Current tax proposals ignore means-testing negatives in our various safety-net programs. Does it make sense that single mothers and those on disability face the highest effective tax rates, when possible loss of benefits is considered? While most consider welfare as a separate issue, shouldn’t tax revision smooth the path out of poverty? The prime rational for a new tax methodology is to encourage all to achieve at whatever level they are capable, minimizing the tax consequences. Our new tax plan should boost efficiency of the most productive and encourage investment and entrepreneurship; but at the same time we must provide relief to the middle class, in the form of lower effective tax rates and safety-net support during down periods; while encouraging those at the bottom with maximum opportunity for self improvement.
For example, my nephew Ben [a paraplegic] receives above $50,000 annually through Medicaid and Disability. He’s a brilliant man, who could dramatically improve his situation working on the internet. With no commute and few outside distractions, he could easily work 12 hours a day. BUT, if he earns more than $1,500 in any one month, he loses his life saving support. Wouldn’t it make sense to tax Ben at the highest marginal rate [25%] and let him keep the rest [75%], without loss of benefits? Ben could and should be a productive citizen with a fuller life, and his future taxes would repay some or all of his government funded support.
This is not an isolated case. Welfare, Unemployment, and Disability programs all have significant disincentives against work. It’s not infrequent that employees turn down additional work or salary increases because they can’t afford to lose food, healthcare, or subsidized housing benefits. Seniors who continue to work lose Social Security benefits and many retire early to get early benefits. The unemployed hesitate to return to work, when potential take-home pay is only marginally better than benefits and benefits once lost may not be reinstated. Extended delays in returning to work often cause erosion of skills and work habits.
The 21st century is dramatically changing our view of work. No longer can one expect to have a life-long position with the same company. And yet, our healthcare and pension arrangements continue to make that assumption, as do government mandates. For many, part-time work for multiple employers is becoming the norm. For other potential workers, age and pre-existing conditions override work qualifications because of healthcare mandates. Automation, off-shoring, trade, and other creative destruction improves productivity and lowers product costs for all; but temporary dislocation for downsized individuals should be anticipated. The loss of a job with company paid healthcare and pension benefits can be a crushing blow. An updated safety-net should buffer those down-times without creating disincentives. Healthcare and pension plans must travel with the individual. The safety-net should support transition between jobs, whether change is voluntary or involuntary.
None of the current candidates integrate an improved safety-net with tax collection. While tax simplification is to be applauded, current dissatisfaction with the tax code presents an opportunity that should not be wasted on incremental adjustments.