Monday, April 20, 2009


Last week was tax week, and so I'd like to share some thoughts on the taxes we pay here in the Hadley-Ives household.

First of all, our income is very close to the median income. I work full-time, and my salary is close to the median full-time year-round earnings of all American men, and after you add in the little bit that Jeri earns, that brings our household close to the median household income. We have two children, so we get some deductions and tax breaks related to that. 

Here is what we paid in taxes in 2008 as a percent of our adjusted gross income:
FICA - Medicare: 1.85%
Property taxes to the state of Illinois and the city of Springfield: 6.44%
Federal income tax: 2.32%
Illinois state income tax: 2.20%
An estimation for sales taxes and various taxes on gas, electricity, etc.: 1.58%

Total that goes to the government: 14.41%

But, as Americans and as employees in a state education system, we have some private payments that would be part of the tax system in most other industrialized economies.  Here is what we paid for these in 2008:

Health insurance and all health care expenses: 6.26% 
Actually, since my employer helped pay much of the cost of my health insurance as part of my benefits, and that money could have gone from my employer directly to me in salary if there was a system of public universal medical insurance, the total cost of our household health care and insurance was probably over 10%.

SURS Self Managed retirement fund (instead of Social Security): 10.71%.
Actually, since my employer matched my contributions, and could have instead just paid me as salary what it contributed to my retirement plan, the total money that went into retirement savings was close to 20%. We're one of the very few American household where we don't pay Social Security taxes. And, unless I take some summer jobs or switch to some other job where I do, I'll never get any Social Security when I retire.  Also, since I am in a self-managed retirement plan, I get no set pension at retirement.  Instead, I get whatever is in my SURs retirement account, and that's it.  When it runs out, I have no source of public pensions with the way our national welfare system is set up now. All the risk and responsibility of saving for retirement has, in my case, been shifted to me. 

College Savings: 5.17%
In America we must pay for higher education, and it's quite expensive. So, we save over 5% of our income for sending our sons to college, and we have done so for nearly a decade, since our youngest son was a toddler. I'll have to increase this contribution to 8% or 9% of the household income pretty soon if I want to have enough saved to pay for my older son's college tuition.

We also contribute about 2.02% of our income to various charities, including medical research, social services, poverty alleviation, religious work, environmental protection, public television and radio, and the high schools and universities where we were educated.  I'd rather we contributed about 5%, but I take a rather large loss of pay by working in the public sector, so I consider my lower salary a form of giving to the public commonweal.

If you sum up all our taxes with all the spending we do on health care, retirement, college costs, and charitable giving, it turns out we are spending about 38.56% of our household income on social welfare and government.  But, since my pension and health care expenses are somewhat borne by my employer directly rather than passed on to me, probably our household income could be raised by 15% and we would spend every penny of that raise in covering the retirement and health care benefits we're getting from my employer. So, the Hadley-Ives household and our employer contributions to social welfare and government services combined probably equals about 53.56% of our gross income.

I was trying to figure out what would be a fair policy of taxation and spending that would give us a society where poverty was eliminated, college was nearly free for most students, and everyone had health care insurance as good as what we have. I also considered what it would cost to adjust Social Security benefits and Medicare and Medicaid benefits so they were sustainable (slight increases in taxation and slight decreases in the amount paid out in retirement pensions for some retired persons, I think).  This gave me an estimate of how our taxes and social welfare spending ought to be in the society and government system I would prefer to what we have now.

Here are some changes I'd make in taxation.

First, I'd forbid property taxes on a home of primary residence up to 125% of the median home value for a state or region. There could still be property taxes on cars, second homes, boats, or the value of a primary residence that exceeds 125% of median home values in an area, but most property taxes would be abolished.  I prefer to transfer taxes to income or consumption.

Second, I'd abolish most sales taxes. I'd keep taxes on gasoline, cigarettes, alcohol, nights spent in hotels or meals eaten in restaurants, and energy generated by burning fossil fuels, but for most items and services I'd abolish sales taxes. 

Third, I'd raise income taxes to make up for the lost revenue from the reduction in sales and property taxes. Income taxes should be progressive.  Poor people shouldn't pay income tax, working class people ought to pay trivial income taxes (about 1% or 2%), real middle class households (near the median household incomes) ought to pay between 14% and 18% of their income in taxes, upper-middle class households ought to be paying between 20% and 30%, and there ought to be a flat tax ceiling on tax rates set near 45%-50% on the wealthiest 4% of American households.

Here are some changes I'd make in policy.

First, I'd create a national health care system.  It would work this way:
  1. There would be a national benefit plan similar to what I get now, or any other standard you want to choose, maybe the medical insurance enjoyed by members of the United States Congress. All health insurance plans would need to have a minimum coverage that matched this national benefit plan or were superior to it.  No plan would be allowed that provided less coverage.
  2. There would be a national maximum price for the national benefit price.  It would equal the less of two figures: either 13% of a household's income or a rate of 5% of the previous year's median year-round full-time salary for each person covered on the policy. Wealthier families would pay the per-person rate and poorer and middle class families would pay the 13% of household income rate. No insurance plan could charge more than the national maximum price for health insurance.
  3. The federal government would offer the national benefit plan at the national maximum price. Private insurers would be allowed to offer better plans for lower prices if they wanted.
  4. Private insurers would be allowed to sell additional supplementary plans that covered more than the national benefit plan at whatever prices they wanted.
  5. The national maximum price would be charged to everyone, but the government would help pay the premiums.  For persons or households with incomes lower than 50% of the poverty level the government would pay 100% of the national maximum price.  For every 1%-point of the poverty level over 50%-of-poverty a household earned there would be a 0.20%-point reduction in the amount of the health insurance plan covered by the government up to 100% of the poverty level, and then (at 90% of the premium subsidized for households at 100% of poverty) the subsidy would start decreasing by 1%-point of the subsidy for every 1%-point of the poverty level over poverty a household earned, so that the health care subsidy would decline to 0% of the payment when a household earned 190% of poverty (a 10% subsidy for a family earning 180% of poverty, a 50% subsidy for a household earning 140% of poverty, etc.). 
  6. All insurers, whether government or private, would be forced to accept any legal American resident or citizen into their risk pool as beneficiaries. There could be no screening for conditions, no exclusions, and each insurer would need to charge exactly the same to all it's customers.

Second, I'd make states cover the full cost of tuition and fees at their public universities for the top half of students at each public high school within their state, and I'd have a national test for college scholarships, and the American citizens with the top 10% of scores on this national achievement test would earn full tuition and fee scholarships to any university in the world (with perhaps limitations on reasonable tuition and fee levels).  I'd also have a national policy to set reasonable tuition and fee levels in higher education. Only universities that charged below the tuition and fee thresholds would be eligible for federal financial aid for their students. Federal research grants would only go to faculty who taught at such schools.  The fee and tuition thresholds would be set at reasonable market levels, maybe at 150% of the median tuition and fees charged in some pool of most American 4-year universities. 

Third, I'd create two national pension programs similar to what the Canadians have.  Every American citizen and legal resident would get a pension equal to 110% of the poverty level for an individual, but this pension would be administered as if it were a negative income tax. For every dollar you earned up to 110% of poverty you would lose a dollar of this pension. This would thus give us a 0% poverty rate for Americans over the retirement age. Persons earning over 110% of poverty from their own private resources would get nothing from this first program, but persons earning nothing would get the full 110% of poverty pension income.  This would remove the economic incentive (but not the social incentive) for many elderly persons to work, and they would leave the labor force to make more opportunities available for young people.  Then, there would also be some sort of a retirement plan more like Social Security is now, and this plan would require everyone to make a flat 4% contribution out of their payroll, and would return to them a benefit level adjusted so that persons who paid more into it would receive more out of it. Everyone would also be encouraged to put money into income-tax deferred retirement savings accounts. A middle class family might put 4% of its income into the second retirement program with the flat contribution rate, and perhaps 3% into the negative income tax to eliminate poverty among the elderly, and then perhaps 4% into a tax-deferred retirement account, so that your typical median income household was saving or paying in taxes about 11% toward retirement security for themselves and everyone else in society.

With these reforms taxes would increase a bit, but employer and employee contributions toward health insurance would go down for most people.  Here is how I think our tax burden would change if these reforms were put in place:

FICA - Medicare: 0% (replaced by the national health care policy).

Property taxes: 0% (replaced by a higher state income tax).

Federal income taxes: 5.95% 
They should go up for a middle class family such as ours. Currently the very wealthiest Americans pay between 19% and 23% in the federal income taxes after all their deductions and tax loophole advantages (according to the IRS, and not counting their FICA-Medicare and Social Security payroll taxes). I think the wealthiest families ought to pay more, perhaps 30% or 35% in federal income taxes. After you adjust for the Earned Income Tax and other benefits so that poor Americans pay no income tax and then assume that the wealthy ought to be paying around a third of their income in federal income taxes (and perhaps another eighth in state income taxes), your left with a situation where the median middle class needs to pay somewhere between 5.5% and 8.5% of their income in federal income taxes.  Households earning $80,000 or $110,000 aren't median middle-class, and such upper middle-class households ought to be paying a rate somewhere between 10% and 30%. 

State income taxes: 8.59% 
Increase to match decreases in sales and property taxes. State taxes should be progressive, with the wealthiest families paying perhaps 11% to 12% of their incomes in state taxes.  In my state (Illinois) we now have a flat tax of 3% on incomes.  That's ridiculous.

Sales taxes: 0.92% 
We would still pay taxes on gasoline, and our energy consumption that wasn't using renewable energy sources.

Health insurance and medical costs: 13.28% 
We would pay 13% for the national plan and still have co-pays worth about a quarter of one percent of our income. We could go with a public plan and have the 13% taken out of our taxes or use a private health insurance plan and have 13% or less paid to them.

Retirement pensions and old age security: 11.10%
This includes the two universal retirement programs that replace Social Security plus our tax-deferred retirement savings account.

College costs: 0% 
Covered by national and state taxes. When our sons are at college we would pay significantly to help with room and board, but those costs would not be so high that we would need to save 5%-10% of our income for each year that our children are under 18.

Charitable giving: same as in the existing system, or about 2.02%.

The total amount paid by our family in social welfare an taxes in the new system would be 41.86%.  This is more than the 38.56% our family is now paying directly, but probably less than the 44% I estimate is paid by our family and my employer when I exclude the matching pension contribution from my employer.  I think my figures are all reasonable, and the figures for typical 4-person households near the median income distribution would be about the same.  That is, if you want a well-functioning government that eliminates poverty among persons over 64 years of age, provides free college educations to most of the country's students who are able to do college work, and provides a national health care system, then middle-class families need to figure they'll be paying somewhere between 36% and 46% of their income on public spending (taxation) or personal savings and health insurance. You can't get what you want and have the middle class paying under 36% (unless you totally soak the rich with something like 65% taxes on them), and you don't need to have the middle class pay and save more than 46%.  

Also, I think this exercise points out that state taxes (and state and local policies) are very important for middle-class taxpayers.  We actually are paying more to our state and local governments than we pay to the federal government, yet most news media coverage devotes far more attention to national policy and very little attention to local and state policy.  This is funny, because at the level of state and local policies it's pretty easy to meet your elected representatives and influence how they make policy, while it's pretty darn difficult to have much of a say in national policies.

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