Tax cuts for the poor
by Ari Armstrong
The following article originally appeared at Boulder Weekly on April 15, 2004.
Most Republicans like to cut taxes. Democrats decry "tax cuts for the rich," which I'll assume implies they don't mind tax cuts for the poor. I have a simple proposal that should gain bi-partisan support, then. Exempt everyone making less than $20,000 per year from nearly all taxes.
If you make less than $20,000 in a calendar year, after expenses, I propose you don't have to file income taxes at all. The burden of proof then lies with tax collectors to prove you earned more than that. You don't have to pay federal or state income tax. If you're in retail sales, you don't have to collect state or local sales tax. If you own property, you don't have to pay property tax.
You also don't have to pay Social Security tax. Why should a poor working family be forced to pay a retired millionaire to play golf in Hawaii? Social Security is often described as a "security net," but it's more like a net that entangles those making less money, trapping them in dependence. One possibility is to give those who make less than $20,000 the choice of whether to contribute to Social Security. If they don't contribute, they can't draw benefits, but neither is their nest egg snatched up during their younger years. Given the expected rate of "return" on Social Security payments, only an idiot would voluntarily pay into the system.
Might conservatives complain that my proposal unfairly benefits the poor? Yes, my proposal is "progressive" in that it charges wealthier people a larger percent of their income. However, even the so-called "flat tax" promoted by some conservatives is progressive: It exempts a certain amount of income from the income tax. The real value of the "flat" tax isn't that it's flatŠit isn't -- but that it's simple. That is, it reduces compliance costs by dramatically simplifying the tax code.
Perhaps some Democrats will worry that tax cuts for the poor will reduce government revenues. However, if we quit screwing the poor with high tax burdens, they'll need less support from the politicians and bureaucrats. I would favor reducing government spending by the amount lost in tax revenues. If any left-winger squawked too loudly about cutting taxes for the poor, I would have to wonder if the real motivation was to help the less advantaged or simply to create a massive state.
There are some wrinkles, of course. What about fees? We can draw a rough rule that any arbitrary fee, such as for a business license, is abolished for the poor. On the other hand, a fee that entails an actual service, such as entry to a state park, may be required. I would do away with fees for license plates for cars, but others might disagree.
What about rental property? Poor renters pay property tax through rent. It would be possible to return the property tax directly to the poor renters, but this would entail more paperwork. Also, while taxes should be as neutral as possible -- meaning they shouldn't favor one activity over another -- property ownership generally contributes to financial stability. So I wouldn't mind too much if property tax were lifted only for property owners. Perhaps a better system would be to tie the tax break to the value of the property rather than to the income of the owner.
A similar problem involves sales tax on purchases. If a person in the lower bracket didn't file taxes at all, there would be no way to exempt the person from paying sales tax on purchases. The only way to accomplish this would be to certify income level and then offer some sort of identification that would enable retailers to skip the tax. But this is problematic. First, the less government tracks citizens, the better. Second, the system would be open to abuse. For example, somebody with a sales tax exemption could purchase stuff for lots of other people. Third, if somebody makes less money one year and more the next, it would be difficult to link the sales tax exemption to the period of lower income. This could again be manipulated.
Thus, I don't think exempting the sales tax for purchases would work.
However, I favor removing the sales tax for groceries across the board.
There's one more minor problem: The policy would encourage some people to make less than $20,000 per year in order to avoid most taxes. Of course, simply exempting the first $20,000 from all income and retail taxes would create parity. All sorts of incentive quirks would arise, but that happens with any sort of tax policy. (The only way to achieve efficient incentives is to eliminate taxes.)
Tax cuts for the poor fulfill the stated objectives of both left and right. If neither Republicans nor Democrats pick up on the plan, I will suspect the parties don't care so much about cutting taxes or helping the poor as they do about increasing their own power.