In the previous two posts, The Shadow Economy, and Do The Math, we established there is a very large underground economy that owes taxes of at least $36 trillion dollars. This lost tax revenue is a huge contributor to our inflation, more than doubles the tax bill for individuals AND corporations.  Furthermore this lost revenue misleads government policy makers using GDP and other financial information relying on total sales which can make for very bad policy such as interest rate changes, increasing or lowering money supply, and other central bank policies.

There are many academic research papers on income mobility with statistics that can make your eyes cross, and they discuss it eloquently and in great detail.  However, for me, I find one person’s income history over time more relevant on the subject of income mobility. This kind tracking is referred to as panel data and focuses on the fact that a person’s income is not stagnant throughout  life.  They start at a lower wage and move up through the levels with their highest earnings later in life as a rule.  However, the truly unexpected result in following the same people over time, is the ‘consistent…find that the largest gains … accrue to the poorest workers and that the richest workers get very little of the gains. Foundation of Economic Education. In other words, the lowest income group usually has the highest growth with more retention of that growth than any other group.  The top income groups are very fluid in contrast. This is best illustrated by looking at the income adjusted for inflation in the census bureau reports over time.

The lowest 20% in income from 1989 (1990 census)had an increase in purchasing power of $3,773  by 2015 whereas the top 20 percent had a $19,200 LOSS in purchasing power.  Since the top 20% are the ones who finance the federal deficit, this loss of purchasing power makes  more of the President Obama’s $4 trillion dollar ‘quantitative easing’ financed through foreign countries like China. A high percentage of the  top 1%  buy our federal, state and municipal bonds BECAUSE the income is not taxed, and therefore would not show on their tax to be paid line.   The fact the progressives label the 1%’s financing of the national deb as greedy because of their zero tax status  shows either their dishonesty or their ignorance regarding who pays for the huge increases is social program spending over the years. 

This is what I also see in the above numbers.  If I start out as a newly graduated adult and get my first job, I likely will be in the lowest 20% of earners.  I work hard, move through the middle stages and most years I fall back into a lower income class because of my tax bill. During this time, there are about 1 ½ families in the underground economy not paying any taxes for every family paying them and some of them even receive money in government assistance.  In other words, I pay taxes not only for myself but for another 1 ½ families,and this is why I never stay in the new income level for long.  It take two to three raises for me to be able to remain in the new income level in a one step forward, two steps back pattern.

Eventually I manage to make it to the upper 20% of income and again, the taxes shoot me down only it is worse because the tax bracket is much higher. I drop out of the top 20% of income many times never staying there for long.  It is a constant bounce up and down.  Eventually I retire.

This bounce is also why the income categories in the census reports do not increase as much in the top 20% as it does in the lower income categories.  The top 20%  adjusted for inflation increased the most at 225% because they had to lower the qualifying amounts.  The middle class is seen as being from $33,773.07 to $115, 800.00, and the population percentage  in the top 20% is higher because of the bounce effect and the broader range of amounts to qualify.

In addition, 100% of inflation ( line of 2015 dollars) is caused by spending more money than we have.  A FULL 100%!  So no matter who wants money for what special project, if we do not have the money, WE DO NOT HAVE IT!  Spending money we do not have is enslaving future generations and it is shameful.  So when Ms Ocasio-Cortez finds her Congressional salary cannot buy a loaf of bread due to inflation from the ‘deficit does not matter’ policy,  perhaps her opinion on the matter will modify somewhat.

This picture is further complicated by inaccurate measures used to determine  federal and state benefits for low income families.  The Census Bureau cash income estimates EXCLUDED 20% of the income of all households and 32% of income in the bottom 20% of households. This results in lower apparent income levels and higher poverty rates  than measures that account for more income sources. (no kidding!) So we really have to wonder who are we helping and are they the people we intend to help? And why are we using census data to determine poverty levels when there is better data at the Bureau of Economic Analysis?

The poverty rates below, labeled Census Thresholds and HHS Guidelines, are used to determine a person’s eligibility for federal and state benefits such as food stamps, Medicaid, public housing and others.  If the 32% under reported income for the lowest 20% of the family/household income in the census bureau’s report is calculated, then this is what you see:

NB:  HHS is not based on Census data; however as the amounts are essentially the same or lower, I have included their values.

Compare these figures to the following data:

  • Annualized federal minimum wage is $28,800.  A single individual  with no deductions owed $4294.20 in taxes in 2018 working for federal minimum wage.
  • The highest unemployment benefit is in Massachusetts at $742.00 plus $25 per child for 30 weeks, amounting for a single individual with no children to $22,260.00 
  • The highest benefit of workman’s compensation in WA state is $35,952 annually and is not taxable.
  • The highest benefit of workman’s compensation in New Jersey is $43,344 and is not taxable.
  • Army single enlisted soldier is paid $44,644.28 if he lives in zip code 98607 will possibly pay $4453.50 in taxes.  The word possibly is used because some military benefits were moved to the tax free side of the equation recently which has not been accounted for in this example.
  • The average base salary for teachers is $55,100 with a low of $42,925 in Mississippi, according to 2015-16 data from the National Center for Education Statistics (the most recent federal data available) and they pay taxes as well.

Obviously, there is a huge incentive to having unemployment or workman’s compensation, and working in the underground.  But the soldier, the teacher, the postman are the people who are paying the taxes that give the 44% of the country’s population that tax free ride.  Furthermore, it cannot be emphasized enough….100% of the inflation that has eroded their purchasing power at the grocery store is due to Congress spending more money than they have in tax revenue. If we cannot afford to spend 17 years in a war in the Middle East, we should come home.  We should tell them we have no more money to spend on their country and they will  have to figure it out.  

I am not sure we can honestly pretend we have secure enough borders that will keep the terrorists in their territory in the war of ideologies with ISIS and the US any longer, and it is not just ISIS.  MS13, saboteurs and whatever gangs drive by in Chicago targeting innocent citizens are equally as threatening.  We need to focus here at home where the very fabric of our freedom and way of life is threatened by those, immigrants and citizens alike, who think freedom means a free ride.  

If the concern is about the lower 20% of the wage earners in this country, the best thing Congress can do is light a fire under the IRS to collect those unpaid taxes. That will lighten the load for everyone PLUS pay for the benefits everyone wants.  It will also slow inflation and IF Congress can restrain themselves from over spending, it might even deflate the cost of living for us all by reducing not only the budget deficit but attacking that national debt.   

“The taxpayer is the new permanent underclass.”
Andrew Wilkow


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