Labor Cost and Tax Impacts of a Citizen’s Dividend

by John Moser

Earlier, I pointed out that minimum-wage-and-public-aid systems are outdated:  they carry high costs, make labor expensive, and lead to increased unemployment.  Good systems for the 1900s; better systems available now.  Horses were a good form of transit when railroad and motorcars cost a millionaire’s salary and the rail and road infrastructure needed every man to pay 80% of his income to the Government, too; we waited until it was affordable before we paved the continent.

I included an abridged run-down of a Citizen’s Dividend in that discussion.  This post investigates the labor cost and tax impacts.

Labor Costs

Imagine you make a middle-class, $60,000 annual salary. The government takes a third in taxes and you bring home $40,000 each year, or roughly $1,500 per paycheck.

The obvious problem with a $60,000 salary is your employer has to pay $60,000 per year to each employee. Reducing the labor requirements is the solution; but we can benefit from reduced cost per labor hour.

The obvious problem with reduced salary, on the other hand, is they pay you less.  Never mind that everything costs less, and thus the balance of prices comes down; you still get less of that overall, and actually come out a bit behind.

So let’s imagine the government only takes 10% in taxes.  Your employer now pays you $45,000 per year; you bring home roughly $1,500 each paycheck, and actually $500 more each year, and your employer pays $15,000 less for each employee—only 75% as much.

This solution looks a hell of a lot like optimal:  you don’t bring home any less, but your employer sure pays you less.  This strengthens your negotiating position:  you’re cheap labor; it strengthens your employer’s market position:  goods cost less, and can sell for less while drawing the same profit; it strengthens the economy as a whole:  we can hire more people to make more stuff, and we can afford all of it because we still have the same amount of money to spend while they cost less to employ.

That leaves the question of where the money comes from.  If the government takes $15,000 less from you, it’s got to take $15,000 more from somebody, right?  Not necessarily.  There are two ways to do it.

Income Inequality

We can have a whole different discussion on income inequality.  The top 10% pull 48% of our income right now:  if we tax the rich an extra 1%, we can let up 1% on the working class.  If they pull, say, two-thirds of our income—a full 67%—then every 1% extra we tax them lets us relieve 2% from the working class.

As a corollary, we can reduce taxes on the working class as the income gap widens, and just not raise taxes on the rich at all:  they have a bigger chunk of the pie, we take the same portion of theirs, it’s bigger than last year, and it covers the little guy, so we don’t take any from the living guy.  In effect, we visit their door first, but we don’t look at how much they have and demand they pay even more of their share; we take the same 40% we took last year, even if the thing we’re taking 40% of is a lot bigger.

Efficiency

Income inequality marches to its own beat:  we don’t want to turn up the tap of gold flowing into the pockets of the aristocracy.  Sure, it’s not necessarily bad they enjoy a bit more of the benefits of progress than everyone else combined; that doesn’t mean we should throw our own meager earnings at them, too:  Not minimizing does not imply maximizing.

We instead attempt to improve our systems.  Instead of a welfare system fraught with fraud and a minimum wage to elevate the cost of labor, we provide a market incentive to grant the minimum standard of living to everyone.  So long as the cost comes in below our welfare system’s cost, this is cut-and-dry better; if it comes in slightly above, it may pay dividends due to secondary economic effects; if it’s too expensive, it’s a bad solution.

As I’ve said:  those costs crossed in 2013.  17.2% for welfare, 17% for an effective Citizen’s Dividend including the raw cost of living and an extra pocket full of cash to make sure it works, recession or not.

A Citizen’s Dividend, as such, cuts labor costs in two ways:

  • Reduces the cost of welfare, thus reducing the taxes required for welfare
  • Provides income, reducing the employment income needs and the effective tax burden of the laborer

If we look at the Citizen’s Dividend as a sort of tax credit—it’s not taxed and it’s not legally income—we can read it as a reduction in effective taxes.

Tax Impacts

A Citizen’s Dividend provides interesting direct tax impacts.  The below graph compares the taxes paid by a single-filing individual to two proposals; the yellow line (Proposal 2) represents the most plausible tax rates.

Tax graph

Single Filer Tax Proposals under Citizen’s Dividend

These rates include the OASDI 6.25% tax charged on all income up to $118,500.  Notice the dip in tax rate at the Social Security cap:  higher-income earners enjoy a tax break up until above $300,000 in the current system.  The working class covers these taxes instead.

The yellow line shows a plausible, proposed adjustment to cover this.  It includes a flat 17% Citizen’s Dividend tax—replacing OASDI, without a payroll component—and a general income tax which excludes the costs of the welfare services a Citizen’s Dividend replaces.  In this proposal, the working class pay less, until the Social Security cap; even then, it bridges to near-parity with the next tax bracket, until it steps from 39.6% to 41% at the highest tax bracket.

The dotted green line represents an unrealistic adjustment downward.  This structure may become possible in a future time, if the income inequality gap keeps expanding, without raising taxes on the top income earners.

The below graph shows the effective tax rate when adding in the Citizen’s Dividend.  At each tax bracket, we remove the taxes representing the amount of money each person receives.  For example:  if the dividend is $7,000 per year, you make $70,000, and you pay 30% in taxes, the below chart reflects 20% in taxes—30% minus 10%, as 10% of $70,000 is $7,000.  It’s a crude guideline.

Effective Taxes

Effective taxes paid by single-filer

This graph exposes two things.

First, Proposal 2 (orange) gives a negative effective tax rate below some $30,000.  A person making $9,000 of income would pay $900 in taxes, but receive about $7000, enjoying a tax rate of -68%.  This approaches negative infinity as income approaches zero.

Second, the break-even point is pretty high.  In fact, individuals with $400,000 income are still paying slightly less in total taxes.  Multi-millionaires pay a little more—an individual with $10,000,000 of income would pay a little less than $100,000 in additional taxes, which I consider unfortunate; as a realist, I don’t consider this catastrophic.

Businesses also pay income tax, and pay into this dividend tax; they won’t receive Dividend payments and, unlike OASDI, they won’t pay additional payroll taxes for each employee they hire.  The business income tax rate sits at 39.1%; in raw computation, it would actually fall to 34.6%, so there’s room to shift some of those rich people taxes to businesses and try to even things out.  The nice thing about business income tax is it’s a tax on success, not a cost paid just to make the attempt:  simply hiring employees and trying to do business doesn’t incur more income taxes.

All of this suggests the impacts of a Citizen’s Dividend range from lower taxes to cheaper labor, encouraging employment, slowing the rate of replacement of human labor with machine labor, and generally reducing the cost of goods.  Again: this plan would have cost more money in the year 2010; possibly too much in the year 2000; and more money than America could supply in the year 1950.  Minimum wage and public aid were the right things to do; they’ve aged out.

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