Sufficiently Progressive: >>>>>> Part Two – The Method

Fiscal policy has been and continues to be underutilized as a policy tool. Because of that, the purchasing power of the middle class goes untapped, and the ability to provide for full employment is lost. There is a lack of understanding on how an economy works.

An economy is like a pressure cooker.  A pressure cooker works its magic by forcing increased interaction. Allow too much steam to escape, and it becomes less effective. Economies also work best under pressure. When pressure to produce goods and services lessens, economies weaken. It is beholden upon policy makers to ensure that the purchasing power of the middle class be maintained and pressure business to produce.

Saving that is out of proportion to the value it represents removes pressure from an economy and presents a danger. Saving becomes excessive not unlike the point where overweightness becomes obesity. Excessive saving, when allowed to persist, poses a threat to our economic health and ultimately to our way of life.

Political control by the wealthy few, compromises democratic action. Great wealth is no friend of democracy. The wealthy have their own agenda. While most wage earners are focused on obtaining wealth and security, the wealthy are concerned with maintaining their wealth. Democratic action in their view can interfere with this objective.

Measures to safeguard our way of life begin with limiting the ability of the wealthy few to subvert democratic intent. A consensus of the electorate must be maintained. Preserving the democratic process must limit excessive wealth. A sufficiently progressive tax code will help to do this.

A sufficiently progressive tax code attempts to minimize excessive saving by setting tax rates in relation to one’s saving behavior. Tax rates are set higher for high rates of saving, and lower for low rates of saving. A tax strategy based upon saving behavior has the benefit of maintaining pressure within the business community to produce by ensuring that disposable income is available to all income levels. Revenue no longer pools at the top. When revenue continues to flow to rich and poor alike, tangible benefits take place, such as the possibility of full employment.

Parity of Saving Strategy

A sufficiently progressive tax code is proposed to ensure the purchasing power of the middle class. A sufficiently progressive tax code puts money into the hands of those who would spend it. A sufficiently progressive tax code promotes both fairness and the health requirements of an economy. The process that uses saving behavior to bring about a sufficiently progressive tax code can be referred to as a “Parity of Saving” strategy.

A parity of saving strategy requires an examination of saving behavior at all levels of income. This examination must look at all income levels uniformly. It cannot use existing income tax brackets. Existing income tax brackets are largely the result of political pressures. The process of setting income tax rates must be divorced from political considerations.

A uniform examination of all income levels and corresponding saving rates can be done by dividing all household incomes into deciles (ten equal parts) by number of households.  Since there are approximately 140 million households in the U.S., each decile would be made up of approximately 14 million households.  For each decile, the average rate of saving would then be determined based upon the previous year's financial data.  The average rate of saving for deciles five and six (the middlemost groups) are then compared to rates of saving for higher income groups.  Where the saving rate for the middlemost groups differ from the saving rate of the higher income groups, adjustments to the tax rate are necessary.

For example, if it is found the saving rate of the median income group is 3% and the saving rate of the highest decile is 25%, the tax rate for median income groups is to be lowered and the tax rate for higher income groups is to be raised.  Lowering the tax rate on median income groups results in more discretionary income and more ability to save.  At the same time, by raising the tax rate on higher income groups, less saving will result. This  would be an interactive process. As tax rates are adjusted incrementally over time, perhaps annually, the top half of all income groups (deciles 6 through 10) will achieve a type of saving parity (saving equality).  When saving parity has been achieved within these deciles, excessive saving will have been squeezed out of the economy resulting in more money in circulation, more demand for products and services, and eventually more growth.

A parity of saving strategy produces the slope line of a Tax Rate by Income Distribution graph (Figure 1). The slope line represents the ideal rate of taxation for each income group based upon that group’s saving behavior. Once tax rates are adjusted to reflect comparable levels of saving for median and high-income earners, the tax code is deemed to be sufficiently progressive. With a sufficiently progressive tax code, excessive saving is minimized, and more money continues to flow within an economy.

                        

It must be noted that in this strategy, most income taxes are paid by the top half of all income earners, but sales tax, property tax, payroll tax, and excise tax, which the poor pay at a higher rate, remain in place. The bottom half pay income tax in relation to the slope line produced by the top half of all income earners. Income tax rates for deciles 1 through 5 are derived proportionately, based upon the results of higher deciles. Income tax rate for the bottom half would likely fall to zero for some.

The use of the tax code for good economic policy does not end with stamping out excessive saving. The other problem good tax policy must address is how to guard against an overheated economy that produces inflation. With a full employment objective, it is not appropriate to slow the economy by way of adjustments to the Federal Funds rate. Slowing the economy by raising interest rates creates unemployment, which is counterproductive. Inflation results from too much money chasing too few goods. Raising interest rates on business to slow the economy is just the opposite of what is required. Business must be encouraged to produce in order to lessen demand pressures. To fight inflation, the buying power of the consumer must be addressed. This is done by adjusting income tax rates uniformly, that is, by moving the slope line from right to left in this now sufficiently progressive tax regime.

Adjustments to  the tax rates are monolithic once saving parity has been achieved. (Figure 2). It is here the progressive nature of the tax code (the slope line) remains the same but moves 

        

proportionately from right to left in an overheated economy (income tax rates are collectively raised) and, if necessary, from left to right in an underperforming economy (income tax rates are collectively lowered).

A Parity of Saving strategy has a two-fold purpose. It will prevent the accumulation of excessive wealth, and it will allow the economy to maintain full employment, even in the face of inflationary headwinds. The intent of this strategy is to keep revenue flowing within an economy. Fiscal policy, in the form of income tax policy, is a necessary first step toward economic health and, in the process, toward a democracy that is better protected against undue influence.

Conclusion

An economy is a force of nature. We can influence it, but we cannot change the way it works. It is incumbent on all of us, at least all economists, to get it right. We ask a lot of our economy: ensure full employment, maintain price stability, allow democracy to flourish. A parity of saving strategy makes this possible.

We have it within ourselves to create a more just society, but thoughtful action is required.  As Frederick Douglass once said, "Power concedes nothing without a demand." To put an end to the suffering an out of balance economic system makes certain, we must demand that a sufficiently progressive tax code be put in place and allow the economy to work for all.  A parity of saving strategy will move us in that direction. Creating a financially strong middle class is the recipe.  Squeezing out excessive saving is the secret sauce.