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Khaldun’s Curve, Non Negotium, and the 76 Exemption

Updated: Mar 7, 2023

Taxes


Khaldun’s Curve, Non Negotium, and the 76 Exemption


By Mark Shubert



This essay tackles the question of taxation and suggests a dynamic tax code based on total tax revenue.


First is the issue of how to view taxation in general. This paper only covers taxation or government revenue and not the issue of expenditures which is usually brought up in this discussion; expenditures only complicates an already complicated topic and since people disagree more about expenditures that tends to get in the way of people agreeing on a sound tax policy. To further simplify this topic the main prescriptions made will be in regards to the Federal Income Tax, but the same reasoning can apply to all types of taxes.

There is an opinion on the left that views higher taxes as a necessity and even a noble goal. They want to raise taxes for the sake of raising taxes under the presumption that it will disproportionately affect the bourgeoisie or capitalist class which will then be spent on the general welfare. There is an opinion on the right that views lowering taxes as a necessity and even a noble goal. They want to lower taxes for the sake of lowering taxes under the presumption that it will raise the water for all boats, so to speak, which will then increase the general welfare. These two opinions view raising or lowering taxes as the focal point or end goal which could then be used to reach the intended end of increasing the general welfare.

This leads to the first exhortation of the essay. That raising or lowering the tax rate should not be the main perspective on this issue but instead the maximization of total tax revenue or TTR should be the main consideration. Increasing the tax rate may increase or decrease TTR and decreasing the tax rate may increase or decrease TTR. The point is that simply increasing or decreasing the tax rate may or may not have its intended outcome. This concept is best illustrated by the Khaldun Curve also known as Laffer's Curve. There is a certain tax rate that maximizes TTR and that should be the goal of tax policy, not the aforementioned opinions. This goal should exist especially when there is a deficit but even in general since it can maximize the amount of money the state can invest in infrastructure that businesses on their own can't afford even if their corporate taxes were lower.

The issue is that we do not know for certain which tax rate maximizes TTR and there are many variables that obfuscate its discovery. It is reasonable to address those variables in short. The main variables that get in the way are the policies that make taxes inegalitarian. These include tax deductions, exemptions and subsidies. If a wide range of successful companies or individuals don't have to pay taxes, or can get away with decreasing the tax rate they are bound to pay, then that will affect which rates increase or decrease TTR. The second exhortation is to abolish these variables as much as possible in order to have a more egalitarian tax program and to better observe the effectiveness of certain tax policies with less variables getting in the way. Besides, the existence of tax exemptions is just the freeloader problem and it puts the tax burden on other people.

A quick analogy. Say there are ten people who make the same income of $100 each and there is a government budget of $100 and the government is fiscally responsible so no deficit spending. In a fair and egalitarian society each person would be taxed $10 or 10% of their income. If one of the people gets an exemption simply because they are religious or a non-profit, then they are not taxed $10. The budget is still the same $100 but now there are only nine people taxed and they are taxed $11.11 or 11.11% of their income. This has now created an inequality, since that one person who no longer pays taxes has more money than everyone else after taxes are collected. This person now has the incentive to lobby the government to increase the budget and in turn increase taxes on everyone else since they benefit from more government spending and don’t have to contribute; this person also now has more money that they can use to have a higher standard of living or to invest that extra money to make even more money than what is possible for everyone else.

This idea that no establishment or industry or individual should receive benefits such as exemptions and deductions to taxes is a piece to what I call Non Negotium or the separation between business and state. This will not only create a fair tax code which will spread out the tax burden but it will also decrease spending and therefore the need for taxes for everyone, but let's not get bogged down talking about expenditures!

There is just one exemption to this rule and that is the 76 exemption. This is the idea that income of $76,000 or less should not be taxed. This $76,000 is the buying power at October 1, 2019 (the start of the fiscal year of 2020), and inflation since then should be taken into consideration, so the $76,000 is the real value at that time not a fixed amount. The more inflation there is with no increase in wages means that less people have to pay taxes, which would encourage the government to have low inflation in order to tax more. The tax brackets would start at $76,000.01. The idea behind this is to help Americans get off their feet and could decrease spending by decreasing the necessity of government programs if the average American has more money at the end of the year. The cost of paying taxes, for the average American, both mentally and fiscally, outweighs the benefits of government programs designed to alleviate the lack of money people have. Why tax the average American when the government spends that taxed income on fulfilling the needs of the very same Americans who cannot fulfill their own needs because they don't have money because they are taxed? If someone made $76,000 in 2021 then they paid $12,468.50 ($76,000 is in the third tax bracket so a 22% tax on income above $40,525 up to $76,000, which means that 35,475 is taxed at 22% which equals $7,804.5 plus $4,664 from the first two brackets equals a total income tax of $12,468.50) in income tax alone which is a huge chunk of money, nearly 16.5% of their income. Besides, the money that won't be taxed directly from the average American will be taxed indirectly because they will spend that money which will trickle up to businesses and wealthier people who are taxed. An idea like trickle down economics but instead reversed so its trickle up economics.

Clearing up these variables leads to the third exhortation where we experiment to find the point of maximizing TTR. We need to have brackets that are more numerous and clear on what they represent. In 2021, for single filers there were seven brackets each representing a fixed amount and each having a tax rate from 10% to 37%. Whatever the number of brackets we choose and whatever they represent, we need to do the following to find the point of maximizing TTR. In the first year of this tax policy, all brackets could be set to the same tax rate, I know this would make the flat tax supporters really happy.

For simplicity let’s have the first year tax rate be 10%. This will be our control year. Then for the next year we increase the tax rate by 10% of the tax rate. That means that the second year tax rate will be 11% since 10% of 10% is 1% and that is how much we will be increasing. Then we compare both years and see which brackets increased and which decreased TTR. The brackets where increasing the tax rate ended up increasing TTR are the brackets where we continue increasing the tax rate by 10% so those brackets would be taxed 12.1% (11% plus 1.1% or 10% of 11%) for the third year. The brackets where increasing the tax rate ended up decreasing TTR are the brackets where we decrease the tax rate to the same as the previous year for the third year and for the fourth year we decrease them further by 10% until the TTR starts to decrease. In short, for each bracket we increase the tax rate until TTR starts to decrease. When TTR starts to decrease that is when we start to decrease the tax rate for TTR to increase until the TTR starts to decrease again and repeat. This dynamic tax system will eventually get as close to the point of maximizing TTR as possible.

In summation: tax policy should be based on maximizing total tax revenue (Khaldun’s/Laffer's Curve), instead of a righteous belief in increasing or decreasing taxes for the sake of increasing or decreasing taxes; everyone should pay taxes and no individual or establishment should be given deductions, exemptions, or subsidies, in order to spread the tax burden and know the true effects a tax rate has on a given bracket of income; the average American should not have to pay federal income tax so income at $76,000 or below should not be taxed. The issue of maximizing total tax revenue is necessary when the state has a deficit and or a debt. The brackets should be more numerous and clear on what they are taxing and the rates should fluctuate steadily until they get close to the point of maximizing total tax revenue.

For you economists out there, this Tax Curve that I am proposing is not the same as Khaldun'/Laffer's Curve in two main ways. Firstly, Laffer proposed a single tax rate for everyone while I am proposing we increase the number of income brackets where each one will have its own tax rate. This is because different brackets will be affected by different rates so it is naïve to assume that a single tax rate will maximize TTR for each bracket. Secondly, Laffer proposed a static tax rate, he believed that there was just one rate that maximizes TTR. I do not believe that the point that maximizes TTR is static since income and spending changes year over year.

I hope I gave a convincing argument and decent reasons as to why our tax policy should be determined by dynamic tax calculation - I haven't thought of a name for it - let me know what you all think!

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