Donald Trump released his tax plan today and several components are pure genius. One is Zero per cent tax on the first $25,000 of income earned by an individual or $50,000 earned by a married couple. Some critics have protested that some people pay no tax at all! They claim that it will cause someone to work up to $24,999 and then stop to avoid paying taxes. Of course these claims could be made whenever someone approached a higher income tax bracket, say from 25% to 35%. But these critics miss the genius of Zero per cent.
Not taxing the first $25,000 of income incentivizes people to earn income! What a shock! Who are these people? Generally, they include many people who are on welfare, food stamps, or who have income but do not pay tax under the current tax code. Consider that for every extra dollar of income they earn, they will need one less dollar handout from the government.
It is genius to motivate people to earn income, especially those who are on the bottom rung of the income ladder. Psychological studies show that multigenerational welfare recipients do not even consider trying to earn income. They have lost the desire to acquire something; they have no wants, no goals. Without wants or goals, humans revert to a survival state. No purpose, no wants, no contribution to themselves, their family, or society. But when people start earning income and see the benefits, they start to desire more and hence, want more income.
From both an individual and societal viewpoint, non-income or low income people starting to work or increasing their income benefits everyone. These people not only benefit themselves, but take the first step off the welfare rolls.
For these low income workers, Zero tax rate avoids the hurdle of filing complicated tax returns. For a married couple with only one spouse working, it allows the income earner to earn up to $50,000 because of the elimination of the marriage tax. This allows families to keep more of their money and again avoids expenditure of welfare dollars.
Some criticize Zero tax rates because they believe that everyone should pay some taxes as a matter of principle. But is that logic any different from Democrats who believe that the rich should have higher tax rates even when it is shown that the amount of tax collected would not increase? Others say that it will incentivize people to earn up to $25,000 and then stop in order to avoid paying tax. This is nonsensical. Why would they avoid earning $30,000? The taxes would only be 10% of the extra $5,000. So for a measly $500 in taxes, they walk away with $4,500! Why stop?
After finally moving from no income to $25,000, it does not take much more effort to move up to $30,000. The effort to move from no income to $5,000 is much more difficult than from $5,000 to $10,000. As one learns the skills and acquires the motivation to earn higher amounts of income, the barriers of earning even more income are lessened. The more dollars a person earns, the easier it is to earn still another one.
The hardest dollar to earn is the first one. Zero tax on it makes it easier.