There's a very simple and elegant way to: 1) reduce and eliminate the deficit and the national debt; 2) ensure yearly balanced budgets without amending the Constitution; 3) fix our disjointed tax and spend systems of government; 4) make it easy for people to calculate their federal income tax; 5) make sure the rich pay their fair share; and 6) put our country back on the right track. It's the plan you'll never hear Congress or the Super Committee talk about.
All this can be achieved by some very simple, straightforward, yet dramatic changes to the tax code and the way we think about revenue collection and revenue spending. I look forward to everyone's comments on this.
First, amend the individual income tax by eliminating ALL the tax deductions, exemptions, credits, etc. Make everyone pay taxes on their actual, total income, not on some artificial adjusted income.
Second, set the tax rates so that all low and middle income earners pay taxes equal to the rate paid by people who make the same but, under the current system, are able to maximize their use of deductions, exemptions, credits, etc. Give all low and middle income earners at the same income level the same low tax rate.
Third, mandate that the IRS adjust the top bracket so that anticipated federal income will match anticipated federal spending for each year, but only give the IRS the power to add brackets with higher marginal rates, don’t give it the power to increase the marginal rate on lower brackets (see the chart!)
Fourth, if there are programs in the individual income tax that have merit and shouldn’t be cut, move them to the spending side. If we want to give people an incentive to buy homes or donate to charity, do it through a spending program rather than a tax deduction or credit. Whether we offer the incentive through tax reduction or through spending, it still costs the government money, but if we move it to the spending side we can see the true cost of the program, we can see who uses and benefits from the program, and we can decide whether the benefits are worth the cost.
Fifth, and this is really important, do all the same things to the business/corporate income tax. Get rid of ALL deductions and make corporations pay on their total gross income, regardless of the cost of producing that income. The rates would have to be dramatically lower than they are now, but if we make this change NO billion dollar corporation will ever again avoid paying income tax. And, as with the individual income tax, if there are programs in the corporate income tax system worth keeping, move them over to the spending side of the ledger. Let us see which companies make use of the program, how much they get, how they use it, and whether the program is worth the cost.
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Before looking at the chart, let's start with a reality check: Our tax rates are NOT too high. They are lower than they’ve been since the Great Depression. Millionaires today pay a top tax rate of 35%. But in the 1950's someone who was earning the equivalent of $2 million today was paying a top tax rate of 91%. For the entire decade of the 1950's wealthy Americans were paying a top tax rate of 91 or 92%. Imagine if today's billionaires were paying a tax rate of 91% on their billions! Yet we’re told that even the current 35% is to high for today’s billionaires. Anyone who thinks the wealthy can’t afford to pay more than they are now doesn’t understand what it means to be wealthy in America and doesn’t understand what it means to be middle class and struggling.
Here is what the current individual income tax brackets look like. Keep in mind, these are on income after all the adjustments are made to a person's total gross income. And because the tax charts don’t list total income, they can’t be used to calculate the taxpayer's effective tax rate.
Bracket |
Marginal Rate |
Top Marginal Tax |
Top Total Tax |
$0-$8,500 |
10% |
$850 |
$850 |
$8,501-$34,500 |
15% |
$3,900 |
$4,750 |
$34,501-$83,600 |
25% |
$13,125 |
$17,025 |
$83,601-174,400 |
28% |
$25,424 |
$42,499 |
$174,401-379,150 |
33% |
$67,567.50 |
$110,016.50 |
$379,151 or more |
38% |
The chart below is one way the tax code could look if we taxed an individual’s total gross income. And there would only be one way to file - as an individual. No more filing as married-jointly, married-separately, head-of-household, etc. Your tax return would be so simple it would fit on a 4 x 6 postcard. No more going through pages and pages of calculations and adjustments. If you know how much you made, you’ll know how much you have to pay and what your real tax rate is. For example, using the chart below, let’s say you earned $52,000 in salary and wages and earned $300 in interest and dividends. That’s total income of $52,300. You can see that the tax on the $50,000 would be $3,500. The remaining $2,300 would be taxed at the marginal rate of 20%, or $460. So your total tax would be $3,960 which is about 7.6% of your total income of $52,300. Easy. Fair. No accountant, tax software or tax preparer required.
Note that in the chart below the top tax bracket stops at 38% for those earning over $100,000. The second chart below shows what the effective tax rate would be for a number of high earners with 38% as the top tax bracket. At some point a person will earn enough to approach, but never equal, an effective tax rate of 38%. Note also that new top brackets can easily be added: each extra $5,000 in income gets an extra 2% in marginal tax rate and for the top of each bracket an additional 1% in effective tax rate. And the top tax rate doesn’t have to go up a full 2%, it could be 1%, or a half percent, or whatever is needed to keep projected federal income equal to projected spending. But all the lower brackets would be unchanged. Unless you are a top earner, you will always know what your tax bill will be, your rates won’t change.
Bracket |
Marginal Rate |
Top Marginal Tax |
Top Total Tax |
Top Effective Rate |
$0-$15,000 |
0% |
$0 |
$0 |
0% |
$15,001-$20,000 |
4% |
$200 |
$200 |
1% |
$20,001-$25,000 |
6% |
$300 |
$500 |
2% |
$25,001-$30,000 |
8% |
$400 |
$900 |
3% |
$30,001-$35,000 |
10% |
$500 |
$1,400 |
4% |
$35,001-$40,000 |
12% |
$600 |
$2,000 |
5% |
$40,001-$45,000 |
14% |
$700 |
$2,700 |
6% |
$45,001-$50,000 |
16% |
$800 |
$3,500 |
7% |
$50,001-$55,000 |
18% |
$900 |
$4,400 |
8% |
$55,001-$60,000 |
20% |
$1,000 |
$5,400 |
9% |
$60,001-$65,000 |
22% |
$1,100 |
$6,500 |
10% |
$65,001-$70,000 |
24% |
$1,200 |
$7,700 |
11% |
$70,001-$75,000 |
26% |
$1,300 |
$9,000 |
12% |
$75,001-$80,000 |
28% |
$1,400 |
$10,400 |
13% |
$80,001-$85,000 |
30% |
$1,500 |
$11,900 |
14% |
$85,001-$90,000 |
32% |
$1,600 |
$13,500 |
15% |
$90,001-$95,000 |
34% |
$1,700 |
$15,200 |
16% |
$95,001-$100,000 |
36% |
$1,800 |
$17,000 |
17% |
$100,001 + |
38% |
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|
|
With a top tax rate of 38%, these earners would pay these amounts:
Income |
Marginal Rate |
Marginal Tax |
Total Tax |
Effective Rate |
$150,000 |
38% |
$19,000 |
$36,000 |
24% |
$200,000 |
38% |
$38,000 |
$55,000 |
27.5% |
$300,000 |
38% |
$76,000 |
$93,000 |
31% |
$400,000 |
38% |
$114,000 |
$131,000 |
32.75% |
$500,000 |
38% |
$152,000 |
$169,000 |
33% |
A similar chart could be structured for the corporate income tax, but with much lower rates since it would require even companies experiencing a net loss in revenue to pay a corporate income tax. And to those who think it would be unfair for a company experiencing a net loss to pay income tax, don't those corporations still pay rent, a mortgage, utilities, property taxes, and other costs which are just a part of doing business? So why not treat the corporate income tax as just such an unavoidable cost? It's the best way to ensure that companies like GE will always pay taxes, no matter how many accountants and lawyers they hire.
This would be a fair, simple tax system that could be adjusted by intervention by the IRS - rather than Congress - to keep revenue in line with spending. And yes, the wealthy would bear the cost of any increase in the federal budget, but with the power, influence and access wealth provides, aren't the wealthy in the best position to encourage Congress to keep spending down? Shouldn't they be the one's to pay if Congress doesn't? It's a plan that makes sense and would really work, which is why it will never be proposed.