Livable Wage vs. Standard Deduction

So here it is, April 15th, again. Are you one of the smug, having filed your tax return in February, or one of the frantic, who should be pounding a calculator right now instead of reading this? Either way, there is an oddity in the system I’d like to share with you.

Look on the standard 1040 return, top of the second page, and you will see line 40, the standard deduction, and line 42, the personal exemption. If you are single, the standard deduction ($5350) and the personal exemption ($3400) add up to $8750. The ostensible purpose of these two slices out of your taxable income is to account for the fact that you actually need some money buy the occasional bowl of gruel, a ragged shirt, and a bed for the night. The quite sensible theory is that people, especially poor people, shouldn’t be taxed on income that they actually need to survive.

The problem is that in the modern world it is essentially impossible to live a halfway decent life on $8750 a year. Yes, I have known people who have cut every corner imaginable, been incredibly resourceful, gritted their teeth, and gotten by on such an amount. If you are tempted to say, “I’ve lived on that much!” think about the year you did that and adjust for inflation (and your tolerance for squalor). In many places, especially urban places and cold climates, it is essentially impossible.

This brings me to the concept of a livable (or living) wage, defined as the amount of annual income needed to acquire the basic needs of life. What are the basic needs of life? The answer will vary from person to person, but The Joint Fiscal Office of Vermont Legislature has come up with a definition that includes food, housing, health insurance, child care, transportation, taxes, and basic personal expenses. No vacations, no restaurants, no Christmas gifts, just the necessities. The results will surprise you. Presently, minimum wage in Vermont is $7.53 an hour, or $15,662 annually. According to Vermont’s living wage study, the wage needed to achieve a minimal living standard a single person with no children averages $14.26 an hour, or $29, 653 annually. Of course, many Vermonters don’t earn this much. They survive by doing without basic things such as health insurance or proper health care, by living in substandard housing, and by government subsidies such as food stamps, Medicaid, heating assistance, and housing assistance.

Two things strike me about this situation. One is that in the JFO report, 15% of income is set aside for taxes. The second is that the combined exemptions on the Federal tax form equal only 29% of a livable wage.

This raises several questions in my mind. Why should people on the edge of poverty pay as much in taxes as they do for transportation or child care? Why are we taxing people at all on income they need just to survive? And, of course, why do we mindlessly pay a government subsidy to businesses that are unwilling to pay their employees enough to live on?

But let’s stick to the tax issue. Back in 1913, when the federal income tax was first established, anyone earning less than the equivalent of about $60,000 in today’s dollars was exempt. It was a tax reserved for those who could easily afford to pay. I’d like to see us go back to something like that. The federal government should figure out some regional livable wage scales and increase the personal deduction to match that. Make up the difference by rolling the tax rates on wealthy individuals and corporations back up to the levels of the 1950’s and 60’s. Corporations used to pay a quarter of federal income taxes. Now they pay about 8%, and some of the biggest, most profitable companies manage to pay little or none at all. Same goes for the gazillionaires among us. Fair taxation advocates estimate that we lose about 70 billion dollars a year to millionaire tax cheats, and the marginal tax rates on the likes of Bill Gates are as low as they have been since the Great Depression.

Various politicians and pundits come up with plans to “simplify” the tax code, many of which put the 7/11 clerk in the same tax bracket as the CEO. The Minor Heretic’s tax simplification plan is to exempt the first $30,000 of income for single people with no kids and ramp up the rates in a geometrically increasing curve above that point to make up the difference. The exemption would match the livable wage for whatever family and income category a household is in. Ditch all the complexities of this, that, and the other credit, deduction, and exemption. Combine this with a thorough cleansing of all the various corporate tax shelters and a bump up in the basic corporate tax rate. Multi-millionaires would gnash their teeth. Corporate CEO’s would howl in agony. Most Americans would sigh with relief, fill out their one-page tax forms, and go buy things with their newly regained income. They might even be able to make their mortgage payments.