Floor and Ceilings – Cost of Living and Max Taxes
What is the minimum people need to survive? How much is too much? And what policies help ensure people are above the floor and those at the ceiling don’t have an unfair advantage?
Rent varies across the country but you can generally find a 1 bedroom for $500-$800, electricity runs about $50-$100, water $15-$30, internet about $40, cell phone service $30-$50, and monthly bus service $60-$200. The average household spends about $200 on food per person per month. All of these costs can vary wildly, but give an idea of what a person needs to have to survive in a modern world which is about $1000-$1400 a month.
Changing the distribution scheme of some programs, combining others, or eliminating inefficient ones and using their budgets to expand more successful programs can help more Americans more efficiently. Capping the amount of deductions you can claim and the amount of capital gains that receive favorable tax treatment will generate billions in revenue, remove distortions, and create a more equitable economy. And all of these changes don’t institute any new programs or tax schemes, but build upon existing programs.
Changing housing subsidies from the voucher system to a cash subsidy with an average of $300 / month would significantly help more people (12 million people) find rent wherever is cheapest which should be around $600 / month. The nutritional assistance programs do a good job of providing food help to 44 million Americans with an average $126 / month subsidy that makes up a good portion of the average $200 per person per month Americans spend on food. Combining the budgets for Low Income Home Energy Assistance Program (LIHEAP) and Lifeline would allow for for a $40 / month subsidy to 10 million Americans for electricity and internet which cost almost $100 combined. Lastly eliminating TANF and adding its budget to the EITC would allow 10 million working childless adults to get a subsidy of $2,000 / year on top of the almost $4000 / year working adults with children have.
Capping the amount of capital gains and dividends that receive favorable tax treatment at $40,000 combined would only affect about 1% of all households and provide billions of dollars in revenue for the government to spend on more beneficial programs. Capping the amount of deductions you can take per year at $40,000 as well would affect only households who make above $200,000. The social security cap should be lifted to over $200,000 and the capital gains tax should also be raised, but simply adding caps avoids some of the dramatic political fights and has numerous positive effects.
Results and Conclusions
Facts
The government has piecemeal services to aid the poor for housing (Section 8), heating (LIHEAP), electricity (LIHEAP), internet (Lifeline), cell phone service (Lifeline), food (SNAP, WIC, Child Nutrition Program), and transportation (reduced fair bus passes). However, most of these have low funding levels and even finding out how to apply that many organizations can be prohibitively difficult. However, the idea is sound if you give people access to what they need to survive in the modern world regardless of income it leads to greater productivity and eventually equality. Breaking down the average benefits by program and comparing that to the average use of a typical American should give us an idea of what it takes to survive in America.
The USDA handles most food related welfare and does a pretty good job, although it makes logical sense to just have one pool of money politically and logistically it is best to just leave that program as it is. It currently spends almost $100 billion and serves over 50 million people including a large number of the 1/5 children who are food insecure.
The HUD serves about 5 million people, but spends $41 billion doing so through their systems of vouchers and credits. Giving people rent assistance in the form of cash for instance say an average $300 / month would be more efficient helpful and allow them to serve well over double the amount of people (12 million by my calculation) it serves now on the same budget.
LIHEAP which provides help for your electricity and bills and Lifeline which provides a subsidy for phone or internet services are a relatively small portion of the budget at $3.4 billion and $2.25 billion respectively, but provide subsidies for a very important part of modern life. They are relatively efficient, but their small size makes them ideal for consolidation. Health and Human services currently runs the LIHEAP program while the FCC runs the Lifeline program. Putting their combined benefits on a card like the SNAP card that only authorized providers can use would allow them to give $40 – $50 / month to 10 million households ensuring even the poorest households have access to cellular service, internet, and electricity. It would work even better as a blanket check, but for political reasons thats unlikely.
TANF is not a very effective program as the state’s use the money for a hodgepodge of programs under the guise of helping the poor. It should be eliminated altogether and its budget of about $20 billion should be added to the EITC to expand it to childless working adults around the poverty line. Using $20 billion could allow an additional 10 million working but childless adults to receive an average benefit of $2,000 / year. The EITC and CTC are by far the best antipoverty programs in the United States arsenal, they cost almost $120 billion, but have huge benefits for working families, their children and the country expanding their budget even at the expense of any other welfare program is welcome.
Assumptions
Welfare could be streamlined dramatically by giving a set amount equal to a percentage of the average cost of rent, water, electricity, gas (if applicable), internet, and phone service that changes based on income level. People could bring in their actual bills to allow the local branch to calibrate their cost estimates for a given region.
A simple way to combat excessive tax expenditures is to simply cap the amount of money you can deduct from your taxes. Capital Gains and dividend payments are another tax expenditure that could be capped. Although the benefits for a special tax rate for long-term capital gains are dubious it is politically difficult to abolish or even change. So, capping is the next logical choice and once again looking at the income distributions we can see the average amount of capital gains and dividends by quintile.
Results
So without changing the budgets of any program and only slight tweaks in the distribution of the benefits you can provide an average of $300 / month in rental assistance to 12 million Americans, $50 / month in electricity, phone, and internet assistance to almost another 10 million Americans, $126 / month for food to 44 million Americans, nearly eliminate food insecurity for children, $2,000 / year in benefits to 10 million working childless adults, almost $4000 / year in benefits to almost 30 million working households with children. There are about 40 million people below the poverty line about 15 million of them children and about 18 million living in extreme poverty; these programs properly refined reach all of them and give them the essentials they need to survive in the modern world.
The average sum of itemized deductions for those who make $200k – $500k is about $43,000 while the average sum of itemized deductions for those who make $100k – $200k is only about $26,000. Setting the limit at $40,000 would still be very generous cap, but still get rid of egregiously large deductions that reduce federal revenue and add to inequality.
Almost all of the capital gains and dividend payments go to the top quintile which averages $93,000 and $17,000 respectively. However, if you break that down further the 90-95th percentile only makes $19,000 and $6,000 capital gains and dividends while the 95th-99th percentiles make $41,000 and $12,000. So, capping capital gains and dividend preferential tax treatment at $25,000 would only affect less than 5% of households and capping at $50,000 would affect less than 1% of households.Just like with capping tax deductions this increases government revenue and reduces inequality without any dramatic changes to the tax code.
Methods and Sources
Average Money Spent on and Governmental Policy and Aid:
Federal Rental Assistance – 5 million households are supported by programs run by the housing and urban development department for about $41 billion a year. Averages to $8200 a household minus the administrative costs and price distortions. 89% of the households supported are either elderly, disabled or have children.
$8200 in rent seems to be rather high for assistance. $850 gets a decent two-bedroom most cities in the US which comes out to $10,200 a year. Meaning a household has to pay less than $200 a month after the subsidy.
https://www.cbpp.org/sites/default/files/atoms/files/4-13-11hous-US.pdf
https://www.cbsnews.com/media/cheapest-rent-housing-us-cities/20/
Electricity
LIHEAP run by Health and Human Services provided 9 million households assistance with their electricity bills for $4.7 billion dollars in 2015. Averaging $522 / year or $43 / month per household. It has since been cut to $3.39 billion dollars lowering the amount of families who receive assistance.
http://www.eei.org/issuesandpolicy/liheap/Pages/default.aspx
Water
Locally regulated. Generally cheap. But the infrastructure is state regulated. Hard to get tax money for up to date infrastructure with poor tax base
Communication
Lifeline a program run by the FCC provides a $ 9.25 / month subsidy to qualifying households. Its annual budget was $2.25 billion meaning almost 20 million households qualified for subsided mobile phone service or broadband. Nonetheless, $9.25 is a small amount when internet and phone are at least $25 often closer to $40 everywhere and the devices were limited to select providers. Since broadband and cell phone service are almost completely private with few notable exceptions (Chattanooga, Louisiana) It could be argued there should be public options since the subsidies are so limited given how important internet and cell phones are.
https://www.fcc.gov/consumers/guides/lifeline-support-affordable-communications
Transportation
With the importance of the car most of the government policies go to highways and interstates. State governments mostly focus on additional highways as well, but sometimes can fund local transportation for major cities. However, local governments handle most of the public transit buses, trains, etc. and generally provide cheaper fares or passes to the poor. However, the poor often benefit the most from the flexibility of a car since public transportation can be slow and unreliable. The average cost of a monthly pass for a city in the US is about $67. Cities usually have reduced fares for low income users.
Food
SNAP is the biggest anti-hunger program in the US and is provided by the USDA it serves 44 million people who receive an average of $126 / month in benefits for a total program cost of $70 billion including 6.5% of administrative costs.
1/5 kids are food insecure. Cities decide if they want to fund public school breakfast and lunch. There are also federal children nutritional programs that spend $23.1 billion to ensure children have access to food as well as another $6.3 billion for the woman and children food programs. However, starvation is nearly unheard of in America, most diet concerns are about the quality of food and a balanced diet.
All being said the US actually does a good job when it comes to hunger there is still food insecurity, but there are variety of programs that take aim at that.
https://www.usda.gov/sites/default/files/documents/usda-fy19-budget-summary.pdf
https://www.cbpp.org/research/policy-basics-the-supplemental-nutrition-assistance-program-snap
Poverty Line and Cost of Living
The poverty line for a a household of 1 is around $12k. There is direct aid for the poor directly in the form of TANF run by the HHS. It has a budget of $19.6 billion and serves 1.36 million families suggesting a high payout per family, but since it is given as a block grant to the States it use as a direct cash infusion is severely limited. On the other hand, the EITC is a direct cash transfer for those who work. 27 million Americans received about $65 billion in benefits for 2017 an average of $2400 / year or $200 / month. It is extremely effective and should be expanded to give larger benefits to childless adults. Some states even have their own versions of the EITC. The CTC costs about $60 billion and gave benefits to 35 million families and 60 million children, it gives a tax credit of $1000 per eligible child.
https://www.cbpp.org/research/family-income-support/policy-brief-tanf-reaching-few-poor-families
https://www.cbpp.org/research/policy-basics-an-introduction-to-tanf
https://apps.urban.org/features/public-spending-on-children/
http://www.crfb.org/blogs/tax-break-down-child-tax-credit
https://www.needhelppayingbills.com/html/state_aid_and_assistance_progr.html
Ceiling
We have discussed how capital gains being taxed at a favorable rate creates perverse incentives. But how much is too much? This one isn’t too hard you could simply cap it at the top 5% or the top 1% if you wanted to be really generous. However, quantifying those brackets is difficult. What is easy is that everyone in America wants to be a millionaire. Therefore, for psychological reasons you could set the tax break cap at $1 million. Your first million is normally taxed the government wants everyone to have a fair shot of being a millionaire. Anything above those marks should be taxed at least at 50% with no tax breaks on top of that. It should probably be $500,000 but you have to start somewhere.
All tax breaks should be taken at the business level anything that goes into to personal income above a certain mark should be taxed fully. It is amazing how Americans support low taxes for the rich when we have a progressive tax structure that ensures all your dollars are taxed the same. Meaning that your first $10,000 dollars are taxed the same as billionaire as so are the next $10,000 the only difference comes when they exceed how much money your make. There is no reason for tax breaks for the upper upper middle class or the rich. An income ceiling for tax breaks and a higher maximum tax bracket should be no brainers. The money gained could be used to improve youth nutrition, education or simply expand the EITC which would increase the lower income brackets take home money further expanding the economy since they spend nearly 100% of any money they have.
Another simple way to combat excessive tax expenditures is to simply cap the amount of money you can deduct from your taxes. The Pease limitation was a law that phases out itemized deductions for higher income Americans, the new tax law repealed that amendment, but put lower caps on some of the same itemizations (mortgage interest, state, local, and state taxes, etc.) almost creating the same effect. However, the next logical step would be to simply cap itemized deductions at a specific dollar amount. The average sum of itemized deductions for those who make $200k – $500k is about $43,000 while the average sum of itemized deductions for those who make $100k – $200k is only about $26,000. Setting the limit at $40,000 would still be very generous cap, but still get rid of egregiously large deductions that reduce federal revenue and add to inequality.
Capital Gains and dividend payments are another tax expenditure that could be capped. Although the benefits for a special tax rate for long-term capital gains are dubious it is politically difficult to abolish or even change. So, capping is the next logical choice and once again looking at the income distributions we can see the average amount of capital gains and dividends by quintile. The 4th quintile (second-highest) has an average capital gains and dividend payout of $7600 and $3300 respectively for a total of about $11,000. Almost all of the capital gains and dividend payments go to the top quintile which averages $93,000 and $17,000 respectively. However, if you break that down further the 90-95th percentile only makes $19,000 and $6,000 capital gains and dividends while the 95th-99th percentiles make $41,000 and $12,000. So, capping capital gains and dividend preferential tax treatment at $25,000 would only affect less than 5% of households (these statistics only take into account the portion of people in the percentile who claim capital gains) and capping at $50,000 would affect less than 1% of households. I would recommend $40,000, but $50,000 should be the easily politically feasible. Just like with capping tax deductions this increases government revenue and reduces inequality without any dramatic changes to the tax code.
Raising the 15% tax rate for capital gains to 20% is also an option as well as raising the top rate to 25%. The Medicare tax for higher income American’s investment incomes address some of the payroll tax concerns, but charging for social security wouldn’t make sense since investment income does count as a contribution. Nonetheless, the income cap on social security contributions needs to be raised or eliminated altogether. The deduction cap should still exclude medical expenses and retirement contributions, but not contributions to a 501c. Retirement contributions are eventually taxed as ordinary income, but using a 501c as a tax shelter for high cost schools shouldn’t be allowed.
https://lifehacker.com/compare-your-tax-deductions-to-the-average-americans-wi-1763787960
http://www.marcumllp.com/insights-news/the-limitation-on-itemized-deductions-it-39-s-baaaakkk
https://fas.org/sgp/crs/misc/R43012.pdf
https://www.thebalance.com/the-pease-limitation-and-why-it-was-repealed-4163498
Other/Highlighted Links:
https://www.cbpp.org/research/housing/chart-book-federal-housing-spending-is-poorly-matched-to-need
https://www.thebalance.com/welfare-programs-definition-and-list-3305759
https://poverty.ucdavis.edu/article/war-poverty-and-todays-safety-net-0
https://www.needhelppayingbills.com/html/state_aid_and_assistance_progr.html
http://federalsafetynet.com/us-welfare-programs.html
http://federalsafetynet.com/safety-net-programs.html
https://www.usa.gov/help-with-bills#item-35107
