Sunday, February 08, 2009

A simple way for government to help the middle-class

If your employer offers a 401k, chances are you've been encouraged to join it. You've quite possibly been auto-enrolled in the 401k so you wind up contributing to it without having to do a thing. So are employers working so hard to get employees to contribute to 401k's because of a strong sense of concern for the welfare of their employees when they enter retirement? Of course not. Employers are working really hard to encourage employees to participate in 401k's because the Highly Compensated Employees (HCEs) are limited in how much they can contribute to retirement plans by the amount that average employees contribute to the plan. Since the HCEs usually are involved in decisions about how to promote 401k participation, it's in their own best interest to do as much as possible to get employees to contribute as much as possible. This relatively simple rule that ties executive perks to the perks available to common employees undoubtedly makes a huge difference in the level of participation in retirement plans by countless rank and file employees.

Well why not use similar incentives in the income tax code. Rather than set the tax brackets at arbitrary levels, why not tie the top brackets to the median income of the nation? I'm sure by the end of a calendar year, it would be possible to determine an official number for the mid-point of that year. So on December 1, for example, the government could announce what the median annualized income was midway through the year and what the corresponding top tax brackets will be. Done right, this could give tremendous incentive for very high wage earners, who frequently make decisions affecting the wages of very large numbers of people, to take significant steps toward improving the wages of middle-income workers.

Here's an example: Currently the highest tax bracket starts at a little under $400,000. Why not replace that arbitrary number with a value equal to 10 times the median income? Currently, that would come out about the same. As median wages rise, the amount of income not subject to the maximum tax rate for higher earners would also rise. But to make this plan truly effective, an additional tax bracket (or two) would need to be added. Suppose we made a tax bracket set to 100 times the median wage. For the plan to work, taxes above this level would have to be significant, say 60% or so. This sets up significant incentives for senior executives making multi-million dollar incomes to work to create not just McJobs, but Good Jobs, and to pay mid-level workers more generously. When senior executives know that giving raises to rank-and-file workers ultimately means a raise for themselves in terms of reduced taxes, I think most executives will suddenly find ways to wring a little more out of the budget to go towards salaries.


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