Version 1, Step 1
1. This is not necessarily new. Other people, smarter than me, have proposed similar solutions. I think my plan bears some resemblance to what Fred Thompson was proposing in 2007, although, this is simpler. I am also aware of American Solutions’ tax plan, allowing Americans to pay a 17% flat tax or use the current system.
2. This is would make life far more enjoyable, accounting less burdensome, and business more profitable. It would also make the government more accountable.
3. This is unlikely to gain traction without an outcry from the populous. Special interests will lobby themselves silly to prevent eRev’s Sensible Tax Plan (eRSTP) from seeing the light of day in Congress.
eRSTP for Individuals
Level 1
Level 1 income is not taxed (0%), and is based on the number of individuals in the household. Every individual counts as $7500 in Level 1 income.
Example: A family of
four making $30k would not pay any taxes. (A total of 0%)
Level 2
The next $30,000 (on top of the Level 1 amount) is taxed at 10%.
Example: A family of
four making $60k would pay $3000 in taxes. (A total of 5%)
Level 3
Any income beyond Level 2 is taxed at 20%.
Example: A family of
four making $150k would pay $21,000 in taxes. (A total of 14%)
Super-Rich Example: A
single man making $4.5 million a year would pay $895,500 in taxes. (A total of about 20%)
That’s it. No deductions. No credits. No government strings attached. No loopholes. Pure, simple and easy to calculate. You won’t need file drawers full of receipts, and you won’t need a CPA to decipher cryptic codes.
All income is treated exactly the same. First you tally what you made – the total of your employment, interest, capital gains, dividends, etc., and that gives you your starting number. Then, you figure out what you owe by separating your income into the three levels.
Level 1 Income – you pay nothing.
Level 2 Income – you pay 10%.
Level 3 Income – you pay 20%.
And you’re done. You didn’t even need fancy software to figure it out for you. For most people, this could fit on one sheet of paper.
eRSTP for Businesses
(Personally, I am in favor of eliminating taxes on businesses altogether. “The people” pay the bill one way or the other, so taxing businesses and individuals is, to me, an unnecessary complication. However, since I am a realist, I’m willing to concede that not everyone will understand why “rich” businesses should not be taxed, and thus, have included this section.)
The four step plan for
business owners.
1. Tally your income received.
2. Subtract your business expenses.
3. Run the remaining number (your profit) through the three levels. (Level 1 is a flat $50k for businesses).
4. Order pizza for everyone at the office.
Example: A small
business doing $200k in sales with $130k in expenses would log a profit of
$70k. This business would pay $2000 in
taxes, or 2.8%.
Big Business Example:
A Fortune 500 company doing $11 billion in sales with $5 billion in expenses
would log a profit of $6 billion. This
company would pay just shy of $1.2 billion in taxes, or about 20%.
The Fine Print
1. Non-profit entities do not pay any taxes.
2. Capital gains from the sale of a primary residence are not counted as income.
3. Gains and payouts from education or retirement investments are not counted as income (basically all of these accounts work like “Roth IRA” accounts currently do – after-tax income is inserted, and neither it nor any of its gains are subject to tax again, as long as they are used for their stated purpose).
4. Inheritance money from family members is not counted as income.
5. There may be other necessary fine print items I haven’t considered, but remember that the idea here is to minimize fine print.
Questions:
What about my
mortgage deduction?
What about it? This system will probably have you paying less in taxes to begin with, so the mortgage deduction is moot point. Forget it. (Take your tax savings from eRSTP and pay off your mortgage early, if you want an actual “deduction”).
What about charitable
deductions?
Now you can give to great causes with completely pure motives. And, under this system, it is likely that you’ll have more money to give. And this doesn’t account for the additional wealth we’ll create due to lower taxes and higher productivity.
Why do you think
special interests will resist eRSTP?
The current tax code is a maze of “favors” for various industries. eRSTP won’t favor anybody in particular (it favors everybody). This means that many lobbyists will be out of job, since they won’t be able to negotiate tax incentives for their industries.
What about taxes on
Social Security benefits?
See fine print item #3.
Is eRSTP fair?
Well, the poor receive the benefit of paying nothing, the middle class pay a little something, and the rich pay the most. Everybody gets their Level 1 income tax free, everybody is taxed on Level 2 income at 10%, and the dollars made at Level 3 get taxed at 20%. Businesses are in the same boat.
Does eRSTP address
Social Security and Medicare taxation? (FICA or Self-Employment tax)
Nope. We’re talking about income tax right now. Our government has promised itself into a bona-fide disaster when it comes to paying for Medicare and Social Security. This issue will have to be addressed separately. In the interests of simplicity, it might be possible to fiddle with the numbers a bit in eRSTP to include these entitlement taxes, but for now, I’d just like to take one step at a time. (It may actually be possible cover everything with the numbers I'm suggesting - more research needs to be done here).
Would eRSTP increase
taxes for anyone?
I suppose the one group for which eRSTP could result in
higher taxes would be those who make substantial money from non-retirement
investments (because eRSTP treats all income in the same way). It is difficult to say if there would be real
tax increases or breaks for the rich in this system – after all the layers of
reverse incentives, deductions, etc. were peeled back. No one would be taxed more than 20%, which I
imagine would be a welcome relief to the rich (particularly considering what the Democratic Party wants them to pay!). This would need to be researched further, and
the pros and cons weighed out by people who actually know what they are talking
about. I also believe that once eRSTP is put in place, we could work to reduce the Level 3 tax rate.
Will Congress resist
this plan?
(Muffled laughter.) My hunch is that many in Washington will object to the term “Sensible” as part of any legislation. It goes against the grain. eRSTP will make it difficult to Congress to “hide” taxes or to tax specific unpopular industries; they also won’t be able to offer special tax incentives for certain activities (which skew the free market). This would represent a major power shift – away from Congress to toward the people.
A piece of compromise legislation might be titled, “eRev’s Nearly Sensible Tax Plan,” which could add in some unnecessary complications and ambiguities, if those would help lawmakers feel better about the whole idea.
Will eRSTP collect
enough tax revenue to run the government?
Surprisingly, the percentages suggested in eRSTP are not that far different from what the government actually receives from people, after all the complicated deductions and loopholes and miscellaneous trivialities are accounted for. According to 2003 statistics, the average “rich” person was paying between 20-25%, and the upper “middle-class” person was paying in the mid-to-high teens as a percentage, and the “poor” were paying next to nothing. (See this article from the St. Louis Federal Reserve Bank ).
On this note, a friend of mine pointed out that it is impossible to collect enough revenue to “run the government” as it is run today. They’ll always want more. They’ll always have another “crisis” to throw your money at. The best idea is to set tax rates reasonably then require the government to operate within those means.
Because I know that the system here is not perfect, nor is
it complete. I know there are issues to
consider (like the question
of how Social Security taxes interface with this system, etc.). There are a lot of numbers to crunch, but I
believe the principles (simplicity, equal treatment of everyone’s income, etc.)
are solid. I hope that eRevolution commenters can offer advice
that will make “Version 2” even better, and closer to something we can present
to Congress.
I call eRSTP “Step 1” because there are other needed reforms to our government’s way of doing business – things that I think will be much simpler once we wipe away today’s complex tax code. Some of my suggestions for next steps (to be explored in future posts):
- the elimination of business taxes and foreign trade tariffs
- a rethink on our government’s approach to monetary policy and inflation (inflation is really a “tax” as well, one that hits the poor particularly hard)
- redesign and upgrade the Social Security and Medicare systems
- begin phased reductions of the Level 3 eRSTP tax rate down to 15%.
Let’s keep our discussion, for now, on Step 1, as outlined above. What do you think? What are the strengths and weaknesses? Where are the holes?
Good plan...although probably too simple for congress...and it doesn't allow for bigger and bigger gov't.
We need to get gov't out of the money business first so that this plan does not have to be adjusted every 10 minutes as the gov't and the fed depreciate the US dollar with increasing recklessness.
Posted by: Kurt | April 09, 2008 at 09:07 PM