Sunday, June 15, 2014

Fair Tax Formula


If congress truly wants to develop a fair tax code, then they would tie the rates to national median salary. I have devised a simple formula that illustrates how rates could be derived and a few illustrations on how it would be applied.

The formula is as follows:

Median Income of upper economic quartile.
 Median Income of Lower economic quartile.
Median Income of total economic population.
  Personal Tax Rate
  Income Tax Rate
   Personal Income 

In the first part of the formula, it can be easily seen that there are two ways to reduce your income tax rate. First, if the median income of the total economy increases, the denominator becomes larger and therefore the fraction, I call the Median Variable, becomes smaller and reduces the income tax rate. Likewise, if the spread between the upper and lower median quartiles decrease, then the Median Variable would similarly reduce the income tax rate. Therefore, in theory it would be in everyone’s best interest to increase the median salary and reduce the gap between poor and wealthy. In other words, develop the middle class.

This brings us to the second portion of the formula . Since  , ones salary relationship in respect to the total median income also plays an important role in determining their tax rate and what they are able to contribute toward the overall economy. If one’s income is well below the median, then their tax burden is reduced to allow them more upward mobility. If one’s income is well above the median, then they should be able to contribute somewhat more to allow others to share in their success.

The only caveat to the formula is when we get into incomes above $370,000 annually and the rate rises above 30%. Thus we should cap the upper tax rate at say 30% on any income made above the calculated rate, which if the Median Variable reduces, and particularly if it reduces due to an increase in the total median income, then the amount of income that is taxable below the 30% cap greatly increases.

Let me clarify the power of the above formula by offering a few examples. Let’s assume the lower quartile have a median income around the national poverty level for a family of four, or $22,000/year. Now let’s assume the median income of the upper quartile is the mysterious $250,000/year. Finally, let’s assume a figure I recently read was the national median income is accurate at $53,000/year.

Doing the arithmetic we have:

% or $392.85 for someone living at the federal poverty line. Although it seems low, you can’t say they are not paying something, and they will most likely place much of their income back into the economy.

Now let’s see what the formula does for someone making the median income:

or $2,280.00 for someone earning median salary. As you see his or her tax burden is more than twice someone in poverty.

Now let’s see what happens to someone earning the median salary in the upper quartile of the economy, or the mysterious $250,000 annual income per individual:

 % or $50,730.00 for someone that is considered wealthy. It might seem high by comparison, but let’s not forget they still have $199,270.00 of spending money as compared to $50,720 and $21,607.00 for the median and poverty earners respectively. Considering all three examples are individuals that benefit from the same public services from our government, security, infrastructure, and so forth, it might seem unfair. But is it?

Let us now look at what happens if you actually increase the median salary because the lower and middle-income brackets start spending more, because they have more, and start improving the economy. Let’s just say the lower median quartile income increases 10% to $24,200, and the national median income moves up to a similar percentage to $58,200 annually.

We now have:

% or $390.39

% or $2,257.99

% or $41,663.25

As you can see, a small 10% increase in the lower and middle median income levels translates to a significant savings for those in the upper income levels.

Obviously the economy expands and contracts so the actual figures will change over time, but the relationships will remain the same. Plus it would be difficult to predict what the next years income tax rates will be, until the data was available from the previous year. However, if everyone is required to file whether or not they have any income, then a reasonably accurate number could be calculated for the participating workforce. Further, some may argue that there would be insufficient revenue from the above examples to support the current social economic and government services budgeted. To that I simply say a minimum base tax could be added to assure it meets the basic necessities of government and current obligations. I shall address that argument by suggesting an 8% figure that could eventually be lowered as the margin between the lower median quartile and the upper median quartile narrows, meaning more people are paying a flatter tax.

Let’s now look at what effect the base 8% rate would have on the above examples.

For the figures in the first example, before an improvement in the lower and middle-income brackets is realized, we have the following tax rates:

Lower = 1.7857% + 8% = 9.7857%  
Providing $2,152.85 revenue and $19,847.15 disposable income

Middle = 4.3019% + 8% = 12.3019% 
Providing $6,520.00 revenue and $46,479.99 disposable income

Upper = 20.2920% + 8% = 28.2920%  
Providing $70,730.00 revenue and $179,270 disposable income

After increasing median salary and wages 10% for the lower and middle-income brackets we have:

Lower = 1.6132% + 8% = 9.6132%
Providing $2,114.90 revenue and $22,085.10 disposable income

Middle = 3.8797% + 8% = 11.8797%
Providing $6,913.99 revenue and $51,286.01 disposable income

Upper = 16.6653% + 8% = 24.6653%
Providing $61,663.25 revenue and $188,336.75 disposable income

We now have roughly a 10% increase in disposable income for both the lower and middle-income individuals, and at least 5% increase in disposable income in the upper income bracket, all by shifting the money from the revenue side. This model is significantly different from the current tax code, however, because the lowering of the revenue through tax decreases is tied directly to the median income levels as well as the persons individual income level, and it motivates the market to do so by increasing the median income and reducing the spread between the upper and lower quartiles, quite the opposite of our existing tax structure.

Our current tax structure is riddled with loopholes that are neither fair nor conducive to creating a wealthier nation. It is completely corruptible through special deductions for lobbyist and other self-interest, and is completely slanted toward corporate welfare.

If you want to treat corporations separately, then we need to either treat all individuals similarly, or eliminate those services provided to corporations that are meant for individual taxpayers, and vice versa. The tax code needs to be simplified. We can no longer afford to subsidize the wealthy on the backs of the poor and middle classes. Our current tax structure is completely upside down!

The tax formula I propose not only reverses that trend, it treats all participants equally based on a market relationship, that not only addresses the disparities in income and the services we all are entitled to, but it does so in a way that makes it in everyone’s best economic interest to raise the bar on salaries and wages to meet the demands of a growing economy. In addition to providing a way to incentivize the market to increase salaries and wages, it does not dissuade any entrepreneur from increasing their income. There is no barrier or keeping one form going beyond the 30%. Millionaires and Billionaires will still find it advantageous to build their empires. We will just be asking them to take a more responsible role in addressing social issues by figuring that the cost of business must include consideration not to place the burden of unemployment and poverty on the governments door step. That capitalism does not mean the highest profit at the expense of the lowest pay reduced benefits! The uncalculated human cost is much higher than the one reflected in the spreadsheet, as we witnessed in the fall of 2007 and the great recession.

Perhaps some may find some flaws in my logic, and there may be some better calculation out there somewhere, but I invite all to the premise that we need to tie the problem of poverty to the very institutions that are motivating it. To simply ignore that the wealthy have a different playing field than the average hard working citizen is to not even get the message.

I have always found it strange that so many people seem to blame unions, or drugs, or wars, or catastrophic events for the poor economic choices we are given. After 45 years of hard work, 5 lay offs, one brief period of homelessness, and a possible sequester that could wreck what little I have been able to build, I must at least speak to the insanity that both sides of the aisle call progress. We Americans cannot pray, or work, or protest, or even wave the flag out of the problems we face. We simply have to make the choice to change the status quo!

Do not question my faith, my patriotism, my loyalty or my work ethic until you have made every effort to help those less fortunate than yourselves. If you need to ask me of my character, then perhaps it is your Americanism that is in question?

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