor families will actually see increases in net income from their current station, even as they see reduced tax rates. In addition, it would sharply reduce the effects of welfare cliffs, which trap the poor in poverty, and the incentives not to engage in stable family formation, which trap the next generation in the same.

cpwill · Sep 17, 2012

For Positive Income Earners, the story changes slightly. Since the Income Tax Rate for a family of four at $50,000 is now "zero", income earners at the 25% perfectly progressive flat rate up to around $80K will see an effective tax rate reduction, effective tax rates from $80K to $400K remain roughly the same (although their is a slight increase at about the $125K mark), with a slight reduction in effective rate for the super-high income earners ($500K). It is worth noting that since revenues are primarily not a function of tax rates, but of growth in GDP, that the incredible pro-growth nature of tax code simplification combined with encouragement to both lower and upper income earners to higher productivity will increase revenues significantly beyond the apparent static score. That being said, the block of income for whom a rate remains steady represents (statically scored) the source of the majority of tax revenue.

cpwill · Sep 20, 2012

Alright, looking at the budget numbers this doesn't work out as well as I'd hoped, so I'm going to have to alter these #'s to a 75% NIT on all income under 150% of the Poverty line, and a flat tax on the above 150% of the poverty line.

What if...? · Sep 20, 2012

cpwill said:
Alright, looking at the budget numbers this doesn't work out as well as I'd hoped, so I'm going to have to alter these #'s to a 75% NIT on all income under 150% of the Poverty line, and a flat tax on the above 150% of the poverty line.

I don't k ow enough to comment constructively, but it's interesting.

I'll follow this to see what otbers who do know enough think.

cpwill · Dec 31, 2012

cpwill said:
Alright, looking at the budget numbers this doesn't work out as well as I'd hoped, so I'm going to have to alter these #'s to a 75% NIT on all income under 150% of the Poverty line, and a flat tax on the above 150% of the poverty line.

This produced plenty of income and reduced outgo to be (as I recall) budget positive - reducing the deficit. However, what kept bothering me was the combined marginal rate it represented. With the loss of NIT upon additional income, the loss of combined income from ones' job and the government would occur at a rate of 75%. You earn an extra dollar, but it only means an extra $0.25.

While not nearly as damaging as the effective combined marginal rates above 100% that we see above at the "welfare cliff" points, this was a strong enough disincentive to improve the worth of ones' labor to bug me.

So, I've decided to combine both measurements in my proposal. All income earned below 200% of the poverty line will be negatively taxed at 200%, but all income earned above 150% of the poverty line will be taxed at 25%. This will create overlap between the two income levels in which people are being taxed positively on income, but still receiving a rebate on income not earned.

Redress · Dec 31, 2012

Just noticed this thread and don't have time to read it in detail(not feeling well, laying down). I did skim over it and it seems like an interesting idea. I did have a quick question you could answer for when I do get time to read it in detail: By "all income", are you including capital gains? If not, would you change capital gains in any way, and if so how?

cpwill · Dec 31, 2012

However, this still leaves a smaller portion of income-earners facing a marginal tax rate of 25%, but a marginal combined rate of 75%.

It is worth noting that this makes the tax slightly more "progressive" (in the sense that "progressive" means "tax upper income earners more"), as it leaves a slightly higher effective rate on upper income earners.

cpwill · Dec 31, 2012

Side note: figures presented are for two-parent, two-child family, but the dynamics are present in all configurations. If anyone has any good ideas on how to avoid the higher combined marginal rates for the crossover area, I would love to hear them.

cpwill · Jan 1, 2013

Redress said:
Just noticed this thread and don't have time to read it in detail(not feeling well, laying down). I did skim over it and it seems like an interesting idea. I did have a quick question you could answer for when I do get time to read it in detail: By "all income", are you including capital gains? If not, would you change capital gains in any way, and if so how?

I would be personally opposed to doing so, as I think that tax rates effect relative incentives. What we tax, we will get less of, what we subsidize, we will get more of. I think at this point (at most points), we do not want to seek to decrease business investment in America, but rather increase investment in America. Increasing the downside risk to investing in America by guaranteeing a decrease in gains (if they occur) strikes me as a.... poor decision for a nation who has to compete with others for capital.

However, in order to get a superior system passed, I can see a number of compromise positions which might be struck. For example, we could directly apply this measure to capital gains, and use it to replace Social Security payouts, while directing FICA contributions towards individual accounts similar to the way I have outlined here. Such a measure would allow us to fulfill Social Security's original goal of ensuring that seniors do not live in poverty, and capture greater revenue from capital gains while replacing any loss of inflowing capital with a separate, stronger, more reliable stream and shifting ownership in our society from large, institutional investors to broad, middle classed based ownership. Over time it would also ensure financial independence to our lower income seniors, who would be retiring as millionaires or nearly so.

In fact, the more I think about that, the more I like it. This would help us to avoid fiscal collapse by significantly reducing the deficit, while still keeping our commitment to ensure the poor a minimal standard of living regardless of their income. Though - full disclosure - the losers in this scenario are wealthy and upper-middle-class current seniors whose investments are currently bringing them in more than 200% of the poverty line, and who would lose their Social Security checks.

cpwill · Jan 1, 2013

In fact, combined with a 50% death tax on SS Individual Accounts (exception when account passes to the spouse), this would become an incredibly powerful revenue generator for the government, obviating over time the need for other more destructive forms of taxation (estate taxes on non-SSIA's, corporate income, perhaps we could eventually lower the perfectly/progressive income rate as well).

cpwill · Oct 4, 2013

cpwill said:
Under the negative income tax rate of -50% on all income earned below the poverty line, poor families will actually see increases in net income from their current station, even as they see reduced tax rates. In addition, it would sharply reduce the effects of welfare cliffs, which trap the poor in poverty, and the incentives not to engage in stable family formation, which trap the next generation in the same.

Worth noting, is that these numbers just got a lot worse:

cpwill · Dec 26, 2013

cpwill said:
Side note: figures presented are for two-parent, two-child family, but the dynamics are present in all configurations. If anyone has any good ideas on how to avoid the higher combined marginal rates for the crossover area, I would love to hear them.

*snaps fingers.

This program will also cover for Federal Unemployment Benefits and SSDI, since both of those programs are funds sent to people to supplement income that has been lost. You can bump back to the original separation mark.

Ta-Da! :mrgreen:

cpwill · Jan 18, 2014

:mrgreen: Apparently Paul Ryan reads my posts

Paul Ryan’s New Idea Is Really Smart—But Will It Fly?

As s part of the general effort among Republicans in Washington to prevent President Obama’s focus on inequality from painting them as the party of plutocrats, Rep. Paul Ryan appeared at the Brookings Institution this week to talk about poverty.

The Wisconsin Republican and 2012 vice-presidential nominee discussed how the poor could be “reintegrated” into society, and as part of his speech, he proposed that the United States consider adopting a “Universal Credit” scheme that would both streamline the various social safety net payments and tax credits the poor receive and, rather than cutting off abruptly when recipients cross a certain income threshold, would taper off as income rises, thereby reducing the disincentive to finding work...

By advocating a Universal Credit benefit system, Ryan is taking a much smarter approach to his ultimate goal of reducing what we spend on entitlements - one in which spending cuts aren’t his first order of business.

The fact is that the system under which Americans apply for and receive government benefits is extremely complex and wasteful. A recent Fiscal Times article, for example, pointed out that just a handful of programs waste more than $100 billion a year by making payments that are later determined to have been inappropriate.

Streamlining the system so that agencies could communicate better would go a long way toward preventing “double-dipping” and other problems that result in improper payments.

It would also, arguably, make the lives of benefits recipients better. Not only would they be spared the effort of trying to coordinate their benefits through multiple federal agencies, they would find it easier to ease back into work if the plan were implemented as Ryan suggested...

“According to Steuerle’s calculations, if she’s enrolled in programs like food stamps, Medicaid, and SCHIP, her implicit marginal tax rate will be as high as 55 percent,” Ryan said. “And if she’s enrolled in other programs—like housing assistance and welfare—the rate will reach above 80 percent. In other words, go to work, and you’ll keep less than 20 cents of every extra dollar you earn.” ...

American · Jan 24, 2014

I'm for anything that improves efficiency. I definitely think that a work ethic needs to be incorporated into any welfare program.

cpwill · Sep 9, 2015

American said:
I'm for anything that improves efficiency. I definitely think that a work ethic needs to be incorporated into any welfare program.

Well, it is a negative tax against earned income, with exceptions for those who are disabled, or who have recently become unemployed. So I think that is maintained. The problem is that, in return for getting rid of absolute barriers to increased income present in welfare cliffs, we produce a drag on increase all the way up via high effective "tax" rates on total take-home pay for low income via the subsidy drop-off rate of 50 cents per extra dollar earned

American · Sep 9, 2015

cpwill said:
Well, it is a negative tax against earned income, with exceptions for those who are disabled, or who have recently become unemployed. So I think that is maintained. The problem is that, in return for getting rid of absolute barriers to increased income present in welfare cliffs, we produce a drag on increase all the way up via high effective "tax" rates on total take-home pay for low income via the subsidy drop-off rate of 50 cents per extra dollar earned

So this is an inefficient system then? It's a negative tax in the form of a subsidy, which sounds like gobbledeegoop.

cpwill · Sep 9, 2015

American said:
So this is an inefficient system then? It's a negative tax in the form of a subsidy, which sounds like gobbledeegoop.

It's an extremely efficient system (it rids us of whole departments full of now-unnecessary administrators, government-hired social workers, and the like), which has the effect of taking a complete incentive against increased income for the poor, and turning into a partial incentive against increased income for the poor; the same as how taxes today function on you.

ludin · Sep 29, 2015

cpwill said:
It's an extremely efficient system (it rids us of whole departments full of now-unnecessary administrators, government-hired social workers, and the like), which has the effect of taking a complete incentive against increased income for the poor, and turning into a partial incentive against increased income for the poor; the same as how taxes today function on you.

Instead of this I prefer people just pay no tax up to the poverty level for their family size.
so if you have a family of 4 then you pay no tax up to I think 37k dollars. anything above that you are taxed at 10%.

this goes for everyone.

cpwill · Sep 29, 2015

ludin said:
Instead of this I prefer people just pay no tax up to the poverty level for their family size.
so if you have a family of 4 then you pay no tax up to I think 37k dollars. anything above that you are taxed at 10%.

this goes for everyone.

So you would keep our bloated, sclerotic, and collapsing entitlement state, but slash revenues so that it falls all the faster?

Yikes. No thanks.

ludin · Sep 29, 2015

cpwill said:
So you would keep our bloated, sclerotic, and collapsing entitlement state, but slash revenues so that it falls all the faster?

Yikes. No thanks.

nope because I would get rid of most entitlements in the exchange.
I see negative income as more of an entitlement than anything else.

revenue would actually increase as people have more spending power.
the difference goes to who pays it which would be on businesses as they are collecting more money.

cpwill · Sep 29, 2015

ludin said:
nope because I would get rid of most entitlements in the exchange.

:shrug: then you need to start your plan by getting rid of the US populace, and replacing it with one more to your liking, because that is not possible.

The American people are not going to accept an alternative where we abandon the poor or the elderly.

I see negative income as more of an entitlement than anything else.

Sort of - it is a replacement for social welfare spending, similar to the proposal by Charles Murray.

revenue would actually increase as people have more spending power.

This is incorrect. Revenue would increase over the very long run, and would decrease over the next decade or so, which is when we need the money.

ludin · Sep 29, 2015

cpwill said:
:shrug: then you need to start your plan by getting rid of the US populace, and replacing it with one more to your liking, because that is not possible.

The American people are not going to accept an alternative where we abandon the poor or the elderly.

Sort of - it is a replacement for social welfare spending, similar to the proposal by Charles Murray.

This is incorrect. Revenue would increase over the very long run, and would decrease over the next decade or so, which is when we need the money.

negative income tax would be the largest entitlement program there is.
I think it would surpass most of the current ones by a fair margin.

who wants to work when I can collect 20-30 grand by not doing anything.
the government picking winners and losers is bad enough this makes it worse.

Politics1234 · Sep 29, 2015

There are different types of poor people out there. There are hard working honest poor people and then there are lazy people that are poor too. I am watching prostitutes who are too lazy to work, with tons of illicit children go on welfare and whine about themselves. So if we fix this welfare thing we are also benefiting the lazy poor and then these numbers do not mean a thing because then the real cause of being poor, meaning the lazy poor taking money that does belong to them, has not been addressed.

cpwill · Sep 30, 2015

ludin said:
negative income tax would be the largest entitlement program there is.
I think it would surpass most of the current ones by a fair margin.

The negative income tax would replace the transfer entitlements. So it takes a system that is opaque, cumbersome, expensive to administer, and which punishes good behavior while rewarding bad behavior and replaces it with a system that is streamlined, easy to administer, easy to watch being administered, transparent, and which rewards good behavior.

who wants to work when I can collect 20-30 grand by not doing anything.

As I laid out in the intro posts, what this does is replace current programs, which already provide similar levels of support - but do so in a way that actively discourages work by setting up "welfare cliffs" wherein you actually net lose take-home benefits/pay by earning more. The NIT changes that math so that the poor are supplemented while maintaining the incentives for work and higher earnings.

An individual on the NIT who is unemployed would make $10K a year "by not doing anything". For able-bodied adults, I think we would be wise to follow Maine's example.

...Last year Maine passed a measure that would require recipients of the Supplemental Nutrition Assistance Program, otherwise known as SNAP, to complete a certain number of work, volunteer, or job-training hours before being eligible for assistance.

Main Governor Paul LaPage passed the measure last year and the resulting drop in food-stamp enrollees has been dramatic.

At the close of 2014 approximately 12,000 individuals were enrolled in the state assistance program. Keep in mind that these individuals are adults who aren’t disabled and who don’t have children at home and who are claiming the food-stamp benefits because of a lack of financial resources.

After forcing these individuals to either work part-time for twenty hours each week, enroll in a vocational program, or volunteer for a minimum of twenty-four hours per month, the numbers showed a significant drop from 12,000 enrollees to just over 2,500....

The Negative Income / Perfectly Progressive Flat Tax

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