Tax THIS!
Back in 1986, President Ronald Reagan teamed up with House Speaker Tip O’Neil and they did something amazing together: They simplified the tax code. But they didn’t just simplify it. Fewer and lower brackets is nice and all, but the really important thing they accomplished was to de-corrupt the tax code. Loopholes, shelters, perverse incentives, stupid deductions — mostly gone. It was a wonderful, beautiful thing. Government was (mostly) out of the business of corrupting the economy, business, and people through the tax code.
Then rates went up under Bush. They went up again under Clinton. Then down under the next Bush. But forget the bouncy rates. All these guys went to Congress to reintroduce loopholes, shelters, perverse incentives, stupid deductions — and as a result, we once again have an amazingly corrupt tax code.
But Brett Arends spent some time — nearly a whole morning! — cleaning it back up. Here’s what he came up with:
I figure a good tax code should be simple, efficient and fair. So I wondered if we could just combine a national sales tax, which is simple and efficient, with a drastically simplified but progressive income tax, which would be fair.
Scrap the regressive payroll tax. Scrap the regressive corporation tax, too: Instead tax the business owners, and treat all investment income and capital gains as income. No loopholes. No breaks. Easy.
The IRS says 2011 taxes total about $2.3 trillion. A 10% national sales tax would bring in about $1.1 trillion, or nearly half of what we need. That would ensure everybody pays something, and it would be relatively easy to collect.
What about income taxes? I played with three tax rates: 0%, 25%, and 40%. (Notice I have shunned the cowardly “39.6%,” as well).
Single filers would pay zero percent up to about $50,000 in income, then 25% up to $200,000, and 40% on everything over that. For joint filers, I just doubled the limits: zero percent up to $100,000, then 25% up to $400,000, and 40% above that.
Based on the IRS numbers for 2009, the most recent available, this would have raised just over $1 trillion that year compared to the $915 billion that income taxes actually brought in. In 2011, when the economy was stronger, you have to figure it would be well over $1.1 trillion.
Which means, of course, that we are at our goal: $2.3 trillion.
I remain wary of any plan that taxes income and spending. I’d rather go with the Fair Tax. But Arends has given us an great election year starting point. And most importantly, he’s come up with a way to de-corrupt the tax code.
I’m w/ you Steve, either an income OR sales tax. Not both. I actually prefer a sales tax as it would make everyone have skin in the game. Specially the underground economy (drug dealers and hired killers gotta buy cloths too). But, and here’s my idea to not screw over low income people, keep the IRS around. Only now their job would be to issue photo IDs to people who are below the poverty level. When those folks buy something, they swipe the card and tax is NOT added to their purchase. Low income folks could fill out a form that lists that year’s income. We could call it Form 1040. And every, say Apr 15th, they send in the form. If the numbers on the form are good, that person gets a tax deduction card. A TDC. Don’t want the deduction or think you don’t qualify? Don’t send in the form.
Funny, I was going to write that with several family members in the underground economy, a 10% sales tax would do wonders for the family income. You should consider that most people in the “underground economy” aren’t drug dealers or hired killers, they are regular people who happen to do some, most, or all of their work off the books. And you can find them in many fields.
A 10% federal sales tax would be devastating to the (immediately and dramatically shrinking) pool of small business people who are above-board. It would make criminals out of yet another class of otherwise decent law-abiding citizens.
Did I forget to note that 10% is completely outta line? I did. 3-6% makes more sense.
As for devastating to small businesses and indy contractors, a sales tax on top of current taxes would be. But INSTEAD OF income taxes, payroll taxes etc. and the paperwork associated with them? I think most businesses would welcome that.
Finally, by “underground” I was specifically referring to various criminal enterprises that are currently not taxed in any way, shape or form. Abet, exaggerating to make a point. I used to be an indy contractor working under the table till people started abusing the process which got CA to take note of all that economic activity they weren’t getting a piece of. So CA cracked down hard on the employers who passed all the reporting responsibilities on to us indy contractors.
One more time.
There’s no reason for the Federal Government to tax individuals.
Congress and the Administration should draw up a budget. OMB & CBO should then calculate what each States portion should be. The Treasury should then send out a ‘TAX BILL’ to the various Governors and Legislatures. With a Due Date. Then it is between the State Government and it’s residents just how the money is raised. Income tax? Sales Tax? Luxury Tax? Property Tax. Fees? Casinos? Brothels? And any method that the people find objectionable, well they can move to another State where they’re more comfortable with the methods of raising revenues.
Anyway, that’s in a perfect world…
That’s a much better idea! It’ll never happen.
Isn’t that sorta bass-ackwards? Where on earth would our federal government derive the authority to “tax” the states that created it in the first place? Looking at implementation of your idea, what happens when EVERYONE moves to the two or three states with the most attractive tax structure? And what happens when states begin to secede, rather than pay the fed’s “bill?”
There is a very good reason for the federal government to tax individuals — the exact same reason a boy dog licks his balls — because it CAN. The Sixteenth Amendment took a hundred years to bring us to where we are today, but anyone with a brain could have predicted it in 1913. It was the worst mistake the American people ever made, buying snake oil sold to them like lying politicians (redundant, I know) still sell taxes: “Don’t worry; YOU won’t have to pay this. It’s for the other guy.”
It’s an interesting proposal – I did the arithmetic (not worth calling it math), and figured we would end up paying roughly the same amount we do know in income and payroll taxes. But then I figured, with a $100K exclusion, my wife could stop working and we could easily downsize a bit (kids are grown) and live on my salary alone. A big difference.
Politicians should LOVE it. Just think of the possibilities for selling favors and rewarding constituencies if they are given a blank sheet to work with.
I saw a program on CSPAN not long ago with two former Senators, one from each party, in which they agreed that the time was ripe for tax reform because after years of servicing constituents with various breaks it was becoming harder dream up something new.
So this dude wants to double tax investment income and capital gains. The reason they are lower (really should not be taxed at all) is one would have already been taxed on the income you earned BEFORE you had the money to invest. We invest AFTER TAX money. Why should I be taxed on investment just because I had a little left after tax to invest?
Note that he does call for elimination of corporation taxes. So in that sense, double-taxation of dividends and cap gains is eliminated.
I have some doubts about this scheme, and I suspect that the 40% number is higher than it should be, but there’s a really good argument for it. What this does is to incentivize people to leave capital in an operating corporation and invest for growth, since the corporation pays no tax on retained profits. This would dramatically increase domestic capital investment, which would be a great thing for everyone.
Eventually, an individual receives the profits. Whether as wages, dividends, or capital gains, it is taxed at a uniform rate. This would be extremely efficient and lets corporations pick the best way to incentivize owners and employees, with no differential tax consequences to any one method of paying out the money. Again, a great thing for everyone.
One of the devilish details here is what to do about closely-held holding corps or investment trusts, that would surely form to prevent the tax consequences of dividends and cap gains. Under current code, these corporate forms are severely regulated, so I guess that’s the default position. But it does have an effect on the expected revenue.
By the way, it’s possible to correctly argue against ANY tax along the lines of “Why should I be taxed on X….” We have to pick SOMETHING to tax, so the question is what is most efficient with the least drag on the economy.
The real reason to tax long-term capital gains at a lower rate has to do with the time value of money.
If you invest $100 today and it becomes $200 in 10 years, your gain in real terms is nowhere near $100. The lower rate is a simpler approach to accounting for that problem. Raise the rate and investors are actually significantly over-taxed.
No incentive to save, no incentive to take risks. That’s no way to run an economy.
There should be no Cap Gains tax at all. As long as the proceeds from some Cap Gain remains in an investment account or gets reinvested, there should be no tax. The moment someone takes the money out for personal use, then it should get taxed at the normal income-tax rate.
This means, you are free to move your money around in investments, and the guys who get huge investment income are not paying 15%, but 35%.
If you are a Liberal, you would have to love this idea. Of course, the big-money guys like that favor Dems, not Pubs. They won’t want to see this happen, so it won’t happen.
40% on income, investment AND capital gains? Plus state tax AND other taxes.
Are you freaking kidding me?
Who came up with this idiotic theft scheme? Bill Ayers? George Soros?
This is simply a pound on the rich until they die plan. And then, TRIPLE tax them when they die and take the money they earned, away from their families.
What in the world does the government need with more than 40% of the money earned by its citizens? Instead of carrying 80% of the burden, they would have to carry 90%?
Sheer and utter nonsense, outright robbery.
Just like clockwork, every year there’s the same stories about reforming taxes during the last part of April.
….and every year, I point out the same thing — the complex part about figuring out income tax isn’t figuring out the tax…..it’s figuring out the income. There’s a saying, “you’ve got to spend money to make money” — and it’s very true. If you have a mortgage and a stock portfolio, you’re effectively borrowing money from the bank in order to invest it — if mortgages weren’t deductible, you might be better off liquidating your portfolio and paying off the mortgage. If you have a job with good pay in a state with higher state taxes, your taxes partially pay for conditions in your state that provide that career opportunity. Just because mortgage interest and state taxes are “Itemized Deductions” on schedule A — and wages, dividends, and capital gains are reported elsewhere — they can still be parts of the same economic activities.
That doesn’t mean that I fully agree that what constitutes “taxable income” reflects economic reality — but to focus on tax rates is overlooking the huge elephant in the room.
Anyone who advocates a national sales tax should be horsewhipped, for sheer stupidity if no other reason.
It should be self-evident that such a tax affects lower-income groups far more than middle- or upper-income groups.
I can speak from personal experience when I say that any tax which kicks up the cost of (well) everything for someone who makes $20,000 or $30,000/year by 10% is a BAD idea.
Casey, take another look at Fair Tax. There is a provision that provides for a refund for basic necessities.