Opportunity Blueprint

In modern times, we find ourselves a highly divided country with an alarming (and continuously growing) disparity in terms of income between the classes of our society. Incomes diverge, as expenses grow. It hasn't always been that way, but this is where we are and we have to resolve these issues before our nation collapses along the fault-lines of growing division.

First of all, let me say this clearly - it is all about money. There literally is nothing else that divides us at the core except for money. Racism, anti-antisemitism, xenophobia, islamophobia, etc. are all just the byproducts of the basic problem where people fear for their financial well being due to a perceived threat or a poverty-stricken reality makes people desperate enough to believe.

While these threats are just untrue and ridiculous at the core, the division we see across our nation are real. Furthermore, the proposed solutions to the economic divergence/disparity among the classes couldn't be more different and polarizing from both Democrats and Republicans. But without a meaningful admission of the core problem, neither of these one-sided proposals have any viable way of solving the root of the problem.

The government earns money from taxing the citizens' incomes, purchases, sales, gifts, etc. The majority of the revenue comes from income tax. The economy strives when the citizens are capable and motivated to spend their disposable incomes. As a result, it drives corporate profits and government revenues up. Finally, businesses see a reason to keep people employed and hire more staff to expand in order to meet the demand.

It has long been a predominant Republican belief that applying a flat tax across all tax brackets will raise enough revenue to balance the budget. However, taxing the lower classes and those below the poverty line would not only drive people into a further financial despair, it would also require additional Federal spending to accommodate those suffering from such a tax program. The general population will have less disposable income, the businesses will lay off staff due to waning demand and the government will be left with an ever-declining revenue. It is a losing scenario.

It has long been a predominant Democrat belief that spending government funds to hire people and create government sponsored projects are ways to increase employment and, subsequently, increase the government's revenue stream. While this appears to be a good plan in theory, it is a totally different result in practice. When you are spending tax revenue on hiring public and creating projects that do not have a corresponding demand, you are in fact cannibalizing the government funds. Yes, the unemployment decreases and the government revenues increase. However, your spending outpaces the revenue received. It is a net negative effect and a losing scenario as well.

What I propose is a return to near-parity in terms of net income. What does that mean? Net income is the total amount of money a person takes home from their wages after all taxes (including income tax) are paid. How would someone increase the incomes of the poverty line and lower classes? Simple, it would involve a two-fold plan of income re-balancing in an employer-employee environment.

First, the government would need to institute an enforceable guideline for compensation of companies' lowest paid employees to be no less than a certain reasonable percentage of the highest earning employee (usually the CEO). This way, each company is required to distribute its profits more fairly and each employee earns enough to where the taxes no longer cripple them below a living wage (that would otherwise require them to borrow in order to survive).

Second, the government would need to protect American companies and workers from outsourcing and in-sourcing scenarios. A lot of companies began to chase profits in the 1990s with cheap overseas labor that resulted in higher profit margins. However, this all came at taxpayer expense as hundreds of thousands of Americans lost their source of a living wage. The government loses revenue from taxes on those incomes and is now forced to spend their depleting revenue to support the newly unemployed. It is time to stop the bleeding. United States is still the leading consumer economy in the world. As such, it can dictate what US companies' foreign manufactured goods can pay in taxes - recognizing that one such product or service bought, is one American product or service left with declining demand. To solve this problematic economic minefield, the government needs to gradually phase in a tax of (5%, 10%, 15%... n%), where n% equals the difference in cost between a comparable American product (or service) + 2%. This will level the playing field for US produced goods and services, while providing American companies operating overseas with enough time to move back their operations, avoid losing government incentives and hire American workers.

The end result will be a greater level of net income for majority of Americans, a new degree of income parity between the highest and lowest earners, protection for American workers' incomes, increased disposable income spending, increased government revenue, reduced unemployment benefits spending and a more stable economy. 

And maybe, just maybe, when we are in a new era of wholesale economic revival, our divisions will greatly diminish as our incomes and interests converge.

At Taxpayer's Expense

Let me start off by saying - I know it is my obligation as a citizen to pay my fair share of taxes and I make sure my employer withholding every year is right on target to meet my tax obligations. I may not like the amount of money chopped off my paycheck, but neither does any other citizen. It is one of those things we know we must, but wish we didn't have to.

My problem revolves around the "wonderful" legislation that dictates the Highly Compensated Employees (HCE) rules. These rules are applied in a blanket manner across this country, whether you live in Wyoming, Texas, New York or California - you become an HCE if you either own 5% of the business or earn more than $115,000.

Once you become an HCE in the eyes of the IRS, you are no longer eligible for several education related tax deductions - and that is right, because those deductions were designed to protect the lower income population.

However, there is another side to the HCE rules. That side relates to the 401K and IRA tax deductible status. Ordinarily, employees are allowed to contribute money from their earnings towards these retirement plans. For 401K, the contributions are pre-tax and for IRA the contributions can be deducted from your taxable income when filing your return. Both plans allow investments to grow tax-deferred for the life of the plan.

When applying the HCE rules, which were advertised by our Washington legislators to the public as "making sure lower income individuals benefit from retirement plans as well as the HCEs", they were actually trying to apply the proverbial 'defibrillator' to the US Treasury investment (as most safe components of any retirement plan contain a healthy dose of Government Bonds and Treasury Bills).

Their crazy way of thinking was explained - each company will have to undertake a 'stress test' to make sure that their lower earners benefit in no lesser proportion than their HCEs. Meaning if the lower earners don't contribute to the 401K plan or don't contribute enough, the HCEs become ineligible for the tax-deductible status of their 401K contributions and will have a refund of those contributions issued (which will then be considered taxable income).

The rationale was - the company HR and the HCEs should encourage the lower income employees to participate fully in the 401K program. Sounds like a collective social pressure applied to a work environment in order to pump up the Government's Treasury bottom line. Don't worry, comrade, the government has your best intentions in mind.

But this idea backfired - you cannot convince lower earners, some of whom live paycheck-to-paycheck, to contribute to 401K the money that they simply do not have to spare. As a result, the lower earners will not contribute because they cannot afford to and the HCEs will not contribute because they have been flagged as ineligible. In conclusion, unless this legislative mess is corrected, the 401K and IRA plans will suffer a contraction - one which will negatively impact the US Treasury investments (the exact opposite of what this legislation intended to do).

P.S. Consider the inconsiderate nature of this legislation - the HCE 'stress test' will surely pass an Investment Bank or a Law Firm, where every HCE will remain eligible for 401K's tax deductible status. Then consider a consulting company, where a lot of workers are per diem, don't earn enough to be considered an HCE and typically do not contribute to the company's retirement plans. The people who just barely meet the HCE criteria (through pulling in a lot of extra overtime) will now be unfairly punished simply because of the per capita income composition of their company. Also, geographically a non-HCE employee earning under $115,000 will probably be able to contribute to a greater degree in remote areas of Texas and Florida (where there is no state income tax to chop off your paycheck and the cost of living is relatively low), as opposed to New York and California (where state taxes are quite high and so is the cost of living).