This document provides a recommendation for changing US economic policy to help reduce the growing disparity between wealth and poverty. It proposes implementing a flat tax rate for all income earners above the poverty level, as well as a 1% national sales tax on all non-food goods and services. This would simplify the tax code, encourage higher earnings by eliminating penalties for success, and distribute the tax burden more evenly across income levels and throughout business operations. The recommendation argues that this tax structure could help narrow the gap between the richest and poorest Americans by increasing incentives to work and earn more.

1. Economic Policy Recommendation
Mike Debiak
September 16, 2012

2. Economic Policy Recommendation
2
Abstract
“Today, the Census Bureau released its annual poverty report, which declared that a record 46.2
million (roughly one in seven) Americans were poor in 2010. The numbers were up sharply from
the previous year’s total of 43.6 million.” (Rector & Sheffeild, 2011) This said, a disconnect
remains between this data and some of the reality of what poverty is in the United States. The
growing issue is whether the government is connected enough with the needs and concerns of the
working public given the widening gap between wealth and poverty. This paper presents a
recommendation for change in economic policy that helps alleviate the growing disparity in the
socioeconomic levels within the United States.

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“As America is the wealthiest and most bountiful nation in the world, it is no surprise that many
Americans think of hunger and poverty occurring only in developing countries” (Results, 2012).
Poverty is the condition of people who lack adequate income and wealth. Absolute poverty is
when people are absolutely impoverished if the minimum amounts of food, clothing and shelter
necessary for survival absorb all of their income, and they live a razor’s edge existence.
Relative poverty is when people are relatively impoverished if the customary (average) standard
of living in their society requires more spending than the income they have available. This
standard changes as a society becomes more prosperous. For example, the standard of living
average Americans experienced in 1900 was below the poverty threshold (guideline) estimated
by the US Department of Health and Human services in 2000 (Byrns, 2011).
There is a growing disparity between those with the least, impoverished, and those with the most,
wealthy, in the United States. There are a number of reasons that can be cited as the cause of this
widening gap, but they all point to one combined root cause – earned income, income and
savings. It seems obvious though that there is a correlation between how much you make and
how much you keep that effects your relationship with, or distance from, the poverty level.
Imagine.
Now, to explain how a few other terms will be used and that are relevant here – earned income,
income and savings. Earned income should be easy for the vast majority to understand, these are
wages like what is seen in a paycheck. Earned refers to work. So all that have a 9-5 or 7-6, or
whatever variation can be thought of that is a job, have earned income. Whether satisfied with
that earned income for the effort put in or not or whether enough is left over to pay the bills, well
that is for further discussion. Income is a collective term that means any source other than earned
as from employment. This includes investment income, retirement income (e.g. pension, IRA

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distribution, Social Security, etc.) and income from business that is not considered wages. Saving
here is used to mean all cash or cash equivalents (money, savings accounts and bonds, etc.),
stocks, real property (homes, boats, cars, property, etc.), business investments, IRA deposits,
401(k) accounts, etc. that make up what are considered financial assets. The combination of
these things and accounting for any monies owed (bills and other regular expenses, loans, rent or
mortgage, credit card debt, etc.) produces what is known as net worth. “The 47-to-1 wealth gap
between old and young is believed by demographers to be the highest ever, even predating
government records.” And “On Wednesday, Forbes magazine released its annual tally of the 400
richest Americans, whose combined net worth has soared to $1.53 trillion, up 12 percent since
last year. To even make the list, it was necessary to have a fortune of at least $1.05 billion, more
than ten thousand times the median net worth of an American household” (Kishore, 2011). Net
worth then seems to drive the measure and define the gap between wealth and poverty. As stated
earlier - it’s not what you make, it’s what you keep.
Since the publication of the first official U.S. poverty estimates in
1964, there has been a continuing debate about the best approach to
measuring income and poverty in the United States (DeNavas-Walt,
Proctor, & Smith, 2012). Income inequality between 2010 and 2011
increased as measured by changes in the shares of aggregate household
income (Rector & Sheffeild, 2011). So, the problem then is simply
stated as – How is the gap between wealth and absolute poverty closed,
in a meaningful way. This is no small task. In a market economy as in
the U.S. there is a natural tendency to allow economic conditions,
either business or personal, to at least initially to resolve themselves, albeit that there is no loss of
The 2011 Poverty
Thresholds for the
U.S. Census
Persons in
family
Income
Threshold
1 $11,702
2 $15,063
3 $17,595
4 $23,201
5 $27,979
6 $32,181
7 $37,029
8 $41,414
9 $49,818

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attention that such things receive once it is decided that taking action is for the common good.
What then has prevented an appropriate level of attention from being placed on the issue of the
gap between wealth and poverty? Suffice to say that those at the top try to stay at the top.
Now that the problem has been enumerated it’s time to dig into the data, and there is a wealth
(excuse the pun) of data. The data is largely various researchers, economists, universities,
authors, columnists, etc., including reports published by the various departments and agencies of
the government, that performed some form of analysis on the whole or part of one primary
source. That is the U.S. Census. The Census Bureau serves as the leading source of quality data
about the nation's people and economy (United States Census Bureau, 2012). There is however a
plethora of other anecdotal sources that rein the realm of information that influences readers.
What will be focused on here are the more reliable sources.
To start, begin at the bottom. A study was conducted by Dr. Paul Piff and his colleagues at the
University of California, Berkeley, which reported in the Journal of Personality and Social
Psychology, that it is the poor, not the rich, who are inclined to charity. Dr Piff himself suggests
that the increased compassion which seems to exist among the poor increases generosity and
helpfulness, and promotes a level of trust and co-operation that can prove essential for survival
during hard times. (The Economist Newspaper Limited, 2010). This will become more useful
later in the paper as discussion of the recommendation is presented. Suffice to say however, that
this type of reaction to the socioeconomic condition of poverty is in part why the problem exists.
Another is the fact that compared to other nations the impoverished in the United States are in
general better off having, as a whole, better overall living conditions. “Liberals use the declining
relative prices of many amenities to argue that it is no big deal that poor households have air
conditioning, computers, cable TV, and wide-screen TV. They contend, polemically, that even

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though most poor families may have a house full of modern conveniences, the average poor
family still suffers from substantial deprivation in basic needs, such as food and housing. In
reality, this is just not true” (Rector & Sheffeild, 2011). Then compare that hard line to, “The
face of a poor person in the United States is a single parent who works full time, but still can’t
afford to pay for food, rent, child care, medical bills, and the costs of transportation to work”
(Results, 2012). Problems become increasingly more difficult when not even the pundits can
agree on the terms and conditions of the issue, no less what the data reflects. Each seeming to
spin the information into whatever message works to further their cause.
Given the
information put forth
here it could be
concluded however
that there is still an
issue of poverty in
the United States, and
the gap between the
wealthiest and
poorest is still growing. So, is this actually a bad thing? Or, is it that as the wealthy get wealthier
the poor are getting poorer. And therein lays the rub.
Taking this all by the numbers can get taxing; this is not to be flip about what many see as one of
the root causes of the expanding wealth gap issue. There is a lot of data to digest. Fortunately
there are reliable sources that have mined this data and put together relatively easy to understand
charts, graphs and tables that can deliver the message effectively. Some of the highlights are: in

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2011, the official poverty rate was 15.0 percent. There were 46.2 million people in poverty; in
2011, 7.2 percent of workers aged 18 to 64 were in poverty; the poverty rate for those who
worked full time, year round was 2.8 percent, while the poverty rate for those working less than
full time, year round was 16.3 percent (DeNavas-Walt, Proctor, & Smith, 2012); according to a
new report by Economic Policy Institute the top 1% had 288 times the net worth of the median
household as of 2010 (Hope Yen, 2011).
The means by which to narrow the gap between the wealthiest and poorest Americans has been
debated in many economic and political circles for years. The recommendation here in fact is not
entirely a new idea. One aspect of this idea has been around since the mid-1990’s with its roots
in Baltic countries and was designed by economists at the Hoover Institution, Robert Hall and
Alvin Rabushka. There are several states in the United States that currently use these ideas to
collect sales and income taxes.
The recommendation is to change the American tax system with one that would have a positive
effect on the U.S. Economy. It is to impose a simplified Flat Rate income tax (Flat Tax) and a
national sales tax. The simplified Flat Tax would be paid by all forms of income earning entities
- wage earners, businesses, mutual funds, hedge funds, etc. The only exemption would be wage
earners below the lower income level similar to the currently establish poverty limits. All income
earners would then only pay income tax on the amount above this exempt level (i.e. earning $1
more than the exempt limit would only subject you to pay tax on the $1). This would distribute
the tax burden equitably and equally across all income levels. No long would earning a $1 more
on a certain tier be subject to a higher tax rate which ultimately reduces the effective take-home
pay. This would encourage both individuals and businesses to pursue higher earnings as they are
no longer penalized for enthusiasm or success.

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The national sales tax would be 1% ($0.01) and imposed on all non-food goods and services,
regardless of whether it was a raw material or a finished product. This would distribute the tax
burden throughout the manufacturing and distribution chain and not place all the taxes on the end
consumer. Now, this is not to say that the end consumer would not be paying for the incremental
taxes throughout the process. It would however redistribute the tax to include exports, and it
would collect tax on products as they are manufactured and distributed thereby improving the
timing of revenues to the government as products are placed into inventory rather than waiting
for the sales to the end consumer. The recommendation would extend to states for their sales and
income tax systems.
The use of a combination of taxing facilities would reduce the income portion of the tax
collection need and distribute the burden to higher volume and value consumers, which are
primarily higher income/wealthier individuals. Lower income families that purchase fewer and
less expensive goods would pay the least. Noting that the current state imposed sales tax is
equivalent to a consumption tax. “…the current U.S. tax system is not a pure income tax; it is a
hybrid between a consumption tax and an income tax. About half of private savings already
receive consumption tax treatment. Funds placed in pensions, 401(k) plans, Keogh plans, and
most individual retirement accounts (IRAs) are not taxed until they are withdrawn…. The flat tax
would eliminate corporate income taxes, put all businesses on an equal tax footing, reduce the
statutory tax rate applied to business income, and make investment write-offs more generous”
(Gale, 1999).
A true flat rate tax on income has two characteristics: first, the tax base is a comprehensive
measure of income with no preferential treatment given to specific sources or uses of income,
and second, a single tax rate is applied to that base. In short, a flat rate tax is a proportional tax

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on total income (Browning & Browning, 1985). The flat tax is a VAT, not so different from the
taxes popular around the world. Under one variant of VAT, called a subtraction-method VAT,
businesses deduct the cost of inputs from gross receipts and pay tax on the difference—the value
added. It is basically a sales tax where the tax is collected in stages from each producer on the
supply chain rather than all at once from retailers (as in the retail sales taxes that are common in
the US). A flat tax adds one more wrinkle: businesses are allowed a deduction for wages paid,
but the employees pay the “flat tax” on their wages directly. If that’s all that happened, the tax
burden would be identical to the VAT (assuming the same level of compliance), but the flat tax
also allows an exemption for every worker. Wages are only taxed above that exemption level,
typically set at around the poverty level, so that wages up to the poverty threshold are exempt
from tax. (Burman, 2011)
Turning to the Armey-Shelby flat tax proposal, notwithstanding what has been argued so far,
there are some benefits to its enactment. First, it would reduce Congress's ability to grant one
group of Americans special tax privileges that are denied to another group of Americans. The
House Ways and Means Committee and the Senate Finance Committee are two of the most
powerful committees in Congress. Their members have the largest political war chest, and the
reason is that they are the focus of Washington's lobbying groups, who pay handsomely and
work diligently to have favors bestowed upon them. The Armey-Shelby flat tax plan would go a
long way toward eliminating privilege-granting by the United States Congress, and that may
explain some of the political resistance to having a flat tax. (Williams, Blackwell, Fund, &
Forbes, 1996)
A Flat Tax is an effect means of helping to reduce, or at least reduce the growth of, the gap
between wealth and poverty in the United States. In examining the effects of a flat rate tax, we

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assume that a flat rate tax is substituted for the present federal individual income tax and that the
single tax rate is set so that government revenues remain unchanged. In this framework, it is
reasonable to suppose that government expenditure policies do not change, so we can
concentrate on the consequences brought about by the change in tax policy alone.
As will become clear, most of the advantages expected from this change in tax policy are really
the alleviation of the disadvantages of the current income tax. One of the most important
advantages of the flat rate tax is that it will improve incentives to produce by reducing the
marginal tax rates of most or all taxpayers. It is important to recognize that the marginal tax rate
that applies to the earnings of productive resources is what produces adverse effects on resource
supplies. If the marginal tax rate is 40 percent, for instance, a person who has an opportunity
to earn an extra $100 will decide whether it is worth the effort based on the $60 in after-tax
income that he gets to keep. The higher the marginal tax rate, the lower is the net rate of
remuneration received and the more adversely resource supply is likely to be affected.
Currently, marginal tax rates under the federal income tax range from 11 percent to 50 percent.
In 1979,35 percent of taxpayers filing joint returns faced marginal rate brackets of 28 percent or
higher, and 13 percent were in marginal rate brackets of 37 percent or higher.
Under a flat rate tax using a comprehensive definition of income, the single marginal rate used
could be as low as 10 to 12 percent. Thus most or all taxpayers would confront a substantially
lower marginal tax rate, and this in turn means the after-tax reward for earning more income
would be increased. Although the magnitude of response to the higher after-tax returns is
disputable, recent empirical research, as well as, common sense suggests that people will choose
to make greater efforts to earn income when the returns are higher. These efforts could take the

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form of increased labor supply or increased saving and investment (or both). (Browning &
Browning, 1985)
Two further advantages can be expected from the use of a comprehensive measure of income
coupled with a low marginal rate. Currently, taxable income is only about half of total personal
income - which accounts in part for the high marginal rates that must be used today. When high
marginal tax rates are applied to an emasculated definition of income, taxpayers are encouraged
to channel part of their incomes into untaxed forms. This change in the composition or use of
income reflects a loss in economic productivity as taxpayers devote resources to lower-valued
uses simply because they are untaxed.
Another benefit from the use of a more comprehensive tax base is that it would produce a fairer
distribution of taxes among those with equal real incomes. Currently, taxpayers who are able to
shift large portions of their incomes into untaxed forms pay less in taxes than those with equal
incomes who are unable or unwilling to make as much use of tax preferences. The result is a
wide dispersion in tax burdens among those who are equally well off.
Our tax code is one of the most complicated in the world. Over two dozen countries have already
adopted a single-rate flat tax system. Nearly all of these nations have tax rates below 20 percent.
Nearly all of these nations have experienced economic growth and lower unemployment rates
after implementing a flat tax. (Kibbe, 2011)
The salutary effects of tax reduction on the economy have been demonstrated. Starting with the
Harding-Coolidge tax cuts in the 1920s and the Kennedy tax cuts in the early 1960s, we have
seen how lower tax rates produce prosperity. In the late 1970s, the Kemp-Roth tax cut proposal
for an across-the-board 30 percent tax cut was adopted by Ronald Reagan when he became
president and launched what became the then-longest economic boom in American history.

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Reference
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