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Tax Reform

Posted this a couple of times in the forums. It's a complicated proposal with some pretty far-reaching effects, so here's the gist of it:
  • Balance the budget.
  • Simplify the tax code by removing all deductions, exemptions, and rebates.
  • Encourage repatriation of American capital by removing tax incentives to locate operations elsewhere.
  • Eliminate manipulation of the tax code for political purposes by pinning tax brackets to price indexes and pinning tax rates in each tax bracket to a base figure.

The core idea, of course, is to use tax policy for its intended purpose-- the most economically efficient possible generation of revenue-- instead of using it as the primary weapon in the game of counterproductive class warfare cynically waged by our politicians.

Like most of my ideas, this one would require amending the Constitution.

Viktyr Korimir's Tax Reform Amendment
  • Section 1: The Federal budget shall be balanced at all times, except in national emergencies as defined by this Section.
    • Section 1-A: Congress shall set aside 5% of the Federal budget for an Emergency Fund, to be spent only in times of national emergency as declared by the President and defined by this section.
    • Section 1-B: National emergencies are defined as follows:
      • Military emergency: an officially declared war that requires additional military spending.
      • Economic emergency: four consecutive quarters of negative GDP growth or a rise of unemployment greater than 2% in a single year.
      • Disaster emergency: any natural or manmade disaster for which a specific state of emergency is declared.
    • Section 1-C: A national military emergency authorizes the Federal government to borrow money to pay for additional military spending.
    • Section 1-D: A national economic emergency authorizes the Federal government to allocate funds from the Federal Emergency Fund for discretionary spending, and to borrow money to pay for specific stimulus packages.
    • Section 1-E: A national disaster emergency authorizes the Federal government to allocate funds from the Federal Emergency Fund and borrow money to pay for spending necessary to contain the disaster and rebuild damaged infrastructure.
  • Section 2: The restrictions described in this Section shall apply to the powers of the Congress, the individual State legislatures, and all metropolitan, county, and municipal governments empower to enact taxes within the United States and its territories, hereafter referred to as "taxing authorities".
    • Section 2-A: The following forms of taxation are specifically prohibited to all taxing authorities: corporate tax, estate or inheritance tax, capital gains tax, property tax, sales or value-added tax, and all income or payroll taxes that are not specifically authorized by Constitutional amendment.
    • Section 2-B: The following forms of taxation are specifically allowed to the Congress: income tax as defined in Section 4, transaction taxes, excise tax, tariffs and duties.
    • Section 2-C: The following forms of taxation are specifically allowed to all other taxing authorities: income tax as defined in Section 4, transaction taxes, and excise tax.
    • Section 2-D: License fees, user fees, tolls,
      administrative fines, and other similar sources of revenue do not fall under the definition of "taxation" and the restrictions in this Section do not apply to them.
  • Section 3: The Congress shall set a Federal base tax rate for the fiscal year annually at the same time as it approves the budget. This base rate shall set the rate of all income tax brackets. Each taxing authority shall have the ability to determine its own base tax rate.
  • Section 4: All income taxes in the United States and its territories shall be applied in the fashion described in Sections 4A-4H.
    • Section 4-A: All income taxes shall be graduated on the basis of tax brackets determined by the size of the taxpayer's household and the Federal poverty line for a household of that size.
    • Section 4-B: A household shall consist of the head of household, any relatives of the head of household sharing the residence, plus the qualified dependents of any person sharing the residence.
    • Section 4-C: Each person with taxable income shall pay income taxes and file tax returns individually. Heads of household pay taxes according to the size of the household; other members of the household pay taxes as members of a household of 1.
    • Section 4-D: The Federal poverty line shall be defined by the Office of Management and Budget on an annual basis.
    • Section 4-E: Each tax bracket shall be numbered in order from 1, 2, 3... to the maximum bracket as defined in Section 4-I.
    • Section 4-F: The first tax bracket shall be all income from $0 to the poverty line for a household that size as defined in Section 4-B.
    • Section 4-G: Each subsequent tax bracket shall be all income from the end of the previous tax bracket to an amount equal to that figure plus the poverty line times the current tax bracket.
    • Section 4-H: Income from each tax bracket will be taxed at the base tax rate times the number of the bracket.
    • Section 4-I: The maximum marginal tax rate is 90%.
    • Section 4-J: Tax credits, deductions, and rebates are all prohibited.
  • Section 5: Federal income taxes shall apply to all income received by US residents within the United States and its territories, and to all income derived by US citizens from sources within the United States.
    • Section 5-A: Citizens of the United States residing abroad are only liable for Federal income on their remaining income after paying any applicable taxes in their country of residence.
  • Section 6: Income tax for taxing authorities other than the Federal government will be collected and disbursed to those tax authorities by the Internal Revenue Service.
    • Section 6-A: Taxing authorities are divided into tiers as follows:
      • Federal
      • State of Territory
      • Metropolitan or County
      • Municipal.
    • Section 6-B: Taxing authorities may claim income taxes from any income received within their jurisdiction and any income derived from sources solely within their jurisdiction.
    • Section 6-C: Tax liabilities for each tier are calculated according to the income remaining after taxes to higher-tier taxing authorities have been paid.
    • Section 6-D: Income which is subject to more than one taxing authority at the same tier is taxed according to the higher rate and the tax revenue is shared equally.

Pretty big, pretty complicated... but it's also pretty comprehensive and has the following economic effects that I consider highly desirable:
  • Everyone pays. Nobody has a negative tax liability, and it's impossible to raise taxes or lower taxes without affecting everyone's taxes.
  • Tax incentives for having children remain meaningful for wealthier families.
  • Anyone can do their own tax returns with the help of a simple kitchen calculator or computer program.
  • It is simple for Congress to determine the necessary tax rate to pay for everything it wants to do-- and it has to pay for it now.
  • It allows the government the flexibility to use Keynesian stimuli without having the ability to borrow the nation into financial ruin.

How does this work in practice?

Let's talk about Alice, Bob, Charlie, and Deborah. Alice is single, Bob's married and his wife stays at home, Charlie's married with a working wife, and Deborah's husband and children all have jobs. For now, we're also going to say that the base tax rate is 5%-- since it's not Constitutionally set, Congress can change it as much as it needs to.

We'll start with Alice and say that she has no children and a terrible job at which she makes $15,000 a year. Minus the $5,800 standard deduction and $3,700 personal exemption, she has $5,500 a year in taxable income all of it in the 10% bracket-- she pays $550 a year plus $1,147.50 in payroll taxes.

Give Alice one child and she's eligible for the Earned Income Tax Credit of $3,050. This means that she actually gets over a thousand dollars more than she's paid in. So she's sitting at around $16,000 in after-"tax" income.

Under my system, the only thing Alice pays is the income tax. Childfree Alice pays 5% of the first $10,890-- $544.50-- and then 10% of the next $4,110 for a total of $955.50. Single-mother Alice pay 5% of her first $14,710 in income and 10% of the last $290 for a total of $764.50. She's sitting on $14,235.50 after taxes, which is painful-- and she probably needs some help with the kid-- but it's not grievous.

Now, it's Bob's turn. Let's say Bob is a first-year elementary school teacher, earning $25,000 a year. Not a lot of money for two people to live on. Bob pays 5% on the first $14,710 like Alice does, so that's $735.50, plus 10% on the last $10,290 for a grand total of $1,764.50. (Under the current system, that would be $4,390.) Now, it's been a few years, Bob's career is going very well, and Bob and... Roberta have a couple children. At $40,000 a year, Bob's paying 5% on his first $22,350 of income-- $1,117.50-- and 10% on the remaining $17,650 for a grand total of $2,882.50 compared to the $5,545 he would have paid currently.

So what this tells me, so far, is that we probably need to bring that tax rate up to about eight or nine percent if we're going to include Social Security-- but I've got a plan for that, that I'll be talking about next time.
 

JP Hochbaum

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Section 1 is already in error and should be removed. The federal government has to operate at a deficit because our trade deficit is near $500 billion per year.

https://www.facebook.com/note.php?note_id=10150233408097109

The first question is what is the sectoral balance of the United States? The

easy answer is Private Sector Balance (Investments minus Savings) + Government

Sector Balance (Government Spending minus Taxes Collected) + the Foreign Sector

Balance (Exports minus imports). In economic algebra: (I – S) + (G – T) + (X – M) = 0.



So let's do a quick example with math here, and I am just going to use easy

numbers to make it easy. So if the Private Sector Balance is at "0", and the

Foreign Sector Balance is at $500 billion (a number close to its yearly

average), then that means in order to make things balance the government sector

had to be in a deficit of $500 billion.
 
G

Guest

I agree with this proposal, we need to simplify the tax code so businesses can focus on investing and creating new jobs rather than filling out tax forms
 
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