Tax Reform.
Issue:
The United States income tax is governed by a monstrous set of laws and regulations that no one person can possibly read or comprehend in its entirety. Factors contributing to its vexing complexity include:
Deception:
The U.S. Congress and President continue to tweak the income tax as if this alone will bring sense and equity to a terribly inequitable system. This approach is deception because only a complete replacement of the current income tax code can achieve a just system. Current proposals by 2016 presidential candidates and various tax-reform advocacy groups make some good suggestions toward reforming the income tax, but none do so in an equitable fashion, and none take on all the special interests that have further corrupted income tax law.
Reality:
The U.S. income tax code is beyond repair. It must be discarded wholesale in favor of a simple, fair and cost-effective code.
Solution:
This essay puts forth a modest, effective proposal for replacing the current income tax while eliminating other taxes and streamlining the rest.
A fair society turns a blind eye to special interests and accords everyone the same responsibilities and benefits. What of the arguments that such a tax system would be unfair to those who work or work harder than others to make a living? This system is preferable to our current code and preferable to anything else currently proposed precisely because:
End Note:
Any tax code that requires accountants, lawyers and fiduciary wizards to understand and which is punitive by virtue of applying different rules to different types and levels of income exerts a tremendous drag on the economy, creates resentment and encourages manipulation and corruption of the system. This proposal eliminates all of these concerns and establishes a universal, easily-understood and eminently fair taxation on everyone, both as individuals and as businesses.
The people of the United States, whether individually or as organizations (corporations, institutions etc.) have suffered through decades of income tax hell. Only a completely new income tax that embodies an easily understood, progressive yet equitable method of taxation will have the respect and support of the people upon whom it is thrust.
This essay will be refined as comments and suggestions warrant.
What Will My Tax Return Entail?
That's it. No itemization, no deductions, no schedules, minimal (if any) documentation required. For many, a simple invoice from the government will do (subject to taxpayer review). In any case, individual tax return preparation/verification should take a matter of minutes, not hours or days or weeks; for businesses and institutions the process will see a similar reduction in preparation
Essay published December 31, 2015
The United States income tax is governed by a monstrous set of laws and regulations that no one person can possibly read or comprehend in its entirety. Factors contributing to its vexing complexity include:
- Size: it is far larger than the U.S. Uniform Commercial Code, which lays the groundwork for virtually all business transactions in the United States.
- Exemptions: it is rife with special favors and exemptions for businesses and individuals based on nothing so much as the favoritism curried through campaign donations and lobbying efforts.
- Inequity: it unduly penalizes many while favoring the few and is highly unfair, regressive and costly.
- Self-sabotage: it encourages manipulation and cheating to minimize tax obligations, all at the expense of the nation's fiscal health and economic progress.
Deception:
The U.S. Congress and President continue to tweak the income tax as if this alone will bring sense and equity to a terribly inequitable system. This approach is deception because only a complete replacement of the current income tax code can achieve a just system. Current proposals by 2016 presidential candidates and various tax-reform advocacy groups make some good suggestions toward reforming the income tax, but none do so in an equitable fashion, and none take on all the special interests that have further corrupted income tax law.
Reality:
The U.S. income tax code is beyond repair. It must be discarded wholesale in favor of a simple, fair and cost-effective code.
Solution:
This essay puts forth a modest, effective proposal for replacing the current income tax while eliminating other taxes and streamlining the rest.
- TAX RATES: All individuals would be taxed at the same percentage according to the dollar level tiers of their income. For example (amounts suggested are only for illustration):
• The first $50,000 of everyone's income would be tax free.
• The next $5,000 of everyone's income would be taxed at a nominal rate of 1%.
• The next $5,000 would be taxed at a rate of 2%
• Tax rates would be continue to be graduated in this fashion to a cap of 95% on incomes of $500,000. Income earned beyond that point would be taxed at 100%, with a 5% credit available for application against future years when income falls below the cap level. Taxpayers in this bracket could instead elect to invest this 5% in a business development fund which would provide zero-interest financing to small start-up businesses and non-profits, with tax-free dividends paid out to investors.
Rationale: Taxing each tier of income at the same rate across all taxpayers achieves absolute equity in taxation and provides a progressive (non-regressive) tax obligation. The more you make, the more you pay, but never any more than anyone else for each income tier. The computing power now available, which was unknown when the income tax was first formulated, will readily accommodate this incremental step-up of income brackets and could be refined to almost any degree, such as taxing each $1,000 at a fractionally higher rate. This would serve well to discourage people and businesses from manipulating their income to avoid the next highest tax bracket, which today involves a considerable jump in tax liability between brackets. A simple formula could be used by taxpayers to estimate their eventual tax payments throughout the year (as income is received); this formula would be available as an online interactive application as well as in print. See End Bar in this essay for a proposed tax return example. - INCOME TAXED: All income would be taxed in this fashion, whether earned (through wages, salaries, self-employment, stock options or returns on investments), inherited or gifted.
Rationale: Income is income. Arguments can be made for treating different types of income differently, such as taxing income earned for labor at a lower rate than that earned through investment (or vice versa), but the point of this proposal is to step completely away from a system wherein various ideologies use the income tax code to advance their own particular values. - DEDUCTIONS/EXEMPTIONS: No deductions or exemptions would be offered for any reason.
Rationale: Deductions are inherently biased in favor of those whose own special interests - whether they include a home investment, business investment or charitable contribution - manage to curry favor with lawmakers. Deductions are welfare handed out to special interests at the expense of the taxpaying population. The loss of deductions and exemptions would free everyone from the tyranny of income tax complexity and allow for the unbridled pursuit of income, and hence productivity and spending, without regard for how it would affect their tax rates. - TAX CREDITS: set percentages of taxes paid in each income tier would be credited to each taxpayer as follows:
• Social Security, providing automatic funding of each individual's Social Security account;
• Medicare, providing automatic funding of each individual's health insurance; and
• Investment account, providing automatic funding of a personal investment account (separate from Social Security) that the taxpayer could draw on to invest to purchase collateral (homes, land, vehicles, appliances, furniture etc.), start or invest in business ventures whether their own or those of others or those initiated by governments. This would serve to stimulate the economy, with repayment to the government as a no-interest loan on a generous schedule. If invested in a business that fails to produce returns within a pre-determined period, say three years, the outstanding loan amount would be repaid by the taxpayer through an increase in their overall tax rate on the same schedule as the loan terms.
Rationale: The U.S. Treasury has the resources to become a no-cost lender to the public, perhaps the most effective type of economic stimulus available. Individuals would still be able to pursue other types of lending (through banks etc.) but this would open up investment and business opportunity to all taxpayers and generate economic investment and activity in both the private and public sectors. It would also make significant inroads on the problem of the nation being saddled with financial institutions that are "too big to fail" and which have increasingly crowded many borrowers out of the market. - BUSINESS TAXES: Businesses would be taxed in a similar fashion as individuals, though at higher rates.
Rationale: Businesses are not people, contrary to legal precedent that ludicrously accords them that dignity. They benefit more handsomely than individuals from society's largess, and taxing their income at a higher rate targets only the business, not the individuals that make the business. Business thrives on competition; successful businesses will be those that can pay increasingly higher taxes on increasingly higher incomes, thereby contributing in more meaningful ways to civic health as remuneration for the benefits they receive from society. - OVERSEAS TAXES: U.S.-based companies would be taxed on all income earned worldwide. To prevent their relocation overseas to avoid taxation (a process commonly referred to as "tax inversion"), taxes levied by overseas nations on verified foreign (versus U.S.) profit would be credited toward the taxes paid to the U.S., but not beyond the tax imposed by the U.S. on U.S. profits (making this a non-reductive tax against the U.S. treasury). Non-U.S.-based businesses would be taxed on all income earned in the U.S. without regard to their overseas tax liabilities, expenses or investments.
Rationale: Corporations currently relocate overseas to avoid the taxes imposed by the U.S. on their overseas activities when and if that money is transferred into the U.S. This encourages companies to retain wealth overseas, depriving the U.S. of tax revenue. Assuming these corporations ultimately pay full taxes on U.S.-generated profits, and are likewise paying taxes to foreign nations based upon their profits in those territories, this proposal would allow them to transfer funds to the U.S. without penalty. As it stands now, companies have less incentive to maintain their headquarters here or reinvest overseas profits in U.S. business activity due to this double-taxation. For any company, whether U.S.-based or not, to shield income from the taxpayers of the United States (i.e., the U.S. Treasury), however, is theft. And although corporations are chartered by the states and operate at their pleasure, it is extremely rare for states to pull corporate charters even when blatant criminal activities or malfeasance, including intentional tax evasion, are committed. See the essay "Rotten Apple" (this essay not yet available). - EMPLOYEE TAXES: Businesses would be freed from paying any share of employee taxes, through the mechanism listed in #4 above, "Tax Credits".
Rationale: Given that wage earners would enjoy far lower tax rates under this system, employees could afford to pay their own Social Security and Medicare taxes, which in an ideal world would provide for universal, single-payer health care (see essay "Health Insurance"). This would free businesses of considerable expense, both in terms of direct payout of funds and greatly reduced administrative costs.
• Social Security taxes would be levied on all income, removing the current cap on the taxable amount which is regressive, inequitable and counter to the long-term health of the trust fund. The Social Security Trust Fund would pay out benefits commensurate with lifetime Social Security tax payments. A minimum payout designed to assure a comfortable retirement would be available to all, with a maximum benefits cap applicable to all. See the essay "Social Security Solvency".
• Medicare taxes would be levied on all income with free healthcare available to all, except for elective surgeries and treatments that are not concerned with health (such as vanity cosmetic surgery). It would operate on the same effective model as Social Security (again, see the essay "Health Insurance"). Individuals would remain free to purchase supplemental insurance. - EXISTING AUXILLARY TAXES: All sales taxes, consumption taxes, value-added taxes, use taxes and special taxes would be eliminated nationwide. The Alternative Minimum Tax would be scrapped. Only property taxes would remain in place.
Rationale: Governing bodies are always looking for cash. Under the current code, which is unpredictable year-to-year and makes income planning difficult and unnecessarily costly for businesses and individuals, these government entities constantly cast about for other sources and methods for taxation. Taxing authorities nationwide are increasingly inhibited by tax limitation laws and initiatives, leading to complex and contorted - and usually regressive (think sales and other consumption taxes) - taxes of various design that are usually applied unequally and inefficiently. These are universally unfair in their misapplication and by nature of the inherent value judgments and special interests that come to bear upon these laws. Instead, the federal collection of taxes through the mechanisms of this proposal would be disbursed to states and localities as revenue sharing from the federal government based solely upon real (census versus registered voters) population. Their need for tax revenue beyond revenue sharing could still be fulfilled by local property tax laws, but this would remove tremendous pressure from personal property tax levies and could provide some relief for commercial property as well. Religious organizations would continue to receive non-taxable status on houses of worship and facilities directly related to charitable activities, but would not be allowed tax breaks on for-profit properties. Non-profit organizations would be taxed in a similar fashion as religious entities. Revenue sharing is currently far out of balance, with some states receiving more than they pay in and others less. Basing revenue sharing on population is equitable, and the share to states and other governing units would be enhanced due to increased revenue at the federal level. Why tax property and not other goods and services? Property is a privilege, in the sense that we are all one planet but have chosen to apportion parts of it to the sole benefit of various individuals. Whether utilized for residences, businesses or natural resource extractions, it must be taxed on the basis that it ultimately belongs to us all - and all should benefit from its use and exploitation. Why not a "luxury" tax on items such as private yachts the size of small towns? Those purchases help contribute to the economic engine of our society. Why not a tax break for purchases beneficial to society, such as energy-efficient products? The availability of those items should be made attractive through law, not through coercion.
A fair society turns a blind eye to special interests and accords everyone the same responsibilities and benefits. What of the arguments that such a tax system would be unfair to those who work or work harder than others to make a living? This system is preferable to our current code and preferable to anything else currently proposed precisely because:
- It is capable of graduating tax rates to any degree, whether by dollars or thousands of dollars. In this way everyone pays the same rate as everyone else on all levels of income.
- By graduating rates more finely, the incrementally increasing rates of taxation based solely on income tiers would not discourage individuals or business from working or working harder or more inventively to increase their income, as each step (tier) of higher taxation would be minimal relative to the preceding tier. The actual tax rate for the "ideal" income (currently about $75,000 annually) would be far lower than it is today (10%, using the amounts shown in the example in step #1). Income earned above that amount would eventually approach and then exceed today's top rates yet still afford everyone the ability to enjoy their wealth and the fruits of their labors, whether physical or intellectual. It is far less painful to pay increasing rates on only your upper tiers of income, rather than on all of it.
- Income is taxed in accordance with laws that would apply equally to all, and is taxed as a benefit of operating within a society upon which we all depend for our income. Higher levels of income owe a greater debt to society because it is ultimately society's patronage that enriches people more than any individual's personal efforts, whether individually or as part of an organization, no matter how creative, innovative or productive.
- It is extraordinarily simple, allowing everyone to understand the code and appreciate that we are all being treated and taxed the same.
End Note:
Any tax code that requires accountants, lawyers and fiduciary wizards to understand and which is punitive by virtue of applying different rules to different types and levels of income exerts a tremendous drag on the economy, creates resentment and encourages manipulation and corruption of the system. This proposal eliminates all of these concerns and establishes a universal, easily-understood and eminently fair taxation on everyone, both as individuals and as businesses.
The people of the United States, whether individually or as organizations (corporations, institutions etc.) have suffered through decades of income tax hell. Only a completely new income tax that embodies an easily understood, progressive yet equitable method of taxation will have the respect and support of the people upon whom it is thrust.
This essay will be refined as comments and suggestions warrant.
What Will My Tax Return Entail?
- Taxpayers will list all sources and amounts of income in an interactive online form or on a one-page, pre-printed paper form. For most, this information will be available for download online, drawn from the government's massive computer databases on our lives but supplemented where necessary (or disputed) by taxpayers.
- An online calculator (also available in print) will provide a fast and simple formula for determining tax liability.
That's it. No itemization, no deductions, no schedules, minimal (if any) documentation required. For many, a simple invoice from the government will do (subject to taxpayer review). In any case, individual tax return preparation/verification should take a matter of minutes, not hours or days or weeks; for businesses and institutions the process will see a similar reduction in preparation
Essay published December 31, 2015