Earned Income Tax Credit

Earning my presidential vote: taxation

As I noted yesterday, the economic portion of my study began with how people can better get more money in their pockets, but this morning I’m going to discuss how best people can keep what they earned. (To start from the beginning, go here. I’m linking to each succeeding part at the end.)

Regarding taxation, the next president should (in five bullet points or less):

Strive for a consumption-based taxation system to replace the income-based system.
Work to repeal the Sixteenth Amendment, as that is a key element in accomplishing the first point above.
Corporate taxes should be lowered to be competitive with other nations.
Do away with the estate tax while we’re at it.
Stop using the tax code to reward behavior, aside from the reward for saving and investing a consumption-based tax would produce.

So how do our candidates look regarding these points? Honestly, some look pretty good – and this is one of the shorter parts. This is the first of our double-digit point categories; 10 points are available.

Castle: I have proposed a taxing system whereby taxes would be apportioned to the states as the census dictates. If my state of Tennessee had two percent of the nation’s population, for example, it would be liable for two percent of the budget. It would be incumbent upon the representatives from Tennessee to help hold down Federal spending. The Federal Government would be encouraged to spend less not more. The states would be empowered and Washington would be dis-empowered. Washington’s hold over the states would be broken and the states would be sovereign again – Washington would have to ask the states for money. States would be free to collect their revenue as they see fit. Alaska might tax its natural resources and Florida might tax tourism. In Nevada, it would obviously be gambling. Since people could keep their income the economy would explode with growth.

Prefers FairTax to income tax, but has less control by states. “I would like to see (the Sixteeneth Amendment) repealed, if possible.” (Facebook page)

Hedges: Until renewed Volstead Act (Prohibition), higher taxes on alcohol and tobacco.

“There is no way to cut back income and at the same time deliver more services. Things that taxpayers want, the taxpayers must pay for.”

Hoefling: We consider the federal income tax to be destructive of our liberty, privacy, and prosperity. Therefore, we are working to bring about its complete elimination and the repeal of the Sixteenth Amendment to the U.S. Constitution. We recommend that the current system be replaced by an equitable, simple, noninvasive, visible, efficient tax, one that does not destroy or even infringe upon our economic privacy and liberty. (party platform)

Johnson: Stop special interest loopholes. Reward responsibility. And simplify our tax code.

Today’s federal tax code does all the wrong things. It penalizes productivity, savings and investment, while rewarding inefficiency and designating winners and losers according to political whim.

For far too long, tax laws have been used not just as a means to collect needed revenues, but as a way for special interests to penalize their competitors while subsidizing themselves. The result is a tax code that is more than 70,000 pages long, enforced by a government agency with almost 100,000 employees. As a result, our tax code has created a nightmare for the average American, while providing shelter for those with the means to manipulate it.

Governor Johnson advocates for the elimination of special interest tax loopholes, to get rid of the double-taxation on small businesses, and ultimately, the replacement of all income and payroll taxes with a single consumption tax that determines your tax burden by how much you spend, not how much you earn. Such a tax would be structured to ensure that no one’s tax burden for the purchase of basic family necessities would be increased. To the contrary, costs of necessities would likely decrease with the elimination of taxes already included in the price of virtually everything we buy.

Many leading economists have long advocated such a shift in the way we are taxed, and Gary Johnson believes the time has come to replace our current tax code, which penalizes the savings, productivity and investment we so desperately need. (campaign website)

McMullin: Evan McMullin will…make the tax code fairer and simpler, helping to spur business innovation, especially the growth of small businesses, which are the country’s most important job creators. Small businesses should pay closer to 25 percent of their profits in taxes, whereas now there are many that must pay almost 40 percent. Right now America also has the highest corporate tax rate – 35 percent – of any advanced economy. Even Barack Obama has said that it should be substantially lower. Income tax rates also need to come down, especially for the middle-class; once the economy starts growing again at an acceptable rate, high-earners should also get a break.

The Earned Income Tax Credit (EITC) is one program that shows how we can fight poverty while encouraging work—it provides a tax refund for those who have jobs but don’t earn enough to be self-sufficient. One shortcoming of the EITC is that tax refunds may not arrive until someone has been working for more than a year. To provide a stronger incentive to work, there should be immediate benefits for those who have jobs. This can happen by transitioning from tax refunds to wage supplements, which add money to every paycheck, starting from day one. Wage supplements also create a strong incentive to spend more time at work, since the benefit rises with each hour spent on the job.

By adding to the paychecks of low-income workers, EITC and wage supplements accomplish the same goal as an increase in the minimum wage, but without reducing the number of jobs available or punishing job creators. If the federal minimum wage rose from $7.25 to $15 per hour, many jobs that pay $9 or $10 per hour would disappear, because employers could not afford the cost. When such jobs disappear, the primary victims are the poor and unemployed, who depend on such jobs to acquire skills and get a foot in the door so they can eventually rise up. (campaign website)

With the exception of a slightly higher corporate tax rate, McMullin’s tax proposal is largely in line with the tax reform plan put forth by House Republicans over the summer. Individual income taxes would be reduced to three brackets from seven at rates of 12%, 25% and 33%. Small business taxes would be reduced to 25%, and the corporate tax rate would also be reduced to 25% (the House GOP plan pegs the corporate tax rate at 20%). (TheStreet.com)

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I think Darrell Castle‘s idea is very intriguing because it would certainly rein in the federal government. Let’s say the federal budget is $4 trillion. Castle uses 2% as an example; it so happens Maryland is roughly 2% of the national population. That would mean the state would be liable for $80 billion, which is about twice our state’s annual budget – but certainly is doable when you figure the state’s GDP is about $365 billion. If a state didn’t want to come up with its share, well, maybe its Congressional delegation would become serious about rightsizing government. To me, that’s the beauty of the idea. He also gets the point regarding the Sixteenth Amendment. 8.5 points.

I question the wisdom of Jim Hedges and his ideas about taxation. It’s understandable that he wants higher sin taxes given the nature of his party (albeit these are consumption taxes, which doesn’t make them completely bad), but the implication that taxpayers want more services is the part I am at odds with. I think taxpayers want more efficient services, but if you ask almost anyone they can point out something they feel the government is wasting money on. This is another area where Hedges’ more leftward tendencies step away from what I think his party really stands for. 1 point.

Tom Hoefling and his America’s Party platform is spot on, except for not specifying the types of taxation which would qualify as “equitable, simple…” and so forth. He has the basics down cold, though. 8 points.

In so many words, Gary Johnson is for a consumption-based tax, too. His misstep is not calling for repealing the Sixteenth Amendment because everyone knows that when the government wants to spend more money they will immediately return to soaking us with the income tax as double taxation. 5.5 points.

The problem with Evan McMullin is that his tax platform tinkers around the edges of a terrible system; in fact, he makes it worse and more progressive to the extent that high-income earners will have to wait for their break until the economy improves. (But who really drives the economy with investment as opposed to consumption?) I think the EITC was intended as a tool to help the working class but now it’s become just another government handout – yet McMullin wants to double down with wage supplements? We do not need another entitlement program. Stick with the lower rates for all, mmmmkay? 2 points.

Well, that spread the field out some. We will see how much more of that occurs tomorrow when I resume the series with immigration.

Competitive advantage

On Friday I received the latest update from Newt Gingrich in my e-mail box. Even though I don’t always agree with him as to tactics – and his Presidential campaign in 2012 went nowhere but to Salisbury University – the one thing you cannot take away from him is the 1994 Contract With America, signifying a Republican resurgence in the post-Reagan era. And you have to respect him for thinking years or decades forward, such as he did in this case.

His piece on Friday looked at the economic prowess of states which did not collect an income tax in comparison to those that did. It even cited some of the same Art Laffer data that unsuccessful gubernatorial candidate Charles Lollar used in his pitch to eliminate Maryland’s state income tax.

But the part which intrigued me came toward the end, when he wrote about the effort by Vince Haley, a State Senate candidate, to eventually eliminate Virginia’s state income tax. Certainly it doesn’t have a great chance of success in the near term with a Democratic governor, but one has to ask what the effects would be if the commonwealth made it all the way down that path – and how would it affect us?

For nearly four years, a significant part of the time of my outside job has been spent on the Eastern Shore of Virginia. I’ve been over most of that strip from Chincoteague to Cape Charles for some task or other, but if you just pay attention to the drive along U.S. 13 you can see that the ESV is not the wealthiest area, nor are many ingredients for prosperity present. Compared to Virginia’s 4% population growth as a whole, the two counties which make up the Eastern Shore are leaking population, with Northampton County (the more southern of the two, closer to the Norfolk region) dropping by 2 percent and Accomack County (closer to Maryland) holding almost steady, with an estimated decline of less than 20 people in a county of just over 33,000.

By way of comparison, the two combined are less than half the population of Wicomico County, and there are good reasons for that: their geographic isolation at the end of the Delmarva Peninsula and a lack of job opportunities outside of the Wallops Island NASA station. Locally, their slogan is “You’ll Love Our Nature” and that is one thing the area can boast given its coastlines on Chesapeake Bay and the Atlantic Ocean are often less than 20 miles apart and meet at its southern tip.

Elected officials of all stripes are trying to increase business at the Wallops Island complex as they see the potential of unmanned space flights from the facility, with the prospect of good-paying ancillary jobs the spaceport creates. But the benefit of not having an income tax would likely be an influx of well-to-do retirees and others with the disposable income residents of the ESV currently lack. It may even be a better attraction than coastal Delaware and its lack of a sales tax, since those outlets are a relatively easy drive away from the northern reaches of Virginia’s slice of the peninsula.

Those who try to promote the area probably realize that prospects for certain types of businesses wouldn’t be very good because the ESV lacks some of the infrastructure necessary for manufacturing. But if the area becomes advantageous in a financial sense thanks to an elimination of the income tax, it can become a playground of sorts for affluent retirees who would like to slow down and enjoy a more rural lifestyle, allowing the remainder of the residents to share in that wealth. On the other hand I can also understand where many ESV residents may object to eliminating the state income tax, especially if they receive Virginia’s version of the Earned Income Tax Credit they call the CLI.

If all this came to pass, though, Maryland would be left in the middle, suffering from having a sales tax-free state siphoning off its retail industry and an income tax-free state choking off its wealth. (Don’t forget that an income tax-free Virginia may have devastating effects on the capital region of Maryland, too.) Of course, we can work to eliminate both those issues but it would take a larger sea change in philosophy than Annapolis has the stomach for.

It may not be the golden ticket to prosperity, but given the slow decline of our Delmarva neighbors to the south a drastic measure like eliminating their income tax may be the only way to resuscitate the area.

No minimum of debate

I noticed this week that the Maryland Reporter website had competing views on a statewide minimum wage increase from longtime Maryland political observer Barry Rascovar and from Benjamin Orr, who heads the Maryland Center on Economic Policy – one of those reliably leftwing advocacy groups with an innocent-sounding name. Rascovar warns about the “law of unintended conseqences” in his piece while Orr would like to have his cake and eat it too by also increasing Maryland’s Earned Income Tax Credit (EITC). I don’t claim to be an economic expert, but the EIC seems to me a handy method for wealth transfer since people using the EITC can receive a larger refund than they actually paid in taxes – instead of zeroing out tax liability, they receive additional money above and beyond a rebate on what the government originally confiscated from their checks via backup withholding.

And the reason this EITC change is important to Orr is the reason he doesn’t state – an increase in minimum wage earnings for a single person could push them over the limit to claim the EITC. Let’s do some simple math.

According to the IRS, for 2014 the EITC phases out at an earned income of $14,590 for a single person, so someone who works 40 hours a week at minimum wage isn’t going to qualify anyway. They would have to work fewer than 38.7 hours a week as a single person to fall under that threshold. Increasing the minimum wage to $10.10 per hour means the person could only work 27.7 hours a week before earning their out of the free government handout – obviously the MCEP wants to keep the goodies flowing.

Obviously being married with a non-working spouse would increase the income limit, but making minimum wage in such a situation makes the couple eligible for a total of just $587 between the state and federal EITC. On the other hand, raising the minimum wage puts the married couple over the threshold as well, thus Orr’s argument that we need both. But I think we need neither.

Raising the minimum wage may be good for the small number of workers who would be swept up in the eventual, phased-in increase, but it will be bad for those who would be considered working class but lie just beyond the $10.10 hourly threshold. No one is necessarily going to give a raise to the factory worker who makes, say, $14 an hour just because the minimum wage went up, but those who can still afford to employ workers will have to raise their prices to cover the increased cost of labor. The Dollar Menu at McDonald’s will have to become a $2 menu sooner or later. How does that benefit the middle class or those on a fixed income?

In a time when the employment market features dozens of candidates for each open position, forcing a wage increase is counterintuitive. Conversely, in those few truly booming areas such as energy-rich North Dakota or the Permian Basin in Texas, the market has determined a much higher minimum wage.

Closer to home, choices will have to be made by consumers who are being pinched by price increases everywhere they go, and prudent families may have to reduce their budgets for fun things like vacation or eating out. Using Salisbury as an example, we just lost another sitdown family restaurant this week when Mister Paul’s Legacy suddenly closed up shop. (This puts a dent in our Republican Club as well, as we’ll have to find a new location for our Christmas party. I also recall attending meetings of the Wicomico Society of Patriots and other fundraisers there as well.) Now some will blame the intrusion of national chain restaurants such as Buffalo Wild Wings or Longhorn Steak House (to name a couple which have opened here in the last two years) for the demise of this locally owned eatery, and they may have a point because they may be able to weather a localized wage increase better by raising prices across the board. Surely we pay for a little extra here at these chains for the people who work for them in areas where the wage level is higher. But I contend the overall pie is shrinking because fewer have jobs and increasing the minimum wage will further erode our local job market.

It’s all a question of value to the employer. One offshoot of the recent drive to unionize fast food workers and get them a $15 an hour wage was learning about automation overtaking that industry – for example, at Royal Farms you enter your order on a kiosk rather than speak to a counter person. By the same token, going to Walmart now can be done with little human interaction since the local stores have adopted self-serve checkouts. On a national scale, Applebee’s is bringing tablets to the table. While business has always trended toward automation and other ways to drive up efficiency, increasing the minimum wage may be a tipping point for new technology which replaces the fast-food worker or even wait staff.

In a perfect market-based world, people would be paid exactly what they are worth, a number determined by the value an employee’s labor brings to the employer. I have jobs for which I receive a wage which is agreeable to both me and the employer, and I have this enterpreneurial outlet which manages to pay for itself but is otherwise a loss leader, as I use it to showcase my writing talents. (How do you think I earned some of my paying jobs? And hitting the tip jar or advertising on this site is always encouraged.) Some in this avocation take the work even further than I do because their mortgage depends on it. Instead of a single employer, those of us who write in this arena depend on building a market share and making it economically viable somehow as writers, or as consultants, or in some other manner.

It’s all about what the market can bear, and the problem with the government putting its finger on the scale is that it makes a lot of hard-working people lose economic ground to benefit a select few. Until recent years, we had a thriving middle class which was upwardly mobile on a large scale, living a lifestyle comparable to those among their parents who were well-off. Raising the minimum wage simply accelerates the vicious cycle in which we are now trapped, for those who are deserving would earn their way off the minimum in due course anyway – they’re being forced, though, to carry a lot of excess baggage with them.

Let the market work its magic.