Changing the Tax Rates to Spur the Economy and Deal With Income Inequality

“We pay too much in taxes.” “Tax revenue needs to be increased.”

What is said on both sides is technically correct. However, most of it is misunderstood because understanding it is a bit mind boggling, so we tend to consider what the people with whom we want to be friends believe, and believe that.

I don’t do that. I consider facts and opinions only as each warrants, with facts far more important than opinions.

Here is what I believe: we pay too much in taxes, and tax revenue needs to be increased.

For the sake of relativity, what I’ve always found a convenient starting point is where we’re at.

Here are the current tax rates on income earned during the 2017 calendar year:

10% on the first $9,325 of taxable income. (If you don’t know, taxable income is income that exceeds your deductions.)
15% on taxable income between $9,325 and $37,950.
25% on taxable income between $37,950 and $91,900. (THIS IS A 10% JUMP!)
28% on taxable income between $91,900 and $191,650. (Social Security will likely max out while in this bracket, which reduces the effective tax on income by 6.2%.)
33% on taxable income between $191,650 and $416,700. (28+6.2=34.2 – this is still a tax reduction.)
35% on income between $416,700 and $418,400. (I don't know why this bracket exists)
39.6% on taxable income over $418,400.
(Based on Individual rate. Source: https://taxfoundation.org/2017-tax-brackets)

Based on that, the tax rates are too high. They are also not representative of anything beyond a somewhat upper middle class income.

Adding some rates that reflect classes of income that actually exist is how additional revenue would be raised.

It’s not really all that complicated mathematically, but you have to think independently of political (read partisan) rhetoric to get the math.

The first thing to understand about how this works is that everyone pays these rates on the income earned within these amounts. Considering only the automatic deduction, the first $6,350 a person earns is not taxed. We’re there, so we’ll leave it at that.

If we were to drop the lowest rate to 5% on the first $10,000 a person earns beyond the automatic deduction, it would reduce taxes for everyone who earns $16,350 or more by $432.50. This would apply whether your annual income is barely $16,350 or $50 million. That would be about $35 per month increased net income for almost everyone.

If we were to set the next rate at 10% on income between $10,000 and $25,000 per year, we would reduce taxes by 5% for everyone who earns $31,350 or more, or an additional $750. (We are now up to almost $100 per month higher net income for everyone who falls in this category by including the $35 we saved on the first $10,000.)

We have now dealt with increasing the net income of those who most likely are living in poverty. It’s not much, but it is a change in the right direction.

The next rates would correct the injustice of the current system attacking the working middle class with a 10% jump in rate that is in the current tax code.

If we set the next rate at 15% for income earned between $25,000 and $50,000, the savings would be 10% on the $12,500 on taxable income of $37,500 to $50,000. That would be another $1,250 for anyone who earns $56,350 or more. We are now getting $200 more per month in net checks.

If the next rate were 18% on taxable income between $50,000 and $100,000, another $3,500 would be realized in net earnings. We are now well over $400 per month greater net income, which many in this income bracket not only would appreciate, but also think they earn – because they do.

If the next rate were 22% on taxable income between $100,000 and $150,000, it would reduce the rate by 5% on the first $42,000, and 8% on the next $8,000. People whose income exceeds the maximum of this bracket would get another $2,800 per month in their net checks. Their net income would truly rise more than $800 per month.

I chose $150,000 as the breaking point because earned income beyond this point is likely not subject to social security tax after this. With that 6.2% reduction, an 8% increase to 30% on income between $150,000 and $500,000 is really a 1.8% increase in real tax dollars, but, by extending it to beyond the earnings in the current tax code, someone making $500,000 taxable income would net an extra $44,000 in disposable income.

Now that everyone has enjoyed their tax breaks, we need to get real about tax rates and income inequality. It need not be harsh, but it does need to be recognized for what it is. To do that, we will need to add some tax rates.

The first additional tier would be for taxable income between $500,000 and $1,000,000 of 40%. That is .4% more than what they are currently paying on this income, but it still results in $42,500 additional net income per year because of the savings on earnings below $500,000.

We have now dealt with 99% of the population, and that portion of the population would get actual tax cuts.

If the next rate were 45% on income between $1 million and $10 million, we would raise about $445,000 per tax payer who maxes out the $10 million in taxable income. That sounds like a lot, but they still net over $5.6 million. That is $4.75 million per month net, for anyone keeping track. People enter this bracket with the $42,500 savings. The savings is exhausted at $1.85 million income. Only people earning more than that would actually see a tax increase.

If the final bracket were set at 50% on annual taxable income exceeding $25 million, we would more than account for reducing the rates for the neediest people, some of whom got about $35 per month more in net pay.

That means anyone earning $25 million this year would not pay the top rate. However, fifty cents of every dollar after that would go to taxes instead of the almost 40 cents that is currently taxed on that amount. Several hundred people will hit this bracket, some as early as March.

Let’s review: the problems were “we pay too much in taxes” and “tax revenues need to be increased.” We have resolved both without being brutal to anyone.

This tax structure will maintain revenues just on its adjustments. The increase in revenues is presumed to occur with much more money flowing in the economy rather than being captured and stowed away even though it will never be needed. As such, there would be consequential increases in taxable income as a result of increased demand and production along with a growing labor force to meet the increased demand.

The best part about restructuring tax rates like this is everyone benefits - even the super rich whose taxes would increase. The benefit to those whose taxes would increase would be greater security for them from the stability and opportunity created for those who are currently desperate or nearing the point of desperation.

Whether you want to look at the famous bank robbers and kidnappers of the 1920s and 1930s, the violence in the labor movement of the late 19th century, or even the French Revolution, the super rich have been targets of common people when income inequality has gone unchecked throughout history. We need not test how far it would go this time because the signs of unrest are already present and getting worse.

The numbers do get mind boggling when we start talking about annual income for individuals that exceed what 50 common people will earn in their lifetimes, but it will be worth it for someone who makes $75 million per year (and there are dozens of people who make that much) to accept a mere $145,000 per day net income after they reach the highest bracket at the end of April instead of the $174,000 per day they currently net once they hit the top bracket on the third work day of the year.

This will not resolve all the issues with income inequality, but it’s a start that would spur the economy with activity from money that is currently being taken from those who work the hardest to earn it and given to the super rich to exponentially compound their wealth.

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Presumptions I made in calculating these rates were based on a fictional community with a population of 1,000 people who earn income subject to income tax:

The top tax rate would affect .1% of the population.
The second highest tax rate would affect .3% of the population.
The third highest tax rate would affect 1% of the population.
The fourth highest tax rate would affect 8.5% of the population.
The fifth highest tax rate would affect 23.5% of the population.
40% of the population earns at least $50,000 per year.
80% of the population earns at least $35,000 per year.
90% of the population earns at least $25,000 per year.
95% of the population earns at least $10,000 per year.
5% of the population does not earn enough to pay taxes.

Whatever errors there may be in determining what portion of the population actually earns the amounts I specified were also applied in calculating current revenues. Any error in the portion of the population that earns any given amount would need to be adjusted to both current and projected revenues, which essentially creates a wash in the calculation as it would only affect the current and projected revenues, and not the relativity of the results.

The projections are based on a population that is comprised of people who work. Those who do not work, such as young children and people who choose to not work, would not affect the outcome as that portion of the population would fall within the range of those who would have no taxes due in both current and projected revenues.