Transforming Federal Income Taxes: Could we agree on a small tweak to increase economic mobility and lift millions out of financial strain?
We have an economic mobility problem in the USA, with nearly 41 million living below the federal poverty threshold.(1) It’s only 12.5 percent of our population,(1) they say. But for one of the wealthiest nations on earth, it’s 12.5 percent too high.
We often talk about changing the tax system to improve this situation. Those on the left want to raise taxes so that government subsidies can increase. Those on the right push back that handouts are not a sustainable fix.
What if I told you that a tiny tweak to our tax system could be so good it would be hard for anyone to argue with?
Better yet, it’s not a handout.
This slight shift could also lift the federal income tax burden off half of America’s tax filers, without breaking the bank.
That’s right. There are no overall tax increases, just a tiny shift.
Would you get behind such a change?
It sounds too good to be true, but the numbers tell a different story.
Let me explain.
“I am for doing good to the poor, but I differ in opinion of the means. I think the best way of doing good to the poor, is not making them easy in poverty, but leading or driving them out of it.”
Benjamin Franklin, “On the Price of Corn, and Management of the Poor” (1766)
Our current tax system is progressive, meaning tax rates rise with income, so the wealthy pay a larger share of taxes, and by most measures, it’s working as designed. Yet, for millions of Americans earning less than a living wage, even a tiny tax burden can feel like a boulder on their backs.
Here’s the good news: a modest change could remove the federal income tax part of that burden for the bottom half.
The cost? A fraction of what the Government Accountability Office estimates the federal government loses to fraud each year.
It could even be accomplished with a tiny shift among existing taxpayers, a shift I believe many would accept.
Let’s dive into the data, challenge some assumptions, and explore how a slight shift could make a big difference.
The Current System: Fair, but Room for Empathy
Our federal tax system is built on progressivity: those who earn more pay more.
In 2022, the top 1 percent of earners (making over $663,164) paid 40.4 percent of all federal income taxes, despite earning just 22.4 percent of the income reported on tax returns. Meanwhile, the bottom 50 percent, earning $50,339 or less, paid 3 percent of total federal income taxes, even though they earned 11.5 percent of the income.(2)
On paper, this seems fair: the rich shoulder more, while the rest contribute less.
But fairness is also about impact.
For the bottom 50 percent, that 3 percent tax share amounts to $63.2 billion, about $822 per return, which could mean the difference between affording rent and falling behind. That figure comes from IRS data, which leaves out the refundable part of tax credits, so the Tax Foundation says it overstates what the bottom half pays.(2) It is still what the exemption itself would cost, before any phase-out.
Many of these families earn less than the MIT-calculated living wage, which accounts for basic needs like housing, food, and healthcare.
In many regions, $50k before taxes doesn’t stretch far enough to cover the essentials and the taxes on it.
The Problem: Taxes on Those Who Can’t Afford Them
The MIT living wage calculator estimates the income needed for a modest but sustainable life. For a single adult, it is just over $40,000 in low-cost states like West Virginia and Arkansas and is over $60,000 in states like Hawaii and Massachusetts.(3)
The bottom 50 percent of earners, with a maximum income of $50,339, often fall short, especially in high-cost regions or for families with dependents. Yet, many still pay federal income taxes, chipping away at tight budgets.
For millions of workers in the bottom half, this is a daily struggle.
Imagine working full-time, only to find that you can’t afford groceries and rent after taxes. I believe that’s the reality for many working families, and it’s a problem our tax system could help solve.
The Solution: Exempt the Bottom 50% from Federal Income Taxes
What if we exempted these earners from federal income taxes? They would continue to contribute to Social Security and Medicare, but not be required to pay additional income taxes. To be fair to people just above the line, the exemption would need to phase out gradually rather than stop at $50,339, so no one owes thousands more for earning one more dollar. That phase-out would add to the $63.2 billion cost, by an amount that depends on how wide the phase-out range is.
The exemption itself would mean forgoing $63.2 billion in tax revenue, a drop for a government that spends trillions annually.
For many in the bottom 50 percent, however, it would make a real difference. That extra money could help with childcare, cover a car repair, or start a small emergency fund, which builds stability.
But how do we make up the revenue? There are three straightforward options:
- A Tiny Tax Shift for the Top 50%
A mere 3.05 percent increase in income taxes for the top half of earners could cover the entire $63.2 billion for the exemption itself.(2) We are not talking about 3 percent more taxes on their income. We mean a roughly 3 percent increase in the taxes they pay. If they were paying $1,000 in taxes, they now pay about $1,030! The top 50 percent pay an average income tax of $27k, which would increase by about $820 to $27.8k. For a single person making $100,000, it works out to about $450 more per year, under $40 a month. The average effective tax rate of the top 50 percent is 15.9 percent.(2) It would rise to 16.4 percent. For the highest earners, it adds less than 1 percent of income. For many in the bottom 50 percent, it’s a real lifeline. Wouldn’t Americans be willing to spend an extra $40 a month (at $100,000) or about $70 a month (the top-half average) to help those who are struggling most? - Cut Waste, Not Programs
Alternatively, we could look inward. Consider the billions lost to fraud each year, as estimated by the Government Accountability Office, along with the improper payments it has long flagged.(4) Recovering part of the fraud losses could help cover the exemption and reduce the need for tax hikes. - Cut tax breaks concentrated among high-income households
The State and Local Tax (SALT) deduction sheltered $104 billion in federal income taxes in 2017, by a Treasury estimate.(5) These deductions ended up subsidizing local and state taxes. The Tax Cuts and Jobs Act (TCJA) of 2017 imposed a $10,000 cap on the deduction, significantly lowering costs to about $21 billion in 2019, down from $100 billion in 2017 on the same Joint Committee on Taxation estimate.(6) At the time of writing, the cap was set to expire after 2025, when the revenue loss would rise to $139 billion.(6) These tax benefits are concentrated among high-income households, especially in high-tax states. Eliminate SALT deductions and save at least $21 billion, or as much as $139 billion after 2025 under the law at the time of writing. (Update: in July 2025, after this post, Congress raised the cap to $40,000 for 2025, rising 1 percent a year through 2029, phasing down for filers earning over $500,000 and returning to $10,000 after 2029.)
Why It’s Feasible and Fair
This idea isn’t a pipe dream. It’s grounded in practical realities and aligns with values we already hold. Here’s why it can work:
Budget Perspective:
Picture your household budget.
If you could help a struggling neighbor by spending just 1 percent more on groceries each month, say, an extra $10 out of a $1,000 budget, wouldn’t you do it?
That’s the scale we’re talking about here.
The $63.2 billion for the exemption itself is about 1 percent of the roughly $6.3 trillion the federal government spent in 2022.(7)
This isn’t about slashing programs or raising taxes through the roof. It’s about reallocating a tiny sliver of an enormous pie to make a massive difference for millions.
The federal government already juggles far larger sums without blinking. Think of the $751 billion the Defense Department spent in 2022 alone.(7) This is less than a tenth of that.
Economic Boost:
Money in the hands of low-income families doesn’t sit idle. It moves.
I expect most of that extra $822 a year per return, on average, would not vanish into savings accounts or stock portfolios. Much of it would go to local businesses. Think grocery stores stocking more shelves, repair shops fixing more cars, or daycares hiring extra staff.
Economists call this the multiplier effect: when people spend, it creates a ripple of activity that boosts communities from the ground up.
It’s relief. And, it’s a grassroots stimulus that strengthens the economy where it’s needed most.
I think increasing disposable income for lower earners fuels demand more effectively than tax cuts for the wealthy. That is because tax cuts for the wealthy don’t always turn into spending, while tax cuts for lower earners are more likely to, especially when the economy is weak.
Moral Clarity:
We’ve already bought into the idea that everyone deserves a living wage. It’s why we debate minimum wage laws and celebrate companies that pay fairly.
So why are we taxing people who don’t even reach that threshold? It’s like charging someone for water use because they have a well, even when it has run dry.
Exempting the bottom 50 percent isn’t about handouts but consistency with our principles. If we agree that $50k isn’t enough to live on in many parts of the country, why pile on a tax burden that pushes people further underwater?
This is not a handout.
It’s money they earned.
They are not slacking off. They continue to contribute to Social Security, Medicare, and sales taxes.
This is about aligning our tax policy with the values we claim to uphold, fairness, opportunity, and a baseline of dignity.
The Pushback: Addressing the Critics
No change comes without objections, so let’s tackle the big ones head-on:
“It’s Unfair to the Wealthy”:
Critics might argue that the top 50 percent already carry the load, paying 97 percent of federal income taxes.(2)
Adding a 3 percent increase feels like piling on, right?
But let’s break it down.
For someone earning $100,000, that’s about $40 a month, less than many people spend on takeout coffee.
For a millionaire, it’s a drop in the bucket. The top 1 percent had a 26.1 percent effective tax rate in 2022.(2) This tweak would raise it only to 26.9 percent.
Now compare that to a single worker scraping by on $30,000: more than $1,000 in tax relief could cover a month’s rent or a semester of school supplies.
The tax system does a decent job of creating tax policies that favor the wealthy, whether through SALT deductions, accelerated depreciation for heavy luxury SUVs bought through a business,(8) or many others.
The effective tax rate of the wealthy top 1 percent is a relatively low 26.1 percent(2) (the top federal income tax rate is 37%, but it applies only to the slice of income in the top bracket, so part of that gap comes from the brackets themselves and the rest from breaks).(8) Some of these breaks were meant to encourage certain industries and purchases. But, in practice, I think they tend to outlast their intended use and are gamed by those who can spend more time taking advantage of the complex code.
Fairness isn’t about who pays what percentage, it’s about who can bear the burden.
The wealthy won’t miss the additional contribution. Low earners feel every dollar.
This tweak recognizes the capacity of those at the top to uplift those far behind.
“Foreign Aid Matters”:
Some will say any spare dollars belong in foreign aid instead, because it’s a lifeline for vulnerable people worldwide, and pulling back could hurt our global standing.
They’re not wrong. Foreign aid is crucial, and the tens of billions of dollars we spend on it each year do real good.(9)
But here’s the counterpoint: when millions of Americans struggle to afford basics like food and housing, shouldn’t we prioritize our backyard first?
This isn’t about isolationism or abandoning allies. It’s about balance.
We don’t have to choose. Stopping part of the $233 billion to $521 billion that the Government Accountability Office estimates the federal government loses to fraud each year(4) could help cover the gap.
My mother was charitable, feeding the poor when we couldn’t predict where our next meal would come from. I believe the American people are among the most generous in the world. The government aid programs are not the only way we have to help the poor around the world.
Charity starts at home, and a stronger domestic foundation lets us help others from a place of strength.
“It’s a Slippery Slope”:
The loudest skeptics might warn that exempting the bottom 50 percent opens the door to endless tax breaks, next it’ll be the bottom 75 percent, then no one pays taxes, and the system collapses.
It’s a fair concern, but this isn’t a free-for-all.
This proposal is targeted and data-driven, pegged to the bottom half of earners, a line that falls within the range of MIT living wage estimates, not some arbitrary line.
We’re not tossing out the tax code or handing out blank checks. We’re fine-tuning a specific pain point backed by economic reality.
Slippery slope arguments assume we can’t draw lines, but we already do. Think child tax credits or mortgage deductions.
This is just another deliberate adjustment, not a radical overhaul.
A Small Step, a Giant Leap for Fairness
Our tax system is fair by design, but could be improved in practice.
Exempting the bottom 50 percent from federal income taxes is empathetic.
It acknowledges that those below a living wage shouldn’t be taxed deeper into hardship. And with options to fund it through a tiny tax tweak or by tackling waste, it’s practical.
So, here’s the question: If we can lift millions out of financial strain with a change whose core costs about 1 percent of the budget, why wouldn’t we?
Let’s rethink fairness and our community obligations, considering the lives it touches.
Reference Sources
(1) https://www2.census.gov/library/publications/2024/demo/acsbr-022.pdf
(2) https://taxfoundation.org/data/all/federal/latest-federal-income-tax-data-2025/, https://taxfoundation.org/data/all/federal/2022-tax-brackets/ (2022 brackets and standard deduction)
(3) https://livingwage.mit.edu/states/54 (West Virginia), https://livingwage.mit.edu/states/05 (Arkansas), https://livingwage.mit.edu/states/15 (Hawaii), https://livingwage.mit.edu/states/25 (Massachusetts)
(4) https://www.gao.gov/products/gao-24-105833
(5) https://taxpolicycenter.org/briefing-book/how-does-federal-income-tax-deduction-state-and-local-taxes-work
(6) https://bipartisanpolicy.org/explainer/how-salt-may-shake-up-the-2025-tax-debate/
(7) https://en.wikipedia.org/wiki/United_States_federal_budget
(8) https://www.irs.gov/filing/federal-income-tax-rates-and-brackets (tax brackets), https://www.irs.gov/publications/p946 (heavy SUVs)
(9) https://www.everycrsreport.com/reports/R40213.html
This is the same independent financial analysis I bring to higher education in my book, We Need To Talk About Higher Education.