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.

 

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.

 

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?

James
 

James retired in 2005 after serving 21 years in the United States Army. During the latter part of his career, James' interest in personal finance was piqued based on his own experiences and observations of the way most Americans plan – or more accurately, fail to plan – for retirement and the difficulty many face in starting the process. His most valued education has been lessons learned from personal experience and through conversations with smart, savvy friends.

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