2014 is the year of the tax form — at least for me. Having quit my day job last year in order to start a web company, while doing some independent contracting on the side, my taxes have become far more complex. Just getting the information together to send to my accountant is taking days.
And then I became a true masochist and wrote a C# program to simulate a wide range of taxpayers for my latest Simple Tax proposal. We could approximate the current system with a simple two-tier income tax combined with citizen dividend. We could go back to a 12 page 1040 instruction book like we had in the 1950s — without going to the horrendous marginal tax rates of the day.
For my Simple Tax, a bottom rate of 30% to replace federal income tax, FICA, Medicare and unemployment insurance for most workers and a 40% rate for individuals making over $400,000 would do the trick. With many payroll headaches removed, we can expect more people to go into business and hire others.
However, even without the need for a payroll service, this income tax still has a hidden disincentive towards paid labor. 30% doesn’t seem super terrible on the surface. But when I did an end-to-end analysis the true marginal rate was 51% for members of the working class.
Consider a call center worker with a dripping faucet at home. Should he take time off to fix it himself or should he call a plumber? To pay the plumber he has to earn the money; the government takes 30% and he has 70% left over. When he pays the plumber the government gets another 30%, leaving 70% of the 70% or 49% in the hands of the plumber. 51% of the marginal dollars go to the treasury. Even if most of those dollars come back as citizen dividend, the marginal impact is significant, and a pretty good explanation why Main St. has boarded up businesses and people opt for do-it-yourself even for tasks that aren’t that fun.
Regardless of the urgency to do something about global warming, we might want to do that carbon tax thingy just to reduce the marginal tax burden on labor.