Thursday, September 24, 2009

Only "Discretionary Income" Should Be Taxed Under A System Of Progressive Taxation.

There is an economic concept known as "discretionary" income. This refers to money that people earn which is above and beyond what they need to pay for their basic living expenses.

For example, let's say someone earns $3000/month, $36,000/year. Let's say further that the minimum it would cost this person for housing where they live is $1200/month; health insurance $200/month; food $400/month; car insurance, gas, amortized portion of purchase and repairs $250/month; other utilities such as gas, electric, trash, phone, $150/month, dental $50/month, clothing $50/month, personal products and cleaning supplies $100/month (shampoo, toothpaste, toilet paper, paper towels), and $100/month for an emergency fund. That means $2500/month is the minimum amount this person needs to pay their basic living expenses, without any extras. That means this person has $500/month, $6000/year in "discretionary" income.

Let's take another person earning $120,000/year, $10,000/month. Using the same figures, this person would have $7500/month in "discretionary" income. They could live reasonably on $2500/month, and therefore can do what they want with the $7500/month additional income. It is within their "discretion" to decide whether to save it or spend it and, if they spend it, whether to buy something of long-term value or buy expensive clothes that will have no value within two years. It is entirely within their discretion.

One approach to a progressive system of taxation is to set up a basic amount which is required for somebody to live reasonably every month. In this scenario, I have assumed $2500 is the minimum cost to live reasonably in a month. In a progressive tax system, the first $2500 of somebody's monthly income should not be taxed because, by definition, $2500 is the minimum each person needs to spend in order to have a reasonable life, to pay for the reasonable necessities of shelter, food, medical and dental, modest clothing, and transportation.

Assuming each person needs $2500/month for basic living expenses, that amount should be deducted from their gross income before any taxes are owed. The "standard" deduction from gross income, for purposes of calculating taxes, should therefore be $30,000 per year for a single person. Obviously for married couples, and people with children, each additional person in the family would "cost" less than the $30,000 for the first person. The second person's "costs," in other words, might only be $20,000, since they share the cost of the housing, utilities, and certain other expenses.

If the standard deduction was $30,000 for a single person, then anyone earning $30,000 or less would pay no taxes. Which is how it should be if it requires $30,000 for somebody to live with minimal standards. It's not the fault of the citizens that the cost of living has gone up so dramatically. The standard deduction, unfortunately, is frozen at some unreasonable figure which doesn't even come close to representing what it really costs for somebody to have a minimal lifestyle in this country.

Taxes should only be applied to discretionary income. The percentage of taxes should be progressive, or progressive upwards to reflect the higher income. For example, the first $10,000 of discretionary income might have a 10% tax rate. Everything between $10,001 and $30,000 of discretionary income might have a 20% tax rate. Everything between $30,001 and $70,000 would have a 30% tax rate, and so on. All income (regular and capital gains combined) above the amount of $250,000 should be taxed at 90%. Somebody earning $550,000 for example, would be taxed a progressive rate for everything above the minimum living standards, but would also be taxed at 90% of the $300,000 above $250,000.

So somebody earning $60,000 would pay $1,000 (10% of the first $10,000 of discretionary income, the amount between $30,000 and $40,000) plus $4,000 (20% of the amount between $40,001 and $60,000), for a total tax of $5,000.

Sounds low? Only because we're used to having so much of the tax burden transferred from the rich and the businesses to working Americans because of the tax changes under Reagan and Bush. They changed the tax structure so that the rich pay less, businesses pay almost nothing, and working people have to pay more and more taxes because of tricks like not raising the standard deduction to reflect the actual cost of living.

A progressive tax system, which we theoretically have, "progresses," starting at a low tax rate for low incomes, and going up to a high tax rate for higher incomes. What we have in our country is a system in which rich people and businesses have paid so much money in bribes to the politicians that our tax laws have been re-written so that everything is now regressive, not progressive. Sales taxes, for example, are regressive.

Let's take a state sales tax of 10%, for example. The person earning $24,000/year could easily spend 1/3 of that income buying items which are subject to the sales tax, so they end up paying 10% of $8,000, or an additional $800/year on sales taxes, let's say an additional 3% of their gross income is paid out in taxes. But for the person earning $120,000/year, most of what they do with their money is not subject to sales taxes, since much of the money is "invested" in real estate, or other investments to which sales taxes do not apply. So that person could end up spending under 1% of their income on sales taxes. Sales taxes are regressive, since they force lower-income people to pay a bigger percentage of their income in taxes, while the rich pay less.

The reason that more Americans are broke is not because we are stupid, or even uneducated. There is a big push on now by the politicians and the business community to claim that the reason we have high unemployment is because we need to have more education for "our" workers so "we" can compete. This is such garbage. A pack of lies. Microsoft, for example, goes to India and Pakistan and recruits computer engineers to come to the U.S. and work on H1b visas, because they can pay them $11,000/year less than they would pay an American. In the meantime, well-educated American engineers in the computer as well as other fields have all been thrown out of work by U.S. corporations simply because the CEO wants cheaper labor.

The same is true in the building trades, with many highly qualified and well-trained Americans thrown out of work and replaced by truckloads of illegal immigrant workers brought into the country by coyotes, with the cooperation of the Bush administration and the Fox government in Mexico.

There is a systematic program in place in this country to throw more people out of work, eliminate taxes and all regulations which otherwise apply to businesses, cut the taxes for rich people, and steal everything that working people have, from the medical care, pensions, savings, homes. All of it has been looted and taken by the wealthiest and most powerful people in our country.

And the tax system has been changed to allow the rich to pay less, and force most Americans to pay more. Then the tax money is taken and given to companies like Halliburton and Blackwater, to pay for wars, while our schools and bridges and freeways are allowed to deteriorate.

Changing the tax system would be a good place to start in trying to save our economy. The last administration as well as the current one have given billions of dollars of taxpayer money to the criminals on Wall Street, as well as running up debt which it will require generations to repay. If we started taxing the rich and businesses, we could begin the process of paying down the debt and investing in our own country again. And by increasing the standard deduction to what it really costs for people to live, we could reduce the tax burden on working people so they could afford to pay their bills without running up their credit cards.

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