Under the two systems, the marginal tax rate progression looks like this:
| BASE TAX RATE | MY TAX RATE | ||
| INCOME | MARGINAL RATE | MARG RATE W/O EAA | MARG RATE W/ EAA |
| $30,000.00 | 45.71% | 14.25% | 7.05% |
| $35,000.00 | 59.17% | 26.36% | 19.16% |
| $40,000.00 | 55.55% | 23.12% | 15.92% |
| $45,000.00 | 57.41% | 24.78% | 17.58% |
| $50,000.00 | 51.07% | 25.82% | 18.12% |
| $55,000.00 | 37.55% | 31.36% | 23.66% |
| $60,000.00 | 38.71% | 32.9% | 24.7% |
| $65,000.00 | 38.83% | 33.01% | 24.81% |
| $70,000.00 | 40.07% | 35.63% | 25.93% |
| $75,000.00 | 38.27% | 29.51% | 19.81% |
| $80,000.00 | 42.15% | 26.25% | 15.55% |
| $85,000.00 | 42.15% | 20.95% | 10.25% |
| $90,000.00 | 42.15% | 22.65% | 10.25% |
| $95,000.00 | 41.15% | 26.65% | 14.25% |
| $100,000.00 | 32.65% | 22.65% | 10.25% |
| $105,000.00 | 32.65% | 22.65% | 10.25% |
| $110,000.00 | 32.65% | 30.65% | 18.25% |
| $115,000.00 | 31.04% | 42.65% | 30.25% |
| $120,000.00 | 26.45% | 42.65% | 36.45% |
| $130,000.00 | 26.45% | 42.65% | 36.45% |
| $140,000.00 | 26.45% | 42.65% | 36.45% |
| $150,000.00 | 27.53% | 42.65% | 36.45% |
| $160,000.00 | 29.45% | 42.65% | 36.45% |
| $170,000.00 | 29.45% | 43.05% | 36.85% |
| $180,000.00 | 29.45% | 44.65% | 38.45% |
| $190,000.00 | 29.45% | 44.65% | 38.45% |
| $200,000.00 | 29.45% | 44.65% | 38.45% |
| $210,000.00 | 29.45% | 46.25% | 40.05% |
I've compared the marginal rate which is effectively the rate at which 'living' dollars are lost as a percentage of the change from one income to the next. Living dollars are defined as the base income minus income taxes plus government support. For my tax rate, I've included two pictures because part of the marginal rate gets hidden from the person, in a sense. Under the marginal rate without the EAA (emergency account amount), I've calculated the marginal rate based on the family's actual take-home pay = salary - income tax + health subsidy - required savings amount (social security tax). In the alternative column, I've calculated the marginal rate as the implied change in total family assets = salary - income tax + health subsidy + employer contributed savings amount. Note that the required savings amount disappears from this formula since it is simply maintained in the retirement/health account and the employer contribution is added.
The increasing required savings amount from 50K through 70K results in a bump in the marginal rate of take-home pay while the reducing health subsidy in this range results in the higher marginal rate of asset accumulation. In both cases, the marginal rate is significantly lower than our current system, which makes each additional hour of labor that much more valuable to the family than before. Additionally, the adjusted social security taxes and income tax brackets push the marginal rate up on the higher incomes such that they are no longer as significantly better off per extra dollar than the poor. Please keep in mind that as a family gets richer, each marginal dollar becomes more valuable as an investment piece as well since they can invest a larger portion of their additional income to produce new income. For an example, consider family A that invests 25% of each additional dollar of income at a rate of 5% and family B that invests 10% of each additional dollar of income at a rate of 5%. If family B faces a marginal tax rate of 25%, then they are able to invest 7.5 cents on every dollar of new income at a rate of 5% which would increase their income by .4 cents annually. The other family, on the other hand, would need to face a marginal tax rate of 65.5% in order to get the same exact return. Now, in reality, the poor and lower middle classes (up to probably 70K annually as a family) likely invest less than 5% of each additional dollar of income. Those families from 70K through 150K are in the range where their investment rate is likely to be increasing -- they have a decent home, they can take the occasional vacation, etc -- so their investment rate increases. Even at the 46% marginal rate, simply netting a 5% return on 20% of each after-tax dollar (the stock market averages 8% historically), puts the rich in a reasonable position to continue to get richer, just not as quickly and dramatically as before.
So, from a marginal tax rate basis, the new system atleast addresses the incentives problem that the old system utterly fails. Now, many people in the middle class looking at this might be freaking out about 'crazy tax hikes, omg!', so the next table we'll look at is the effective tax rate at each income. The effective tax rate is one minus the total take home pay divided by the original salary. So, if you earned $100,000 and after taxes and benefits you took home 75,000, then your effective tax rate would have been 25%.
| BASE TAX RATE | MY TAX RATE | ||
| INCOME | EFFECTIVE RATE | EFF RATE W/O EAA | EFF RATE W/ EAA |
| $25,000.00 | -34.49% | -19.52% | -25.72% |
| $30,000.00 | -21.12% | -13.90% | -20.26% |
| $35,000.00 | -9.65% | -8.14% | -14.63% |
| $40,000.00 | -1.50% | -4.24% | -10.81% |
| $45,000.00 | 5.04% | -1.01% | -7.66% |
| $50,000.00 | 9.65% | 1.67% | -5.08% |
| $55,000.00 | 12.18% | 4.37% | -2.47% |
| $60,000.00 | 14.39% | 6.75% | -0.2% |
| $65,000.00 | 16.27% | 8.77% | 1.72% |
| $70,000.00 | 17.97% | 10.69% | 3.45% |
| $75,000.00 | 19.33% | 11.94% | 4.54% |
| $80,000.00 | 20.75% | 12.84% | 5.23% |
| $85,000.00 | 22.01% | 13.31% | 5.53% |
| $90,000.00 | 23.13% | 13.83% | 5.79% |
| $95,000.00 | 24.08% | 14.51% | 6.23% |
| $100,000.00 | 24.51% | 14.91% | 6.43% |
| $105,000.00 | 24.90% | 15.28% | 6.62% |
| $110,000.00 | 25.25% | 15.98% | 7.14% |
| $115,000.00 | 25.50% | 17.14% | 8.15% |
| $120,000.00 | 25.54% | 18.20% | 9.33% |
| $130,000.00 | 25.61% | 20.08% | 11.41% |
| $140,000.00 | 25.67% | 21.70% | 13.2% |
| $150,000.00 | 25.79% | 23.09% | 14.75% |
| $160,000.00 | 26.02% | 24.47% | 16.27% |
| $170,000.00 | 26.22% | 25.71% | 17.62% |
| $180,000.00 | 26.40% | 26.90% | 18.92% |
| $190,000.00 | 26.56% | 27.97% | 20.08% |
| $200,000.00 | 26.71% | 28.93% | 21.12% |
| $210,000.00 | 26.84% | 29.87% | 22.14% |
| $220,000.00 | 26.96% | 31.02% | 23.36% |
| $280,000.00 | 28.51% | 35.49% | 28.71% |
Now, under the current system, the effective tax rate grows incredibly fast from 25K through 80K -- this is another view of the extreme marginal rates. I've again split my tax rate into the two segments of with and without the EAA component. For incomes below 60K, the benefit from the healthcare subsidy and the employer contribution is actually larger than the income + medicare tax owed by the family. This results in their net income being greater than their base income, but again this is masked from their take-home pay. Considering just the immediate cash available to the family, the effective rate is greater than 0 upon reaching an income of $50K. With my system, the take-home pay is better for all incomes up to $180,000. Furthermore, the overall income is better up to incomes of $280,000 thanks to the conversion of social security from a tax to a savings account. At $280,000, the marginal tax rates catch up and the overall effective rate creeps beyond the effective rate for the current incomes. (I've cut incomes from 230-270 to shorten the table). These tax figures even include the additional 2.5% tax on incomes above 150K for the social security coverage, which would expire in 30 years.
That means that only the top 6% of married couples would face an actual tax hike as a result of this system with only 12% of married couples facing a lower level of take-home pay (the 180K threshold). Furthermore, the effective tax rate does not include the tuition assistance of between 5K and 15K.
If you want to compare these figures by dollar amounts, below is a table with the effective take-home pay by tax rate plus the annual contribution to the emergency/retirement account for my plan.
| TAKE HOME PAY COMPARISON | |||
| INCOME | BASE RATE | MY RATE | SAVINGS ACCT |
| $25,000.00 | $33,622.00 | $29,881.00 | $1,550.00 |
| $30,000.00 | $36,336.50 | $34,168.50 | $1,910.00 |
| $35,000.00 | $38,378.00 | $37,850.30 | $2,270.00 |
| $40,000.00 | $40,600.50 | $41,694.10 | $2,630.00 |
| $45,000.00 | $42,730.00 | $45,455.10 | $2,990.00 |
| $50,000.00 | $45,176.50 | $49,164.10 | $3,375.00 |
| $55,000.00 | $48,299.00 | $52,596.10 | $3,760.00 |
| $60,000.00 | $51,363.50 | $55,950.90 | $4,170.00 |
| $65,000.00 | $54,422.00 | $59,300.30 | $4,580.00 |
| $70,000.00 | $57,418.50 | $62,518.90 | $5,065.00 |
| $75,000.00 | $60,505.00 | $66,043.50 | $5,550.00 |
| $80,000.00 | $63,397.50 | $69,731.00 | $6,085.00 |
| $85,000.00 | $66,290.00 | $73,683.50 | $6,620.00 |
| $90,000.00 | $69,182.50 | $77,551.00 | $7,240.00 |
| $95,000.00 | $72,125.00 | $81,218.50 | $7,860.00 |
| $100,000.00 | $75,492.50 | $85,086.00 | $8,480.00 |
This table does not include any adjustment to the EITC that would contribute to the savings below a certain income. While I believe that would be an integral piece to creating a literal safety net for the poorest among us, I did not take the time to determine a balanced formula for determining that level. Simply providing ~$1,000 at $25,000 would make the total take home situation break-even as far as pure assets are concerned. Given the relative marginal rates, the EITC could even be created with only a portion (albeit a relatively major portion) going towards the savings account with the remainder being provided as a housing subsidy.
As one final dataset, I present how my suggestions would provide benefits and income split into pure cash, healthcare support, retirement and deductible support, and tuition support.
| INCOME | PURE CASH | HEALTH SUB | SAV ACCT | TUITION |
| $25,000.00 | $23,053.50 | $6,827.50 | $1,550.00 | $15,000.00 |
| $30,000.00 | $27,481.00 | $6,737.50 | $1,910.00 | $15,000.00 |
| $35,000.00 | $31,908.50 | $6,041.80 | $2,270.00 | $15,000.00 |
| $40,000.00 | $36,336.00 | $5,508.10 | $2,630.00 | $15,000.00 |
| $45,000.00 | $40,763.50 | $4,891.60 | $2,990.00 | $15,000.00 |
| $50,000.00 | $45,191.00 | $4,248.10 | $3,375.00 | $15,000.00 |
| $55,000.00 | $49,618.50 | $3,327.60 | $3,760.00 | $15,000.00 |
| $60,000.00 | $53,946.00 | $2,454.90 | $4,170.00 | $15,000.00 |
| $65,000.00 | $58,123.50 | $1,726.80 | $4,580.00 | $15,000.00 |
| $70,000.00 | $62,301.00 | $942.90 | $5,065.00 | $15,000.00 |
| $75,000.00 | $66,478.50 | $465.00 | $5,550.00 | $15,000.00 |
| $80,000.00 | $70,656.00 | $200.00 | $6,085.00 | $15,000.00 |
| $85,000.00 | $74,833.50 | $200.00 | $6,620.00 | $15,000.00 |
| $90,000.00 | $79,011.00 | $200.00 | $7,240.00 | $15,000.00 |
| $95,000.00 | $83,188.50 | $0.00 | $7,860.00 | $15,000.00 |
| $100,000.00 | $87,366.00 | $0.00 | $8,480.00 | $15,000.00 |
While I have not directly compared this data against our current system, here are some quick notes. The maximum possible tax credit for tuition through the American Opportunity Tax Credit is $2,500, with a maximum of only $1,000 if you don't actually owe taxes.
http://www.irs.gov/uac/American-Opportunity-Tax-Credit:-Questions-and-Answers
Alternatively, a maximum of $4,000 of tuition can be deducted (which would reduce taxable income resulting in a net tax decrease of only a relative percentage of 4,000) if you don't qualify for the AOTC. $2,500 is hardly a drop in the bucket for most tuition programs and $1,000 for the poorest among us pays for like 1 class a year. Providing atleast $15,000 of tuition for up to 5 years (so a lifetime maximum of $75,000) should practically eliminate affordability as a reason for the poor to not be able to attend a vocational school, community college, or state college.
My healthcare subsidy at $25,000 is only for $568/month rather than the $717/month under the current system; however, no silver or bronze plan is affordable if the deductible and out of pocket costs cannot be covered. Eliminating the social security tax for these earners and diverting the employer contribution into a health savings account in conjunction with support affording a healthcare plan should better help a poor family weather a significant health problem better than the current system would.
Again, I have not included any additional EITC calculations. My suggestion would be to have the EITC contribute to the health savings account and perhaps as a partial housing subsidy if actively enrolled in school so as to create the time and ability to become educated despite a low-paying job. The important thing is to ensure that the EITC does not create a slope in pocket income where the marginal gains in living from extra work is unduly punished while still providing for the ability to scrape by.
That concludes the full on numbers-fest for my series of proposals. In the final part 4, I'll answer any questions and revisit the two families and determine the new return on investment for the college degrees.
