The immediate potential downside I see is that this would effectively institute a very high marginal tax rate on income below ‘x’. For every additional dollar that someone who makes less than x earns, they lose 0.5 dollars of social security. That’s a 50% implicit marginal tax rate, on top of whatever the official marginal tax rate is. By comparison, the highest marginal tax rate for federal income taxes in the United States is 35%, which is only applied to household earnings beyond $370,000 (source). The implication of standard economic theory is that many people would simply choose not to work and earn .75x.
Agreed. But does this problem not exist in even bigger measure when you have min wage and social security for those unemployed as a result of minimum wage. The social security cannot be equal to the min wage, since otherwise no one would work at min wage. However the social security would presumably be something like 2⁄3 of min wage to ensure that those who are unemployed are able to have some decent standard of living. And this per your argument would put the implicit tax rate of those earning minimum wage at 67%!
I don’t think that’s quite right. The marginal tax rate is going to be 50% no matter the value of x, given your formula. Your social security payment is half the difference between your income and the x threshold, so each additional dollar you earn below that threshold loses you 0.5 dollars of social security. This is true whether the threshold is $10,000 or $100,000.
You are right, though, that there will be a correspondence between the minimum wage and the level of x. I don’t think this is causal, but popular notions about the ideal levels for both the minimum wage and ‘x’ will probably both reflect underlying notions about an “acceptable standard of living”. If there’s a correspondence between the level of the minimum wage and the fraction of people who give up working because of this system, I think it would be chiefly because of this correlation (in addition to the employment effect of having a minimum wage at all).
A 50% marginal tax rate would be a dramatic improvement on existing programs; at present, it is not uncommon for getting a job to reduce the net income of someone previously depending on government assistance. And yet most people try very hard to get off government assistance as soon as they can (don’t tell me about your worthless cousin who hasn’t worked in their adult life; I have one of those, too. But the statistics show them to be much rarer than they appear). The problem with this program isn’t that there’s a bunch of lazy poor people who would choose not to work and take the smaller income, the problem is that our political system is in the grip of vicious stereotypes about lazy poor people that make it impossible for any program like this to gain widespread support, because of irrational fears that it will end up rewarding lazy poor people.
A basic income is, of course, an alternative which would eliminate the 50% marginal tax rate problem. It would obviously be more expensive, if you wished people with no other income to be at the same level as on your proposal, but if we’re floating crazy utopian schemes, a wealth tax would be a very promising way to raise quite a lot of additional revenue while having some beneficial incentives. It would encourage wealthy people to sell non-productive or insufficiently productive assets to those who would get more use from them, instead of hoarding them out of laziness or tradition; while there are not a lot of rural aristocrats inefficiently farming vast estates because they like being local lords these days, there do seem to be modern phenomena with some similar features to Adam Smith’s favorite example of massive, widespread inefficiency.
All good points. To clarify, 50% is the marginal tax rate from the OP’s system alone. A major reason that effective marginal tax rates can be so high is that programs like (to be US centric) food stamps and Medicaid are means tested, so they phase out or go away entirely as you make more income. If the OP’s system would retain those kinds of programs, their contribution to the marginal tax rate would come on top of the 50% cited above.The net effect of enacting this system would depend on which parts of the current bundle of social insurance programs it would displace (in the US, presumably the EITC and TANF, at least).
Interesting idea. It’s in the same family as the Earned Income Tax Credit and the Negative Income Tax.
The immediate potential downside I see is that this would effectively institute a very high marginal tax rate on income below ‘x’. For every additional dollar that someone who makes less than x earns, they lose 0.5 dollars of social security. That’s a 50% implicit marginal tax rate, on top of whatever the official marginal tax rate is. By comparison, the highest marginal tax rate for federal income taxes in the United States is 35%, which is only applied to household earnings beyond $370,000 (source). The implication of standard economic theory is that many people would simply choose not to work and earn .75x.
Agreed. But does this problem not exist in even bigger measure when you have min wage and social security for those unemployed as a result of minimum wage. The social security cannot be equal to the min wage, since otherwise no one would work at min wage. However the social security would presumably be something like 2⁄3 of min wage to ensure that those who are unemployed are able to have some decent standard of living. And this per your argument would put the implicit tax rate of those earning minimum wage at 67%!
I don’t think that’s quite right. The marginal tax rate is going to be 50% no matter the value of x, given your formula. Your social security payment is half the difference between your income and the x threshold, so each additional dollar you earn below that threshold loses you 0.5 dollars of social security. This is true whether the threshold is $10,000 or $100,000.
You are right, though, that there will be a correspondence between the minimum wage and the level of x. I don’t think this is causal, but popular notions about the ideal levels for both the minimum wage and ‘x’ will probably both reflect underlying notions about an “acceptable standard of living”. If there’s a correspondence between the level of the minimum wage and the fraction of people who give up working because of this system, I think it would be chiefly because of this correlation (in addition to the employment effect of having a minimum wage at all).
A 50% marginal tax rate would be a dramatic improvement on existing programs; at present, it is not uncommon for getting a job to reduce the net income of someone previously depending on government assistance. And yet most people try very hard to get off government assistance as soon as they can (don’t tell me about your worthless cousin who hasn’t worked in their adult life; I have one of those, too. But the statistics show them to be much rarer than they appear). The problem with this program isn’t that there’s a bunch of lazy poor people who would choose not to work and take the smaller income, the problem is that our political system is in the grip of vicious stereotypes about lazy poor people that make it impossible for any program like this to gain widespread support, because of irrational fears that it will end up rewarding lazy poor people.
A basic income is, of course, an alternative which would eliminate the 50% marginal tax rate problem. It would obviously be more expensive, if you wished people with no other income to be at the same level as on your proposal, but if we’re floating crazy utopian schemes, a wealth tax would be a very promising way to raise quite a lot of additional revenue while having some beneficial incentives. It would encourage wealthy people to sell non-productive or insufficiently productive assets to those who would get more use from them, instead of hoarding them out of laziness or tradition; while there are not a lot of rural aristocrats inefficiently farming vast estates because they like being local lords these days, there do seem to be modern phenomena with some similar features to Adam Smith’s favorite example of massive, widespread inefficiency.
All good points. To clarify, 50% is the marginal tax rate from the OP’s system alone. A major reason that effective marginal tax rates can be so high is that programs like (to be US centric) food stamps and Medicaid are means tested, so they phase out or go away entirely as you make more income. If the OP’s system would retain those kinds of programs, their contribution to the marginal tax rate would come on top of the 50% cited above.The net effect of enacting this system would depend on which parts of the current bundle of social insurance programs it would displace (in the US, presumably the EITC and TANF, at least).