By Theo Anthony. Edited by Arjun Chandrasekar.
Income inequality is at the pinnacle of rising global economic inequality; most notably in the United States, where in the past three decades the bottom 50% of earners have become $900 billion poorer, and the top 1% of earners have become $21 trillion richer. This is mostly due to poor enactment of moral policies — higher taxation of the rich, regulation of large corporations, increasing wages of workers.
Now, although raising the taxes on the rich would mitigate the increase in income inequality, it defies Adam Smith’s core principle of fair taxation. In democratic societies built on the principles of liberty, the only way to provide a level playing field for everybody, in a way that aligns with my proposed economic model, is through a well-known policy of flat taxation.
Harvard economist, Dale Jorgenson, states that “tax reform would boost national wealth, as all income-producing assets would rise in value, as flat taxation would increase the after-tax streak of income generated.” This suggests that the implementation of the taxation policy would unequivocally reduce income inequality amongst top-earners as a lesser proportion of their income would be taxed.
Let’s take a look at an example of a bold success story of a country that adopted a nationwide flat-taxation policy. After establishing a flat-taxation policy in 2003, the World bank awarded Slovakia as “the most reformed economy.” Slovakia then went on to accumulate an economic growth of 6.6% in 2005, after adjusting inflation. The flat-taxation model has its successes, as shown, but obviously, one case is never enough to determine it as the “correct solution” to reducing global income inequality. Capitalist societies can surely use the flaws exhibited in Slovakia’s economic system as a way to improve the flat-taxation model.
Going back to the flaws of today’s tax system, in many capitalist countries, it becomes crystal clear how the system has yielded unfair results if we take a look at a real-life example. Suppose worker A and worker B both reside in northern California. Now suppose worker A earns $400,000 per year, before tax, and worker B earns $45,000 per year, before tax. Suppose worker A was accomplished in high school, majored in economics at Princeton, received an MBAn (Master of Business Analytics) from MIT Sloan School of Management, and is now the President of a huge corporate firm. Suppose worker B dropped out of high school, earned their GED, then worked a few different jobs, and now works as a human resources person for a law firm. Worker A’s total income taxes represent 40.45% of their respective earnings, whereas, worker B’s total income taxes represent 18.65% of their respective earnings. Given that worker A has clearly put much more effort into their life and worked very hard for all they have accomplished, and worker B not so, it could be argued that a smaller proportion of their income should be taxed. But going back to Adam Smith’s principle of fairness, this would undermine the capitalist goal, hence, fairness could only suggest that flat-taxation is the solution. California’s taxation policies only represent one piece of the puzzle of major income inequality.
With that being said, Virginia has adopted a unique tax model of $720 + 5.75% of all excess income above $17,001. However, all income below $17,000 is subject to variable tax. This seems like a great first step taken towards combatting the taxation policies of the present day. Given that Virginia’s median household income, in 2019, was $81,313, and in 2020, the 10th percentile income of Virginia’s household was $17,200, it can be safely said that almost all Virginia households pay the flat state tax. While I see this taxation policy as a great first step, it is still not as fair as it should be given that household income below $17,000 is taxed.
My model disagrees with taxing income below a “threshold value”. The threshold value is the value of income in which if you earn less than that, it is completely untaxed. In Virginia, this would be $17,000, had no income below this value been taxed, in the UK, income below £12,570, which is known as a “personal allowance”, is untaxed, hence this is another example of a “threshold value.” My model agrees with a threshold value where income above is taxed at a flat nationwide/statewide tax rate, and income below is untaxed. But, there is a twist. The threshold value should vary depending on where you live within your country/state, the reason being is living costs vary — and they can vary largely — for example, in California, San Francisco’s average cost of living is 45.4% higher than the California average, whereas, in Oxnard, the average cost of living is 3.5% lower than the California average. It would only make sense for the threshold value to vary depending on where one resides as it somewhat standardizes each individual’s earnings.
In conclusion, taxation policy reform is just one of the many policies that my decentralized economic model entails. This proposed taxation policy satisfies both fairness and accommodates for variation in living costs across the country/state!