[patroclus]

One of the courses I'm taking this semester is Tax Policy. As part of this class, I have to invent & propose a piece of legislation that would:
A) Reform the existing 1986 tax code;
B) Be revenue neutral (neither increasing nor decreasing overall government revenues);
C) Be rooted in existing statutory & judicial framework;
D) Have a "better than a snowball's chance in hell" chance of being approved in Congress.

I don't believe income taxes are moral. I don't believe the government has any right to the fruits of my labors, but that can't be factored into my presentation. So here is my proposal:

1. Elimination of all itemized and personal deductions, exemptions, and exclusions in favor of a percentage-based exclusion;
2. Elimination of the current tax-bracket system in favor of flat rates;
3. Elimination of the Corporate Income Tax
4. Elimination of the Estate Tax

The Rates would be structured like this:

Taxpayers with AGI (Adjusted Gross Income):
< $20,000 would have a 100% exemption. No one below this line will pay income tax.
$20,000 under $25,000 have a 90% exemption and a 20% rate (effective tax rate 2%
$25,000 under $30,000 have a 80% exemption and a 20% rate (4% ETR)
$30,000 under $40,000 have a 70% exemption and a 20% rate (6% ETR)
$40,000 under $50,000 have a 60% exemption and a 20% rate (8% ETR)
$50,000 under $75,000 have a 50% exemption and a 20% rate (10% ETR)
$75,000 under $100,000 have a 40% exemption and a 20% rate (12% ETR)
$100,000 under $200,000 have a 30% exemption and a 25% rate (17% ETR)
$200,000 under $500,000 have a 20% exemption and a 35% rate (28% ETR)
$500,000 and up have a 10% exemption and a 40% rate (36% ETR)

Statistically, that means that the lowest 35% of taxpayers will pay nothing. Of those who do pay tax, 82% will fall into the 20% rate. Compared to FY2006 collections (best IRS data available), this plan would represent an increase of tax of approximately $401 billion annually. To maintain revenue neutrality, corporate income taxes and estate taxes would be eliminated. With the sliding-rate exemption, a progressive structure is maintained, fully in line with public demands that the "rich pay more." People will still have the opportunity to adjust their finances to legally avoid taxation. As Judge Learned Hand once said, "Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes. "

Approximately 90% of the current tax code can be eliminated. Only §1-60 and certain sections relating to penalties and late charges need to be retained. Expensive enforcement operations against corporate taxpayers can be terminated. Enforcement operations against taxpayers which involve only below-the-line (after AGI) deductions can be terminated as well. The remaining law will be far easier to enforce, allowing reductions in staffing at the IRS and the Department of the Treasury. The government would maintain its ability to "influence behavior" via the tax code, but will be limited to items that can be deducted from income "above the line."

This system totally eliminates the double-taxation of corporate income, and levels the playing field between various forms of business. It will create a very business-friendly environment in the United States, and would encourage corporations to locate their operations here, in order to deliver maximum income/cash-flow to their shareholders.

This system also eliminates the "death tax," preventing the government from double-taxing a persons earnings (once when they are earned, and again when they are passed on).

Critiques? Would the typical liberal be able to live with this? Typical conservatives? I can e-mail the excel sheet to anyone if they want to see the base data from the IRS.

Thanks.

[techs]

I think one problem is that in many cases, a person earning a slightly higher income may actually be left with less money after taxes than someone earning less. For instance, if I earn $95,000, I get a 40% exemption and pay a 20% tax on the remainder. That leaves me with $83600 left over. However, if I earn $101,000, my exemption is lower and my tax rate is higher, and I only end up with $83325. Not only did my entire $6,000 raise go to the government, but they penalized me by $275 for even getting it in the first place. Similar issues exist around all of your other delineation points.

I think the current tax code avoids this by applying different tax rates against segments of income rather than the entire cumulative thing. For instance everyone pays a certain amount of tax on the first 'x' dollars they earn, and then a higher tax on the next 'y' dollars, and so on. It makes it a bit more complicated to calculate the amount of tax owed, but it also means that there will *never* be a case where in increase in total income actually results in a reduction in a person's after-tax income (ignoring the alternative minimum tax). You might consider re-working your idea to do something similar. Another, potentially simpler, alternative is to do away with the coarse delineations between the different tiers, and make the exemption rate and the tax rate continuously variable. For example, you could have:

exemption = f(income) { factor = income / 555555.5; if (factor <= 0.036) factor = 0.0; if (factor > 0.9) factor = 0.9; return 1.0 - factor; }

and then you do 'adjusted_income = income * (1.0 - exemption)', and then you can have:

taxrate = f(adjusted_income ) {factor = (adjusted_income / 225000.0) / 10.0; if (factor > 0.2) factor = 0.2; return 0.2 + factor; }

and then you have roughly the same scale (in terms of the upper and lower bounds), implemented with continuously variable exemptions and tax brackets. Additionally, the tax brackets in this example are assigned after the person's income is adjusted by the exemption amount, which eliminates any possibility of a person with a higher total income ending up with less after-tax income than someone who earns less overall. The upper and lower bounds behave the same is in your original example, anyone earning less than $20,000 pays no taxes. Someone earning $20,500 would owe $151.48 in taxes, and someone earning $500,000 would owe $180000. Also, the $95000 person would now owe $3366.29 in taxes, and be left with $91633.71 (hooray!), and the $101,000 person would owe $3822.21 and be left with $97177.79, keeping essentially $5500 of their $6000 pay increase.

Note that both of my functions are linear, and as a side-effect, exemptions decrease much more slowly, while tax rates increase slightly more quickly at the low end, and much more slowly at the high end (which is why the taxes owed has gone way down in the examples). You could replace the linear functions with slightly more complicated ones that produce more of a curved progression to get closer to your original model, while still ensuring that there is no case where a higher income person in excessively punished for having a higher income. In fact, you'd almost definitely have to make such a change in order to meet the "revenue neutral" requirement.

All that said, I would prefer a flat consumption-based tax, like FairTax. Let the consumer whores fund the government. And also I think I should get a federal tax credit for any state/local taxes I pay. The federal government can make up some of the difference by imposing a tax on the state and local governments themselves.

This post has been edited by techsupp0rt: 25 April 2009 - 07:07 AM

[techs]

And why remove the corporate income tax? If there's a $401 billion surplus, then that surplus could go to reducing everyone's taxes across the board. Corporations already get to assert ownership of my work for a fraction of what it's actually worth, so why should they get a huge tax break on top of that? If corporations are exempt from having to pay taxes, then maybe profit sharing should be mandatory for all publicly traded companies. At least that way the people who actually create valuable IP for a company have a way to get a piece of its true value.

[patroclus]

First off, eliminating the corporate income tax is a way to get the more pro-business elements of congress on board with the proposal. Second, as i noted, it eliminates the double-taxation of corporate income (currently, corporate income is taxed--a deduction for dividends paid is not allowed--and then those dividends paid are taxed as income to the shareholders who receive them). Third, it would make the United States TREMENDOUSLY business-friendly. The friendlier a business-climate we have, the more likely it is that businesses will locate here and keep their profits here (rather than, say, sending those same profits to Bermuda). Also, government finds it far too easy to pass idiotic spending measures knowing they can make corporations--who don't vote--foot the bill. If every budget bill was prefaced with the thought "my constituents will HAVE to pay for this," I think we may see a little more restraint in spending.

I'm aware of the higher-income problems in the proposed calculation. That happens in any flat-rate system. With the data I have, however, I don't see a way to calculate the effect. The IRS data table isn't broken down very well to calculate a delta that way. Curving the exemption percentages may be an option (my original file actually used the depreciation rates for 10-year double-declining balance with a 10% floor). I've still got time to play around with it.

I would personally eliminate all federal taxes in favor of direct apportionment. California has 10% of the population and should therefore foot 10% of the bill. Wyoming, which has 0.18% of the population, should only foot 0.18% of the bill. The states themselves can figure out how to raise said funds (within the boundaries of the Constitution). As I said earlier, if a Congressman/woman is looking at a $4 trillion budget, it helps to have them think "My state will have to pay X% of this," or "Why should my state pay for 10% of a peanut museum endowment??"

PS--The state & local deduction could be maintained in my plan. It would just have to go from "Deduction from AGI" to "Deduction from Gross Income." ;)

PPS--It occurs to me that some of you have never looked at an American 1040. The quick version would be that you start with gross income, deduct certain items of income that aren't taxed (interest on federal bonds, alimony, child support, etc) and certain expenses (student loan interes, self-employed health insurance, etc) and you come to "adjusted gross income." You then deduct further from AGI to get to your Taxable Income.

This post has been edited by patroclus: 25 April 2009 - 12:36 PM

[techs]

Quote

First off, eliminating the corporate income tax is a way to get the more pro-business elements of congress on board with the proposal. Second, as i noted, it eliminates the double-taxation of corporate income (currently, corporate income is taxed--a deduction for dividends paid is not allowed--and then those dividends paid are taxed as income to the shareholders who receive them). Third, it would make the United States TREMENDOUSLY business-friendly. The friendlier a business-climate we have, the more likely it is that businesses will locate here and keep their profits here (rather than, say, sending those same profits to Bermuda).

If making the U.S. seem more business-friendly relative to other countries is one of the goals, then wouldn't it be sufficient to just reduce the corporate tax to a few percentage points below the next best country? It has the same pro-business appeal, but without throwing away the revenue source entirely.

Also, I'm not sure I buy the double-taxation argument, mostly because the same argument could be applied to pretty much any tax. For instance, I have to pay a tax on any income I earn. And then, if I go and spend some of my post-tax income at a restaurant, then either the restaurant has to pay taxes on the money I give them if they claim those dollars as profit, or they pay them out to an employee/supplier/other third party who must then pay taxes on the already taxed money as income. And when they spend the money they have left after that round of taxes, it gets taxed again, and again, and again, until there's nothing left. And that's to say nothing of the sales tax and other incidental taxes that may get applied along the way. All money is taxed a ridiculous number of times, not just corporate income.

Quote

I would personally eliminate all federal taxes in favor of direct apportionment. California has 10% of the population and should therefore foot 10% of the bill. Wyoming, which has 0.18% of the population, should only foot 0.18% of the bill. The states themselves can figure out how to raise said funds (within the boundaries of the Constitution). As I said earlier, if a Congressman/woman is looking at a $4 trillion budget, it helps to have them think "My state will have to pay X% of this," or "Why should my state pay for 10% of a peanut museum endowment??"

Wouldn't one problem with that be that it would be almost impossible for the small states like Wyoming to get a substantial amount of funding? Like what happens if Wyoming needs 2% of the total budget for infrastructure and other essential things? Why would California or any other state consent to allowing a portion of the money raised in their state to be spent on another state? I think the approach could work for funding things like broad social programs where every individual benefits roughly equally (social security, universal healthcare, etc.), but for funding large-scale single-state projects I think it would be a mess.

[shakey_snake]

A bicameral legislature is supposed to help with that.

[patroclus]

techsupp0rt, on Apr 27 2009, 01:57 AM, said:

Also, I'm not sure I buy the double-taxation argument, mostly because the same argument could be applied to pretty much any tax. For instance, I have to pay a tax on any income I earn. And then, if I go and spend some of my post-tax income at a restaurant, then either the restaurant has to pay taxes on the money I give them if they claim those dollars as profit, or they pay them out to an employee/supplier/other third party who must then pay taxes on the already taxed money as income. And when they spend the money they have left after that round of taxes, it gets taxed again, and again, and again, until there's nothing left. And that's to say nothing of the sales tax and other incidental taxes that may get applied along the way. All money is taxed a ridiculous number of times, not just corporate income.

"Double taxation" has a very specific meaning in the world of tax, and only refers to the corporate dividend problem. When you use after-tax dollars and wind up paying sales tax on something, you're taxed "coming and going" on both income and outflow. Corporate dividends are taxed coming and coming. It is fairly egregious as well, since the dividend usually winds up taxed at the 35% corporate rate AND the top individual rate of 36% before he/she has even had the CHANCE to spend it.

I'd remind you as well, eliminating the corporate income tax will make business locate here. We want jobs, don't we? It will entice them to re-patriate their earnings from overseas operations and spend them here. We want that, don't we?

I could also bring up another point: This country was founded on the concept of "no taxation without representation." Corporations are not people (they're separate legal entities, but they are not flesh-and-blood people) and do not vote. Why should they be taxed?

What I seem to be getting here to my original questions (would a normal conservative/liberal vote for this) seems to be "no." I'm surprised none of the real liberals have piped in on it...

Still, it leaves untouched some of the true "Sacred Cows" of the tax system and doesn't even touch the realm of Social Security Taxes and Medicare/Medicaid. Once I've recovered from class (staying up past 10 isn't as easy as it used to be) I'll take a crack at calculating a bracket-based approach.

[sttaffy]

aren't corporations regarded as persons?

[techs]

Well wikipedia says:

Quote

A corporation is legally a citizen of the state (or other jurisdiction) in which it is incorporated (except when circumstances direct the corporation be classified as a citizen of the state in which it has its head office, or the state in which it does the majority of its business). Corporate business law differs from state to state, and many prospective corporations choose to incorporate in a state whose laws are most favorable to its business interests. Many large corporations are incorporated in Delaware, for example, without being physically located there because that state has very favorable corporate tax and disclosure laws.

As juristic persons, corporations have certain rights that attach to natural purposes. The vast majority of them attach to corporations under state law, especially the law of the state in which the company is incorporated – since the corporations very existence is predicated on the laws of that state. A few rights also attach by federal constitutional and statutory law, but they are few and far between compared to the rights of natural persons. For example, a corporation has the personal right to bring a lawsuit (as well as the capacity to be sued) and, like a natural person, a corporation can be libeled.

But a corporation has no constitutional right to freely exercise its religion because religious exercise is something that only "natural" persons can do. That is, only human beings, not business entities, have the necessary faculties of belief and spirituality that enable them to possess and exercise religious beliefs.

So while it's not explicitly stated, I would assuming that voting is another right that only "natural" people get. Of course, that completely ignores the impact of lobbyists, and the fact that in reality, most corporations hold far more sway over the government than I do, the right to vote notwithstanding. Some of them have done quite well for themselves, actually.

[Magilla]

techsupp0rt, on Apr 25 2009, 04:16 PM, said:

And why remove the corporate income tax? If there's a $401 billion surplus, then that surplus could go to reducing everyone's taxes across the board. Corporations already get to assert ownership of my work for a fraction of what it's actually worth, so why should they get a huge tax break on top of that? If corporations are exempt from having to pay taxes, then maybe profit sharing should be mandatory for all publicly traded companies. At least that way the people who actually create valuable IP for a company have a way to get a piece of its true value.

Because, for the scope of the assignment, the changes must be revenue-neutral. Out of all the possible ways to make this happen, removing the corporate income tax is not a bad way to go, as it gives hells snowball a bucket of ice to work with.

Were you putting this forward in the real world, no such stipulation would exist. Personally, I would halve the Corporate Income Tax and the Estate Tax, giving the Government $200 billion more to work with each year, while still improving the business atmosphere.

[hestermofet]

I would ask for critiques from your fellow students, as they would know more about the subject. I wouldn't ask for help on a political science essay here, as it would be filled with specialized knowledge. After about high school, it's not really worth asking for help on assignments from the general population (except for on certain kinds of things). I think the lack of replies bears out that fact that most of us here aren't much help.

I'm sure everyone here has an opinion on the tax system (I know I do), but none of us have considered the subject as carefully as someone who just finished a course on it.

This post has been edited by hestermofet: 18 May 2009 - 02:32 AM

[patroclus]

Actually, hester, I was looking for the more vague, politically-oriented comments that would give me a feel for how Joe/Jane Legislator would react upon glancing through a precis of what would have to be a rather lengthy bill (if still less than the 10,000+ pages of the current code). The few who replied told me exactly what I needed to know. :)

[Hugh]

I agree with Hester, but you got what you needed, so yay. :up: :)

This post has been edited by Hugh: 18 May 2009 - 06:35 AM

[Simo]

Pat, doesn't the US have a tax imputation system? Dividends here can be franked which means the shareholder will get a tax offset. Dividends that are fully franked will only be taxed once.