This is not a candidate diary. This is about a fairly old idea that, at various times in the history of our country, has been supported by both Democrats and Republicans, conservatives and liberals. This is an idea that, if implemented, would go a long way toward stabilizing our economy from the bottom up, make the resources available for our economy to grow in new and necessary directions, solve the current credit crisis, and promote such freedom in this country as we have never known. And the best part is that this would be a program that is applied to everybody, rich or poor, college-aged through the retired, in exactly the same way. And it is an idea so simple, so easy to sell, even the theocratic fascists that are the Republican party today will buy it.
Follow me over the jump, as I outline this seemingly magical program
As we all know, when Republicans are asked about ideas to stimulate the economy, they are like a broken record proposing tax cuts and deregulation. The problem with tax cuts in any system with a progressive tax system (as ours is considering only income tax) is that any flat tax cut will always disproportionately benefit the rich. (If you already know this, you can skip the rest of this paragraph) Consider three people who make $20,000, $100,000 and $1 million dollars annually and who pay a tax rate of 25%, 30% and 35% respectively. For the sake of argument, let's say each of them take the standard deduction when doing their taxes. So these folks have a taxable income of $15,000, $95,000, and $995,000, respectively and pay $3750, $28,500, and $348,250 in taxes. Now, let's say we pass a flat, 5% tax cut across all tax brackets. This means that these folks pay $3000, $23,750 and $298,500, for a savings of $750, $4750, and $49,750 respectively. In other words, this savings in proportion to their income is 3.75% for the poorest of our three chaps, 4.75% for our middle class fellow, and 4.975% for our wealthy friend. As we can see, any flat tax cut will benefit the wealthy disproportionately. In an environment where the wealthy have little trouble maximizing the impact of their benefits, such a cut will only exacerbate the problem of income and wealth disparity. Even if we limit tax cuts to a particular set of income brackets, the benefit will still be regressive in proportion to income within that bracket.
And we all know the problems with deregulation. Not only does it result in less safe working conditions, greater pollution and greater corruption and fraud, the largest corporations are able to leverage their economies of scale and take advantage of the putatively "freer" environment to greater effect than small or medium sized businesses, in effect, pricing them out of existence. When combined with tax cuts, these have the effect of accelerating the phenomenon of the rich getting richer while everybody else gets poorer
But let's try our above scenario with a slight tweak. Rather than cutting taxes, let's increase the standard deduction, and let's be generous about it, doubling it from its current $5000 to $10,000. In the above scenario, our poorest fellow now owes $2,500, for a savings of $1,250 for a benefit of 6.25%, the middle class fellow owes $27,000, saving $1,500 for a benefit of 1.5%, and the wealthiest fellow owes $346,500 saving a mere $1,750 for a benefit of 0.175%. As we can see, raising the standard deduction is sharply progressive.
But merely increasing the standard deduction is not the idea I am proposing here. To illustrate this idea, let's try another slight tweak. Rather than increasing the standard deduction, let's abolish it entirely and replace it with standard tax credit for the same amount. Rather than subtracting the deduction from your gross income and applying your tax rate to determine what you owe, you apply your tax rate to your gross income and subtract from that the tax credit to determine what you owe. We'll analyze this scenario in reverse of the other two. Our wealthy friend would owe $345,000, saving $3250 for a benefit of 0.325%. Our middle class friend would owe $25,000, saving $3,500 for a benefit of 3.5%, and our poor fellow would actually owe nothing, saving $3,750 for a benefit of a whopping 18.75%. As we can see, replacing the standard deduction with a standard tax credit is even more sharply progressive than even doubling the standard deduction. And since this credit is applied to everyone equally, no one can say we're playing favorites by applying different standards to different income classes.
How might this proposal do all the things I suggest in the intro? For one thing, since this is actually a tax credit, rather than a deduction, this would be an even and impartial redistribution of wealth, just the sort of redistribution needed to give a lot more stability to the poorer classes, making it easier for them to make their credit card payments and mortgage payments, effectively increasing their income. Indeed, every person making less than $20,000 a year, would actually be owed money above and beyond any excess taxes they may have paid throughout the year. Someone who makes a mere $10,000 a year (not uncommon amongst the very poor or college students or those with mental and physical handicaps) would actually be owed $2,500 increasing their income to $12,500. And if we combine these latter two proposals, making the standard tax credit $10,000, these benefits become even more profound.
This would provide the monetary resources to those who need them most, and they will be able to use those resources to make better choices for themselves, from buying more expensive, but energy efficient products and appliances, to gaining the capital necessary for them to open up their own businesses, employing untold numbers of others. Freedom is not just freedom from interference by others, but the real ability to do what you want to do, and this takes resources. For a country that purports to be the freest in the world, it is a travesty that we have means-tests and benchmarks to meet in order to gain access to those resources, and that those resources are nonetheless wholly insufficient to help those who need them.
As I said before, this is not a new idea. You can find similar proposals at http://www.usbig.net. Richard Nixon and Patrick Moynihan joined forces with none other than Milton Friedman to back a similar proposal. (Friedman ultimately withdrew his support when he couldn't sell his idea as a complete replacement of the tax code, rather than a supplement to it. His proposal was far more radical than the one I offer here.) Today, the Earned Income Tax Credit is a vestige of those past political battles, and while it is nearly universally lauded, it doesn't go nearly far enough to tackle the problems we have today. And this is an area where the US can truly lead, as no one else has attempted a program such as this on this scale. Alaska has something similar, where each citizen is paid about $2000 for industry's exploitation of their natural resources, and Portugal has a basic income guarantee for about the same amount, far too low to have any significant economic effects.
So what do you think? Far from being either socialism or communism, this proposal is quintessentially capitalistic. The means of production would neither be owned nor entirely controlled by any federal agency or government. The government wouldn't constrain our choices beyond those regulations necessary to ensure public safety and health, and beat back corruption and fraud. Consumption would pick up, but more importantly, so would consumer freedom, enabling a resurgence of "buy local" movements. Competition, and the innovation that it brings, would come back into prominence, but without its deleterious side-effects. And private ownership would not be impacted at all.