This is a very useful analytical article, unpacking the statistic that says 47% of Americans pay no federal income tax.
Filed under Uncategorized
Tagged as economics, taxes
I think the article rightly points out that the 47% statistic is more a reflection of the increased income disparity in this country. It also was right to point out (and could have emphasized further) that the major federal entitlements (medicare, social security) are technically paid for by payroll taxes, not income taxes, and that we all share this burden a bit more equally. My question (a real one, not rhetorical) is how do we address the increasing income disparity without creating disincentives for job creation, living wages, and small business/ entrepreneurship?
That is an excellent question, but imbedded into it is an assumption that the wealthy use their income for job creation. That is probably true in a trickle-down sense, but I doubt it is the best way to stimulate job creation. The people at the top end of the wealth distribution, after all, are not usually the small business entrepreneurs. They are quite often people who are good at capturing surplus generated by others.
As for how to actually incent job creation with tax policy, we could offer lower tax rates on Schedule C income and tax incentives for investment in small businesses, etc… So, if a high-salaried engineer wants to invest in a start-up coffee shop, that should be generously supported in the tax code, with his investment credits offsetting or reducing his/her high personal income tax rate. The more s/he invests, the more of a credit s/he would receive.
There are already generous incentives for investing, because capital gains tax rates are so much lower than the marginal income tax rate. It doesn’t encourage people to start small businesses, though, because they wouldn’t be taxed on capital gains until they sell the business. So, what I’m suggesting is that we should offer a lower tax rate on income from sole proprietorships and similar small business income.
Of course, there could be some unintended consequences… it doesn’t help society if the engineer is encouraged to make inefficient investment decisions… such as buying an unnecessarily expensive, over-engineered espresso machine just because it’s cool and it reduces his/her taxes.
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