The Fleecing of Main Street: Taxes and the Wall Street Bank

This post by Ezra Klein got me thinking back to one of the simple calculations I performed recently had to do with flat taxes on a sample population. It essentially showed to maintain our current revenue levels, we would need about a 33% tax rate, and this would reduce discretionary spending. I recently expanded this calculation to look at the standard rate, a lowered rate on the middle class, and a flat tax. It calculated income available for spending (both staples and discretionary), as well as money saved, and money put towards the wall street bank, either in the form of stocks, speculation, or angel/venture funds.

Here's the data for the current standard rates, with income in thousands, and population in millions:

These numbers mirror published data, since about 70% of our $14 trillion GDP is consumer spending. In terms of what is available to main street and small businesses, only 67% percent of the funds left after taxes are available. Also of interest is the fact that under this taxation scheme, upper middle and low upper class pay more taxes as a percent of their income than upper class, without counting the disparity that capital gains introduces.

Now let's look at a Flat Tax.

In order to achieve the same revenue level for the government, we must have a 35% tax rate. Everyone pays the same, but it's higher for almost everyone. However, this reduces consumer spending nearly $1 trillion and reduces percent of funds available to Main Street by 3%.

Finally, let's look at lowered tax rates for most income classes, with higher taxes for the upper 2%.

Same revenue level, but now, everyone up to earners of $250,000 have a lower tax rate and lower effective tax rate. Earners from $250,000 to $1 million have the same taxes as under the Bush Tax Cuts. Earners over $1 million now pay 55% and earners over $5 million pay 65%. By doing this consumer spending rises $600 billion and 79% of funding is available to Main Street. This money comes from somewhere though, and that's reducing the money in the Wall Street casino by $2 trillion. Even though there is a loss in savings, the strength of Main Street should be enough that banks put some of their excess capital to work lending to small businesses again.

It basically boils down to anyone not wanting to raise taxes on the rich is just looking to put money into the pockets of the wealthy. With high marginal rates on high income earners, we can reduce the tax burden on the majority of Americans while maintaining the same level of revenue and higher levels of consumer spending. It may even result in more money for small businesses as the majority of Americans will now have excess money they must now save, which can be packaged in loans for small businesses.

Wealth Distribution

This topic has been bugging me quite a bit lately, with Republicans wanting the tax cuts on the wealth to be preserved, and any mention of limiting compensation or increasing taxes on the wealth being shot down as promoting socialism through wealth redistribution.

I came across an interesting article that reworked the view on the issue, such that wealth will always be redistributed as long as taxes are in place. By having low taxes on the wealthy, we have redistributed income to the wealthy (Link). Similarly, if income taxes were abolished and a national sales tax were implemented, would we redistribute wealth from the spenders to the savers (usually the wealthy, since they save more of their income). Would a flat tax also redistribute wealth, since the wealthy also save more of their income, producing additional income for them?

What started me down the path towards examining wealth redistribution was the idea that asset bubbles are a result of the widening gap in earnings between the middle class and the wealthy (Link). This goes back to the idea of the wealthy being savers. As they continue to search for ways to increase their earnings potential, they move assets away from places that create jobs (banks, treasuries) with low return and risk to speculative areas with higher rates of return (stocks, tulips, houses, oil, and now even chocolate).

One simple solution is to raise taxes on people earning over $250,000. The argument presented against this one is that it will hurt small business owners similar to comment 52 here. Without seeing the books, it would seem that he is complaining about the rate he is taxed at, while recording essentially $1.8 million in personal income. Although I'm not an accountant or tax lawyer, it might be time he looked at his corporate structure, or hiring more American workers to reduce his profit levels. Most small businesses owners would be happy to have profits of $250,000 or more and be taxed on it (myself included).

The other solution I've seen recently and favor is the discretization of the income scale into finer levels. Tax rates for $250,000, $500,000, $1million, $10million, etc. (Link). This may even allow rates to be further cut for the lower and middle class. And since the lower 95% composes about 67% of the spending in our country, having more money in their hands would give our economy a nice boost.