A Tale of Two Tax Cuts

by Lisa Longo, 2/9/15

“Tax cuts to the rich create jobs”. “Tax cuts for the working poor and middle class stimulate the economy”. Only one of these is true, and it is time to figure out which. And we can, using some basic math.

Is taxing the rich socialism? Is it “un-American” to ask the rich to pay more taxes? Or is income inequality at the root of our economic problem? And how can we know which is the “right” theory? On the one hand you have Democrats calling for an increase to the minimum wage, affordable health care for all and an increase in both the benefit and wage base of the Social Security system as a method of putting more money on “Main Street” to stimulate the economy. On the other side you have Republicans insisting we give more money to “Wall Street” and just saying no to everything until they get their way.

In order to decide who is really “right”, I decided to do some math. I find that when I can break an argument down to mathematical components it provides useful data to help me understand the issues better.

Here are some computations and assumptions for this problem:

An average family needs to make approximately $4,000 per month, net of taxes to cover all expenses. That comes to $23.08 per hour net, which is $27.69 gross for a base hourly wage if we assume average taxes paid equal 20%.

That is the minimum wage at which a person does not “need” any assistance to pay for living, insurance, food, transportation and health care. It does not include saving for retirement, vacations or other expenses that are “discretionary”, for example vacations, gifts, going out to dinner or the movies, buying clothes or getting your hair cut or nails done. And forget about getting sick and not being able to work, republicans don’t want paid sick leave either.

Now, let’s compare discretionary income and how taxes work, and how a tax cut or increase impacts different income levels:

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