Poverty, Taxes and Getting Skin in the Game

Four factors serve as the contributors, or perhaps more accurately, as the catalysts for this post. As regular readers of this blog know, I have touched on the subject of poverty on multiple occasions. In fact, one of the most well received (page views and comments) posts in the recent past has been A Richer Understanding: Thinking About Maslow and Poverty, where as  you might guess, I discuss Maslow’s Hierarchy of Needs and how it relates – at least in my mind’s eye – to poverty. That would be the first factor.

The second factor would be a post I read, and commented on, over at Freedom is Groovy, one of the personal finance blogs I visit on occasion. In Are You Overtaxed? Mr. Groovy asked that very question and shared that for the first time in his life he decided to calculate his total tax burden as a percentage of his income. He noted that he believed anything beyond 15% struck him as tyrannical. Check out the post to get more on his take of taxes and tax rates.

In my comment I noted that it just so happened that my taxes had just recently been completed and my tax preparer had informed me that my effective tax rate was 19%. I also noted I did not feel that was excessive.

The third factor is the simple fact that we are in the middle of tax season. As everyone in the United States deals with getting their taxes filed over the next two weeks, eagerly await their return, or prepare to send off a check for payment, most personal finance bloggers have written a post or two on the topic.

Internal Revenue Service

The fourth and final reason is because of the aphorism, skin in the game, I have heard used by co-workers and a good friend. The idea being that everyone, regardless of their level of income, should be paying something with respect to income taxes.

Before we move along, I concede that I am an expert on neither tax policy nor poverty. I’m just a guy with a few thoughts.

I should note that these co-workers and my good friend, someone whose opinion I value highly and has good judgment, are reasonable people who believe it’s basically just a question of fairness. And I must concede it sounds very reasonable. There is nothing wrong or malicious in believing everyone should have some skin in the game.

But don’t all Americans already have skin in the game? While not all Americans pay taxes on their income, they certainly pay some form of local and state taxes on goods and services as they go about their daily lives. Even those that don’t pay income taxes are contributors to the economy. They are certainly cogs in this system, receiving income, in various forms, and putting that money back into the system every time they buy groceries, get gas, etc.

However – and you knew that was coming – while it sounds reasonable in theory, I believe the practical implications of paying income taxes are too consequential for some. One alternative to our current progressive tax system – one in which taxes progress from low to high based on income and has caveats, such as those below a given threshold based on income and household size pay nothing – is a flat tax.

At one time I thought a flat tax was a reasonable alternative. You get rid of a lot of loopholes, confusion and everyone has some skin in the game. Pretty simple and straightforward? Not so much in my mind.

An easy example is two households; two parents and two children in each. Let’s assume the annual incomes of the two are $20,000 and $200,000 respectively.  Let’s further assume we set the flat tax rate at 10%. In this scenario the first couple would pay a flat tax of $2,000, leaving them with $18,000. The second household would pay a flat tax of $20,000, leaving them with $180,000.

I would suggest paying $2,000 annually would decimate a family already struggling to get by. Conversely, I have a high level of confidence that the second family would not miss a beat. I don’t believe for one minute that they would start scrambling to cut back – give up the daily Starbucks coffee and commit to bagged lunches – if they were reduced to $180,000.

Coffee Bar

Should some loopholes be closed in our current tax system? Certainly. Should the government, at the state and federal levels, do a better job of efficiently spending the money they do collect in taxes? Absolutely. However, for all of its shortcomings, I have come to believe a progressive tax system – one that relieves some households of the burden of income taxes – is our best bet.

Another thought that has run through my mind. There has been a lot of chatter over the last two to three years about raising the national minimum wage to $10/hour, and a lot of retail and fast food workers, at the local and state levels, are demanding $15/hour.

While I don’t want to paint with too broad a brush, my experience has been that those who are most to inclined to agree with the idea everyone should be paying income taxes, everyone should have skin in the game, are most likely the ones to be opposed to raising minimum wages.

It seems to me there is a slight disconnect between those two beliefs. If those retail and fast food workers were to make more money, might they be lifted higher on the income ladder and be more likely to pay income taxes, either putting some, or more, skin into the game?

Blogger-in-Chief here at RetirementSavvy and author of Sin City Greed, Cream City Hustle and RENDEZVOUS WITH RETIREMENT: A Guide to Getting Fiscally Fit.

11 Comments

  1. Hey James, thanks for mentioning my article. This post is great food for thought. I’m definitely in favor of a flat tax, but I understand the need for a little progressivity. One way to have both is to have a generous personal exemption. Using your example, let’s suppose we had a $10,000 personal exemption. Our $20,000 couple would have an AGI of zero and would therefore pay zero in federal taxes. And our $200,000 couple would have an AGI of $180,000 and pay $18,000 in federal taxes (a 9% effective tax rate). Like some of the other commenters here, I have a problem giving our government more money. I just don’t see how it will help. Check out this link about the salaries and benefits of college presidents in Massachusetts. More generous Pell Grants and more friendly student loan terms will just feed this corrupt and ravenous beast.

    How a Perks Binge Sweetens the Pay of Massachusetts College Chiefs

    • I’m certainly not advocating to give the government more money. Like most people, I would like to have some assurances that our tax dollars are being spent more wisely before the question of ‘more’ is even raised. With this post I was really looking more at how to deal with the poor and taxes, specifically income taxes.

      In essence, your example is basically what we have now – at least as it relates to the poor – in that even though they may pay income taxes on each paycheck throughout the year, their effective tax rate at the end of the day is 0% once they file and adjustments are made. My sense in speaking with those who advocate for everyone having ‘skin in the game’ is that their effective tax rate should not be 0%; they should in fact have to pay something, hence the aphorism.

      I will have to check out the link. Thanks for stopping by and adding your thoughts, my friend.

    • Certainly a lot of avarice in the Massachusett’s school system.

      Interesting how two people can read the same story and walk away with different impressions. Like you, I was taken aback by the level of greed and what appears to be corruption, or at a minimum, rampant cronyism.

      However, instead of thinking of about Pell grants or student loans, my thought was that the problem isn’t that there isn’t enough money to provide better pay and benefits to those at lower positions in the Massachusett’s university system, many likely scraping by on minimum – or near minimum – wage, it’s that those in positions to impact policy structure the system in such a way to enrich themselves at the expense of others, contributing to the ever widening income and wealth gaps.

      This article is a great example of how a more equitable distribution of resources would ensure that more citizens are in a position to ‘have skin in the game’ with respect to taxes.

  2. The minimum wage is a tough one. I can’t help but think that business owners are being incentivized to automate processes and cut out workers. I can understand why some are in favor of raising the minimum wage, I just don’t think they will be happy with what results from it – automation.

    • ” … I just don’t think they will be happy with what results from it [raising the minimum age] – automation.”

      What you’re saying implies that the move toward automation will be stopped by keeping the minimum wage as low as possible. And perhaps the logical extension of what you’re saying – please correct me if I’m wrong – is that those who are earning minimum wage should understand (be satisfied?) with the status quo, lest their efforts result in the loss of a job, which of course, would be worse than it is now.

      Will Minimum Wage Hikes Lead to a Huge Boost in Automation? Only If We’re Lucky | Vox

      I’d be interested in hearing your thoughts on those who effectively do not pay income tax and whether they should have ‘skin in the game.’

      Thanks for stopping by and joining the conversation. Good stuff!

  3. Raising the minimum wage to a point hasn’t been shown to hurt job growth, so I don’t buy that argument. $15/hr may be too high though. But you’re right that something lower would generate more income and thus more tax revenue!

    • Yep, I don’t buy the argument that raising the minimum wage will hurt job growth and the overall economy. With respect to income, for those in the 50th percentile and below, real wage growth has been less than 3.5% – it’s actually negative for those in the 10th and 20th percentile groups – since the mid 1970s … Economic Policy Institute.

      Like you, I don’t know if $15/hour is the answer, but surely it needs to be higher than $7.25 – the Federal minimum Wage since 2009 – and should have some relationship to inflation.

  4. I generally agree the minimum wage should be raised but I had a thought the other day that raising the minimum wage will inevitably raise the cost of living pretty much across the board. Probably not equal the the same percentage of the wage raise but it will go up, somewhat similar to the effect of printing more money. Most notably probably in the cost of rent and home values. Not that we shouldn’t raise it, just a thought I had.

    When you’re high enough on the ladder it’s easy to not think about how hard many people really have it, I think it makes sense for the higher earners to pay a bit more, but… I also have a general problem with taxes. Not that we should go to an anarchy state, but Anyone who thinks they have control over tax percentages, how the money is spent, how our financial system works through voting is in my eyes, disillusion. The federal reserve system is a joke, we know tax money is spent inefficiently in front of our eyes and disappears in huge quantities behind our backs in projects we’re not allowed to even know about, let alone see where the money is specifically going. To me it’s a rigged system I have zero control over. If there’s a legal way to reduce my tax I’d take it and not worry about anything else.
    I don’t know how to say it but, it’s not millions of people working together to make our government work, it’s a tiny few manipulating and controlling the system and trying to make the public feel like they have control. If we feel like we have control, we’ll try to “do the right thing” and give fiat money to the black box system and talk about what taxes are fair. Not sure if any of that made sense, but that’s how I feel. I don’t mind paying my share, just wish things were less corrupted and more for the people.

    • “I don’t mind paying my share, just wish things were less corrupted and more for the people.” I believe that is a common sentiment. As I noted in the post, I don’t believe the problem is with the progressive tax system. I believe the system is fine, we just have to find ways to clean it up and make the collection and expenditure of tax money more efficient.

      Thanks for stopping by, my friend.

Leave a Reply

Your email address will not be published. Required fields are marked *