Monday, November 12, 2012

Re-Engineering the Tax Code: Part I

Part I:  Income Tax

One of my favorite time-killing activities is fairly nihilistic. It involves thought experiments where obviously broken systems are annihilated: figuratively blown apart, sending all the blazing, broken, smoking pieces careening into smithereens.  No more  WD-40 hastily applied to the rusting, booby-trapped secret compartments designed for special circumstances almost two centuries (or even two decades) ago.

Indeed, the defunct system we're talking about here is the US Tax Code.  Not just income tax (which gets most of the attention), but sales tax, property tax, the death tax, etc -- the whole shebang.  We need to re-engineer the very framework underlying concepts and philosophy of tax. In Part I today, we'll focus on the Income Tax, because income is the source of all the grease in the wheels in our economy. 

After studying and pondering the current tax code, which starts taxing AT 25 PERCENT ($70,700 for a married couple), every dollar of earnings at and above $35,350,  I realized that this tax thing is seriously SERIOUSLY broken.   Aside from the fact that there is no reason the tax code should be extra nice to married or child-bearing people (alas: another digression for another day), can we please just stop the insanity?   

Continuing with this analogy, our current tax code is antiquated and irrelevant.  Let's just acknowledge that no amount of WD-40 can save us now; for too long have we been focused on the framework, rather than seeing the big picture for what this machinery is supposed to do.  The tax code in its current form makes it far too easy for nefarious folks to get what practically amounts to a free ride on the efforts of humble, honest working people.   If you've studied the tax code as deeply as I have, it becomes pretty obvious the amount of money and manipulation that goes into getting people like Mitt Romney a tax break could be better used for something else. 

Indeed, is it almost impossible to have a discussion about tax without acknowledging the deep political contentions such discussions about tax seem to invoke.  But it is not the purpose of this article to create or stir any contentions.  Thought experiments are theoretical, and theoretically, we're starting over from scratch here. 

Presuming we don't have to spend time and energy arguing about, revising,  maintaining, and maintaining the revisions on the old system, we are finally free.  Free are we to implement the fortified carbon fiber version:  strong and lightweight, nothing but functional.   Let's focus on what this machinery is supposed to do, not the moving parts themselves. 

Income Tax 

Assumption:  Income Tax is a necessary good, not a necessary evil.  If the tax code in the US worked as it was supposed to work according to the original intentions of the tax, there would be minimal need for any kind of social welfare programs, and thus (paradoxically) less need for tax revenue to fund such social welfare.  Employers would benevolently pay employees their fair share of the profits and increases made as a direct result of their work, allowing them to accumulate savings and create their own safety nets through economic ups and downs.

But we've accumulated enough evidence through two centuries of economic activity: the sad truth is that virtually no employers pay their employees a fair portion; employers keep most of the profits and gains at the "top", and deny the "worker bee" the full value of what has been rightfully earned.   Because of this sad truth, a flat tax just doesn't work.  It is just plain necessary to tax higher incomes at a higher rate; the graduated income tax rate is imperative.   

Income Tax Brackets that just makes sense

The first strata here are the lowest income layer of America; they are most likely to be working families, so they deserve the biggest breaks.    No more different brackets for single, married, Head of Households, business structures, investment income, etc.  Cash is cash, and a dollar is a dollar.  Let's consolidate earnings into one single number, and tax low-digit earners with low-digit prime numbers (since primes really are the most beautiful and forgiving of numbers).

         $0 - $21,200                                  3.00  %  (7 percent decrease)
         $21,201 - $53,000                        7.00  %  (up to 18 percent decrease)
         $53,000 - $132,500                    11.00  %  (up to 17 percent decrease)


The next layer eases the burden on the strata most likely to be small to medium businesses -- the Mom and Pop shops, the startups just getting "started", etc.  Let's give them a break, too.

         $132,501 - $331,250                  23.30  %  (up to 5.7 percent decrease)
         $331,251 - $828,125                  29.70  %  (up to 5.3 percent decrease)
         $828,126 - $2,070,312               31.90  %  (up to 5.1 percent decrease)


The final layer of the tax cake here should apply only to businesses, though perhaps there are a few executives at very large corporations that have somehow beguiled the Board of Directors into paying them way too much.  The final layer of the tax cake increases the tax burden on income earned above $2 million + 70K only.   Lets give them the two prime numbers before and after the meaning to "Life, the Universe, and Everything Else".

         $2,070,313 - $5,175,781            41.00  %   (up to 6 percent increase) 
         $5,175,782 +                                43.00  %   (up to 10 percent increase)

-----------------------------------

The less intelligent out there would look at the above and zero in on the top tax rate of 43 percent and "freak out."  Puh-leaze.    Taxes work like a formula.  Using the above tax "brackets" it works like this:

The first $21,200 of income is taxed a rate of 3 percent (this is the same whether your total income is $15,000 or $15,000,000) so the most you can pay on $21,200 of income is $636.  In other words, if you earn less than 21,200 per year, you will not pay more than $636.

>> Here is the math. 

Examples

Ms. Simon earns $35,000 per year; her total tax bill will be $636 + (0.07 * ($35,000-21,200)) or a total of $1602 with the re-engineering.  Under the current system, Ms. Simon pays $4867.5.

Family Biz owner earns $125,000 per year in his shop that employs his wife and son.   Under the "broken" system, he pays just over $34K in taxes, but on the re-engineered system, he pays just $11K.

Old, young, married, single, caregiver of animals or the elderly -- for too long has the US tax system been biased toward people with children and just a bit too harsh on the "indie" business owner.    America is changing; people earn income from a variety of sources both online and off.   The number of people moving toward the "side" income model where they have supplemental income means that we can and should make things easier for people to be self-employed, if they need to.   

Stay tuned for Part II

1 Comments:

At November 12, 2012 at 4:16 PM , OpenID sicco said...

I like the idea of increasing the tax rate all the way to 5M. One question though, why stop there? Because right now it generates enough tax? What would happen if the tax rate kept increasing all the way to 50%, 60%, 70%, 80%, 90%+ at higher incomes?

If we are building a new tax system from the ground up then we might as well just abolish income tax since taxes can be seen to discourage a taxed activity and we don't want to discourage work, right? Removing the income tax will make it cheaper for employers to hires employees, potentially resulting in lower unemployment. So what should we tax then? Well; lets tax harmful practices just like we are doing with alcohol and tobacco. One harmful practice is the mass consumption of natural resources. Taxing natural resources will result in more careful usage of these precious goods and promotes recycling. Find more about this idea on http://www.ex-tax.com

 

Post a Comment

Subscribe to Post Comments [Atom]

<< Home