U-645: Tying the top tax rate to unemployment

[nuxvomica]

I posted an early version of this idea in the Economy forum back in February (Why not tie the top marginal tax rate to the unemployment rate?). Here's the revised formula:

The top marginal rate = (the U-6 unemployment rate x 4) + 5.

This is how it would work: The IRS would calculate the tax rate on financial wealth, the top marginal rate, at a baseline of a mere 5% plus four times the average U-6 unemployment rate for the preceding quarter or year.

I worked out the formula to be as simple as possible so that everyone could readily understand it, yet variable enough to produce a range that would provide a powerful incentive to the top earners to focus their energies on creating domestic jobs.

Currently, the top marginal rate (TMR) is 35% and the U-6 unemployment rate in June(which includes the underemployed and the discouraged unemployed, and is often called the real unemployment rate) was around 16.4%. Under U-645, the TMR today would be 70.6%. That is still less than the rate of 76% in 1964 and far less than 90%-or-so rates of the 1950s. The slightly lower 70% rate has been proposed by people like Robert Reich as adequate to both address the deficit and still keep the nation functional, so even at the currently high U-6 rate, the number is reasonable.
The incentive part of this can be seen when we compare to historic rates. As recently as 2001, the U-6 rate was down to 7%. For that period, the U-645 would have been 33%, two points below today's sharply discounted rate of 35%.

I think that if such a formula were already in place, we would have avoided many of the economic problems of the past thirty years. If you give top earners an incentive to invest their highly disposable income in domestic, job producing industries there's probably not a lot left over for derivatives and bubbles, or stock in off-shoring corporations. A CEO might think twice about closing a factory and laying off workers when he knows that that might reduce his own take-home pay. And his board and stockholders would likely agree, because it affects their personal fortunes as well.

Note that this is not a quid pro quo like tax breaks for job creation. The top earners work toward a goal they can't alone directly control so they will simply do their part and try to get others to do the same. It's like they're guided by, ahem, an invisible hand.

Whether this could ever get adequate support to become law, it could at least change the national debate on taxing the rich. Republicans continue to argue the fanciful notion that the rich create jobs with their wealth so let the rich put their money where Republican politicians' mouths are. If the Republicans don't rush to embrace this proposal, maybe they'll at least be forced to stop making that argument. The irony is, if U-645 were implemented, it might actually prove the argument right for the first time in history.

Here's an historical comparison using a yearly average:

Year    U-6 YRLYAVG   proposed TMR   actual TMR 
------  ------------  -------------  ----------
1994    10.79166667   48.16666667    39.6
1995    10.01666667   45.06666667    39.6
1996     9.616666667  43.46666667    39.6
1997     8.808333333  40.23333333    39.6
1998     7.991666667  36.96666667    39.6
1999     7.425        34.7           39.6
2000     7.025        33.1           39.6
2001     8.141666667  37.56666667    39.6
2002     9.583333333  43.33333333    38.6
2003    10.13333333   45.53333333    35.0
2004     9.575        43.3           35.0
2005     8.933333333  40.73333333    35.0
2006     8.233333333  37.93333333    35.0
2007     8.35         38.4           35.0
2008    10.56666667   47.26666667    35.0
2009    16.29166667   70.16666667    35.0
2010    16.75833333   72.03333333    35.0

So what do you all think?

[harun]

1. I prefer a wealth based tax/charity system over an income based one.

That being said the proposition of your suggestion would scare the sh*t out of the top earners and probably effect positive change.

[nuxvomica]

2. There's nothing for them to be scared of

If the top earners are as smart, resourceful and motivated by incentive as we've heard all these years, they should jump at the chance to control their own tax rate. I'd like to let the Republicans prove their rhetoric on this. And I'm not just calling their bluff. Really I'm not. I swear.

[nuxvomica]

3. Kick!

:kick:

[Jim Lane]

4. No, the invisible hand would push the rich to be free riders.

The actions of any one taxpayer would have only a small effect on the unemployment rate, and hence on that taxpayer's marginal rate. The plan wouldn't induce them to make an investment that they would otherwise deem unprofitable.

A job-creating investment will be deemed profitable when there's a demand for the goods and services that the newly hired workers would provide. That's it. Fiddling with the tax code will accomplish almost nothing.

[nuxvomica]

7. That's assuming such investments are unprofitable

There are many choices in the marketplace. A job-producing investment strategy is not, ipso facto, an unprofitable one but it may not have as high a short-term yield as others. I don't think investors and CEOs always make the best decisions, especially for long-term growth, but this may spur them to do so.

[hack89]

20. But you are discouraging long term planning

you will punish them if there is no growth in employment within a quarter or a year? You will force companies to make very short term decisions - how can there be room for large projects that take several years to plan and implement?

[nuxvomica]

23. I don't see that

First of all, this is not a corporate rate reform, it's personal income taxes, and it's not tied to the rate of job growth per se but the rate of employment, even if it's a steady state. Companies that hire domestically instead of overseas should see an influx of capital under this plan. That's the decision point this addresses.

[Rhiannon12866]

5. Makes sense to me. K&R.

It's sure a better plan than the Republicans have! :thumbsup: (Which is none. :grr:)

[nuxvomica]

11. In times of economic debate, it's good to have ideas available

The Republicans actually have a plan but it's just a plan to keep Obama from being re-elected,

[Rhiannon12866]

17. That certainly appears to me to be all that they're trying for and they've said as much.

Nothing that they have to offer is designed to help the American people in any way (health care, jobs, budget), and that includes their one issue platform of not reelecting the president. And it's not like they have anyone else to offer as a viable candidate, either. Anyone voting Republican clearly votes against their own best interests, which certainly ought to be clear by now. *sigh*

Maybe you should pass on your proposal to one of your representatives, whoever you thing might take the most interest. Too bad you can't have a beer (or coffee ;)) with the president, himself, to propose it to him. :)

[Chan790]

6. Would encourage statism and bureaucracy but little else.

Think about it, if you're rich under that system and want to keep your money, what's the best approach?

Encourage government hiring. That way you can keep your own money and you can lower your taxes. Then you complain about the inefficiency of a government that is big, bloated and does nothing.

[nuxvomica]

8. If I were rich and wanted to keep my money...

I would rather have a decision path available that encourages private hiring. I'd pick companies that aren't going to close factories and move operations overseas just for a few extra percentage points in profit. I could live with the smaller short-term gains knowing that long term I'd be keeping more of my income. The highly speculative climate we have now carries higher risks as well.

Let's say you're right, though. Even if U-645 were unworkable, as a proposal it could force the other side to give up the "rich create jobs" argument.

[krispos42]

9. I like it... as long as the TMR is set in stone, too

Otherwise the fatcats will just set the TMR at, say, $10,000,000+ or something.


We have a minimum wage, which is annualized at about $14,000 per year. So set the TMR so it starts at 15x annualized minimum wage.

[Enrique]

10. maybe then the "job creators" would create some jobs n/t

[lumberjack_jeff]

12. It is the opposite of keynesian.

When the economy is hurting, government injects capital into the economy, through borrowing or tax cuts.
When the economy is humming along, you raise taxes to pay off that debt and preclude inflation.

This economy is tweaked in part because of wealth concentration, so it might be useful in that regard. But it will lead to deliberate underestimation of the unemployment rate.

[nuxvomica]

13. We are in an unusual situation with wealth concentration

The WSJ reported that the latest recession was the first in which the wealthy took no hit enjoyed an increase instead. I think U-645 could remedy that. I agree that making sure the BLS is not subject to undue influence is a real problem, though.

[hack89]

14. I would simply adjust my portfolio to reduce my taxable income

it would certainly be a boon for tax-free municipal bonds.

[nuxvomica]

15. Why didn't everyone do that when the rates were higher?

Why aren't they doing that now?

[hack89]

16. Different people, different goals, different tax strategies, different laws?

not being a millionaire I have no person experience in the matter. However, my experience with simplistic solutions to complex problems is that there are always unintended results. There will be a lot of very smart people looking to find all those unintended results. The rich always land on their feet - they can pay for the smart advice.

[nuxvomica]

18. Actually, this is more complex than the current policy

The TMR is a simple percentage, untethered to anything. The smart advisors the rich pay for might tell them how to direct their investments toward a job producing goals. That's the kind of advice they should be giving because higher employment means greater demands for goods. What investors would lose in profit percentages over speculative practices they would make up in volume.

[hack89]

19. But you assume that these investors know exactly where to put their money

such that it creates jobs. I don't think anyone has that knowledge or skill. A reasonable assumption is that many companies would get no investment whatsoever as everyone places their money on the safe bet. How is a small high tech start up going to attract investment when you are prepared to punish investors that loses money on a risky start up? Don't you think your short time period for recomputing tax rates will punish new companies - it is asking a lot for a company to be profitable and growing in a quarter or even a year. How does any small business attract investment at all - the biggest potential for job growth lies with the large established companies - why shoot for 10 small or mid-sized companies when a single Ford plant can create 5,000 jobs? You just became big business's best friend - tons of money and a system designed to discourage any future competition.

These are just off the top of my head. I think your idea is simplistic and poorly thought out. It will fundamentally change the pattern of investing in America - don't you have the slightest doubt that bad things might happen?

[nuxvomica]

21. They would definitely know where it wouldn't create jobs

And they could invest in small businesses, which in toto are the biggest job creators. And I think the science of investing to create jobs might improve very quickly.

[hack89]

22. Fortunately we will never have to find out. nt

[hack89]

24. If I was that rich, I would invest my money in the politicians on the tax committees.

the fundamental flaw in your plan is that even if it became law, you are depending on the very same people who are benefiting from the status quo. Considering how complex tax law is, what are the odds that there will be enough loopholes essentially neuter the law?

[hack89]

25. If simply employing people is all that is needed to create demand for products

why were they all fired in the first place? By your logic, if the companies simply kept employment constant then demand would be constant.

[hack89]

26. Do you subtract government employment from the equation?

States, cities and towns are laying off huge numbers of workers. You don't plan to hold wealthy taxpayers responsible for replacing those jobs are you?

[nuxvomica]

27. It's based on the U-6 unemployment rate

I don't hold wealthy taxpayers responsible for anything but paying their fair share. This was a way to do that and provide an incentive. We disagree.

[hack89]

28. But it is unfair - you just want to punish the rich.

just because life has been unfair to you does not give you justification to be unfair to others.

[nuxvomica]

29. You don't know me or anything about my life or motives

I am not trying to "punish the rich". I'm just looking for solutions.

[hack89]

30. But you seem happy with high employment as long as the rich get soaked

because you consistently gloss over the not so insignificant point that you have no idea if it is even possible for an individual investor to know enough about the US economy to precisely target his investments to create jobs. What publicly available information is available to inform the investor? How sure are you that all the needed information is readily available?

So when you create a situation when all the rich are paying higher taxes because you rigged the system against them AND you still have high unemployment - what next?

And again - If simply employing people is all that is needed to create demand for products why were they all fired in the first place? By your logic, if the companies simply kept employment constant then demand would be constant.

[0rganism]

31. I like it - good incentive for "job creators" to become Job Creators

Set the TMR so its bracket is keyed to the top 1%, and we're rolling.

Coupled with sane trade policies that actually impose tariffs on imports from countries with weak environmental and labor standards, and we might actually see real improvements in the economy.

However, getting any congress I've seen in my lifetime to pass your TMR modification would be prohibitively difficult.