A modest proposal to strengthen the typical U.S. Household

Edited November 19, 2017

It's no secret that income inequality has widened in the United States over the last several years and has caused political strife.  Occupy Wall Street, the Bernie Sanders campaign and even Donald Trump's surprise electoral college win are all highlights of people becoming more and more disenchanted with the "American Dream."

NPR recently ran an article noting that US Children are now less likely to earn more than their parents.  It's fair to say that neither major US political party has identified ways to strengthen the middle class that have proved to be successful and reverse this trend.  I took a stab at this problem thinking about this core question:

"What would make it easier for the typical U.S. Citizen to get ahead"

The proposal

• The Affordable Care Act would be overturned.
• Each U.S. citizen between the ages of 21-64 would receive a $10,000 refundable credit, every citizen below the age of 21 would receive a $5,000 refundable credit and all citizens over the age of 65 would receive a $25,000 credit.  A refundable credit means it's possible for someone to have negative tax liability.
• A 28% tax would be levied on income up to $250,000 for single filers and $500,000 for joint filers.
• The tax would jump to 40% for all income above the specified thresholds above.
• All subsidies, Social Security, Medicare, Federal Student Loans, and all welfare payments would be eliminated.  This totals approximately $350 Billion.
• This would result in the elimination of HUD, Department of Agriculture, Department of Education, the Social Security Administration & a significant downsizing of other Federal Agencies.
• The high earning threshold and the credit would be indexed to median household incomes annually 
• Exception #1:  All IRAs, 403bs & 401ks would be converted to a single "S" IRA.  In these IRAs, the contributions would be tax deferred until the funds were withdrawn.  Individuals would be able to contribute up to $20,000 annually.  To off-set the fact that Roth IRAs would be moved into this bucket, all Roth IRA balances would be given a one time 130% match that could be deposited immediately into the "S" IRA.
• Exception #2:  The capital gains rates on home sales would be kept in place to encourage mobility.  In short, most home sales are not taxed if the individual lived in the home for 2 of the last 5 years, OR it was sold because of a work related move.
• Exception #3:  Estate & Excise Taxes would remain in place with the exception of fuel taxes which would increase by 300%
• Exception #4:  Capital Gains Taxes would be lowered to 17.5%
• Exception #5:  Corporate Tax rates would be lowered to 10%

Impact to the Federal Budget

One of the secondary goals of this project was to create a balanced budget.  This would achieve this and the new (simplified) budget would look like:

Revenues
$4.33 T from base 29% tax rate
$0.07 T from 40% tax rate on high earners
$0.24 T from Excise Tax + Estate Tax
$0.264 T from Corporate Income Tax
$0.225 T give back from Capital Gain lost Revenue (calculated from the top bracket)

$4.7 Trillion Total

Expenses

$3.54 T from refundable credits

$0.75 T from remaining discretionary spending (most of which is on the military)

$0.03 T from exempting Capital Gains on Home Sales 

$0.25 T from remaining mandatory Federal Expenses (most of which is interest on the National Debt)

$4.57 Trillion Total

There is still about a $130 Billion Surplus - however, that would be consumed for the next 10 years by the Roth IRA off-set.

The Tax Impact

The below chart depicts the tax impact to each of the typical households in the various income ranges (on the horizontal axis).  The savings to the typical household is on the vertical axis - a value of $10,000 means that the typical household in that income range would see their after tax income increase by $10,000.  For simplification purposes, this is the under 65 chart and assumes that all income earned is through wages.  

The savings curves tend to have a downward slope - not turning negative until the income levels are fairly high.  This is by design.  The goal of this proposal is to truly "lift" up the middle class and enhance the after tax incomes of the vast majority of families by a substantial amount.  

While this doesn't include transfer payments like WIC, Section 8, & the SNAP Program, those programs tend to phase out in the $15,000-$40,000 range depending on family size.  The typical family would see a bump in their after tax incomes with the biggest bumps accruing to those making 

between $25,000-$50,000.

This would be a tremendous injection of capital into the economy from the lower/middle class - spurring a large jump in consumption and (hopefully) savings.  

Additionally, employers would get big wins as they would no longer be on the hook for payroll taxes, small business taxes or corporate taxes.  Next to middle class families, employers would be the largest winner of this proposal.  After tax incomes of most U.S. Companies would increase materially.

Accounting for the negatives

It's clear who the winners are because the winners are broad based - the vast majority of U.S. Households would see a clear benefit - as well as anyone who employs people.  This would provide the upper middle through lower class households with a nice bump in after tax income - especially those with children.  

However, it would  be disingenuous to not recognize that there are those who would  be impacted adversely. 

These include:

• Seniors with very high medical expenses.  Reasonably healthy seniors would benefit from this proposal as their social security payments would no longer be taxed, and they would receive the rough equivalent of per capita spending on medicare in cash.  Seniors with severe health expenses would probably be hurt by this proposal.
• Federal employees would be impacted as the proposal eliminates several Federal Departments and reduces the size/scope of others.
• High income single tax filers would be amongst the most common loser.  Most single tax filers making over $175,000 would see a drop in their after-tax incomes.
• Most households earning $500,000+.  The chart makes clear that those earning in excess of $500,000 would be forced to pay more.
• Individuals who derive most of their income from long term capital gains and dividends.  Those groups whose income is "preferred" in the way of capital gains & dividends would see a sharp increase in their tax burden.
• Colleges.  This proposal implicitly eliminated federal loans.  It is more likely than not that college students would not feel the burden as it is now understood by most economists that the impact of Student Loans drives up the cost of tuition.  Without the supply of loans, universities and colleges would have to find other means of revenue.

Wrapping Up

Net-Net, the positives are more likely to outweigh the negatives.  The proposal generates a more friendly business environment as businesses would face less restrictions, the U.S. Fiscal situation is strengthened which would promote investment in the U.S. Economy and the upper middle to lower class income groups would receive a boon to their finances.  

I strongly believe that this proposal would achieve the goal of making it easier for the typical U.S. Citizen to get ahead.

The sources for this included:

Wall Street Journal

Wolters Cluver

Turbo Tax

Statista

US Census Bureau

IRS

Center for Federal Budget Priorites