Tax Reform Begins with a Citizen Dividend
If you dream of getting rid of the income tax, begin with a prebate. For most income tax alternatives are regressive compared to the current system. Even if you do not care, The People do. And your ideas will be quickly shot down by screams of “But that will hurt the poor!” as soon as they get beyond the right wing blogosphere.
The Fair Tax folks sort of get it. While they call for a huge national sales tax to replace federal income and payroll taxes, they also include a prebate – a pre-emptive rebate – to let the poor get off tax free. Their package is politically difficult.* It calls for several gigantic changes at the same time: sales vs. income tax, tax collection at the state instead of federal level, and setting up the prebate. This is too much to sell to the electorate and legislature as a single package. And even if you did, you are also looking at a bureaucratic restructuring that’s in the Obamacare range. There will be setup problems.
Besides, a prebate is a good incremental reform of the existing income tax system. One giant step at a time, folks.
Prebate as Universal Basic Income
Serious tax reform needs to be bipartisan. Let’s start with the Left, because that’s the harder sell. Some factions on the Far Left yearn for a government provided basic income for everyone. We should encourage them, for that is what a prebate is.
The Mercatus Institute estimates that tax expenditures cost the federal government roughly a trillion dollars per year. That’s roughly $3000 per person. What if we were to divide this amount into monthly payments and just get rid of the assorted tax loopholes?
As far as I can tell the Mercatus study does not include the cost of the personal exemption, the standard deduction, nor the low bottom brackets. Let’s do a bit of very rough arithmetic to estimate what those are worth.
The personal exemption was $4000 in 2015. Were we to simplify by flattening the bottom rates to be 25%, this would require rebating $1000/year per person in a tax paying household. The standard deduction was $6,300. A quarter of that is about $1500/year per adult.
Figuring out the effect of the lower brackets is a bit trickier. In the spirit of rough estimation, let’s just look at the value of the low brackets on those who have reached the 25% bracket. According top the tax foundation, the first $9,275 in taxable income (single filers) is taxed at 10%. Multiply this by 15% and you get $1,390. Income from $9.275 to $37,650 is taxed at 15%. Multiply this range ($37,650-$9,275 = 28,375) by 10% and you get about $2,840 per taxpayer.
Add all these up and you get $3,000 + $1,000 + $1,500 + $1,390 + $2,840 = $8,230 per taxpayer. That’s nearly half the value of a full time minimum wage job! Whee! Meanwhile, using this very rough bit of calculations, dependents of taxpayers get $3,000 + $1,000 = $4,000/year.
Now, if we handed out these amounts to everyone: say $8,000 per adult and $4,000 per child, we would not be budget neutral. Not everyone is a taxpayer, and not all taxpayers reach the beginning of the $25% bracket. And if we handed this to welfare recipients this would be an enormous windfall. Major boos from the Right!
We need to be bipartisan, remember? The Right is not going to go for a massive windfall for welfare recipients.
But they might be sold on helping out the working poor. Suppose we reduced the amount of existing welfare programs so that those who max out of welfare lose the amount given by the basic income. For the non-working poor, we have break-even. But for those making the transition from welfare to work, the value of the basic income will more than offset welfare benefits clawed back, even with the higher marginal tax rate. We can expect many able-bodied welfare recipients to join the workforce. And we won’t have to win the Drug War or threaten them with starvation to do so.
We might make the Right happier if we adjust the numbers a bit as well. Maybe make the number for adults a bit higher and for children lower. Paying people to have children is perhaps not an optimal policy in an overcrowded world. Part of the basic income could be in the form of vouchers for health insurance as well. (I’ll have more to say on the matter later.)
For Republicans who still balk, I recommend Charles Murray’s In Our Hands. Buy a copy for your rightwing friends, family and coworkers today!
But if that’s not enough, I have yet another pitch:
Prebate as Citizen Dividend
A good idea still needs good branding. The term “prebate” is too weird. Microsoft Word’s spell checker doesn’t like it. It speaks only to tax reform geeks. Basic income sounds way too lefty. I like the term Citizen Dividend.
Republicans like dividends. Rich Republicans have friends at the country club who collect dividends. Responsible retirees, those who saved during their working years, collect dividends. The image of a dividend collector is well dressed, not criminal, stately. (Exception: if you live in a hippie town such as Asheville, NC, dividends are also associated with spoiled Trustafarians. But since few Republicans live in such towns, we can ignore these outliers.)
The term Citizen Dividend emphasizes that only citizens collect. It says, “We the Citizens of the United States of America own the government, and are entitled to collect a share of the profits.” This cashes is on the current anti-immigrant sentiment.
It also helps tame that sentiment. Turn guest workers into net taxpayers, and we don’t need a wall or mass deportations. We can also reduce the paperwork and other hassles that guest workers experience. Guest workers can safely go home and visit their families more often, so they too get something in return for the taxes that pay. Give guest workers a clearer legal status, and they can safely call the police in the event of crime. This reduces crime.
Rumor has it Republicans like reducing crime.
A Rough First Step
The numbers in this chapter are very rough. The Congressional Budget Office or a well paid think tank can do better. Indeed, I will provide some better numbers over the course of this series on Tax Reform. The important lesson is that we need to get a prebate/basic income/citizen dividend in place first, before we can consider any truly radical reform, be it flat tax, national sales, carbon tax, etc.
By the way, even if we are looking to just reform the income tax, the quick hack above is far from optimal. A few of the existing tax expenditures are worth keeping, and those we replace we need to do so carefully. (Retirement savings, the employer provided health insurance and the home mortgage interest deductions come to mind.) Also, replacing just the income tax with a 25% flat tax is subtoptimal. It is too regressive, and not as simple as we could be.
That’s right. I can devise a progressive tax system that’s flat for the 99% and simpler than Republican giveaways for the rich! Stay tuned.
See my Free Money for All site for a wealth of arguments in favor of replacing most tax deductions and welfare with a citizen dividend.