An idea on income distribution and tax justice.

The Wall Street Journal points out that "Income-Inequality Gap Widens."

The wealthiest 1% of Americans earned 21.2% of all income in 2005, according to new data from the Internal Revenue Service. That is up sharply from 19% in 2004, and surpasses the previous high of 20.8% set in 2000, at the peak of the previous bull market in stocks.

The bottom 50% earned 12.8% of all income, down from 13.4% in 2004 and a bit less than their 13% share in 2000.

This income distribution is based largely on the existing financial institutions and the IRS tax code which the individual creation of wealth (wages) rather then the forms by which that created wealth is siphoned off and given to the rich and powerful (investors.)

Income distribution is a result of both the creation of income and the way existing institutions decide to distribute that income. Income taxes should be lowest on those who directly generate social value, and highest on those who simply take a share of the value created by the workers who actually create it. Taxes support the institutions that investors use to extract their income from those who actually create it.

Income is not created until a worker, somewhere, creates it. The worker should always have first call on the income he or she creates. Socially we normally define that income as wages or commissions.

His ability to create income and the total amount he can create is influenced by the both history (as institutionalized in society) and by contributions of capital and creative applications of social conventions and institutions of both capital and workers. There is value in these speculative functions, but only after the final consumer of those goods and services actually buys it in a fair market transaction.

Always remembering that the income was created by the worker, the individuals who aided in its creation deserve a fair share. But fair is not "unlimited." The "worker" is the person who is operating in the direct line of the Value Chain of the organization. Only workers actually in the value chain of an organization create value. Everything paid by the worker to support management and investors on the value he actually creates is a tax on his work. There is no difference between a worker supporting management and a worker supporting government. Both are taxes that must be paid out of the value created by the worker. If the worker's productivity is not increased by more than the tax then the payment is not worth it.

Taxes should be lowest on those who personally create ultimate value as recognized by the final consumer. As the functions performed by the individual increase in social distance (think 'six degrees of separation') from the value chain that creates the product or service for the final customer, taxes on their income should increase because they are using existing social and governmental institutions more than those who directly create value within the value chain.

In short, when an investor hires a worker to create a product or service, the investor himself creates less value than the worker does, and he uses social institutions (employer-worker relationship, government creation of money as a standardized medium of exchange, legal enforcement of contracts, etc.) and has a greater responsibility to pay taxes to support those institutional entities than does the worker actually adding to the overall stock of social value.

As a measure of this, income taxes should be nothing on the lowest quintile, below average on the second quintile, average on the middle quintile, and the fourth quintile should pay the average plus the difference between what the second quintile pays and the average. Which, of course, means that the top quintile should pay the average rate, plus the amount of taxes not paid by the bottom quintile. This represents the degree to which their income depends on existing social institutions rather than on the actual value they themselves create. This equates the taxes paid both to the dependence on social institutions for the income and to the degree the effort of the worker actually contributed towards creating market-measured value for society.

This assumes that the costs of providing local social stability functions and local on-going economic infrastructure (police, judiciary, fire suppression education, etc.) which benefit everyone pretty much equally is paid mostly out of sales and property taxes.

Just a thought on value creation, income equality and taxes in a market society.