Wednesday, October 15, 2014

Politics: Taxes

Whew, I hope this is the last blog I write about a politics for a while. I'm guessing that for every one reader who takes an interest in these subjects, two more are just waiting for me to get back to writing about movies, video games, and... alcohol? My most popular post in the past few months was the one about alcohol? Well, alright.

Anyway, I feel like I should cap off my series about macroeconomics by talking about the primary goal of both supply- and demand-side economics: generating tax revenue.

People have hated taxes for as long as taxes have been a thing, yet they're also a well-established, necessary part of a nation. Unless you want to pay out of your own pocket to maintain your own roads, fund schools, and maintain a national defense, you need taxes to fund a government to do all of that for you. (I actually once heard a story about a city that attempted to spare people taxes and the them take care of public works themselves--it didn't go well.)

I mentioned a couple of posts ago that in Rome often the rich would get out of paying their taxes, leaving the poor to shoulder the burden of funding the state. However, one emperor (I'm guessing Diocletian, but don't quote me on that) saw this going on and decided to do something about it. Rather than simply forcing the rich to start paying their part (a tactic that would have likely gotten him assassinated), he decided to lower taxes across the board. As a result, the taxes were low enough to make it easier for the rich to just pay their part rather than bribe their way out of it, and the poor were no longer being crushed under the weight of their financial burden. In other words, by decreasing taxes, the government actually generated more tax revenue.

This counter-intuitive approach to taxation is one of the primary goals of supply-side economics: reducing taxes on the rich in order to encourage them to hire more people, creating more middle-class workers that the government can tax. In the United States, people under a certain income level pay a lower percentage of their wages in taxes, so the burden of the government's budget falls mostly on the middle class who are both able to pay more than the poor while being more populous than the rich.

My demand-side theory likewise attempts to generate more tax revenue by building a larger middle class, but without sparing the rich from doing their part in the process.

One of the most effective sources of tax revenue is income tax, which in the United States uses a system called "tax brackets." The tax bracket system is really ingenious, and it's worth explaining. I don't have the actual numbers since they change regularly, but I'll quickly illustrate how it works:

Let's say the brackets are structured like so (pretty close the actual, current structure, for what it's worth):

$0-9k, 10%
$9k-36k, 15%
$36k-88k, 25%
$88-180k, 28%
$180-400k, 35%
$400k+, 40%

The way the brackets work, the percentage you pay depends not on your total income, but where each part of your income falls in these brackets. To illustrate: a man making $30k per year doesn't pay 15% of $30k ($4,500); he pays 10% of the first $9k ($900) and 15% of the remaining $21k ($3,150), totaling $4,050.

This is important, since we don't want a worker that earns $8,990 in a year to be afraid of earning another $20 income and taking a loss from entering another tax bracket. ($8,990 - 10% taxes is $8,091, while $9,010 - 15% taxes is $7,658.50.) As it is, some people do this anyway, but for other reasons: welfare depends on a person's income, and at a certain point that welfare assistance is cut dramatically. So, in order to avoid taking what basically amounts to a massive pay cut by working too much, they intentionally maintain a minimal income. (Our welfare system could probably use some work.)

In any case, to be clear, that's a gross simplification of how tax brackets work. It gets pretty complicated from there, given all the different ways we can reduce our total taxable income--otherwise, far more people would simply do their own taxes.

Ideally, I'd love to take that first tax bracket and make it 0%, then adjust the higher brackets accordingly in order to stimulate my demand-side approach, but I think I would need a lot more time and data at my disposal to really concoct a solid tax proposal.

In any case, the major thing to take away from this post is that taxes are important, but sometimes the most effective way to collect them can be counter-intuitive.

As a final note, a friend of mine asked me my opinion on the concept of basic income: the idea of all citizens in the country receiving a guaranteed, unconditional check from the government, calculated to cover all of a person's basic needs. I was literally, right before I started writing this very sentence, just about to give a brief opinion on the concept.

Then I realized that this would require more than a brief opinion. I'll plan to give this radical (but not crazy) idea full consideration in a future blog post.

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