The Simple Curve Tax

This is my proposal for what the income tax code should be. It’s as simple as it is egalitarian.

What if there was a way to cut taxes for 98% of households while revenue from income taxes is increased by 15%? I’m looking for a simple tax that I can send in on a postcard-size piece of paper—one for which the entire tax code could be reduced to just a few pages, but which would be progressive and help to reduce income inequality while providing the free-market economy with a stimulus shot like nothing its seen before. It will have simple deductions and one formula that does away with all of the IRS forms and schedules.

The flat tax is a formula: tax rate = .2 (Income). But I think that is kind of dumb. For one thing, it would raise taxes on everyone with income below $80,000, while lowering taxes on everyone making more than that. I think instead that it is the households making less than $80,000 who can use the money most and that it is their consumer power and savings rate that drives the economy forward.

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Instead of a flat tax, I propose the following formula be permanently substituted for the current income tax system:

tax rate = (9*log(“taxable income”)-85)/100

The log is a natural logarithm. If you want to place it into excel, you would use: tax rate=(9*LN(income)-85)/100. No one has to do the math themselves of course. The IRS will have an online calculator that will do it for them.

Amounts owed less than $500 are forgiven so you won’t see federal income tax until about $18,309.00 in taxable income. Capital gains are tax free up to $50,000, and then taxed at as normal income above that. This provides a nice incentive for investment and the wise use of capital, but places a healthy limit that will serve to address the serious issue of wealth inequity. Here is a sample online calculator:

For those who are interested in the amount of revenue that the Smooth Curve tax will generate, I’ve done a calculation based on the number of households at each income bracket. It turns out that the Smooth Curve tax actually increases the revenue that the government collects from income taxes by 15%, netting about $1.9 trillion each year (not counting additional capital gains revenue).

That makes sense! Now we can start to be fiscally responsible, invest in infrastructure for the 21st century (how about a 100% post carbon economy!), provide excellent public services, free education, give the vast majority of Americans more money in their pocket, and enhance all of the social benefits that create a healthy society and a powerful economy.

Below $13,300, the equation produces a negative rate. That means that those households would receive a check from the IRS for up to $500 each year in addition to the EITC which should remain in effect, unless it could be replaced with a minimum basic income program (which we could afford with the additional revenue).

It Should Never Have Come to This

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If wages had tracked with growth (GDP) over the past 60 years, you would be making about 160% what you make now. Do the experiment: multiply your current salary or hourly wage by 1.6 and tell me what you get. $35,000 a year? You should actually be making $56,000 now. You make $60,000? Well, you’d be making $96,000 now. $10 an hour? How’s $16 sound instead? Your billing rate is $40? Change it to $64. It’s already $100? Make that $160 then. What would you do with the extra money? Pay off debts maybe? Invest in home improvements? Build a larger college tuition fund for your kids?

What am I talking about? I’m talking about the fact that in 1952 the gross domestic product was just over $2 trillion in inflation adjusted dollars. At the end of 2012, the GDP had grown to $13.6 trillion. Measured per capita (dividing by the population of each year) it was $14,000 in 1952 and is $43,270 today. In other words, the US generates wealth to the tune of $43,270 per year for each man woman and child in America. Last year, we generated three times as much wealth per person as compared to 1952.

The average worker’s hourly compensation in 1952 was $10.59 (adjusted for inflation). Based on this, you can calculate a ratio of average hourly compensation to per capita GDP. In 1958 that was 0.089% and it has been falling ever since. Now it stands at 0.054% (average wage now is $23.53/hour). The difference between these two figures is what gets you to the “1.6 times” figure I mentioned at the start. That’s what we all should be making if the ratio of wages to GDP were the same as it was in 1958. But things didn’t happen that way. So much for the rising tide lifting all boats, or wealth trickling down…or some other such nonsense.

The country is getting richer, but that wealth is not tracking with people’s wages. The point of departure of this essay is the contention that a healthy economy is one in which wages do track with per capita GDP—within a reasonable boundary. To say otherwise is to believe that exploitation of the workforce is a good thing for everyone, as long as it makes the rich richer. There are many objective measures that prove otherwise.

If you were making 1.6 times what you make today, the rich would be no worse off. We would still have the disparity of income that we had in 1958. There would still be obscenely rich people in the world, but what would change is that we would not have the extreme poverty and lack of infrastructural investment that we see today. And you’d feel an added sense of security and freedom with that added 60% to your paycheck every two weeks.

Now do a second calculation. Take your new salary (the one that is 1.6 times your current one) and subtract what you make now. This difference—the money you are not making but that you should be making—is being stolen from you each year by the 0.5% highest earning Americans.

That is why you keep hearing story after story about the record income disparity, which hasn’t been this great since before the Great Depression. It was the income tax changes, social safety nets, and other economic policies that were enacted to avoid another Great Depression that led to that health ratio of average hourly compensation to per capita GDP that we had in 1958. Since then we have dismantled the framework of the New Deal and witnessed the gap steadily increase.

If your household earns more than $600,000 every year, then you can count yourself among the top half of a percent. If your family earns less than that, then you continue to be systematically stolen from by way of official US economic policy that has been written and enacted by the wealthy elite.

The additional 60% income that you should be receiving represents a subsidy that you pay to corporations every year. This is not the invisible hand of a free market. This is a rigged system that is unjust and anti-capitalist. It is one in which the middle class is losing and there is little connection between hard work and economic upward mobility. It is not the decisions being made by the CEOs and investment bankers that is increasing our GDP. It is the sweat of those whose wages have been almost completely stagnant for the past ten years. It’s a bad deal.

The way to turn this around is through a more progressive tax structure that can broaden our social services, and through regulations that hold Wall Street accountable. It was carefully crafted economic policies that brought us to this point and it is carefully crafted policies that will get us back to where we should be. The question is, “who is crafting them?”

In this blog, I’m going to share my ideas about what kind of policy changes could help to right the ship. It will take some time to go through iterative changes on the way, but it is critical for the health of our society and our democracy that we begin as soon as possible.

-Robert Ferry, September 2013

Sources: Measuring Worth, The Congressional Budget Office, EXCEL FILE.