Government
Reform
Contents
Part
I, An overview of sources and
strategies for collecting tax revenue.
Part
II,
Gives a detailed formula for taxing ordinary personal income, with
the following attributes:
- Set one time and run forever without Congressional adjusting,
- Adjusts automatically to inflation,
- Adjusts automatically to correct for deficit spending or surplus,
- Protects low-income people from over-taxation,
- Provides tax-deferred saving for retirement, healthcare and education.
Part
III,
Provides a method for regular (annual or quarterly) collection of
taxes on Investment Gains.
Part
IV,
Discusses taxation of businesses.
Part
V,
Shows how to keep Social Security from bankruptcy and provides a
method for privatization of Social Security without incurring
up-front deficits.
Part
VI,
Suggests a set of Constitutional rules for Congressional behavior.
Part
VII, Lists
the most obvious consequences expected from implementation of all of
the above.
Part I – Taxation Overview
Available tax source categories and strategies include the following:
A.
Personal Income – This is the simplest and fairest taxable
category.
B.
Business Income or Profits – This category is quite plainly
self-destructive because it inhibits employment and reduces workers'
wages more than any other form of taxation. Additionally, any tax a
business is forced to pay will always be passed directly on to the
consumer. Finally there is the problem of defining what is “profit”
in a business and what is necessary funding for current or future
expansion, for research, for ongoing maintenance of offices,
manufacturing plant, etc., and finally, for any unforeseen increases
in costs due to government regulation or union demands. Some further
considerations on Business Taxes will be discussed in Part IV -
Taxation of Businesses.
C.
Personal Consumption – This is also easy to tax, but it has the
disadvantage that it is extremely regressive. Poor people spend all
or most of their income on basic necessities and would therefore be
taxed on virtually everything they earn. With increasing wealth,
necessities become an ever smaller fraction of total consumption, and
consumption gives way to investment as the major use of assets, so
the wealthy would likely pay a much smaller effective tax rate than
the poor. Any form of tax protection for the poor would necessitate
complicated and arbitrary rules for what constitutes “basic
necessities” - with lower or no taxes applied – and what
classifies as “non-essential” or “luxury” purchases for
higher (how high?) tax rates. Adding to this would be the cost of
essential services, with more of the same problems. By now we are
all well aware of the 70,000 page abomination of current Tax Rules
that have resulted from subjective responses to these types of
problems.
D.
Tax on Wealth or Net Worth – In a sense this seems to be an
eminently fair way to tax, because it seems to take in proportion to
ability to pay. To a Socialist this probably makes good sense; it
provides the ultimate “Redistribution of Wealth”. Of the many
problems that come to mind the most obvious is: how would the
government go about measuring any person's net worth. There is no
way they could measure the value of “intellectual property”, for
example, and it would be impossible to measure the relative value of
different people's real estate, cars, home furnishings, etc.,
especially when one considers that the exact same items would
typically be valued differently in different locations. We see
aspects of this problem in the application of Property Taxes as they
vary from city-to-city and state-to-state across the country. At
best it would result in another 75,000-page hodge-podge of rules and
in never-ending complaints and lawsuits, just like our current tax
code.
E.
Value-Added Tax – This is perhaps the worst form of tax ever
conceived. It is used extensively in Europe, and is roundly hated by
everyone who pays it. Its worst feature is that it is a multiple
layer tax on already taxed goods. Like compound interest, the final
consumer is paying the VAT rate raised to a power which is unlimited,
depending solely on the number of steps from acquiring and processing
raw materials through creation of many separate parts, through
combining parts into a section of a final product, through the
completion of the whole product, then painting, polishing,
inspections, shipping to distribution centers and finally to the
consumer. If the VAT rate is, say, 10% and a product goes through,
say, 20 steps (typically both of these numbers are low estimates!),
the materials gathered in the early steps of production will have
been subjected to a final tax rate over 500%! This is the sort of
tax paid by Europeans on almost everything they buy. Is it any
wonder that the Euro-Zone is galloping into Socialism and bankruptcy?
Further
discussion of what to tax seems unproductive to me. For purposes of
this discussion I will assume that we can agree on the Personal
Income Tax as the only logical tax structure for Federal Funding. My
next topic is to build a set of rules that is simple, equitable and
that can be applied uniformly to everyone.
Rule
1 – The same tax rate will be
applied to all
taxable income.
Rule
2 – A simple exemption
formula is needed to protect those at the low end of the income scale
from abject poverty. At the same time, the exemption will not
absolve anyone from paying some amount of tax. Since we all enjoy
the benefits of living in this country, we should all accept some
share of the costs of those benefits.
Rule
3 – A tax deferred Savings
Account will be available to allow everyone to set aside enough money
to cover Medical Expenses, Education and Retirement. Deposits to
this account must be limited to no more than a taxpayer's Taxable
Income or 25% of current Median Income, whichever is less. Normal
income tax will be paid on any funds are withdrawn from this account.
More details on this will be given in Part II.
Rule
4 – There
will be no special-case rules or exemptions for any group of people,
regardless of wealth, health, time or place of birth, education,
“connections” or any other of the thousands of situations which
our current tax codes pander to. In this country our Constitution
says plainly that we are all identical when it comes to opportunity.
This implies that there will be no more special deals, subsidies or
bailouts for any person or any group of people, even if they have the
potential to improve our way of life. If the potential is there,
every person or business will have to access public funding through
normal channels, not from government.
Rule
5 – All income must be taxed
one time, but no income will be taxed more than once. This is
perhaps the single most important rule. It requires that all
accounts containing cash or cash-equivalents must be carefully
labeled as “pre-tax” or “taxed” and all money added to or
withdrawn from the two types of accounts must be kept carefully
segregated and treated appropriately.
Rule
6 – The maximum tax rate
under normal conditions
should never exceed 15%. If our government undertakes to involve
itself in areas not explicitly covered by the Constitution, and the
costs of these activities force an ongoing tax rate over 15%,
Congress has the responsibility to cut the offending activities and
bring the spending back under control. Too many of the intrusive
activities of our Federal government today involve things that should
fall within the capabilities and responsibilities of the States or
The People. Education, healthcare, welfare, minimum wage laws,
industrial regulations, and hundreds of other areas into which the
Federal government has intruded over the past 100 years or more,
should all be returned to State control.
The
only exception to this 15% rule would be a National Emergency, such
as war or a natural disaster of major proportions. However, with the
monstrous debt our government has amassed over the past half century,
a slightly higher tax will have to be tolerated until the debt is
brought under control; but again Congress must take responsibility
and correct this problem as quickly and painlessly as possible.
I
would point out that the ancient tradition of tithing, used by many
early tribal and “nation/state” groups for thousands of years
(and still common among religious groups today), set the cost of
“government” at just 10% of each member's productivity. The same
should be true today if we reject dependency and wean ourselves from
expecting government to handle what ought to be our personal
responsibilities.
What
is Income?
One
common definition has two types of income: earned and unearned.
Earned income is simply the regular pay a person receives for
services rendered. Unearned income generally applies to profits from
various forms of investment. Since this would also include
investment earnings such as interest or dividend payments, which tend
to be quite regular, I would prefer to include these payments in the
same group with wages and call this type of income “Ordinary
Income”. Then “Non-Ordinary Income” would cover all forms of
increase in assets or asset values, such as Capital Gains, profits from gambling
or from trading real property. The term “investment income”
is similar to “Non-Ordinary Income” but the latter indicates
this broader field of asset forms.
With
these definitions we can now design an Ordinary Income tax
code that honors Rules 1 and 2 very nicely (see Part II), and
a Non-Ordinary Income code
that conforms to the rest of the above rules (see Part
III).
Part
II - Tax rules for Ordinary Income
- Personal taxes will be paid on ALL ordinary income; there will be no tax-exempt or tax-free status for any kind of income from any source, nor will there be any other form of deduction or exemption for anyone - in particular no special interest exceptions or loopholes for those in positions of power - with the sole exception of the cost-of-living exemption formula defined in section 2, next.
- A cost-of-living exemption which will apply to all ordinary income can be defined using two variables which must be reset annually: personal Ordinary Gross Income (GI) and national Median Income (MI). Then:Exemption = a percentage of GI that starts at 100% at GI = 0, and decreases linearly to 50% at an income of GI = 2 x MI; above an income of 2 x MI, the exemption will remain constant at the value MI. This results in:TI (Taxable Income) = GI² / (4 x MI) up to GI = 2 x MI, andTI = GI – MI for incomes above 2 x MI.
- A third variable, Flat Tax rate (FT), is needed to calculate the tax, so that:Income Tax owed equals TI x FT for all taxpayers and for all taxable income.
- Each year the value of FT will be updated to reflect Federal Spending (FS) and the Total Tax Revenue (TT) collected during the preceding year, as follows:FT(new) = FT(old) x FS / TTIf Congress spends more than it collects, FT will increase; if it spends less, FT may decrease. A small surplus should be figured into each new FT value to gradually pay down the National Debt; however, in years of serious economic difficulty, Congress may, by 2/3 vote of both houses, waive all or part of a required increase. It might be reasonably expected that this feature will not only act as a brake on Congress' spending habits, it may well prove to be more effective than Term Limits for replacing unrepentant spenders in Government. In keeping with Part I - Rule 6, above, Congress must begin ASAP eliminating unconstitutional departments and activities in order to bring FT down to 15%.
- Note that the above restrictions do NOT allow exemptions for dependents, regardless of family size or condition. Social Engineering is not a proper responsibility of the Federal Government. The maximum exemption under the above formula, MI, is more than double the “poverty level” that Congress has defined over past decades, so this exemption should be more than adequate for any normal household situation.
The
following tables show how these rules would work out with the MI in
2010 (Table 1a) and in 2015 (Table 1b – extrapolated using MI
growth from 1960 to 2010).
Tax
Table Using New Tax Code with MI = $50,000 (2010 level)
|
||||||||||
Gross Income
|
Exemp-tion
|
Taxable Income
|
Total Tax
|
|||||||
FT=15% | Eff.Rate | FT=20% | Eff.Rate | FT=25% | Eff.Rate | FT=30% | Eff.Rate | |||
---|---|---|---|---|---|---|---|---|---|---|
$10,000
|
$9,500
|
$500
|
$75
|
0.75%
|
$100
|
1.00%
|
$125
|
1.25%
|
$150
|
1.50%
|
$20,000
|
$18,000
|
$2,000
|
$300
|
1.50%
|
$400
|
2.00%
|
$500
|
2.50%
|
$600
|
3.00%
|
$30,000
|
$25,500
|
$4,500
|
$675
|
2.25%
|
$900
|
3.00%
|
$1,125
|
3.75%
|
$1,350
|
4.50%
|
$40,000
|
$32,000
|
$8,000
|
$1,200
|
3.00%
|
$1,600
|
4.00%
|
$2,000
|
5.00%
|
$2,400
|
6.00%
|
$50,000
|
$37,500
|
$12,500
|
$1,875
|
3.75%
|
$2,500
|
5.00%
|
$3,125
|
6.25%
|
$3,750
|
7.50%
|
$60,000
|
$42,000
|
$18,000
|
$2,700
|
4.50%
|
$3,600
|
6.00%
|
$4,500
|
7.50%
|
$5,400
|
9.00%
|
$70,000
|
$45,500
|
$24,500
|
$3,675
|
5.25%
|
$4,900
|
7.00%
|
$6,125
|
8.75%
|
$7,350
|
10.50%
|
$80,000
|
$48,000
|
$32,000
|
$4,800
|
6.00%
|
$8,100
|
9.00%
|
$10,125
|
11.25%
|
$12,150
|
13.50%
|
$90,000
|
$49,500
|
$40,500
|
$6,075
|
6.75%
|
$8,100
|
9.00%
|
$10,125
|
11.25%
|
$12,150
|
13.50%
|
$100,000
|
$50,000
|
$50,000
|
$7,500
|
7.50%
|
$10,000
|
10.00%
|
$12,500
|
12.50%
|
$15,000
|
15.00%
|
$150,000
|
$50,000
|
$100,000
|
$15,000
|
10.00%
|
$20,000
|
13.33%
|
$25,000
|
16.67%
|
$30,000
|
20.00%
|
$200,000
|
$50,000
|
$150,000
|
$22,500
|
11.25%
|
$30,000
|
15.00%
|
$37,500
|
18.75%
|
$45,000
|
22.50%
|
$300,000
|
$50,000
|
$250,000
|
$37,500
|
12.50%
|
$50,000
|
16.67%
|
$62,500
|
20.83%
|
$75,000
|
25.00%
|
$500,000
|
$50,000
|
$450,000
|
$67,500
|
13.50%
|
$90,000
|
18.00%
|
$112,500
|
22.50%
|
$135,000
|
27.00%
|
$1000000
|
$50,000
|
$950000
|
$142500
|
14.25%
|
$190000
|
19.00%
|
$237500
|
23.75%
|
$285000
|
28.50%
|
$2000000
|
$50,000
|
$1950000
|
$292500
|
14.63%
|
$390000
|
19.50%
|
$487500
|
24.38%
|
$585000
|
29.25%
|
$5000000
|
$50,000
|
$4950000
|
$742500
|
14.85%
|
$990000
|
19.80%
|
$1237500
|
24.75%
|
$1485000
|
29.70%
|
$10000000
|
$50,000
|
$9950000
|
$1492500
|
14.93%
|
$1990000
|
19.90%
|
$2487500
|
24.88%
|
$2985000
|
29.85%
|
$50000000
|
$50,000
|
$49950000
|
$7492500
|
14.99%
|
$9990000
|
19.98%
|
$12487500
|
24.98%
|
$14985000
|
29.97%
|
Table
1a
|
Note
that taxes for equal incomes decrease with increasing MI. Also, over all the years for which MI has been tabulated (I have been
able to find this information only from 1950 to the present, so some
earlier periods, such as 1929 – 1940, may be an exception) MI has
increased by rates between 0% and about 6 - 8%, while inflation rates
have generally ranged between 0% and about 5%. I am unaware of any
year since 1950 in which inflation grew faster than MI, until 2008.
From 2008 through 2012, inflation has grown at a fairly normal rate,
but according to the best sources I have found, MI has actually seen
negative growth, dropping by about $4300 over the past four years.
Given this information, my extrapolated MI for 2015 may not be
realized until some years later!
Tax
Table Using New Tax Code, MI = $60,000 (2015 level?)
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|
Gross Income
|
Exemp-tion
|
Taxable Income
|
Total Tax
|
|||||||
FT=15% | Eff.Rate | FT=20% | Eff.Rate | FT=25% | Eff.Rate | FT=30% | Eff.Rate | |||
$10,000
|
$9,583
|
$417
|
$63
|
0.63%
|
$83
|
0.83%
|
$104
|
1.04%
|
$125
|
1.25%
|
$20,000
|
$18,333
|
$1,667
|
$250
|
1.25%
|
$333
|
1.67%
|
$417
|
2.08%
|
$500
|
2.50%
|
$30,000
|
$26,250
|
$3,750
|
$563
|
1.88%
|
$750
|
2.50%
|
$938
|
3.13%
|
$1,125
|
3.75%
|
$40,000
|
$33,333
|
$6,667
|
$1,000
|
2.50%
|
$1,333
|
3.33%
|
$1,667
|
4.17%
|
$2,000
|
5.00%
|
$50,000
|
$39,583
|
$10,417
|
$1,563
|
3.13%
|
$2,083
|
4.17%
|
$2,604
|
5.21%
|
$3,125
|
6.25%
|
$60,000
|
$45,000
|
$15,000
|
$2,250
|
3.75%
|
$3,000
|
5.00%
|
$3,750
|
6.25%
|
$4,500
|
7.50%
|
$70,000
|
$49,583
|
$20,417
|
$3,063
|
4.38%
|
$4,083
|
5.83%
|
$5,104
|
7.29%
|
$6,125
|
8.75%
|
$80,000
|
$53,333
|
$26,667
|
$4,000
|
5.00%
|
$5,333
|
6.67%
|
$6,667
|
8.33%
|
$8,000
|
10.00%
|
$90,000
|
$60,000
|
$33,750
|
$5,063
|
5.63%
|
$6,750
|
7.50%
|
$8,438
|
9.38%
|
$10,125
|
11.25%
|
$100,000
|
$60,000
|
$41,667
|
$6,250
|
6.25%
|
$8,333
|
8.33%
|
$10,417
|
10.42%
|
$12,500
|
12.50%
|
$150,000
|
$60,000
|
$90,000
|
$1,3500
|
9.00%
|
$18,000
|
12.00%
|
$22,500
|
15.00%
|
$27,000
|
18.00%
|
$200,000
|
$60,000
|
$140,000
|
$21,000
|
10.50%
|
$28,000
|
14.00%
|
$35,000
|
17.50%
|
$42,000
|
21.00%
|
$300,000
|
$60,000
|
$240,000
|
$36,000
|
12.00%
|
$48,000
|
16.00%
|
$60,000
|
20.00%
|
$72,000
|
24.00%
|
$500,000
|
$60,000
|
$440,000
|
$66,000
|
13.20%
|
$88,000
|
17.60%
|
$110,000
|
22.00%
|
$132,000
|
26.40%
|
$1000000
|
$60,000
|
$940000
|
$141000
|
14.10%
|
$188000
|
18.80%
|
$235000
|
23.50%
|
$282000
|
28.20%
|
$2000000
|
$60,000
|
$1940000
|
$291000
|
14.55%
|
$388000
|
19.40%
|
$485000
|
24.25%
|
$582000
|
29.10%
|
$5000000
|
$60,000
|
$4940000
|
$741000
|
14.82%
|
$988000
|
19.76%
|
$1235000
|
24.70%
|
$1482000
|
29.64%
|
$10000000
|
$60,000
|
$9940000
|
$1491000
|
14.91%
|
$1988000
|
19.88%
|
$2485000
|
24.85%
|
$2982000
|
29.82%
|
$50000000
|
$60,000
|
$49940000
|
$7491000
|
14.98%
|
$9988000
|
19.98%
|
$12485000
|
24.97%
|
$14982000
|
29.96%
|
Table
1b
There
are three classes of deferred tax exceptions that will be
allowed in addition to the standard Exemption Formula (see Part
I, Ordinary Income, Rules 2 and 3):
A.
Personal Retirement Account (PRA) (see Part
V - Retirement Reform Rules):
- As long as the current Social Security Administration continues to exist, each taxpayer may add a portion of his 25% limit toward a PRA account, in addition to what is required under the SSA law. Additionally, until SSA is fully privatized, the “Payroll Tax” percentage will be treated as part of the 25% limit.
- Once privatization is started, the mandatory PRA contribution will be 5% and the remaining 20% can be distributed between PRA and the other tax deferred accounts defined below. With this extension, even those toward the lower end of the income scale would be in a position to retire in reasonable comfort at a normal retirement age provided they manage their finances responsibly.
- Since all of the funds going into the PRA are tax deferred, it necessarily follows that all withdrawals from this extended PRA after retirement will be taxed as current ordinary income, with the standard exemption formula applied.
B.
Health Savings Account (HSA)
- All taxpayers will be encouraged to contribute a portion of their Taxable Income to a Health Savings Account (HSA), also tax deferred. This account may be used as needed either to purchase a Health Insurance Policy, or to pay for medical services directly. The limits stated at the beginning of this section will apply.
- The HSA can be left to accumulate indefinitely (including investment growth) until needed. Like the PRA accounts, when a withdrawal is needed, it will be taxed as income.
- It is anticipated that by starting new young employees early in contributing to their future healthcare costs, the need for Medicare and/or Medicaid can be phased out over time, or at least greatly reduced in scope. Some employers may consider contributing to their employee's HSA accounts in lieu of income, but in this case employer and employee must coordinate to assure that the 25% limit is not exceeded. Since input to the HSA is pre-tax, it makes no difference whether it is contributed by the employer or the employee.
C.
Education Account
- Many families are all too familiar with the problems in our education system today, and many of them would welcome the opportunity to put their children in a private school if one is readily available. By starting as early as possible and contributing some of the tax deferred 25% to an education account, they should have no problem affording the best education they can find for their children.
- Families without children may also contribute to such an account on behalf of children of relatives or friends, at their discretion, for education only.
- The only restriction is that ordinary income tax must be paid on withdrawal.
The
sum of these contributions may not exceed Taxable Income or 25% of
MI, whichever is less. The current Payroll Tax, or the 5% PRA
contribution (see Part
V), must be treated as a portion of this 25% limitation.
(For those whose incomes are so small that the Payroll Tax or PRA
contribution would exceed their Taxable Income under the formula
given in Part
II, the government will have to come up with some creative
bending of these rules. My suggestion would be to simply limit the
amount mandated for Social Security Tax to the lesser of TI or the
current mandate.)
Note
that since MI tends to increase from year-to-year, and since each
person's GI also is expected to increase with time, normally a few
percent faster than MI, the contributions put into these accounts are
likely to be relatively small during the early working years but to
increase toward the 25% of MI maximum in later years. I would
anticipate that as more people learn how to manage their finances
more responsibly, we will find that the slow slide into Socialism
will begin to reverse direction fairly rapidly, to the benefit of
all.
These
options will be available to all taxpayers, regardless of income
level. But note that care must be taken to assure that the sum of
all contributions to these optional tax deferred accounts does not
exceed the 25% of MI limit for any individual. I would suggest that
all three of these accounts should be merged into a single tax
deferred Savings Account. This way, the entire amount saved may be
used as needed for any of the three purposes listed – but not
for any other purpose. I would also propose that, if our
citizens can exercise the self control and responsibility to
accumulate enough to provide for themselves in this way, Congress
should be willing to accept a permanent cap on the tax rate applied
to withdrawals from these Savings Accounts at 15%, even if government
spending (and repayment of debt) require that the FT for all other
income taxes goes above that level, per Tax rules for
Ordinary Income, Section
4.
(As
a matter of curiosity, I wonder if anyone reading this will have
realized that the taxable portion of GI under these rules does not
reach 25% until GI equals MI. The implication of this is that a
low-income earner may put any or all of his/her taxable income into
this tax-deferred savings account and thus avoid paying any income
tax. This is not too different from our present situation where
nearly 50% of our tax payers pay no income tax, but one critical
difference is that under this new rule the taxes not paid at the time
the income was earned - and deposited in the Savings Account - will
be paid later when the money is withdrawn. Since withdrawal would
normally occur years after contribution, an inflation factor might
also be considered to further protect the responsible saver, as
discussed in Part
III, next.)
Part
III - Optional Tax Rules for Non-Ordinary Income (Asset Gains)
Although
current Gain tax laws are generally acceptable there are three major
flaws:
- Capital Gains are not adjusted for inflation. With investments often held for many years, inflation causes significant degradation in asset gain values.
- Current laws allow the exemption of most, or even all, of the Gains through the loophole of contributions to charities or to political agendas. Since this violates Part II - Section 1, above, this flaw needs to be eliminated. The ongoing controversy about a “Buffett Rule” is a distraction that is simply political posturing.
- The fact that good investment strategies promote long-term investment also means that gains are not taxed until they are “realized” - i.e., until assets are actually sold. The result is that the treasury is deprived of legitimate income for extended periods of time. A secondary result is that investors are tempted to hold onto investments beyond their point of viability simply to avoid paying the taxes. This works to the disadvantage of both government and investor.Current laws require that tax on ordinary income be withheld from every paycheck, or that a quarterly estimate and payment be made. Achieving the same effect with investment income would correct this flaw.
Each
of these flaws is addressed in the following section:
All
of the various types of Non-Ordinary Income are subject to a final
outcome which may be either a Gain or a Loss, and it is impossible to
predict when or how much Gain or Loss will be realized. It is for
this reason that the current tax code imposes no tax on Gains, and
provides no relief from losses, until the end of the year in which
the Gain or Loss is “realized”. I believe, however, that it
would be in the best interests of both the government and the
investor to change this system so that taxes on gains may be
estimated and imposed annually (or even quarterly). It is not
feasible to recover losses until an asset is actually sold, but most
investors will sell a losing asset quickly unless there is very good
reason to believe that the asset will recover the loss in a
reasonably short time.
The
following set of rules accomplishes this goal and may provide enough
incentive to persuade investors to adopt them. For the government,
the obvious incentive will be that they would guarantee a steady
stream of tax revenue that, with today's code, is both irregular and
uncertain. A secondary benefit to the government would be that the
constant stream of tax receipts from Gains would provide a quick and
accurate measure of the effectiveness of the numerous laws and
regulations emanating from Congress and from the many Departments
that have appeared in recent years. From the investor's viewpoint,
the inflation adjustment described below should be a strong enough
incentive.
These
rules depend on the same Flat Tax rate, FT, and the regularly updated
value of Median Income, MI, as defined in Part II. To
simplify definitions used in the following, I will use common stock
market terms and refer to all assets as “stocks”, and all
“non-ordinary income” as Capital Gains. The extension to less
common forms of “non-ordinary income” should be straightforward.
- When a stock is purchased on a given date, a “Cost Basis” is fixed (price times number of shares + fees or incidental charges). An MI value can be set as of either the end of the previous year (when the government typically determines a value for MI), or the date of purchase (by interpolation) if greater precision is preferred.
- At the end of the following tax period (quarter or year, to be established by Congress) the stock price will reflect a gain, a loss or no change. If the price has gone up the stock value will show a Gain equal to the new price times number of shares minus the original Cost Basis. If the price has not gone up, there is no action to be taken.For the following sections (3 - 7), we assume that the price has increased:
- For each tax period a Gain value can be figured from the end of the previous period and the tax obligation will be Gain x FT. This tax amount should be included as part of the regular assessment of estimated taxes in the same way that the government now mandates an estimated payment for regular income tax. This calculation will be repeated for each tax period until the end of the tax year.
- At the year-end, the price again will be compared to the purchase price and a Gain value computed for the annual tax return. At this point, the Gain value will be adjusted for inflation as follows:Taxable Gain (TG) = Gain x MI(old) / MI(new) where MI(old) is the Median Income at the end of the previous year and MI(new) is the MI for this year.
- Then the final annual tax owed on the Gain for this stock will be TG x FT. Any estimated tax already paid will of course be taken into account. A new Gain Basis can now be set to the year-end value of this stock holding.
- For each year this stock continues to increase in value, a new Gain value can be calculated the same way, but always with reference to the Gain Basis from the previous year rather than the original Cost Basis.
- When a stock is sold, the Gains Tax owed will be calculated on only the gain since the previous year-end or estimate payment. For an asset held for many years, this final tax will typically be a small fraction of the amount required with today's rules. In addition, the final total tax on any investment gain will have been reduced to compensate for inflation during the holding period.
- Now let's assume that the stock price went down during the past year, but is still above the original purchase price. In this case, the investor will have paid more in Gains tax through the end of the current year than he owes, so he will have a tax refund due. The overpayment amount will be simply the Gains taxes paid up to this year-end times the ratio of the Remaining Gain (this year-end) divided by the Maximum Gain (at the time when the last previous Gain taxes were paid).
- If the stock price drops to the original purchase price, or lower, then all of the taxes paid up to this year-end must be refunded and the Gain Basis reverts to the original Cost Basis, and the MI(old) reverts to the MI at the time the stock was purchased. If the investor, under these conditions, continues to hold the stock, no other tax consequences are incurred at this time. The stock will remain in the Loss column either until it is sold, or until the price goes back above the purchase price. A loss at time of sale will be treated exactly as it is now.
Annual
(or quarterly) payment of Gains Taxes, with inflation adjustment
included, should provide sufficient incentive to investors to
follow this option.
However, I recommend that this method should be made available as an
option initially, because some investors may have good reasons
to stick with the current Gains Tax method until the consequences are
fully understood. As long as the total real Capital Gain is taxed before
any exemptions or deductions, this choice is of little concern to the
Treasury. This rule of tax first, other distributions later
must be the primary consideration.
Part
IV - Taxation of Businesses
The
reason people form businesses is to make a living, that is, to make
money for themselves. The only way this can work is for the business
creators to develop an idea for a product or a service that their
business can provide, and which they believe will be useful to other
people, at a price that their consumers will be willing to pay.
Therefore, the concept of a business “profit” is inherently
meaningless; any money the business brings in must go either toward
maintaining, expanding and improving the business, or to the business
owners, managers and operators. It is people who realize any real
profit, not the business itself.
As
a general rule, any form of “Profit Tax” on a business operation
has a net negative effect, directly on the business, indirectly on
the national economy. It automatically diminishes the ability of
businesses to hire more employees and it discourages higher wages.
In addition, any tax imposed on a business will necessarily be passed
on to those who would become consumers of the business's products or
services, increasing costs and further depressing the economy. No
company could remain profitable if it did not add the cost of
taxation to the cost of its output. Following this logic, I propose
the following rules:
- Business income/profit which stays in the business, to be used for expenses and for growth and improvement of the business, will not be taxed.
- Any business income which is extracted from the business for the benefit of an individual in any form will be taxed as income to that individual. Payroll, employee benefits, employee insurance premiums, bonuses, dividends, interest payments, etc., all will be taxed as personal ordinary income.Where it is simpler for the employer to pay both a benefit and its concomitant tax directly (as when an employer pays for a group policy, plus tax, for example for medical insurance for many employees), the total amount of the benefit plus tax must be used in calculating the correct total amount of the tax. My reasoning here is that the full insurance benefit is a part of each employee's income. If the cost of the insurance were added to employee's paychecks, tax would be owed by them on the entire amount, and the extra tax on the insurance benefit would come out of the employee's take-home pay along with the cost of his individual insurance premium, which would likely be far greater than each worker's share of the cost of the group policy.For example: a company purchases a group policy for all of its employees at a cost of X dollars. The net tax must be FT x (X + tax), so the tax paid by the employer should be calculated as:Tax = FT x X / (1 – FT)To demonstrate this, let's say that a benefit paid by a company has a cost of $1000, and FT for this year = 20%. Then the tax will be $250, not just $200. If the $1000 were just added to the employee's paycheck he would have to pay at least the $1000 to cover the premium, plus the $200 tax on the extra $1000 income. For those on low incomes this might be a deal-breaker for any insurance coverage.
- Non-commercial organizations, such as Unions, Churches, Charities, Social Groups, Homeowners Associations, etc., are all considered businesses under these rules, and they will pay no taxes on already taxed money that is contributed to them by individuals or households. When any organization pays wages to others who classify as Personal Taxpayers, those persons will pay the appropriate Personal Taxes, as above. A charity or church, however, may provide food, clothing, general welfare materials to those it deems to be in need, without incurring any tax obligation on the part of the recipient or the provider. That is the nature of the charity's business rather than payment for goods or services; for example, a union may provide temporary wages or support in the form of food to members who are unemployed, without being taxed. If a union pays a union employee for services, however, that is income to the worker and is subject to standard income tax, paid by the worker.Implicit in these rules is the requirement that unionized workers must pay the normal income tax on their earnings before paying their union dues. The only alternative would be for the unions to pay the tax out of the dues they collect. In this latter case, the unions would have to pay the full FT tax rate on all the dues they collect because it would be impossible to determine an average cost-of-living exemption formula covering all of the union members contributing.
- If a business contributes to a charity and such support does not qualify as a part of the business's normal activity, then there will be a Personal Income Tax obligation to be paid by that business (note the tax calculation under Rule 2, above) or by the receiving charity, a) because the end beneficiary of the donation is the welfare recipient, and b) because no prior taxes have been paid on the amount donated.
- When one business buys stock in another business, to increase its cash reserves or improve its product, or any other legitimate business purpose, any profits realized from such transactions which remain in the business will not be taxed.
- Any business which sends money overseas, to open a new plant or start a new branch operation for example, will post a “tax bond” in the amount of the current FT personal tax rate applied to the amount of money expatriated. Assuming that the foreign investment bears fruit and returns money or equivalent cash value to the U.S., there will be a refund at the same tax rate on the value repatriated. This serves two purposes: it prevents American companies from sending income to offshore accounts for favored executives without paying the appropriate income tax, and it minimizes the incentive for companies to ship jobs overseas where labor costs are less than in the U.S. When (if) the overseas operation returns the whole amount originally expatriated, the “tax bond” account will be closed and any further money coming into the U.S. for that account will be untaxed profit to the company.
Political
Influence
It
has been traditional for both individuals and businesses to deduct
political contributions from their taxable finances each year before
computing taxes due. New rules are needed for this area.
- Personal contributions:Since deductions from personal income will no longer be allowed, there is no reason to limit contributions that individuals can make, after taxes, to any politician or political organization. People should be free to give any amount to anyone they wish without penalty. This same logic applies to gifts from one person to another. Tax must already have been taken from the person giving the gift, so there can be no additional tax on the recipient.
- Business contributions:Since business profits will no longer be taxed in the traditional manner, it is necessary to consider the basis for any political contribution from a business source. The primary consideration, of course, must be that a business does not contribute to a political entity for purely altruistic reasons; such giving is necessarily always done to gain some influence or advantage that would not be available otherwise. In other words, money is used to buy favorable legislation and/or attention. For this reason, there should be a cost to the business for the advantage it expects to realize. This same reasoning applies to Unions, Charities, or any other business or organization.A simple and effective arrangement would be to require a tax donation equal to the political donation, dollar for dollar. If business executives or union bosses believe it is worth a large donation out of untaxed business or union funds to get the favorable action they want, it is only fair that they pay the cost of such favors in taxes, in the same amount. The penalty for failure to pay the equal amount in taxes should be a fine of ten times the amount not paid up front.Corporate and union influence in Congress both are notorious sources of bad legislation, and have been for as long as the United States has existed. At least by matching tax and donation influence we may achieve a better balance. I would urge that taxes realized from this source be dedicated to paying down the National Debt rather than simply going into the General Fund. This again would go a long way toward defraying the cost of “business as usual” in our “crony capitalism” society.To circumvent this 100% tax, it should be apparent that a business (corporation, union, or other) could pay the desired contribution to a business officer, who could then pay the ordinary personal income tax and contribute the after-tax balance to the desired political recipient. I cannot envision how this rule could be perceived by our courts as a violation of the First Amendment Free Speech rule, so I do not anticipate any legal argument. In any case, viewing this problem logically, if a business is unlike a “person”, as is implied by the first two sections of this article in order to exempt businesses from taxation, then it follows that the Free Speech rule cannot apply in the same way to a corporation as it does to an individual. This is undoubtedly a ruling by our Supreme Court that is likely to be revisited. One obvious flaw in the Court's recent decision is that, if a Corporation is a “Person” then the same donation limit should have been applied to both. Even our Supreme Court can make some curious blunders!
Part
V – Retirement Reform Rules
There
are two methods available for making Social Security sustainable.
The first protects Social Security, as it is now, from long term
losses and ultimate bankruptcy; the second shifts it gradually over
to privately owned Personal Retirement Accounts (PRAs). Both methods
can, and should, be implemented simultaneously.
A.
Making the current “defined benefit” system sustainable:
- Redefine the Income Cap on which “Payroll Taxes”, or FICA taxes, are paid to twice the Median Income (MI), or MI x 2. This is a close match to the current cap, and has the advantage that it adjusts automatically to inflation and economic growth (proxy for COLAs).
- Redefine the standard monthly payment, after retirement, for those who are fully vested and have paid the FICA tax up to the income cap level, to Median Income times 3.5 %1. This would put the standard S.S. payment at $1750 on the 2010 MI of approximately $50,000. The current SSA rules for adjusting the monthly payment based on early or late retirement will be retained, as will the current rules for adjustment based on income lower than the Cap.
- For those whose incomes have been above the Cap for most of their working years, and whose post retirement income from sources other than Social Security remain greater than the Cap (as defined above), will receive monthly SSA checks which are corrected by the ratio of the Cap divided by their non-SSA income. Thus, if in some future year the MI grows to $60,000 and a retiree has a Gross Income (before tax and before SSA payment) of $150,000, then his SSA check will be only $1680 rather than the standard $2100, (2100 x 120000 / 150000). This is similar to the concept of a “Means Test” currently under discussion in Congress but does not involve any convoluted legislation.
- The portion of both employee and employer contributions to FICA taxes should be reset to 5% of each employee's paycheck. Combined with the remaining 20% of GI permitted toward the Tax Deferred Savings Accounts (see Part II - Additional General Rules) this will provide a much better retirement pension than the current system, at least for those with incomes greater than 20% of MI. (This is the GI at which TI = 5% of GI. Very few workers spend much time at such low incomes.)
- FICA taxes collected from those still employed, from employer and employee, must be invested in “locked” accounts like those defined below (see section B-rule 11), not put into the Treasury's General Fund.
B.
How to gradually shift from today's “defined benefit” scheme to a
“defined contribution” retirement plan:
Every
suggestion I have read is a variation on the theme of starting new
employees, as of a set Starting Date, on their own Private Retirement
Plans such that they and their employers deposit a mandated percent
of each regular paycheck into the employee's private account. These
accounts would be invested so that the contributed sum plus growth
would provide for living expenses after retirement. The advantages
would be that under normal market growth the accounts should provide
a better retirement than the current SSA system, and the entire
account would belong to the retiree and his or her heirs.
This
approach has one major flaw, which is that everyone already in the
SSA system would still be contributing to it until retirement and
then withdrawing from it for as much as 30 years (or more in rare
cases), but the new workers, after the set Starting Date, would not
be contributing to SSA at all. So the already negative balance
between Payroll Tax inflow and Social Security check outflow would
become steadily worse for at least the next 50 years. Our country is
already bankrupt; this would certainly push us over the cliff!
I
propose an back end approach, starting with employees at or near
retirement and working year-by-year toward the youngest workers.
This way the first people to shift into the new plan will already
have paid in most of the Payroll Taxes they will ever owe, and will
withdraw from S.S. slightly less, year-by-year, as they shift into
their own PRA accounts. According to simulations I have run, this
method actually results in a marginal improvement in the SSA balance
sheets. Along with the “sustainability” modification in Section
A, this should totally eliminate the present SSA deficit.
Coupled
with my recommended Tax Deferred Savings Accounts (Part II) this
plan should provide adequately even for those retirees at the lower
end of the income spectrum, provided they learn to save responsibly
throughout their working lifetime.
- Once Congress has agreed on the rules for Private Retirement Accounts we can define a starting year as Year 0.
- On the SSA-designated retirement age birthday in Year 0 of any workers who already have at least a 40 year record of payment into SSA, those workers would be eligible to retire on normal standard Social Security pay-out. If they decide to continue working and contributing to a greater retirement fund, they will have the option of discontinuing their FICA payments and instead putting the same amount into their own Personal Retirement Account.
- In order to maintain an adequate flow of funds into the SSA account, the matching funds from their employer will continue to go into the SSA.
- When those workers do elect to retire, they will collect their standard S.S. checks enhanced by the years their employer continues paying the matching contribution into the SSA account (about 1.25%2 per year).
- In Year 1, the same rules will apply to those at standard retirement age minus one year and who have a 39 year input record in SSA. They may discontinue their payment into the SSA fund and instead direct the same amount into their PRA. They will realize the ownership of their PRA funds, plus any investment gain on those funds, and they will lose 1.25%2 of the SSA pay-out they would have received at normal retirement age. Again, if they work beyond retirement age, their S.S. checks will grow at the same 1.25%2 for each added year of employer matching contribution.
- From Year 2 through Year 9, the optional switchover to PRA will proceed starting an additional year ahead of normal retirement age, with the same reduction of S.S. payout for each earlier switchover year. Thus, by Year 10 all of those who are eligible to retire in Year 20 may choose to switch to the PRA plan, take a loss of 12.5% (10 times 1.25% per year) of their S.S. checks and enjoy the ownership of all the funds growing in their own PRA.
- Assuming that the switchover has been a success up to this point – no shortfall in funds available in the SSA Trust Fund to pay all of the S.S. checks due to both full- and partial-beneficiaries, and satisfaction with the growth of their PRAs among those who have made the switchover – then it would be reasonable to accelerate the switchover option to an additional two or even five years for each additional year after Year 10. By Year 11, for example, the accelerated PRA option might allow workers at retirement age minus 15 years to shift earlier rather than having to wait until Year 15 to make the shift.
- At this rate, we can assume that some people will be starting their careers, forty or more years before anticipated retirement, with the PRA option available to them immediately, possibly as early as Year 16. These first workers who opt to put all of their retirement money into a PRA will have the additional option of having all of their employers' matching funds also put into their PRA, rather than into the SSA. At this point we would begin to see the full benefit of Personal Retirement Accounts.
- At some point between Year 16 and Year 40, all workers will be able to start directly into the PRA scheme and all retirement fund pay-in for these new workers from that point on, from both employees and employers, will be into PRAs. There may be a significant number of older retirees still receiving S.S. checks, but they will be a diminishing number, and many of those checks will be reduced by many years of attrition at the 1.25% per year rate (due to the employee contributions going into their PRAs rather than into SSA).
- Beyond about Year 30, or earlier if all goes as well as anticipated, no employer matching funds should be allowed to go into the SSA fund, but will instead be directed into each employee's PRA. The turnover point should be determined when it is clear that sufficient SSA funds exist to cover the few remaining retirees still drawing S.S. checks.
- The accounts used for accumulating PRA funds will be managed by reputable investment firms and the structure of those accounts must be approved by Congress, with criteria such that income and growth are maximized within the absolute constraint that risk will be as close to zero as possible. Many similar 401K and other fund accounts exist today, and most show returns averaging between 5% and 10% over many decades.
- The SSA itself should be required to put all of the contributions accruing to it into similar accounts so that there will no longer be any way that Congress can spend them on General Spending items. This change should be made now, completely separate from any discussion of the rules given here. By locking these funds away, the SSA can essentially guarantee that it will have the funds necessary to pay S.S. checks to all remaining beneficiaries of the old system, without having to borrow in order to honor its obligations. Once all remaining SSA beneficiaries have died, all funds still left in the SSA accounts, if any, will automatically revert either to the General Fund or, better, go directly to paying down National Debt liability.
- The single most important rule for Entitlement Benefits is that all of the above rules will apply equally to everyone. Specifically, this means that all Federal employees, including our elected servants, will abide by these rules; they will no longer be covered by separate pensions, retirement plans, medical coverage or any other benefits that are not equally available to every citizen of the United States. (See also Part VI - 2, below.)
- This same argument applies also to all laws which benefit or restrict some people and not others. Congress will not pass any law benefiting Federal Employees which is not available to all citizens; and Congress will not pass any law restricting or punishing any citizen which does not apply equally to themselves. The present ability of Congress to establish its own perquisites: salaries, vacations, pensions, healthcare coverage, etc., must be subject to approval by all other branches of government and by the people.
- This reasoning also implies that all businesses must also provide the same basic minimum benefits, specifically pension and healthcare benefits, for all full-time employees. If employers elect to provide additional benefits, they will be valued at cost and taxed to the employees as income. In accordance with our Constitution and Declaration of Independence, the time has come to honor the “Equal Opportunity” clause and treat every citizen with the same respect. This does not imply equal outcomes for all, but it does mean that everyone will receive the same outcome results versus input worth as anyone else. Obviously, “input worth” is subjective and requires cooperation and agreement between the employer and the employee, which in turn requires honesty and integrity on both sides.
1 This percentage figure is approximate and may need to be adjusted.2 The 1.25% value is predicated on a nominal work-life of 40 years, with employer and employee combined putting in 2.5% of the 40 year total each year.
Table 3 demonstrates three possible schedules for the transition from SSA to PRA. The Starting Year (Year 0) is assumed to be 2015. The first ten years in each case are restricted to a one-year advance in eligibility age per year in the new plan. Starting in Year 10 (2025) the first pair of columns shows a continuation of the one-year advance per year, the next pair shows an acceleration factor of 2, and the third pair shows an acceleration factor of 5. If this plan is completely successful, we could see the last of our outdated and non-sustainable SSA scheme disappear by as early as 2031, except for those few living retirees who elected not to make the shift into a PRA at their earliest opportunity.
Assume
PRA Law Becomes Effective in 2015 (Year 0)
|
||||||
Year
Eligible for PRA Shift
|
Years
of SSA Contribution (No Accel)
|
Age
eligible for shift to PRA
|
Years
of SSA Contribution (Accel * 2)
|
Age
eligible for shift to PRA
|
Years
of SSA Contribution (Accel * 5)
|
Age
eligible for shift to PRA
|
2015
|
40
|
67
|
40
|
67
|
40
|
67
|
2016
|
39
|
66
|
39
|
66
|
39
|
66
|
2017
|
38
|
65
|
38
|
65
|
38
|
65
|
2018
|
37
|
64
|
37
|
64
|
37
|
64
|
2019
|
36
|
63
|
36
|
63
|
36
|
63
|
2020
|
35
|
62
|
35
|
62
|
35
|
62
|
2021
|
34
|
61
|
34
|
61
|
34
|
61
|
2022
|
33
|
60
|
33
|
60
|
33
|
60
|
2023
|
32
|
59
|
32
|
59
|
32
|
59
|
2024
|
31
|
58
|
31
|
58
|
31
|
58
|
2025
|
30
|
57
|
30
|
57
|
30
|
57
|
2026
|
29
|
56
|
28
|
55
|
25
|
52
|
2027
|
28
|
55
|
26
|
53
|
20
|
47
|
2028
|
27
|
54
|
24
|
51
|
15
|
42
|
2029
|
26
|
53
|
22
|
49
|
10
|
37
|
2030
|
25
|
52
|
20
|
47
|
5
|
32
|
2031
|
24
|
51
|
18
|
45
|
0
|
ALL
|
2032
|
23
|
50
|
16
|
43
|
||
2033
|
22
|
49
|
14
|
41
|
||
2034
|
21
|
48
|
12
|
39
|
||
2035
|
20
|
47
|
10
|
37
|
||
2036
|
19
|
46
|
8
|
35
|
||
2037
|
18
|
45
|
6
|
33
|
||
2038
|
17
|
44
|
4
|
31
|
||
2039
|
16
|
43
|
2
|
29
|
||
2040
|
15
|
42
|
0
|
ALL
|
||
2041
|
14
|
41
|
||||
2042
|
13
|
40
|
||||
2043
|
12
|
39
|
||||
2044
|
11
|
38
|
||||
2045
|
10
|
37
|
||||
2046
|
9
|
36
|
||||
2047
|
8
|
35
|
||||
2048
|
7
|
34
|
||||
2049
|
6
|
33
|
||||
2050
|
5
|
32
|
||||
2051
|
4
|
31
|
||||
2052
|
3
|
30
|
||||
2053
|
2
|
29
|
||||
2054
|
1
|
28
|
||||
2055
|
0
|
ALL
|
||||
Table
3
|
Part
VI – Congressional Reform Rules
Congress
has, for far too long, viewed its own members as though they were a
“Ruling Class”, not bound by the same rules they write for the
“rest of us”. This is perhaps the clearest sign that our
government has turned away from the Constitution and has taken upon
itself the role of a Monarchy. A new set of rules is needed to get
our nation back onto the track established by the Founders. I
strongly recommend that these rules should be encoded in the form of
an Amendment to the Constitution so that the resulting benefits would
be much harder to abrogate in future years.
- Congress shall make no law which in any way restricts or penalizes all of the Citizens, which does not apply equally to Congress and all members of the Government Bureaucracy. (E.g., Insider Trading)
- Congress shall make no law which in any way benefits or favors its own members, or other Federal employees, which does not apply equally to all citizens of the nation. (E.g., Government pension and medical plans)
- Congress shall pass no law which it is not certain is clear and devoid of damaging “unforeseen” consequences, or which it is not convinced is fair and enforceable. (E.g., Illegal immigration problems)
- In keeping with the letter of the Constitution, no new laws or binding regulations may be made and enforced without full Congressional approval. Furthermore, all laws and regulations which are approved by Congress (and by the President), once passed, must be fully enforced. There must never again be situations where a new administration decides unilaterally that it doesn't like laws passed by a previous administration and then refuses to enforce such laws; nor may Congress ever decide that it doesn't approve of a law from an earlier administration and simply refuse to fund its enforcement. Once properly passed, every law must be followed rigorously unless and until it is determined that the law was ill advised and needs to be removed. Once deemed unacceptable, such laws must be deleted diligently. A government divided against itself is destructive and self-defeating.
- Congress shall make a concerted effort to remove any and all old laws which have proven to be poorly written, unenforceable, duplicative of other better written laws, or otherwise simply not worthy of retaining. Frankly, I would much rather vote for a Congressman who would promise to get rid of bad laws before I would ever vote for one who would promise to try to pass a law that would benefit me personally!
- Congress shall permanently terminate the practice of adding riders to bills unless the riders relate clearly and objectively to the primary subject of the bill in question. If the subject of any unrelated rider is worthy of passage, it must be considered on its own merits as a separate bill, with no exceptions.
- Congressional salaries should not be determined by Congress alone. Any increase in any Government salaries must be approved, on a case-by-case basis, by both houses of Congress and the President, and by the people of the Congress person's district. There should never be a general Congressional salary increase without voter approval.
Part VII – Consequences
It
can easily be seen that the above six sections, if fully implemented,
would produce consequences, most of which would be viewed, by most
people, as beneficial; but some of the consequences will require
some adjustment from some people. Let's look at how these new rules
will affect various segments of the population.
- With the greatly improved predictability of business costs - taxes, healthcare and retirement contributions, regulations - it can be assumed that business will thrive. All businesses and virtually all employees will benefit.
- The new tax rules are likely to be popular with nearly everyone, except for those whose current livelihood depends on tax code complexity. However, it is likely that many IRS employees will no longer have jobs.
- Many of the tax lawyers, tax accountants in private business and the thousands of minor employees working in tax and accounting departments will have to be retrained in other aspects of corporate business. With the explosion of profitable business one should expect from all this, the number of productive jobs available to absorb this loss of “make work” jobs should be satisfying to almost everyone.
- Since a very large part of government business is based on and supported by tax complexity, a huge chunk of government “make work” will disappear, with concomitant reduction in cost of government.
- The details of the shift from Social Security to the Private Retirement system will require retraining the surplus IRS, SSA and other accounting personnel to make sure the SSA accounts remain balanced and no retirees lose payments they have coming to them. No net loss to the treasury is foreseen here.
- The same potential applies to government's reduced presence in the healthcare and education “industries”; just releasing its grip on these areas of public affairs, in which the Federal Government has no Constitutional authority in the first place, will take some years of careful extraction, with a large number of qualified workers to untangle the mess.
- The growth in productive business – and corresponding growth in profits – will create a need for more workers at all levels, especially more highly qualified workers. The increased need and the growth in profits will work together to make higher pay rates both necessary and affordable, to the benefit of workers at all levels. It's the exact opposite of what we have with creeping Socialism, which stifles business and causes far greater harm to both lower paid workers and the middle class than does healthy Capitalism.
- Inevitably, there will be some individuals – in government, in the corporate world, and in the unions - with a lust for power who will try to suborn this new system to their advantage (and to everyone else's disadvantage), so it will always be necessary for honest members of Congress and The People to maintain careful oversight.
- Weaning taxpayers from the current Special Interest system in which many investment vehicles are “Tax Free” or “Tax Exempt” (Municipal Bonds are typical of this class) will be a gradual process. It would not be reasonable to expect to break existing contracts just to more quickly realize the benefits of these new rules, so some degree of “grandfathering” of contracts now in place must be accepted, but all new investment should be fully locked into the new rules. It should be noted, however, that this comment applies specifically to Federal Tax loopholes. The States must still be free to handle their tax regulations free from interference from the Federal Government.
- It will likely take at least 20 years, possibly longer, with this system in place before the National Debt will be adequately reduced, or eliminated - about the same length of time it should take to fully shift over to the Private Retirement Accounts. By that time it can be assumed that our economy will have shifted into high gear and our future should look far more promising than it does today.The transition from our current way of doing things to full implementation of all parts of this new system will take time and more will and courage than is evident in some of our present Members of Congress. Hopefully, this change will encourage a higher quality of candidates dedicated to public service.
Tax
Reform Modified for Dependents
In
my original Tax Reform article, above, I intentionally avoided varying the
tax obligation for number of dependents. Although few of my readers
objected to this rejection of one of the primary tenets of our
current tax code, several did question the wisdom of taxing everyone
the same regardless of family size and other dependency
considerations. As I stated in my earlier version, I did not – and
still do not – consider it to be any of government's business how
many children a family decides to have. If everyone adopted
responsible behavior, the only people who would have children would
be those who have a stable family situation and can afford the
children, and who would bring those children up properly. It becomes
a matter of interest to government authorities only when people
exhibit irresponsible behavior, and the cost of providing for some
children defaults to others than their parents. This happens far too
often, but it is not within the scope of this article to suggest
methods for changing people's behavior.
Part
II of my Tax Reform article contained the simple formula:
(1) TI = GI² / 4 * MI
to
calculate Taxable Income (TI) from Gross Income (GI) and Median
Income (MI) for annual incomes up to 2 * MI. Above that limit, TI =
GI – MI.
If
it is the consensus of the citizens of this country (and of Congress,
of course) that tax levels should increase for those who are single
or have no children, then one more variable can be added to the above
formulae to accomplish this goal quite painlessly. In an early
version of my Tax Reform article I offered two versions of the same
formula. The alternate version was:
(2) TI
= GI² / 2 * MI
for
incomes up to MI, and TI = GI – MI / 2 for all greater incomes.
The Taxable Income resulting from this alternate version (2) was
exactly double the TI from the published version (1), up to an income
equal to MI. Above that level, version (2) increased slightly faster
than version (1) up to an income of 2 * MI, and then both increase at
the same rate. The only difference between the two versions can be
described by one added variable, R, which lies between 1 and 2 and is
determined by the number of dependents each taxpayer claims, as
follows:
(3) TI
= GI² / 2 * R * MI and TI
= GI – R * MI / 2
for
incomes up to R * MI and incomes greater than R * MI, repectively.
Then,
it is necessary only to select a reasonable set of values for R to
fit the circumstances of single taxpayers with no dependents, married
taxpayers with no dependents, and single or married taxpayers with
one or more dependents.
I
have set up a worksheet showing TI values for a range of realistic R
values (see Table I) and have selected what appear to me to be
suitable values of R as follows:
- Single taxpayers, R = 1.0
- Married taxpayers, one income earner, R = 1.4
- Married taxpayers, one income, one child (or other dependent), R = 1.7
- Married taxpayers, one income, two children, R = 1.9
- Married, one income, more than two children (dependents), R = 2.0
- Single parent, head of household, one child, R = 1.7
- Single, head of household, plus two, R= 1.9
- Single, head of household, three or more, R = 2.0
- Couple, both with incomes, may combine incomes and report as Case 2 or file separately and each report as Case 1. The latter choice will always produce the lesser Taxable Income, and is the obvious preference.
- Couple, two incomes, one or more children, set R = 1 for the lesser income. For the higher income member, set R = 1 plus .3, .5, or .6 for one, two, or three or more children (or other dependents). Each member of the couple would then have to file separately to minimize taxes.
The
rules can be summarized by the following sequence of steps:
Single,
no dependents – R = 1.0
Spouse
– add 0.4 to single R value
Head
of household (single with dependents) – add 0.4 to single R value
One
dependent – add 0.3 to R
Second
dependent – add additional 0.2 to R
Third
(or more) dependent – add additional 0.1 to R
In
each of these cases, it can be seen by using Table I that the
addition of this R factor for calculating tax will, in most cases
yield a higher tax burden than the simpler formulae given in (1)
above, except for families with at least three children.
Double-income families with maximum dependents will actually pay less
than with my original formulae. This appears to be the objective of
those who wish to give married couples with children an exemption for
dependents, so this extra variable resolves that issue nicely.
Note
that, just as was shown in my earlier article, for those with incomes
below some multiple (between 1 and 2) of MI, the portion or their
income that is taxable is less than half of R * MI, while the taxable
portion grows linearly with income above that limit. In all cases,
the actual tax is then simple the Flat Tax rate (FT) times that
taxable income. No one pays the full FT tax rate on all of their
income, but those with very high incomes pay almost the full rate. I
would defy anyone among the Occupy 99% group to come up with a fairer
tax method than this.
MI = | $60,000 | Single Taxpayer, Taxable Income for all possible R values | |||||||
GI | TI (R=2) | TI (R=1) | TI (R=1.3) | TI (R=1.4) | TI (R=1.5) | TI (R=1.6) | TI (R=1.7) | TI (R=1.8) | TI (R=1.9) |
$10,000 | $416.67 | $833.33 | $641.03 | $595.24 | $555.56 | $520.83 | $490.20 | $462.96 | $438.60 |
$20,000 | $1,666.67 | $3,333.33 | $2,564.10 | $2,380.95 | $2,222.22 | $2,083.33 | $1,960.78 | $1,851.85 | $1,754.39 |
$30,000 | $3,750.00 | $7,500.00 | $5,769.23 | $5,357.14 | $5,000.00 | $4,687.50 | $4,411.76 | $4,166.67 | $3,947.37 |
$40,000 | $6,666.67 | $13,333.33 | $10,256.41 | $9,523.81 | $8,888.89 | $8,333.33 | $7,843.14 | $7,407.41 | $7,017.54 |
$50,000 | $10,416.67 | $20,833.33 | $16,025.64 | $14,880.95 | $13,888.89 | $13,020.83 | $12,254.90 | $11,574.07 | $10,964.91 |
$60,000 | $15,000.00 | $30,000.00 | $23,076.92 | $21,428.57 | $20,000.00 | $18,750.00 | $17,647.06 | $16,666.67 | $15,789.47 |
$70,000 | $20,416.67 | $40,000.00 | $31,410.26 | $29,166.67 | $27,222.22 | $25,520.83 | $24,019.61 | $22,685.19 | $21,491.23 |
$80,000 | $26,666.67 | $50,000.00 | $41,000.00 | $38,095.24 | $35,555.56 | $33,333.33 | $31,372.55 | $29,629.63 | $28,070.18 |
$90,000 | $33,750.00 | $60,000.00 | $51,000.00 | $48,000.00 | $45,000.00 | $42,187.50 | $39,705.88 | $37,500.00 | $35,526.32 |
$100,000 | $41,666.67 | $70,000.00 | $61,000.00 | $58,000.00 | $55,000.00 | $52,000.00 | $49,019.61 | $46,296.30 | $43,859.65 |
$110,000 | $50,416.67 | $80,000.00 | $71,000.00 | $68,000.00 | $65,000.00 | $62,000.00 | $59,000.00 | $56,000.00 | $53,070.18 |
$120,000 | $60,000.00 | $90,000.00 | $81,000.00 | $78,000.00 | $75,000.00 | $72,000.00 | $69,000.00 | $66,000.00 | $63,000.00 |
$130,000 | $70,000.00 | $100,000.00 | $91,000.00 | $88,000.00 | $85,000.00 | $82,000.00 | $79,000.00 | $76,000.00 | $73,000.00 |
$140,000 | $80,000.00 | $110,000.00 | $101,000.00 | $98,000.00 | $95,000.00 | $92,000.00 | $89,000.00 | $86,000.00 | $83,000.00 |
$150,000 | $90,000.00 | $120,000.00 | $111,000.00 | $108,000.00 | $105,000.00 | $102,000.00 | $99,000.00 | $96,000.00 | $93,000.00 |
$160,000 | $100,000.00 | $130,000.00 | $121,000.00 | $118,000.00 | $115,000.00 | $112,000.00 | $109,000.00 | $106,000.00 | $103,000.00 |
$170,000 | $110,000.00 | $140,000.00 | $131,000.00 | $128,000.00 | $125,000.00 | $122,000.00 | $119,000.00 | $116,000.00 | $113,000.00 |
$180,000 | $120,000.00 | $150,000.00 | $141,000.00 | $138,000.00 | $135,000.00 | $132,000.00 | $129,000.00 | $126,000.00 | $123,000.00 |
$190,000 | $130,000.00 | $160,000.00 | $151,000.00 | $148,000.00 | $145,000.00 | $142,000.00 | $139,000.00 | $136,000.00 | $133,000.00 |
$200,000 | $140,000.00 | $170,000.00 | $161,000.00 | $158,000.00 | $155,000.00 | $152,000.00 | $149,000.00 | $146,000.00 | $143,000.00 |
Extrapolation to higher incomes is linear with income | |||||||||
Table I |
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