A Simple Tax Proposal
You start with a single tax bracket that includes everyone from the student with a part-time minimum wage job to Bill Gates and everyone in-between. Everyone pays the same percentage of their income in taxes regardless of whether they are rich or poor, regardless of whether the income comes from toil or non-toil, wages or capital gains, or dividends, or inheritance. There are no deductions, credits, or exemptions – not for charity, or home mortgages, or even children. There is not even a personal exemption for the taxpayer herself.
Assuming you wish to raise the same amount of money from income taxes as we do now, I estimate the tax rate would end up being around 13%. (Could I be wildly wrong about the 13%? Wrong: yes; wildly wrong: doubtful.)
I could stop here and declare victory, but I want to press on. I want to add progressivity, and I want to help the poor since under this ultimately simple and fair system the poor end up paying more than they do now.
We do this by having the government make tax-free cash payments to every adult citizen. (The details about how to do this will be the subject of a later welfare essay.) The dollar amount of this payment would be the same for everyone. Choosing the right amount will be tricky, I admit. Obviously, the higher the amount, the higher the percentage of tax would have to be. If payments of zero dollars result in a 13% tax rate, payments of $200 every two weeks will result in a percentage much higher than 13%. The debate over the amount of the payments would be a most interesting one.
Take a pencil and a piece of paper and play with the numbers. By giving everyone the same amount of cash, and taking from everyone the same percentage of income, you get a wonderfully progressive tax system. The very poor would get more than they paid. The working poor might break even. The middle class would pay more than they received, but the net percentage (factoring in the payments) would be far less than the gross percentage, and the difference between gross and net would slowly shrink as the amount of income grew.
An income tax this progressive, simple, and fair, yields indirect benefits. First, it is good for democracy and good for government to have every citizen with income, even the poor, pay taxes to help support the government. Every citizen should have a financial stake in good, efficient, cost-effective government. Every citizen should appreciate that a rise in taxes for some also means a rise in taxes for themselves. A single tax rate increases the beneficial feeling that we are all it this together. There is tremendous value in having a young waitress look a doctor in the eye and know that the government is treating them both exactly the same. Second, as confidence grows that everyone is truly paying their fair share, the level of voluntary compliance with tax laws should increase. There is a vast amount of unreported income in our economy that would be added to the tax rolls if members of the “cash economy” could be persuaded to fully report their income. Third, the marketplace is free to function as it should with millions of better decisions being made because they are not being influenced by tax considerations.
Exceptions to the No-Exceptions Tax Plan
As perfect as my ultra simple and fair income tax plan is, even I wish to tinker with its perfect simplicity in two respects.
The first is related to retirements. Setting aside some money for retirement is not simply Good Behavior; failing to do so is affirmatively Bad Behavior. Therefore, I would encourage the good behavior of retirement savings and thereby punish the behavior of not saving for retirement. To prevent the rich from overly benefiting from this exception, a cap would appropriate. Within the cap, money placed in a qualified IRA or deferred compensation account (i.e. an account that can’t be touched until age 60) would not be counted as income. To further encourage retirement savings, I would lower the tax rate (by say, 10 percentage points) for money withdrawn from the account during retirement.
The second exception involves the super rich – not the upper middle class, or the well off, or even the moderately rich.
At a certain point, it can no longer be argued that a person truly “earns” or “deserves” such a high income. At a certain point, even the person making the super-high income has to acknowledge that the money is as much a blessing or luck (deserved or otherwise) as it is income due to hard work. The good luck might be possession of a special talent or aptitude, or being in the right place at the right time, or both. Let’s face it, at a certain point, it is embarrassing to make so much money. When that point is reached, a higher marginal income tax rate is warranted.
Let me be clear: this extra tax on the super rich is not about the super rich paying their fair share of the burden of paying for the government. This extra tax is about having them pay more than their fair share. Why? Because I suspect my single bracket plan will produce a tax rate that many would find too low for the super rich. Call it class envy or class warfare if you wish, but at income above a certain level, to not tax such income at a higher than average tax rate is insensitive, unwise, and bad policy.
You and I will no doubt differ tremendously as to where that certain point of income is. Mine is pretty high. I do not begrudge the highly skilled and highly trained professional making a lot more money than me. I would set these certain points of income at multiples of the median income. Every time the median income goes up, the points at which these higher tax rates kick in also goes up. At present, the median income level is around $35,000. Ten times that annual income is $350,000 a year. In my book, anyone making more than 10 times the median income ought to be a little humble about it. Such a person should humbly admit that other people, equally talented as he/she, work just as hard as he/she, and don’t earn that kind of money. They should humbly acknowledge that they have won life’s lottery and gratefully share some of the wealth. That is why I call my higher tax rates Humility Taxes. Under my plan, all income over 10 times the median income is taxed at a rate of 30%. All income over 50 times the median income ($1,750,000) is taxed at a rate of 35%, and all income over 100 times the median income ($3,500,000) is taxed at a rate of 40%. These rates may seem low to you, but remember, these marginal rates would be applied in a system that had zero deductions, credits, or exemptions, and which taxed capital gains and inheritances the same as regular income. Trust me, in a world without tax accountants, these rates are going to raise a lot more money from the super rich than the current system.
Making lots of money is not a crime. Furthermore, not all supply-side economic theories are bogus. It is possible to harm the overall economy by taxing the rich excessively. Therefore, I would strongly argue against any tax rate higher than 40% no matter how embarrassing it is to have someone making that much money. Remember, States and localities are also going to take their bite.
The only thing standing between the taxpayers of this country and a postcard-sized 1040 form is the political will to make it happen. It is time for all the people who want a super simple tax system to count noses; realize they are a majority; and do something.
C E Sutton
Assuming you wish to raise the same amount of money from income taxes as we do now, I estimate the tax rate would end up being around 13%. (Could I be wildly wrong about the 13%? Wrong: yes; wildly wrong: doubtful.)
I could stop here and declare victory, but I want to press on. I want to add progressivity, and I want to help the poor since under this ultimately simple and fair system the poor end up paying more than they do now.
We do this by having the government make tax-free cash payments to every adult citizen. (The details about how to do this will be the subject of a later welfare essay.) The dollar amount of this payment would be the same for everyone. Choosing the right amount will be tricky, I admit. Obviously, the higher the amount, the higher the percentage of tax would have to be. If payments of zero dollars result in a 13% tax rate, payments of $200 every two weeks will result in a percentage much higher than 13%. The debate over the amount of the payments would be a most interesting one.
Take a pencil and a piece of paper and play with the numbers. By giving everyone the same amount of cash, and taking from everyone the same percentage of income, you get a wonderfully progressive tax system. The very poor would get more than they paid. The working poor might break even. The middle class would pay more than they received, but the net percentage (factoring in the payments) would be far less than the gross percentage, and the difference between gross and net would slowly shrink as the amount of income grew.
An income tax this progressive, simple, and fair, yields indirect benefits. First, it is good for democracy and good for government to have every citizen with income, even the poor, pay taxes to help support the government. Every citizen should have a financial stake in good, efficient, cost-effective government. Every citizen should appreciate that a rise in taxes for some also means a rise in taxes for themselves. A single tax rate increases the beneficial feeling that we are all it this together. There is tremendous value in having a young waitress look a doctor in the eye and know that the government is treating them both exactly the same. Second, as confidence grows that everyone is truly paying their fair share, the level of voluntary compliance with tax laws should increase. There is a vast amount of unreported income in our economy that would be added to the tax rolls if members of the “cash economy” could be persuaded to fully report their income. Third, the marketplace is free to function as it should with millions of better decisions being made because they are not being influenced by tax considerations.
Exceptions to the No-Exceptions Tax Plan
As perfect as my ultra simple and fair income tax plan is, even I wish to tinker with its perfect simplicity in two respects.
The first is related to retirements. Setting aside some money for retirement is not simply Good Behavior; failing to do so is affirmatively Bad Behavior. Therefore, I would encourage the good behavior of retirement savings and thereby punish the behavior of not saving for retirement. To prevent the rich from overly benefiting from this exception, a cap would appropriate. Within the cap, money placed in a qualified IRA or deferred compensation account (i.e. an account that can’t be touched until age 60) would not be counted as income. To further encourage retirement savings, I would lower the tax rate (by say, 10 percentage points) for money withdrawn from the account during retirement.
The second exception involves the super rich – not the upper middle class, or the well off, or even the moderately rich.
At a certain point, it can no longer be argued that a person truly “earns” or “deserves” such a high income. At a certain point, even the person making the super-high income has to acknowledge that the money is as much a blessing or luck (deserved or otherwise) as it is income due to hard work. The good luck might be possession of a special talent or aptitude, or being in the right place at the right time, or both. Let’s face it, at a certain point, it is embarrassing to make so much money. When that point is reached, a higher marginal income tax rate is warranted.
Let me be clear: this extra tax on the super rich is not about the super rich paying their fair share of the burden of paying for the government. This extra tax is about having them pay more than their fair share. Why? Because I suspect my single bracket plan will produce a tax rate that many would find too low for the super rich. Call it class envy or class warfare if you wish, but at income above a certain level, to not tax such income at a higher than average tax rate is insensitive, unwise, and bad policy.
You and I will no doubt differ tremendously as to where that certain point of income is. Mine is pretty high. I do not begrudge the highly skilled and highly trained professional making a lot more money than me. I would set these certain points of income at multiples of the median income. Every time the median income goes up, the points at which these higher tax rates kick in also goes up. At present, the median income level is around $35,000. Ten times that annual income is $350,000 a year. In my book, anyone making more than 10 times the median income ought to be a little humble about it. Such a person should humbly admit that other people, equally talented as he/she, work just as hard as he/she, and don’t earn that kind of money. They should humbly acknowledge that they have won life’s lottery and gratefully share some of the wealth. That is why I call my higher tax rates Humility Taxes. Under my plan, all income over 10 times the median income is taxed at a rate of 30%. All income over 50 times the median income ($1,750,000) is taxed at a rate of 35%, and all income over 100 times the median income ($3,500,000) is taxed at a rate of 40%. These rates may seem low to you, but remember, these marginal rates would be applied in a system that had zero deductions, credits, or exemptions, and which taxed capital gains and inheritances the same as regular income. Trust me, in a world without tax accountants, these rates are going to raise a lot more money from the super rich than the current system.
Making lots of money is not a crime. Furthermore, not all supply-side economic theories are bogus. It is possible to harm the overall economy by taxing the rich excessively. Therefore, I would strongly argue against any tax rate higher than 40% no matter how embarrassing it is to have someone making that much money. Remember, States and localities are also going to take their bite.
The only thing standing between the taxpayers of this country and a postcard-sized 1040 form is the political will to make it happen. It is time for all the people who want a super simple tax system to count noses; realize they are a majority; and do something.
C E Sutton
Related Posts (on one page):
- A Simple Tax Proposal
- Beware Tax Policy by Cute Names
- The Self-Evident Truths of Income Taxation