Dynamic tax model v.2

After 2,5 years in the US I think I can understand now why there is a significant gap between poor and rich people. And why this gap only increased year by year. In my humble opinion it’s because of tax model that is used now.

Analysis of the Current U.S. Tax Structure and a Proposal for a Dynamic Redistribution Model

The United States currently operates under a progressive federal income tax system consisting of seven brackets:

• 10% → $0 – $12,400
• 12% → $12,400 – $50,400
• 22% → $50,400 – $105,700
• 24% → $105,700 – $201,775
• 32% → $201,775 – $256,225
• 35% → $256,225 – $640,600
• 37% → $640,600+

It is important to note that these rates apply only to federal taxation, excluding state and local taxes.

Structural Imbalance: Income vs. Asset Growth

While the progressive model is designed to ensure fairness, its long-term outcomes suggest structural inefficiencies—particularly when comparing income growth to asset prices:

• 1980:
  Average salary: ~$30,000
  Average home price: ~$90,000 → 3× income
• Today:
  Average salary: ~$70,000
  Average home price: $400,000+ → 6× income

This divergence highlights a critical issue: income growth has not kept pace with asset inflation, particularly in housing.

Higher-income individuals have been able to accumulate real estate and other appreciating assets, allowing wealth to compound over time. In contrast, lower-income households often lack access to asset ownership or must allocate a disproportionate share of their income toward housing. As a result, the financial benefits of ownership are frequently delayed until late in life—or even deferred to future generations.

Economic Implications

This dynamic suggests a broader systemic concern:
wage growth is not aligned with economic productivity or asset appreciation.

From a macroeconomic perspective:

• Higher disposable income → increased consumption → economic expansion
• Lower disposable income → reduced consumption → economic stagnation

Thus, insufficient wage growth in lower and middle income groups can suppress overall economic activity.

Proposed Solution: A Dynamic Tax Model

To address these imbalances, a dynamic tax framework can be introduced. The objective is to:

1. Expand the number of tax brackets for greater granularity
2. Encourage upward income mobility
3. Align tax incentives with improvements in income distribution

Proposed Tax Structure (10 Brackets)

• 5% → $0 – $12,000
• 7% → $12,000 – $24,000
• 11% → $24,000 – $40,000
• 13% → $40,000 – $65,000
• 17% → $65,000 – $100,000
• 19% → $100,000 – $150,000
• 23% → $150,000 – $225,000
• 29% → $225,000 – $350,000
• 31% → $350,000 – $600,000
• 37% → $600,000+

Target Distribution of Taxpayers

A balanced economic structure in developed economies typically follows this distribution:

• ~30% lower-income
• ~50–60% middle-income
• ~10–20% upper-income

The policy goal is to shift a significant portion of taxpayers into middle-income brackets (particularly the 13%–19% range), thereby strengthening the middle class.

Transitional Challenge

Achieving this requires a substantial increase in incomes among lower-income taxpayers—potentially in the range of +$15,000 to +$75,000 annually for tens of millions of individuals. While this appears ambitious, it can be supported through aligned incentives.

Incentive Mechanism for High Earners

A key feature of the model is conditional tax reduction for top earners, tied directly to improvements in income distribution.

Proposed adjustments to upper tax brackets:

• 23% → 22%
• 29% → 25%
• 31% → 27%
• 37% → 30%

These reductions are not automatic—they are earned through measurable economic progress.

Performance-Based Tax Adjustment Rule

A simple and transparent mechanism can be defined:

For every 10 percentage point reduction in the lower-income population, reduce the top tax rate by 3 percentage points.

Example Scenario

Starting Year:

• Lower-income: 59%
• Middle-income: 32%
• Upper-income: 9%
• Top tax rate: 37%

End of Tax Year:

• Lower-income: 49%
• Middle-income: 42%
• Upper-income: 9%

Outcome:

• Reduction in lower-income share: 10 percentage points
• Adjustment: Top tax rate reduced from 37% → 34%

Policy Advantages

This model introduces several key benefits:

• Performance-based taxation
  Tax reductions are tied to measurable improvements in income distribution
• Economic alignment
  Encourages employers to increase wages, strengthening purchasing power
• Political feasibility
  Tax reductions for high earners are justified by broader societal gains
• Middle-class expansion
  Creates structural incentives to grow and stabilize the middle-income population

Long-Term Adjustment Path

A gradual reduction framework for the top tax rate may look as follows:

• 59% → 54% → Top rate: 35.5%
• 59% → 49% → Top rate: 34%
• 59% → 44% → Top rate: 32.5%
• 59% → 39% → Top rate: 31%
• 59% → 30% → Top rate: 30% (floor)

This ensures a controlled and sustainable transition, avoiding abrupt fiscal changes while maintaining incentives for economic improvement.

Conclusion

The proposed dynamic tax model reframes taxation as a performance-driven system rather than a static redistribution mechanism. By directly linking tax policy to income mobility and middle-class growth, it aims to create a more balanced, resilient, and economically productive society.