Rebuilding the Middle Class

[Rota]

A plan to rebuild the middle class and save social security

For those of you that recall my previous thread with a proposed solution to poverty, you will recall that I have a Masters in Economics. For those that don't know the post, you can find it here?

http://bbs.evony.com/showthread.php?t=93171

I have dragged an even more insane idea out of my bag of tricks, if you would like to kick it around. The poverty plan lacked a lot of detail work. Unfortunately, you will find that this idea lacks even more. It's in the very, very rough stages of development. It has not been fleshed out in any way, whatsoever. So, don't expect much.


Where the idea spawned.

A long while back, there was a man named Obama and a man named McCain running against each other for some government office of some sort. I can't recall which one at the moment, I'm sure it's unimportant.

Both of these men had tax plans that would affect different echelons of income earners in different ways. A radio program I listen to regularly did a special on how each candidates tax plan would affect three typical households in America. There was a gentleman making about $70,000 a year, with a homemaker wife that did not work and a kid. One of the plans raised his taxes a little and one raised his taxes quite a bit. There was a gentleman making $270,000 a year with a wife that worked part-time and earned enough to bring their total income to just over $300,000 a year. One of the plans raised their taxes a larger dollar amount, but a rather insignificant percentage. The other plan reduced their taxes. But we shall leave these people behind, because they don't matter anymore. They are all comfortably well off. The third couple got me to thinking.

The third couple profiled was a pair that worked 2 part time jobs EACH (that's a total of FOUR jobs for those of you counting at home ) for a total of $46,000 in income. This family also had two children. Neither tax plan really affected this family by more than a few hundred dollars either way. By far the third couple spent far more time away from home for the least amount of income. I understand there is a market value to all occupations and that an hour of someone working the grill at a fast food joint is not worth the same as someone working an hour at a cancer research laboratory. I'm not going to argue that the top earning couple should be paid less and the bottom earning couple should get a raise.

Now the seed has been planted, and my brain starts it's gears working. At a glance there seems to be something unfair going on. But, there really isn't. If only the employers would be more accommodating, or a little more generous, or something. I don't know what.

[Rota]

Background Info

Wages aren't taxed. That just needs to be said right up front. Income is taxed, but not wages. That would be a double tax, which is just plain unfair. I'm sure I've lost some of you, so I'll spell that out better, I hope

A company makes money, this is a gross dollar amount. From that amount they reduce costs of business, costs of goods, utilities, wages they pay to their employees, etc... and come up with a new number. This reduced number is the net earnings or the "profit" they made that year. This net earning is the income for the company that they pay taxes on. In those many expenses to get down to the net is wages, so the company is not paying any taxes on the money their employees make. Of course, the employees each pay an income tax on their received wages, but not the company. I'm sure that's as clear as mud to a few people, but I hope some people are able to follow my ramblings.

But wait! There is a tax on wages that the company pays... kinda.

Social Security is taken out of everyone's paychecks automatically. For the first $85,000ish(I'm recalling this inaccurate number from memory, and I'm sure the number has changed but it should be close to this) dollars you earn, you will put 15% of your earnings into your social security benefits. After you reach the cap, then no more Social Security money is deducted from your checks and no more gets added to your statement for the year. However, 15% is not deducted from your paycheck. Only 7.5% is deducted. Your employer pays the other 7.5% into the social security fund on your behalf. So for 7.5% cost, you get credit for 15% of benefit. Maybe you should all go thank your boss for being so nice. Go on, I'll wait. Are you back? Okay, we'll continue. We'll also ignore the fact that the generosity the employers show by doing this is a federally mandated law and they'll go to the penitentiary if they don't do it.
So, let's do a sample. If you get a $1,000 paycheck, then $75 will be deducted for social security, but at the end of the year, your statement will have $150 on it. You're employer paid the other $75 even though you never saw it in any of your paperwork.


How Do Politicians Motivate You?

Taxes. (That's it. I love simple, one-word answers.)

In order to direct the country anywhere, tax law is used. If you want corn grown, then you create a tax benefit for corn growers. If you don't want tobacco grown, then you create a tax burden on tobacco growers. You can fight all you want about the role a lobbyist plays in this mess. You can argue that this or that tax law doesn't work. I don't care. The point of this paragraph is merely to establish that tax law is a motivational tool used in politics. That's fact.


Social Security Fail

We all know social security is underfunded. It started and immediately got the help of a baby boom, so that the ratio of wage-earners to retirees was so huge, that the payments were easy to make. But now, as life spans increase, and the boomers start to retire, there are ever-shrinking "next generations" to pay the bill for the current retirees. The entire system needs to be overhauled. But, it's not called the third rail of American politics for no reason. Social Security is a sacred pact with the elderly, that after a lifetime, they will not be forgotten. It's society's pact to not leave behind those that lead for so long, merely because they lose strength. It's a mandate of social justice that cannot be taken back.

So, what do we do? The system needs to be funded differently. With the cost of healthcare soaring, the payments need to scale up faster than standard market inflation. Payments need to be made for longer periods as life spans are on the rise.


Underemployment

There is a lot of talk about unemployment rates being high. But most that is the tip of the iceberg. The problem is compounded by the country's massive underemployment. People who have jobs, but not enough to sustain themselves. People who live paycheck to paycheck and still are stretched thin to cover basic needs. People who have part time jobs because full-time work just isn't available. We need an incentive for companies to fully utilize people.

An education is supposed to mean something about better earnings in this country. That's what every politician and parent preaches. How many college graduates are filling the workforce in jobs where only a HS diploma is necessary? How many people with degrees and the college loan debt that comes with it are barely scraping by in retail and food service jobs? Far too many. We need an incentive for full time "professional level" job growth. I can walk out the door today and get a job. But that job is going to be a part-time cashier or dishwasher or sales floor employee. It feels like my college diploma means jack squat to todays employers. I have a Master's Degree in Financial Economics. But when I go to the bank to turn in my resume, they aren't going to offer me more than a bank teller job.


Progressive Tax

A progressive tax is a tax that takes an increasing proportion of income as income rises. Income tax is an example of a progressive tax, as the rate increases as a person earns more.

I could go on for about 12 pages describing the progressive tax system. But, I'm fairly sure you all know what it is. If you don't, then I'm sure someone close to you, maybe a parent, can explain it. If all else fails, the web knows all, check Wikipedia or Google. I'm not wasting any more space on this forum for this background info.

[Rota]

My Crazy Idea

I want to rebuild a middle class. I want to save social security.
I want that third couple to have a better life.
I want to motivate employers to do this, so I will use the politician’s tool of taxes. But, there is no tax on wages paid by employers. So, I will use the tax-like system of social security that employers must pay based on wages they pay out.


Step 1

I want ALL of the social security payment to be made by the employer. This has several tax implications, as to who pays taxes on how much money, but I’m ignoring that briar patch. Feel free to shred this part of the plan in the following discourse, as I said, this idea is in a complete “bare-boned” state. It hasn’t been fleshed out in the slightest.

Also, the formula that determines social security benefits received will have to be re-calculated. The amount paid into social security by the employer should not be a factor. Maybe it could be based of an average of your peak 5 earning years with a hard cap, of course. That's another part of the detail work I have not touched with a ten foot pole.

Step 2

This is the real heart of the plan. You recall the concept of a progressive tax system? Well, I want to institute a “REgressive” tax system. Don’t panic, that was a bit of a fib. It’s actually a targeted tax system. When I described it to others in my Economic Masters program, one clever classmate dubbed it the donut tax system. He called my “target” the donut hole. I want to make the first half of the SS payments made by the employer a regressive system, and then it turns into a progressive system.

First, we define the target, rebuilding the middle class. We want the middle class to be about $75-150,k per year.

Now, we start with the regressive system. For the first $5,000 that EVERYONE makes, the employer pays 50% into social security. That’s $2,500 for those still playing along at home.
For the five thousand and first dollar through the ten thousandth dollar, the employer pays 45% into social security. That’s $2,250.
For the next ten thousand dollars of income, the employer pays 35%, which is $3,500.
So, for the first $20,000 of everyone’s income, the employers shell out $8,250

We continue in $10,000 increments going down to 25%, 15%, and 5% so that by the time anyone has made $50,000 in income, their employer has paid $12,750 to social security. Keenly aware readers at this point might notice that $12,750 is the same 15% that was paid on $85,000 of income in the current system.

So, we have kept this regressive rate dwindling until $50,000. After that, the social security cost to the employer is a big fat ZERO!!
If a company pays an employee $50,000 a year, they pay $12,750 to social security.
If a company pays an employee $70,000 a year, they pay $12,750 to social security.
If a company pays an employee $90,000 a year, they pay $12,750 to social security.

Now we’re noticing something I hope. The deeper into our defined “middle class” that an employer is willing to pay, the lower the social security cost of those wages are in percentage terms.
An employee making $20,000 costs the company 41.25% of their wages in social security expenditure.
An employee making $50,000 costs the company 25.5% of their wages in social security expenditure.
An employee making $75,000 costs the company 17% of their wages in social security expenditure.
An employee making $100,000 costs the company 12.75% of their wages in social security expenditure.
An employee making $150,000 costs the company 8.5% of their wages in social security expenditure.

We’re not done yet, though. We need to continue the target system in order to fund social security aptly. We have passed the “donut hole” and are now ready to finish the donut. The social security payments based on wages now continues after we reach the top of our target. But, this time it is done progressively, in much smaller increments, and in much broader stages.

For $150,001 - $175,000 of income, there is a 5% social security cost.
Up to the $200, 000 income mark is a 10% cost, then 12% up to $250,000 of wages. Finally it caps off at 15% for every dollar over $250,000 of wages paid. I cannot see any progressive rate for this being higher than 15% of wage expenditures.

[Rota]

The Impact

Now let’s return to that family with 4 jobs making $46,000 a year. For easy math, I’m going to assume 3 jobs that each pay $10,000 and one that pays $16,000. Under the current system there are $3,450 of social security costs to Corporate America for these people, that’s 7.5% of their income. So, it roughly costs $49,450 to employ them. Under my system it would cost $67,100 to maintain their current income and schedules. Alternatively, Corporate America could offer ONE of them a full time job for $50,000 a year and it would cost that company only $62,750 in total wage and social security costs. The family gets $4,000 MORE every year, and now has a parent able to stay home full time. Corporate America actually saves almost $5,000 by fully utilizing one of the couple.

Because of the disincentive of the regressive tax system, more people will be given more full time employment for better wages. More full time employment also means more people will be eligible for more benefits. I know for a fact that there is a major incentive right now in America to hire 10-12 part time employees with no benefits, rather than fully employ 3-4 people who would then qualify for benefits. I worked as management at a store when a new company mandate came down that at least 80% of all new hires had to be part time employees. The ONLY goal of this policy was to slowly phase the company structure to a large part time work force with little benefits instead of a medium sized full time employee core. After a few months, there were far less people working at any given time on the sales floor, yet the store roster had grown 50% in size.

The impact of the 0% cost “window” incentive should push people into higher paying jobs in order to maximize cost effectiveness. Companies should begin sponsoring more training and education initiatives. We’ll see more tuition reimbursement programs. I certainly hope anyone reading this didn’t think I wanted people to get paid more just to get paid more. I still want them to earn the market price of their respective jobs. I don’t expect the $30,k per year janitor to make $70,k a year now. But I do expect a corporation to try and get that data entry college student into that accountant job so they can EARN a raise. That way the company can save the on the effective social security cost by taking advantage of the marginal rate of 0% for that window.


Exceptions

AM I CRAZY!!! A complete disincentive to part time employment?!?!?!
No, I’m not. Well… maybe a little.

Of course there are going to be exceptions to the rules!
Any employee that qualifies as a “student” is an exception. Single parents may need an exception if they want it. Anyone who has a special need at home, like an elderly parent they care for, may need to be an exception.

There are going to be exceptions made all over the place. Employees that qualify as an exception would have the same cost structure to keep things easy, but at the end of the year there would be a rebate in the tax system with the formula that makes the effective cost 15% again, just like the current system. I worked it out, but there’s no need to put superfluous math here.

However, being an exception can’t be too easy. If it’s as simple as signing a paper saying “I want to be part time,” then some employers will simply only offer jobs if you’re willing to sign the paper. That’s just the definition of extortion, so we cannot make it an allowable practice.
A student ID and class registration for full time hours are easy enough to qualify college or high school students to fill all those part time jobs that need filled in the service industries around the nation. I’m sure similar paperwork can be figured out for the other necessary exceptions.

[Rota]

Thank You

Well, that’s my other crazy scheme.
Feel free to rip it to shreds. I know it will be very easy to focus on the exceptions needed that I mention at the end. But try to put the plan in broad perspective and see how it impacts jobs for “the public” rather than how it affects the job of “that one guy in a certain situation.”

As I said in the start, this idea is still in the brainstorming stage and has not been fleshed out at all. These are the most words that I have put to paper about it, since I first conceived the plan.

I await your responses.
There’s plenty of holes in the idea that you can poke at, but please keep it civil.

[Rota]

Reserved for expansion if needed, thank you.

[Cosmic Fury]

I only see one glitch in the plan: the low-wage earning people like me will not get as much from my employers, me having earned FAR less than $20k so far (I am 18 and in college), so the employer will only give me extremely low wages for the first few years.


Something to add.

EDIT +1 rep anyway. it's a good plan.

:NOTHER EDIT: "You must spread some reputation around before giving it to Rota again"

Bummer.

[armbarchris]

Its way too early in the morning for this right now. I liked your other idea, so i'll read this later.

[Rota]

I only see one glitch in the plan: the low-wage earning people like me will not get as much from my employers, me having earned FAR less than $20k so far (I am 18 and in college), so the employer will only give me extremely low wages for the first few years.

I direct you to the "Exceptions" section in the 4th post.

Wow, Rota. You probbaly could take over the world AND be an effective leader at the same time!

It has been said that democracy is the worst form of government... except for all the other ones.
It has also been said that true communism is the utopian society we aspire to.


I think I have made a clear case that the best form of government is a truly benevolent dictatorship.
If everyone would just do what I say, then I'll make the world a better place.

[King Dylan]

Wow, Rota. You probbaly could take over the world AND be an effective leader at the same time!

I'll surely present you the Dylan Award of Wisdom!