Tuesday, May 02, 2006

Both ends, toward the middle

In his thoughtful proposal for a "Libertarian-Green Strategic Alliance," Kevin Carson mentions "cut[ting] taxes from the bottom up and welfare from the top down." He also gives me more credit than I deserve for putting it that way.

Meanwhile, over on a Yahoo! Group discussion, both my name and Kevin's are associated with a proposal for a "flat" corporate income tax. I can't speak for Kevin, but I can (and hereby do) say that the idea isn't mine. I haven't looked into it closely enough to say whether I could live with it or not, but I certainly haven't ever promoted it. I assume the association was made in good faith ... but I'm beginning to see that when I say things like "cut taxes from the bottom up and welfare from the top down," I should probably explain myself more fully so as not to be misunderstood.

First, a proposition for libertarians -- Resolved, that barring revolution or cataclysm (neither of which we have the power to create), society as we know it will not move from confiscatory taxation to no taxation, or from welfare state to laissez-faire instantaneously. Getting from here to there is going to be a journey, not a leap. We are going to cut taxes before we end taxes. We are going to cut welfare before we end welfare.

Second, a protestation of "purism" -- I do not advocate, and never intend to advocate, any increase in any tax on, or welfare benefit for, any person for any reason. I accept incrementalism (steps in the right direction, large or small), but not compromise (trading a move in the wrong direction in one area to get a move in the right direction in another). You'll never hear me agree that it's okay to raise taxes on one group as a "tradeoff" for lowering taxes on another group, or to offer new subsidies to one beneficiary in trade for reducing subsidies to others. Or, to shift policy areas and clarify it a bit, I'll accept "medical marijuana" as a step in the right direction, but I won't support "trading," say, support for the death penalty for cocaine possession to get "medical marijuana."

If we're going to cut taxes, it makes sense to do so from the bottom up -- because the primary rhetorical tool of anti-tax-cut advocates is that tax cuts "benefit the rich at the expense of the poor." I'd rather get a bottom-up tax cut than wish for a top-down tax cut. And, properly done, cutting taxes from the bottom up results in a tax cut for everyone.

Cutting federal income taxes from the bottom up is simple -- just raise the personal exemption. Doing so meets two important tests. First, it cuts everyone's taxes. Secondly, those cuts are most economically significant at the lower end of the income scale, where the "class warfare" argument against "tax cuts for the rich" ring the most true. The bizarre variable rate system does produce slightly larger tax cuts for people who make more money, but not especially significant ones. The first step in my proposal would lower Bill Gates's income taxes by about $400 a year. I doubt that that $400 is as important to Gates as the extra $105 a minimum wage fast food fry cook would get to keep.

I'm going to use 2004 figures for exemptions because they were the first ones I found. I don't know if they changed in 2005. As of 2004, the first $7,950 (at least) of federal taxpayers' income was tax-exempt -- $3,100 as a "personal exemption" applicable to everyone, and $4,850 as the "standard deduction" for those who chose not to itemize. Those who itemized might be able to increase the exempt amount, but the first $7,950 of everyone's income was tax-free.

Let's take a look at the effect of a hypothetical personal exemption increase of $1,150, to $4,250. This would make the first $9,000 of income tax-exempt. For rates, I'm using 2005 figures, because they were the first ones I found. Hey, it's hypothetical anyway. Don't sweat it.

The minimum wage is $5.15 per hour. An individual who worked 40 hours a week, for 52 weeks per year, would have a gross income of $10,712 per year. Under the old numbers, $2,762 of that income would be taxable, and the bill would be 10%, or $276.20 (here are the brackets/rates for those who are following closely). With the exemption increase, $1,712 would be taxable, so the bill would be $171.20. Bammo -- instant $105 tax cut.

Now, let's look at someone who makes more money: Say, $100,000 a year. With the current rates and the current exemptions, the taxable portion of that income would be $92,050; with my proposed increased exemption, $91,000.

Figuring this gal's taxes out is more complicated, of course; she pays 10% on the first $7,300 of taxable income, 15% on the next $22,400, 25% on the next $42,250;and 28% on everything above that (her income doesn't get into the 33% or 35% brackets). So, at current exemptions, her tax is $20,280.50; with my propose exemption increase, it's 19,986.50, or a $294 tax cut.

Fair? Probably not. Proportionally distributed? Nope. But everyone gets a tax cut, without jogging marginal rates around, crafting special deductions for favored groups, and igniting class warfare rhetoric. For every $1,000 of increased bottom-up exemption, every taxpayer -- convenience store clerk to factory worker to CPA to Bill Gates -- gets a tax cut of between $100 and $350.

Cutting welfare from the top down is more complicated, as it involves a number of programs -- but the proposition itself is simple. At one point in the recent past, Missouri politicians were simultaneously claiming that the belt needed to be tightened on the state's $4.x billion Medicaid budget ... and that the taxpayer should be happy to fork over $600 million to build stadiums for the benefit of multi-billionaire sports franchise owners. This kind of thing creates a big credibility gap. When the federal government can come up with $78 million to subsidize advertising for Florida orange juice (and it has), the argument that it can't afford to (or shouldn't) subsidize cups of that same juice for school cafeterias rings pretty hollow.

The big "entitlement" programs are going to be a bear to tackle in any case. Until and unless poor and middle class Americans can be truthfully and convincingly told that they aren't subsidizing "the rich," they are going to remain deaf to demands that "the rich" be allowed to stop subsidizing them.

Cut taxes, from the bottom up. Cut welfare, from the top down. And when those two efforts meet in the middle, they can slap hands, do a little victory dance ... and then get back to work cutting right past each other.

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