The Lifelong Endowment

T99 over at Grim's Hall recently put up a post called "The wages of consent". It points out that:

A welfare state threatens to become a system in which the most valuable service some voters can offer the market is to elect a politician who will drain resources from those who didn't elect him.  The politician pays for this service by routing a fraction of the loot back to his loyal voters.  The welfare state differs from our earliest attempts at state-administered charity in that the politician no longer is commandeering and redistributing only a small fraction of the nation's wealth to a small number of the most desperately needy.  Now he's commandeering from 49% of voters and redistributing to 51%.  Once the politician realizes that that's the path to staying in office (where he makes a handy living by skimming off the top of the redistributed funds), we are well on our way back to a command economy, one in which a centralized power directs where most of the resources shall be routed.  That way lies poverty for everyone.

and asks:

How do we stop a pernicious system of votes for hire?

I believe the ship has sailed as far as ever getting back to a system where people in the United States don't expect money to be taken from some of us to and given to others of us, so the fact that T99 is not asking, "How can we convince 51% of the people that wanting money to be redistributed to them is a Very Bad Thing?" seems to me to be a step in the right direction. That is, she is not asking how we can do the impossible but, rather, whether there's a way to do the maybe-perhaps-possible. There may be.

Quite a while back, someone who read my blog emailed me about a plan he had to address this very issue. Called the Lifelong Endowment*, the plan takes the government out of the equation by setting up a direct transfer of money from those who have more to those who have less. The plan document** detailing the Lifelong Endowment summarizes it thusly:

It assesses sixteen percent of all personal income and retained corporate earnings on a monthly basis, and distributes the full proceeds in equal shares to each adult citizen and quarter shares to minor citizens. Neither the assessment paid nor the benefit received is subject to federal income tax. [snip] Two pieces of companion legislation complete the proposal. The first eliminates the Social Security Old Age, Survivors, and Disability Insurance program (OASDI), and returns all employer and employee payroll taxes to the employee as wages. It also guarantees beneficiaries a total Lifelong Endowment benefit not less than the total OASDI benefit they would otherwise receive. The second measure is a corporate income tax rate reduction sufficient to make the proposal revenue-neutral for corporations.

The math here is simple and lovely. The Lifelong Endowment is:

- Flat in assessment: everyone pays the same percent.
- Flat in distribution: each adult gets the same as every other adult; each child gets the same as every other child
- Perfectly redistributive in effect: the poorer you are, the greater your net positive; once you become rich enough, the effect is a net negative

Thinking about this approach does require that we accept the inevitability of some kind of redistribution and turn our attention to minimizing its ill effects. Anyone who is still attempting to eliminate redistribution itself will not find this approach helpful. I encourage everyone, however, to think about how various scenarios would play out under this approach. When I did that, I usually found that this approach worked quite well even in those situations where I was sure I could find a fatal flaw.

How does the Lifelong Endowment "stop a pernicious system of votes for hire"? By getting the Federal government out of the redistribution business. This happens first because the sixteen percent assessment does not flow to the Federal government. Rather:

The collection of the tax and the apportionment of its receipts occur monthly. It is administered through accounts provided and maintained for that purpose by the banks of the United States, the choice among which is made according to the convenience of each individual.

The government has no control over this money and is unable to "make a handy living by skimming off the top of the redistributed funds". It "has no role other than to enforce [the plan's] operation". There is no reason to offer votes in exchange for loot since the politician has no loot to give. There are thus no special interest groups arguing for greater support for their group.

Second, because they have no control over the money, the government and its employees and sub-contractors also have no control over recipients of the money. In speaking of those who currently "look to … [government programs] to satisfy basic needs", the plan document says:

They must accept the definitions and priorities set by the [government program] for the problems that they face and for the solutions to those problems; but these and all other aspects of the [government program] emerge from public-choice processes that reflect interests unrelated to their own. They must forego productive activity on their own behalf in order to meet program eligibility requirements, but attend without fail to unproductive dealings with executive bureaucracies. Both the [government program] and the relationship of citizens to it depend solely on public-choice and resulting political factors that again reflect interests other than their own; but the possible (or threatened) loss of their [government program]-client status can command their support for those interests nonetheless. Through a combination of requirements, prohibitions, and incentives, current assistance programs are thus destructive of the personal, economic, and political liberties of those who must rely on them.

The Lifelong Endowment removes this power from the government. The money is distributed to everyone equally with no intervention from or direction by the government. Recipients need not adopt or forego specific behaviors in order to be "allowed" to receive this money; they need not support policies they don't like in order to elect the politicians who will continue to "give" them the money they need to keep body and soul together:

Citizens are not beholden for their benefit to the patronage of a political faction, but rely instead on the general prosperity that both their own efforts and the genius of their shared civic endeavor help to create.

The Lifelong Endowment also means that people who need financial assistance but would like to support themselves don't have to worry about losing the assistance when they start trying to help themselves. A young mother can take an entry level job without worrying that she'll lose subsidized day care: she goes right on getting her share of the Lifelong Endowment. Even if a big chunk of her salary goes to pay for child care her family is no worse off than it was before and she has her foot in the door of the work world. If a man with an injury that makes it hard for him to work 40 hours a week at his previous well-paid job finds an easy, low-paying job 15 hours a week, he doesn't have to worry he'll lose his disability payment:

All citizens alike can exercise and develop their personal autonomy, defining and ranking the challenges of life in accordance with their own perceived interests. All citizens have the identical incentive to pursue their economic self-interest through productive and voluntary market exchange.

The Lifelong Endowment has effects beyond interrupting what T99 calls "a pernicious system of votes for hire". One of the most important is that it undercuts the idea of a limited pie where more for the rich somehow means less for the not rich. Instead we are all tied together: the more money the Koch brothers make, the more money we all get. Everyone now has a rooting interest in policies which encourage making money. The Lifelong Endowment does this by:

… tying the benefit amount directly to national prosperity. It thereby enlists the self-interest of citizens toward the prosperity of their neighbors, and thus toward creating a nation where both they and their neighbors can prosper.

In other words, once the Lifelong Endowment is in place, proposing a plan that would limit the prosperity of anyone in the country would mean limiting the prosperity of everyone in the country. When a politician starts railing against those who are making too much money, everyone in the country can do simple arithmetic to figure out how much of that "too much money" will flow into the Lifelong Endowment and thence to them - and can see clearly that if that "too much money" flows into the government tax coffers instead, everyone will see far less direct benefit from it.

Although the plan document does not mention it, there is another aspect of the Lifelong Endowment I think is important. It brings into sharp focus the question, "How much of my income am I willing to give to other people?" That, after all, is really what's happening with all Federal income support programs: Social Security; disability payments; unemployment benefits; welfare; food stamps; housing subsidies. All of it. I am giving some of my income to other people: I get taxed; you get money. However, the Rube Goldberg contraption that funnels my taxes to your wallet is so opaque that the connection between the two simply can't be grasped. This makes it very easy to agree to an increased benefit for Person A because it appears to have virtually no impact on Person B's taxes - even if Person B is me. If we extend unemployment benefits for another six months, it may cost each of us, I don't know, $1 a year. That seems like a small price to pay to help those who need assistance. But $1 here and $1 there and before you know it you're talking either confiscatory tax rates or a multi-trillion dollar deficit.

WIth the Lifelong Endowment, we're starting from the other end. We aren't asking, "How much money do we want the needy to have?" but "How much money are we wiling to ante up?" If 16% seems like a lot to be assessed but we run the numbers and it turns out that the government is already redistributing the amount of money that a 16% assessment will provide, well, guess what? That means someone somewhere is already chipping in at least 16% to provide that money. Or, more likely, our grandchildren will be doing so here shortly. In other words, this approach also brings into sharp focus the realization that money given to people must be coming from somewhere and that somewhere is other people, either currently existing or soon to be born into crushing debt.***

I do have some concerns about the Lifelong Endowment as currently proposed. First, the plan leaves intact existing Federal income support programs. Since the Lifelong Endowment would leave most of the people currently receiving them above the means-testing line, the idea is that those programs would be unused without ever being repealed. I have serious reservations about this. I believe eventually the poverty line for participating in those programs would simply be raised and we would end up with a Lifelong Endowment and massive Federal income support programs. (The framework for that is already in place with the trend toward redefining poverty from an absolute condition to a relative one.) I would prefer that the existing income support programs be discontinued.****

That said, the plan document is not just about defining the Lifelong Endowment: it is also about building a coalition to pass it. Leaving the existing Federal income support programs in place may be necessary to build that coalition:

… the continuing availability of current aid programs … serve[s] to reassure voters that their support of the proposal carries little risk.

I am also hesitant about the proposed distribution formula; I lean toward simply giving each adult a full share and children no share. My concern here is about children being seen as little ATMs, whether we're talking about families getting more money the more children they have or divorcing couples whose child custody fights suddenly get much uglier. However, I can see the appeal of providing shares for children so I go back and forth on this issue.

Then there is the assessment on retained corporate earnings. I am leery of corporate income taxes in general so this makes me uncomfortable. However, again, the plan is designed to build a coalition to actually enact the Lifelong Endowment. It may be that the assessment on corporations is necessary to make the Lifelong Endowment large enough to be embraced by a "hyper majority" and/or that requiring corporations to "pay their fair share" may be required to garner support on the Left. Furthermore, the plan envisions an offsetting income tax reduction so the effect on corporations is neutral. We should be aware, however, that once we go this down this road it will probably be impossible to ever remove the Lifelong Endowment assessment against corporations. That means we will always have, a minimum corporate income tax (at least one retained earnings) of 16%.

Finally, what keeps the same "pernicious system of votes for hire" from kicking in and resulting in politicians increasing Lifelong Endowment assessment from 16% to 18%, then 20%, then 25%?

Nothing. Which is why it would be nice to set this up as a Constitutional amendment if possible.***** The plan's author takes the long view here:

The proposal envisions that some variant of a Lifelong Endowment would eventually be adopted as a constitutional amendment. An effort to curtail government powers rather than expand them has the advantage of tactical flexibility: this and other restrictions of government spending can proceed at first through legislation, and their effects can be studied and debated, before the more difficult task of adopting a constitutional remedy is ever attempted.

My own shorter view is that while this type of assessment creep will be a danger if the Lifelong Endowment is enacted through legislation, I believe it is less of a danger when how much is really being paid for a benefit is front and center. It can sound very reasonable to say, "Poor people need more money. Let's increase everyone's food stamp allowance." It can sound even more reasonable to say, "Poor people deserve better food. Let's loosen up requirements for food stamps on top of Lifelong Endowment shares." It should sound pretty unreasonable, however, to say, "Getting 16% of your money isn't enough; poor people need 20%." And if that doesn't sound unreasonable, we're pretty much toast anyhow.

So. Comments, questions, problems, screams of outrage?

*****

Notes:

* I like the name "Lifelong Endowment" because it removes the word "redistribution" and the word "entitlement". It emphasizes the idea that we are all in this together. It removes the stigma of government handouts. It also removes the implication of charity which is a serious consideration if a plan is going to garner support from the Left.

** The Lifelong Endowment plan does not exist in a website although a summary of it can be found in this comment to a PJ Media post. When I quote the plan, I am quoting with the author's permission from our correspondence, including an approximately thirty-page document detailing the plan. Throughout this post, I have snipped specific dollar calculations and amounts when I quote from the plan document. They are not the focus of my post and they are based on older data and need to be updated.

*** I disagree with the statement by Fabius Maximus here that "Proposals like this are dross unless we see the numbers". If the plan is a way out of our current situation then we figure out if the numbers can work. If it causes more problems than it solves then the numbers are irrelevant.

**** I believe health care/insurance issues must be handled separately so I would treat Medicare and Medicaid separately.

***** In the form of the plan outlined at the comment to a PJ Media post, the author proposed a variable rate, set by an independent board. This proposal was not part of the plan document I have. I am extremely leery of a variable rate since such rates seem to travel in only one direction.

Acknowledge the corn

Muhtar Kent, the CEO of Coca-Cola, has an opinion piece in the Wall Street Journal arguing that Coca-Cola is not making Americans fat and therefore shouldn’t be the target of an excise tax. One of his points is:

Sugar-sweetened beverages have been singled out in spite of the fact that soft drinks, energy drinks, sports drinks and sweetened bottled water combined contribute 5.5% of the calories in the average American diet ...

I certainly agree that singling out soft drinks for a supposedly health-driven excise tax is a shaky proposition. I do, however, have a quibble with one of Mr. Kent’s facts: Coca-Cola is not a sugar-sweetened beverage.* I wish it was.

*****

* At least where I live. I have heard rumors that Costco stores in Southern California carry sugar-sweetened Coca-Cola imported from Mexico.

A little housekeeping

I redid Categories over the weekend and may have ended up with even more of a mess than I started with - so I imagine Categories will be a little fluid for a while as I straighten things out. This process meant I skimmed a lot of what I’d written and some interesting patterns fell out when I did so. More about them in future posts.

I found an error in my post on revising the Federal individual income tax: I had a lapse of logic when I described how I would phase in my new tax plan. I updated the original post to fix that.

I also gave some thought to modifying my post on insuring the uninsured. I advocate letting people buy into the The Federal Employees Health Benefits Program (FEHP) and having the Federal government subsidize those who cannot afford it. After re-reading what I’d written, I considered letting people use whatever amount of government subsidy they would have gotten to buy into FEHP to buy into any private health insurance plan they wanted. I decided that would be a mistake. I believe the whole reason HR3200 has developed the hideously complicated Exchange with its Bronze, Silver, Gold, and Platinum plans is to be sure that when people buy health insurance they’re getting a decent plan. If I modify my plan to let people use a government subsidy to buy into any private plan, it’s almost certain some people will end up in worthless plans. Since a mechanism for defining decent plans already exists via FEHP, why take that risk? (Hint to those who wrote the Exchange provisions in HR3200: you’re reinventing the wheel.)

And, yes, I understand the idea that people should be free to buy lousy insurance if they want, that there’s a limit to how much we can or should protect people from their own errors. However, if people buy lousy plans, get sick, and need medical care, society is not going to let them die; instead we’ll just pay again to get them that care. Which ties into my second reason for wanting to “nanny state” this issue: I’m not crazy about my tax dollars going to some fly-by-night insurance company that decamps to the South Pacific when their claims catch up with them. So I’ve made what I think is a good no-call and left my health insurance reform as is: the uninsured buy into FEHP with a government subsidy if needed.

Also if this post (via neoneocon) about the problems with Medicaid is accurate, I think moving Medicaid enrollees into FEHP looks like an even better idea. Sauce for the government employed goose is sauce for the poverty stricken gander - and even more so for the goslings.

Finally, commenter MrsWhatsit at neoneocon has made an excellent suggestion: use the unspent money from the February Stimulus Bill (American Recovery and Reinvestment Act of 2009 aka ARRA) to subsidize insurance for the uninsured. If we assume 75% of the approximately $700 Billion Stimulus is unspent, we can subsidize the uninsured signing up for FEHP for at least three years. (That’s assuming a worst case scenario in terms of costs.) That would, as I said in my original post, give us time to see if that’s really all we need to do. If so, we can figure out how to fund it going forward; if not, we can consider other reforms.

There. Dusted and vacuumed, even fluffed up the pillows a little.

Spinning soda into gold

They’re talking about taxing sodas again. TigerHawk doesn’t sound happy; Conor Clarke asks what the big deal is. To me, the big deal is that I hate all sales and consumption taxes - actually all individual taxes except the income tax. If I assume, however, that the government is bound and determined to levy some kind of tax on “unhealthy” food and drink then what becomes important to me is making sure we understand what we should be taxing and why we’re taxing it.

Clarke has up an interesting chart that shows the results of asking people who and what they would be willing to tax “to help pay for health care reform and provide coverage for more of the uninsured.” Soda and soft drinks were a less popular target than (in order of popularity) cigarettes; families making more than $250,000 a year; wine and beer; and unhealthy snack foods. Clarke is puzzled about the unpopularity of taxing soda. I’m not.

It does seem illogical to support taxes - higher taxes - on cigarettes, wine, and beer while not also supporting taxes on “unhealthy snack foods” and “soda and soft drinks”. But it’s not surprising: relatively few people smoke and I suspect that relatively few people drink enough to make raising taxes on wine and beer an issue. (Plus we can all just start drinking bourbon instead. Although I like mine with Coke so I may be out of luck anyway.) An awful lot of people, however, like a cold Coke on a hot day at least occasionally. And since the survey didn’t specify only non-diet sodas, it’s not just those of us who are addicted to the real thing who are going to resist a soda tax.

Also, people are aware that cigarettes, beer, and wine are already subject to significant taxes so the idea that’s it’s “normal” to tax those products is firmly implanted in most people’s brains. Similarly, cigarettes and alcohol are firmly filed under “Vice” while snack foods and sodas are equally firmly filed under “Treat”. Finally, while people may agree with Clarke that soda isn’t good for people’s health, I don’t think most people think of soda as being bad for you in the same way that cigarettes are and alcohol can be.

One issue that Clarke gives weight to is where to draw the line in defining what is and is not a “soda and soft drink” and he bemoans the lack of a bright line to distinguish what would and would not be taxed. On that score, I have a suggestion. Well, two suggestions, actually.

Let’s start by looking at the rationale behind taxing sodas: sodas cause obesity and obesity is a big health problem so if we tax sodas we will improve health by reducing consumption and raise money for other health-related improvements. Interestingly, the Wall Street Journal article cited by both TigerHawk and Clarke does not provide any links to any evidence of the causal relationship between sodas and obesity. The WSJ article does identify The Center for Science in the Public Interest as the moving force behind the idea of taxing sodas to pay for health care reform so I checked their Website and found a one-page memo proposing the soda tax. The memo states - without hyperlink, citation, or footnote - that:

More bad news comes from researchers who are finding that soft drinks are especially good at making people gain weight. In fact, soft drinks are the only beverage or food that has been linked to a greater risk of obesity.

Perplexed but undaunted, I did a quick Google search for “soda causes obesity” and found the top hits dated from 2006 or earlier. An article in The San Diego Union-Tribune seems to sum up the state of play pretty fully. It presents four arguments advanced to support the causal link between soda and obesity.

Argument 1: While soft drink consumption was rising between 1977 and 1997 so was obesity. Somewhat haphazardly lumped into the same argument is a reference to two studies that found obesity increased in schoolchildren and nurses when they consumed more sodas.

The first part of this argument presents correlation but not causation. The second part is somewhat tautological: as students and nurses consumed more calories they gained weight. None of this answers the really important questions: Why did soft drink consumption rise and why does soda consumption apparently occur on top of existing calorie consumption rather than replacing it? In other words, when the students and nurses drank more soda why didn’t they cut back on calories from other sources? Answers to those questions are contained in the second argument.

Argument 2: Soda is sweetened with high fructose corn syrup (HFCS) which does not act the same way other carbohydrates do to reduce appetite. Thus while consuming “real food” causes the body and brain to figure out that they’ve eaten, consuming HFCS does not. (This is a remarkably sloppy section. It begins by talking about HFCS then cites evidence from a study of “caloric beverages”. One is left to assume without evidence that the caloric beverages were sweetened with HFCS.)

Unfortunately, Argument 2 is presented in such a way as to only address the question about why people who consume soda don’t reduce calories from other sources. A little thought, however, reveals that the problems with HFCS can shed even more light on Argument 1. If high fructose corn syrup doesn’t produce feelings of satiety, perhaps that’s why soda consumption rose from 1977 to 1997 - a period that matches up nicely with the introduction of HFCS into sodas:

HFCS was rapidly introduced to many processed foods and soft drinks in the U.S. from about 1975 to 1985.

In other words, this suggests that the causal relation is not between soda and obesity but between HFCS and obesity. Soda may be an intermediary - HFCS in soda causes increased soda consumption which causes obesity - but since HFCS is found in so many foods I'm not even convinced we can say that. Take away people's sodas and they will still be consuming a lot of HFCS. So if HFCS is the problem, people deprived of soda may simply increase calorie consumption from other sources in a continuing vain attempt to achieve satiety.

Argument 3: People who consume soda are more likely to eat less healthily across the board. There is absolutely no evidence - none, zip, zilch, nada - that consuming soda causes people to eat more fast food and fewer vegetables. It makes just as much sense to say that people who eat fast food are more likely to consume soda simply because it’s the most readily available beverage at fast food places. Or that people who are careful to eat healthily are more likely to avoid high-calorie beverages. Or that rich people eat vegetables and drink water while poor people go to McDonalds a lot.

Argument 4: I don’t even know how to describe this argument. The article says:

Many different types of studies link sugary drinks and weight gain or obesity. Some even show a “dose-response” relationship – as consumption rises, so does weight.

There’s that tautology again: as people consume more calories their weight goes up. And there’s that question again: why does soda consumption apparently occur on top of existing calorie consumption rather than replacing it? And notice the sloppy use of the word "sugary" when what's almost certainly meant is "HFCS-y". Argument 4 is just a restatement of Argument 1 with the addition of the words “[m]any different”.

As I said above, what I derive from this review of the evidence is not that soda causes obesity but that if there is any causal relationship at all it’s between high fructose corn syrup and obesity. So here’s my first suggestion. If the government is going to go ahead with this tax, don’t levy it on soda (or “unhealthy snack foods”): levy it on high fructose corn syrup. And since we don’t know whether HFCS’ bastard child, crystalline fructose, is any better, let’s tax that also. Think of the benefits. First, HFCS is in everything; the government will make a fortune in revenue. Second, since a HFCS Tax will advantage manufacturers who use real sugar in their products we can expect fewer items with HFCS and more items with real sugar. This will result in a real-life field test of the idea that HFCS is messing with our appestats and making us all fat.

My second suggestion is that the government tax artificial sweeteners also. There is research linking the consumption of diet sodas to obesity so if the goal is to reduce weight as well as raise revenue, there’s no logical reason not to tax artificial sweeteners right along with HFCS. People who cannot eat sugar, like diabetics, can submit their receipts for the purchase of artificially sweetened items along with a form signed by their doctor and get their taxes refunded.

And there you are. Tax high fructose corn syrup, crystalline fructose, and artificial sweeteners. Americans will become slender and thus healthy and the government will make a fortune in revenue. Er, or not. Actually you can only have one of those two outcomes. In order for people to become thin, they will have to eliminate the taxed items from their diet. But in order for the government to rake in the dough, people will have to continue to eat the taxed items. You can’t have it both ways. Which means that when The Center for Science in the Public Interest says:

The Obama administration needs to mount a comprehensive anti-obesity campaign, and slashing non-diet-soda consumption should be front and center. We need to get soda out of schools, install millions of water fountains across the country, require warning labels on soda containers, and sponsor a media campaign to counter the soda industry’s billion-dollar-a-year effort to maximize sales.

As it turns out, the quickest, most effective way to put a lid on soda sales would also give the government the money to do all that and more: slap a tax on carbonated and non-carbonated soft drinks.

what they really mean is either “We’re incapable of logical thinking” or “We don’t care about improving people’s health. We just want the government to have more money.”

Federal individual income tax

[Updated the implementation plan on August 17, 2009.]

When I started this blog it was partly because I believed I had some good ideas about various issues. Now that the excitement of the election is behind us and the initial Obama administration flurry is subsiding, I’m going to tackle some of those issues. First up: the Federal Individual Income Tax.

All tax policy is based on beliefs about what is right and fair and how things should work. There is no value-free tax policy. Here are the beliefs behind my tax policy:

1) Everyone should pay taxes. I don't care how little you make or where your money comes from - you pay taxes on it. There must never be a time when some people pay taxes and some people do not - we're all in this together.*

2) Income tax rates should be progressive. I'm utterly opposed to a flat-rate tax. Although I'm not at all religious I did spend a lot of years in Sunday School and the Parable of the Widow's Mite has stayed with me ever since.

3) People shouldn’t be making life decisions based on the tax implications. For example, a house is a huge responsibility and - as we‘ve just seen quite clearly - can be a world of trouble. But because avoiding taxes is seem as a universal good, people apparently do actually say to themselves, “What the heck! I’ll buy a house. It’s just like paying rent but I get to deduct the mortgage insurance.” This deforms rational decision-making.

4) The tax code is not the place for social engineering (beyond that already implicit in a progressive tax code). In order for a tax system to work, the system must be perceived as fair and clear. The more the tax code is used to promote desired outcomes the more people argue it’s not fair. Remember the fights over the “marriage tax” and now over the “death tax”? I could get a whole post out of the whole "charitable deductions aren’t fair" quarrel. Most destructive, of course, is the chronic suspicion that the rich can somehow use “tricks” that aren’t available to those less well off. Make the tax code simple and clear and many of those complaints disappear.

What does this mean in practice for my tax policy? First, no one is in a 0% tax bracket. This is not a change from recent tax policy. The 2008 and 2009 Federal Individual Tax Rates define the Marginal Tax Rate for people making from $0 to whatever as 10%.** In other words, based on current tax policy, if you make $100, you owe the government $10.

It doesn’t actually work that way, of course. To start with everyone gets a standard deduction: $5,450 on the 2008 1040A for people filing single, more if you’re a head of household ($8,000) or married filing jointly ($10,900). If you have children, you get a $3,500 credit for each child. So if you’re married and you have 2 children, you don’t pay any tax unless you make more than $17,900. And you only pay then if you do not qualify for any of the other deductions and tax credits listed on Form 1040A (pdf). Plus you can qualify for even more deductions which means a Form 1040 and Schedules.

So under my plan, no deductions. You pay taxes on whatever you make. I don’t care if you have 10 children or no children; if you contribute to an IRA or give to charity; if you’re paying off student loans, pay interest on your mortgage, or have medical bills out the wazoo. None of that is the concern of the IRS and so none of that is deductible.

There is one and only one exception to the “No deductibles” rule: Any money the Federal government is already withholding from your paycheck does get deducted from your income before you calculate your taxes. This means whatever is withheld for Social Security, Medicare, etc., does not get taxed. This includes your employer’s matching Social Security amount.

If the country wants to continue to encourage certain choices such as having children or taking on a mortgage or wants to ameliorate bad fortune like incurring huge medical expenses or becoming disabled, that’s fine. The government can fund programs to provide financial help to people who meet certain criteria and mail those people checks. Whatever situation the government wants to reward or ease it can do so, just not in the tax code.

Which brings me to the next rule of my plan: all of your income is taxable and - with a few exceptions I’ll note in a minute - it’s all taxable at the same rate. If you get a check from one of the programs I discussed in the last paragraph to encourage you to have children or to lessen the blow of huge medical expenses, that’s taxable income. If you get money from Social Security or welfare, from a job or a trust fund, it’s all taxable. Income “in kind” is taxable, too. Yes, this means the use of a car and driver but it also means food stamps and public housing. If you’re the CEO of a huge megacorp and the company provides you with an apartment, that’s taxable income. If your company pays for part of your medical insurance; puts matching funds into a retirement account for you; puts money into a pension fund for you - it’s all taxable income. (Medicare is a huge knot to wrestle with. I’ve solved Social Security - except for one small glitch - but I haven’t solved Medicare. Until I know more, I don’t know whether the Medicare “premiums” the government is essentially paying for the elderly should be taxed as income.)

Furthermore, all of an individual’s income counts the same. Salary, savings account interest, stock dividends, stock sales, Social Security, welfare, income “in kind”, whatever. It all goes into the same pot, gets added up, and that’s the income you pay taxes on. No special rates for capital gains and stuff like that.

While you’re recovering from the shock, let’s talk about those exceptions. All but one have to do with selling stuff you own:

1) When you sell stock, you count as income the difference between what you paid for the stock and what you sold it for. If you lost money on the stock you can count that as a loss. However, you must (not may, must) income average any profit or loss across the years you owned the stock. This means filing amended tax returns for those years if necessary.

2) When you sell your house you count as income the difference between what you paid for the house and what you sold it for. If you lose money on your house that does NOT count as a loss - after all, you had the use of the house for however long you owned it so you don't get any better deal than someone who has paid rent all those years. If you want, you may income average any profit across the years you owned your house. This means filing amended tax returns for those years if necessary.

3) Selling any other real property - a car, unused clothes, old gold jewelry, the china you inherited from your grandmother - works just like selling your house. The profit is the difference between what you paid for the item and what you sold it for; you cannot deduct losses from your income; if you want you may income average any profit across the years you owned the item (and file any necessary amended tax returns). If you cannot prove how much you paid for the item or if you did not pay anything for the item, the profit is whatever you sell it for. In the case of inherited items, the price at which you “bought” is the value on which you paid income tax when you inherited the property. Which brings me to :

4) Yes, inherited property is just another form of income, treated the same as all the rest except that I would allow income averaging over some number of years into the future to reduce the tax burden of inheriting, say, your parent’s paid-off home or your aunt’s thriving accounting business. We could set a fixed number of years - say five or ten - or we could get into calculating the number of years to income average based on the size of your inheritance vis-a-vis your income before the inheritance. The latter is much more fun.

One more rule: You pay taxes on your own income. That means if two people are married they don’t “File jointly” and pay taxes based on their joint income. Each spouse files a tax return and pays taxes on whatever income he or she makes. There is only one type of filing: Single.

So what should the tax rates be? Well, first, if you’re screaming in outrage because some poor person who makes $1,000 a year has to pay the government $100 of that, don’t. The lowest tax bracket shouldn’t be 10%; it should be 1/10th of 1%. Someone who makes $1000 has to pay the government $1. For the rest of the brackets, I want to replicate the current effective tax rates. This will make the change revenue-neutral for the government and - on average - tax neutral for taxpayers. The lowest bracket will, of course, now be paying taxes but the amounts are nominal ($40 on an annual income of $40,000).

The effective tax rate is the percent of total income (before deductions) paid in individual Federal income taxes. The Congressional Budget Office (CBO) has kindly put together this data although the most recent year I can find is 2005. (Information on earlier years is here.) The CBO gives effective tax rates broken down by quintiles along with average income for each quintile. It also gives the same figures for the top 10%, 5%, and 1%. This data isn’t perfect. In the incredibly unlikely event we ever decide to adopt my plan someone should spend a lot of time slicing and dicing the income tax data to determine effective tax rates for a variety of income groupings. However, it will do to go on with.

The average incomes for each quintile and then for the top percent groups become my tax brackets. My marginal tax rates are set up so that someone making what the CBO gives as average income will pay about what his effective tax rate was. Since the Lowest and Second Quintiles both have negative effective tax rates, I’ve set my tax rate for those two groups at 0.1%.

Here is my tax table with an additional column to show the effective tax rate for those making the top end of each bracket under my proposal. ((For the highest bracket I calculated Effective Tax Rate for someone making $1,500,000 since that was the average pretax income for the Top 1% in 2005.):

Over	But not over	Marginal Tax Rate	Effective Tax Rate
0	40,000	00.1%	00.1%
40,000	60,000	09.0%	03.0%
60,000	85,000	13.0%	06.0%
85,000	230,000	19.0%	14.0%
230,000	340,000	20.0%	16.0%
340,000	520,000	21.0%	18.0%
520,000		22.0%	20.5%

There’s one more element I want in this plan: The highest marginal tax rate will never exceed 25%. I’ll have more to say about this when I do my Position Paper on shrinking the Federal government. And at this point, I’d be quite happy if this plan was implemented even without such a cap.***

[Updated, August 17, 2009: Unfortunately, I had a lapse of logic when I originally described how I would phase in my new tax plan so I'm striking out the old implementation and putting in the new.]

Speaking of which, how would I implement it? I’d allow some fixed amount of time for switch-over, say five years. For those five years each taxpayer can elect to use either the old method of calculating taxes (complete with deductions and the old tax tables) or the new method of calculating taxes. That lets people who made major decisions based on the tax code adjust those decisions accordingly. After that five-year period, everyone follows the new rules.

[Um, no. If the government has to convert programs from relying on forgiving taxes to relying on distributing payments then people can’t pick whether to follow the new tax structure or the old one. In order to do so, the government would have to know to mail checks only to people following the new tax structure. So here’s my new implementation plan:

Speaking of which, how would I implement it? I don’t think there’s any way to phase it in gradually. We could manage a gradual phasing out of deductions and tax credits while phasing in the corresponding replacement government payments without too much trouble. However, adjusting the tax rates in step with these partial changes would be so complex as to be almost impossible to do at all and completely impossible to do in any way that convinces people it’s rational and fair. So we’ll simply have to set a date some number of years after passage - I’d prefer no more than two but could live with anything up to five - at which point the new structure kicks in. This means, of course, we’ll need to find a way to make sure the new tax structure isn’t un-legislated in the meantime. If legally possible - and I do not know if it is - the legislation creating the new tax structure should contain a provision that means it can only be modified or overturned by a super majority for, say, ten years after it’s passed.

There. All better.]

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* Yes, I am explicitly arguing that everyone should have to face the fact that the government does not pay for anything. Individuals pay for everything and I think it’s important that everyone who can vote both understand that intellectually and see the reality in terms of diverted income. A character in one of Rumer Godden’s books explains quite clearly why this sort of understanding is important (emphasis mine):

Faced with a most un-monastic need for a vast sum of money to pay for a building project that was committed to under the belief someone else would pay for it, the cellarer of Brede Abbey cuts back on a hundred small expenses. The Abbess tells her, “Dame, you are saving shillings and pennies when we need thousands of pounds.”

The cellarer replies, “I am aware of that but shillings will help. Besides, it brings home that buildings have to be paid for.”


** From 1916 to 2009 the bottom tax rate has been greater than 0% except for the period between 1977 and 1987.


*** This doesn’t address all the issues with individual taxpayers, of course. People who work at home and file as individuals will need some thought. Yes, some of their income is simply passthrough (billing clients for business expenses, for example) and some of their expenses are legitimate (a hairdresser who buys a hair dryer, for example). But can someone who works at home but must visit his clients once a week write travel off as an expense even though someone who commutes to work every day cannot do so. Obviously this will get very complicated very fast.

Also, as part of the quarrel over defining the rich as those making more than $250,000 a year, there have been claims that some people run small businesses - with employees - yet file individual income tax forms. I don’t understand how this works so that’s an area I will have to leave to those who are more knowledgeable than I.

Taxes take a holiday

At some point while I was away I watched a discussion on either Fox News or CNN about the stimulus bill. One of the experts being interviewed opined that there were much more stimulative measures than those contained in the bill. When asked for an example, he stated that for a trillion dollars we could simply not have anyone pay income taxes for a year. I thought that was a wonderful idea.

It will not happen, of course, for two reasons. First, as my husband pointed out, that would mean individuals would get to decide what to do with their money rather than having the government decide. An unwelcome idea in Washington and absolute anathema to this Administration. Second, the government would have a revolt on its hands when the year was up. I can just imagine how horrified and resentful people would be if they had been able to keep most of their own money for an entire year and were then faced with having to hand a significant chunk of it over to the Federal government once again.

It’s nice to dream, though.