Free Money as Two-Tier Tax Prebate

With a 40% flat tax we could have the government give back $12,000/year/adult which would eliminate the need for most welfare for the poor, give a substantial tax break for the middle class, and a small tax increase for the rich – in return for substantial simplification. For individuals making $100,000/year, the plan would be roughly a wash.

With such a plan we could retire most of the welfare bureaucracy, get most people out of poverty, and simplify the tax code. But the plan may not make everyone happy. 40% is a rather high withholding rate. Many will be tempted to cheat. And the idea of a $1000/month universal stipend is offensive to many who work for a living.

A possible alternative would be a 30% flat tax coupled with a smaller prebate. Such a tax would closely approximate the current tax system while enormously simplifying the tax code and providing a small bridge of free money between welfare and work. This might, however, be a small tax cut for the truly rich, which would make many of the Left very unhappy.

Indeed, I often hear complaints from the Left and the Center about the growing gap between the merely well off (degreed professionals, small business owners) and the astonishingly rich (big corporate CEOs, high finance wizards, world class sports professionals, etc.). These complainers would be happy with a tax cut for the merely well off coupled with a tax increase on the truly rich.

To mollify this group, let us toy with a two-tier tax system. We keep the 30% bottom bracket for most people and levy a higher rate starting at whatever constitutes “rich.” While we do lose the elegant simplicity of a single rate, these two-tier proposals are still simpler than most flat tax proposals floating around as they combine the income tax and payroll taxes into a single simple tax. Furthermore, since most people will be paying the bottom rate, we can still eliminate W-4 forms and have employers withhold 30% for everyone. The IRS can send a bill to those who owe more.

The following table looks at a two possible higher tax brackets: 35% and 40%, starting at either $100,000/year or $200,000/year – per individual. For a family incomes double these numbers to $200,000 and $400,000 respectively. The chart below looks at individual tax filers:

Num adults1, Num children: 0, Estimated current deduction rate 15%

Nominal Income Total Tax Two Tier @30%, 35% break @100K Prebate to Match Two Tier @30%, 40% break @100K Prebate to Match Two Tier @30%, 35% break @200K Prebate to Match Two Tier @30%, 40% break 200K Prebate to Match
$14500 $2734 $4683 $1949 $4683 $1949 $4683 $1949 $4683 $1949
$25000 $5754 $8074 $2320 $8074 $2320 $8074 $2320 $8074 $2320
$30000 $7269 $9689 $2420 $9689 $2420 $9689 $2420 $9689 $2420
$40000 $10254 $12918 $2664 $12918 $2664 $12918 $2664 $12918 $2664
$50000 $13544 $16148 $2604 $16148 $2604 $16148 $2604 $16148 $2604
$60000 $17199 $19377 $2178 $19377 $2178 $19377 $2178 $19377 $2178
$75000 $22681 $24221 $1540 $24221 $1540 $24221 $1540 $24221 $1540
$100000 $31819 $32678 $859 $33060 $1241 $32295 $476 $32295 $476
$200000 $59330 $68333 $9002 $73809 $14478 $63333 $4002 $63809 $4478
$300000 $90005 $103840 $13835 $114389 $24383 $98840 $8835 $104389 $14383
$500000 $152860 $174855 $21996 $195549 $42689 $169855 $16996 $185549 $32689
$1000000 $316109 $352393 $36283 $398449 $82339 $347393 $31283 $388449 $72339
$2000000 $642609 $707468 $64858 $804249 $161639 $702468 $59858 $794249 $151639
$5000000 $1622110 $1772693 $150583 $2021649 $399539 $1767693 $145583 $2011649 $389539

In all these combinations, the prebate to match column is nearly flat up to where the second tax bracket cuts in. Give out more free money to the poor and you also give a tax break to members of the professional class. But even with a generous amount of free money, the rich pay more, which given the level of the federal budget deficit may be worthwhile.

This, we leave as a meditation for the reader. How generous do you want to be to those who are out of work? Should the professional class get a tax cut? Should the rich pay more? Is the complexity of an additional tax bracket worth it?

While you contemplate these questions, here are the equivalent tables for a married couple with no children and a married couple with two children. The nominal incomes are for the family. The bracket break is and prebate to match is per individual. So if the tax goes to 35% at $100K, then a family has to make over $200K to start paying a 35% marginal tax. If the prebate to match is $2000, and the government gives out a $6000 prebate, then the family gets an $8000 = ($6000 - $2000) * 2 tax cut.

Num adults2, Num children: 0, Estimated current deduction rate 15%

Nominal Income Total Tax Two Tier @30%, 35% break @100K Prebate to Match Two Tier @30%, 40% break @100K Prebate to Match Two Tier @30%, 35% break @200K Prebate to Match Two Tier @30%, 40% break 200K Prebate to Match
$14500 $2219 $4683 $1232 $4683 $1232 $4683 $1232 $4683 $1232
$25000 $4455 $8074 $1809 $8074 $1809 $8074 $1809 $8074 $1809
$30000 $5720 $9689 $1984 $9689 $1984 $9689 $1984 $9689 $1984
$40000 $8478 $12918 $2220 $12918 $2220 $12918 $2220 $12918 $2220
$50000 $11508 $16148 $2320 $16148 $2320 $16148 $2320 $16148 $2320
$60000 $14538 $19377 $2420 $19377 $2420 $19377 $2420 $19377 $2420
$75000 $19083 $24221 $2569 $24221 $2569 $24221 $2569 $24221 $2569
$100000 $27088 $32295 $2604 $32295 $2604 $32295 $2604 $32295 $2604
$200000 $64400 $65355 $478 $66120 $860 $64590 $95 $64590 $95
$300000 $94708 $101158 $3225 $107037 $6164 $95278 $285 $95278 $285
$500000 $157489 $172173 $7342 $188197 $15354 $162173 $2342 $168197 $5354
$1000000 $320739 $349710 $14485 $391097 $35179 $339710 $9485 $371097 $25179
$2000000 $647239 $704785 $28773 $796897 $74829 $694785 $23773 $776897 $64829
$5000000 $1626739 $1770010 $71635 $2014297 $193779 $1760010 $66635 $1994297 $183779

Num adults2, Num children: 2, Estimated current deduction rate 15%

Nominal Income Total Tax Two Tier @30%, 35% break @100K Prebate to Match Two Tier @30%, 40% break @100K Prebate to Match Two Tier @30%, 35% break @200K Prebate to Match Two Tier @30%, 40% break 200K Prebate to Match
$14500 $2219 $4683 $1232 $4683 $1232 $4683 $1232 $4683 $1232
$25000 $3825 $8074 $2124 $8074 $2124 $8074 $2124 $8074 $2124
$30000 $4990 $9689 $2349 $9689 $2349 $9689 $2349 $9689 $2349
$40000 $7520 $12918 $2699 $12918 $2699 $12918 $2699 $12918 $2699
$50000 $10413 $16148 $2868 $16148 $2868 $16148 $2868 $16148 $2868
$60000 $13443 $19377 $2967 $19377 $2967 $19377 $2967 $19377 $2967
$75000 $17988 $24221 $3117 $24221 $3117 $24221 $3117 $24221 $3117
$100000 $25263 $32295 $3516 $32295 $3516 $32295 $3516 $32295 $3516
$200000 $62356 $65355 $1500 $66120 $1882 $64590 $1117 $64590 $1117
$300000 $92299 $101158 $4429 $107037 $7369 $95278 $1489 $95278 $1489
$500000 $154934 $172173 $8619 $188197 $16631 $162173 $3619 $168197 $6631
$1000000 $318184 $349710 $15763 $391097 $36456 $339710 $10763 $371097 $26456
$2000000 $644684 $704785 $30050 $796897 $76106 $694785 $25050 $776897 $66106
$5000000 $1624184 $1770010 $72913 $2014297 $195056 $1760010 $67913 $1994297 $185056

For more charts, see Appendix B.