Improving Our Standard of Living (Wattpad Edition)

Chapter 27: Inequality-Based Tax System

According to G. William Domhoff, Research Professor at the University of California, Santa Cruz, the richest 20% of Americans receive 60% of the nation's income [1]. The wealthiest 1% alone take nearly one-fourth of the income. That's double what it was in the mid-to-late-20th century. Among the richest 20%, most of that income is concentrated among the top 5%. Remember what I said earlier about there being a Pareto principle among the wealthy. Even among the top 1%, most of that income is concentrated among the top 0.1%.

Almost all the growth in GDP in the last 40 years has gone to the top few percent—particularly the top 1% and above.

Imagine what our standard of living would be today had that not happened. What if the working class had continued to get wealthier at the same pace it did from 1940 to 1980?

If so, the typical working class individual today would have about 50% more income. The average cashier today would earn $43,000 per year instead of $29,000. The average secretary would earn $51,000 instead of $34,000. The typical nurse would earn $100,000 instead of $67,000. The federal minimum wage would be $11.00 per hour instead of $7.25.

The GDP would also be higher today because the economies of more equal countries grow faster.

Had the income gap not increased so much in the last 40 years—if instead, the working class got richer at the same pace it did in the mid-20th century—America would have by far the greatest standard of living on Earth. The country had a huge lead after World War 2, so it has no excuse. The United States shouldn't be at tenth place in quality of life today. It should be first by a large margin. But it has been slipping in recent decades, and growing inequality is why. The same happened in the UK to a lesser extent and a few other nations.

Here's the solution:

To reduce inequality to an optimal level, a law could be passed that removes all taxation on the poorest 95% of the population. Tax only the richest 5% of individuals and 5% most profitable corporations. Then fund all necessary public programs like the military and road maintenance. Then give the remaining tax revenue to the poorest 80% until the income gap reaches the desired level.

Here's a more specific rundown of how the inequality-based tax system would work:

First, it would determine an appropriate national income ratio between the poorest 80% and richest 20%. Next, the system would determine how much money needs to be levied from the wealthiest individual until his or her income equaled the second richest person. Then it would determine how much needs to be collected from the two wealthiest people until their incomes equaled the third richest person. Then it would determine how much needs to be levied from the three wealthiest people until their incomes equaled the fourth richest person. And so on.

This would be done for corporations as well. This is necessary because large shareholders may dump most of their income into their companies in response to higher taxation.

Like with individual incomes, the tax system would determine how much money needs to be collected from the most profitable company until its profit equaled the second most profitable corporation. Then it would determine how much needs to be levied from both companies until their earnings equaled the third most profitable corporation. Then it would determine how much money needs to be levied from these three companies until their profits equaled the fourth most profitable corporation. And so on.

This top-down approach to taxation would continue until enough money has been raised to increase the average income of the poorest 80% of the population to the desired ratio of the richest 20%.

Alternatively, the Gini coefficient could be used. Once it reaches 0.25, stop taxing and stop redistributing. This would be called a Gini-based tax system.