Poverty, the Brain, Tax Rates…. a Way to End Childhood Poverty?

brain

A new study links poverty to brain development.

The findings:

Screen Shot 2015-04-01 at 3.26.57 PM

I’m not an expert in brain science, so I will not attempt to evaluate the science. I’ll just note that the findings are based on correlation, not causation.

This findings mirror other findings linking poverty to reduced IQ.

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Let’s say that we prove that poverty negatively affects brain development.

Furthermore, let’s assume that the negative effects can be completely eradicated by increasing the wealth of those living in poverty.

The question then becomes one of wealth transfers: what tax rates would we need to give enough wealth to those living in poverty in order to eradicate the negative brain development effects?

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The Laffer Curve is a simple way to understand the trade offs between tax rates and revenue. The key insight of the curve is that there is some point at which tax rates are so high that they reduce tax revenue. For example, at a 100% tax rate, presumably no one would work, which would mean no revenues for government.

So, if you want to to raise taxes to fund wealth transfers, you want to make sure you stay on the “good” side of the curve (once you cross to the other side increased taxes do not increase revenue).

There’s not universal agreement on where the curve peaks, but estimates generally fall in the 50-70% range.

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There is much debate about how to calculate the number of adults living in poverty. Similar debates are had about the number of children living in poverty. Estimates are around 16 million children. Let’s assume this is roughly right and let’s also assume an average of two children per household.

That would be 8 million households with children living in poverty.

Let’s say we wanted to transfer $20,000 worth of wealth to each of these households, which would presumably lift most of these households out of poverty. For example, someone with children earning minimum wage probably makes around $20,000 a year post tax transfers, so this proposal would double her earnings.

To annually provide $20,000 in additional funds to 8 million households, we would need to raise an additional $160,000,000,000 (160 billion) in tax revenue per year.

Currently, the federal government raises ~3.3 trillion in taxes.

Raising another 160 billion would require a ~5% increase in federal tax revenue.

This is all back of the envelop math, but I think it’s roughly right. Let me know if I’ve made any major errors.

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A 5% increase in federal tax revenue will likely keep us on the “good” side of the Laffer Curve, especially if the revenue is drawn from both middle and high income taxpayers (the broader the base, the less likely any specific group is going to see their tax rates skyrocket, though the top 10% of tax payers produce the majority of income tax revenue, so the impact would likely be concentrated at the top).

And if you don’t think $20,000 is enough, make it $30,000; I think this would still keep us on the “good” side of the curve (based on eyeballing this somewhat outdated chart).

The next question would be how to transfer this wealth. Direct transfers could reduce the incentive to work, while wage subsidies would only impact those who do work. Direct transfers that are predicated on behavior (child attendance in school, etc.) could also be an option.

My preference would be to emphasize a mix of wage subsidies and conditional transfers, but I’m not an expert on the mechanics of wealth transfers, so others might come up with better ideas. There is probably some trade off between covering all households in poverty and incentivizing work. We may also want to keep the tax “reward” for having children from being too high.

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Given my philosophical beliefs, I’m generally inclined to raise taxes as high as they can optimally go. No one chooses her genes; no one chooses her environment; and I’m skeptical of any strong versions of free will. To paraphrase Obama: you didn’t build you.

So I find hard to justify why some people should have way more money than others.

My philosophical beliefs aside, there may be strong scientific reasons to conduct wealth transfers.

Ensuring everyone’s brains develop to their full potential seems like a good enough reason to me.

Lastly, given my lack of expertise in taxes and transfers, all feedback especially welcome.

One thought on “Poverty, the Brain, Tax Rates…. a Way to End Childhood Poverty?

  1. badgehs

    Neerav, bless you for your continued insistence that things should be better. And a joyous Easter to you and yours.

    Several questions to be asked here. The first: is it merely green paper that correlates with brains and learning? Or is it other things that come with money?

    For example, most people get their money through work. Work may bring a larger set of acquaintances, stories, vocabulary that the adult can share with the child. (One way to test this would be to check on full time graduate students with children).

    Also, is there not value merely to work itself? So that a parent with the most menial and lonely of a job still brings home certain a certain sense of esteem and pride and an ethic of continued work?

    So with that in mind, it behooves us to look at the supply side of transfer money. This money doesn’t come from thin air. It doesn’t come from cans in people’s back yards. Where will $160B come from?

    It won’t come from the 1%. Some of it might. But do the math and you’ll see they won’t get you very far. You’ll need to tax the top 40%.

    Where will the top 40% find the money to give?

    They’ll have to stop paying someone else.

    Who? Well, first, remember who the top 40% are. They are teachers, They are engineers. They are skilled machinists and health care workers.

    Perhaps they will contribute to this transfer by forgoing a few meals out. Not paying the cook, waiters, busboys at the local nice restaurant. Not paying the wholesale companies who supply the ingredients for the meals at that establishment. Not paying for truckers who bring them and the workers who prepare them and the farmers who grow them.

    Perhaps they will curtail visits to the local arts and crafts shops. The nice places that have popped up all over American streets like Columbus’ High street. Shops that in the ’70’s and ’80s were vacant, but now thrive off the spending of the 40%. And in turn provide jobs for the rest.

    Ooops, time for church. Perhaps they will give less there. Or to other charities?

    Like

    Reply

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