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  • Tax Reform

    What benefit can there be to having tax code that is so complicated, that only trained professionals know how to read it? Why should an average American wage earner be forced to fill out long, complicated forms when much simpler ones can be generated? I propose to replace the Federal Tax Code of the United States of America from the current reams of overtly complicated rules, conditions, exceptions, and exemptions to a simple document which is easily understandable by anyone who has completed at least 9 years of standard (ie K-8th grade) schooling.

    Multiplication, addition, and subtraction are all common mathematical operations, and nearly everyone who has completed just a few years of school can understand how to do them. In the available Excel file (taxes.xls), you can see the entire mathematical backing of my proposal.

    I have split the tax rates down into 8 simple categories. The only items taxed under this new proposal are listed here. Every other form of federal taxation has been removed.

    The primary forms of income tax, and my new proposed rates:
    Personal 20.0%
    Corporate 19.5%
    Sole Proprieorships 19.5%
    Rental 19.5%
    Other* 15.0%

    * - interest, capital gains, dividends

    The two categories of goods to be taxed:
    Gasoline and fuel oil 5.0%
    Durable goods* 2.0%

    * - motor vehicles, furniture, automotive parts, appliances, etc

    Necessary tax rate for people not opting out (with 0.1% cushion):
    Social Security 8.17%

    So, what is this about opting out of Social Security? How does it work? What does it mean? The way Social Security is built requires currently working taxpayers to pay into a system to support those currently drawing from it. I propose to allow anyone currently paying into the system to opt out. Everyone who opts out of SS will be allowed to invest up to 8.17% of their gross income in any investment account, such as a certificate of deposit, mutual fund, money-market account, savings account, stock fund, or interest-bearing checking account. Any interest or gains earned on such an account will only be taxed at 15%, as indicated above. This means that if someone earning $50k/yr deposited their full allowance into a certificate of deposit yielding 4% interest, they would put $4085 into the CD, earn $163.40 and only pay $24.51 in taxes on that interest.

    That 8.17% of their income not being spent on Social Security is considered tax-free income at the federal level. Of course, an individual could invest as much of their pay as they wish in various investment opportunities, but any amount beyond 8.17% of their gross would be invested after taxes. Gains on those monies would still only be taxed at the 15% rate on interest/capital gains.

    There will no firm requirement that the 8.17% be invested at all. Any taxpayer could look at that amount as a tax-free bonus every pay period, and use it for whatever he/she wishes.

    Opting out of Social Security will also entitle the individuals leaving the system to receive the money back that they have paid into SS over the course of time. They will receive 20 annual payments, each being a percentage of the money they have paid-in. The first payment will be 1/20 of the total they have paid. The second payment will be 1/19 of the remainder. The thrid, 1/18 of the remainder, and so on until all twenty payments have been made. While that money was sitting in the Social Security fund, it was earning interest. Any taxpayer opting out of SS will be given the choice of giving the interest accrued to a favored charity without being able to claim it on their annual tax return, or taking the money and paying the 15% interest tax on it.

    What kind of deductions do I plan in this proposal? The only allowed income deductions will be in the form of capital losses and donations to charitable organizations, such as churches or the Red Cross. A cap of 20% of a taxpayer's net income (ie after income taxes are accounted for, and the 8.17% equivalent for SS is deducted) will be applied to claims for a tax refund. For example, if someone earning $50k/yr donated $3000 to the Red Cross, $1000 to Goodwill, and $4500 to their church, they would only be able to claim a maximum of $7183 in deductions, which will yield them a return of $1436.68 (20% of $7183).

    Corporate and other business deductions are a somewhat easier matter. Since only profits are taxed, any business must only redirect profits into other areas, such as dividends, research and development, or capital investment to reduce their tax liabilities. Any business donations to non-profit agencies will be considered as occurring pre-profit, and will, therefore, lower their official profits. Any business with negative profits, however, will not be entitled to any refund or rebate. Any business posting 4 consecutive years of losses will be required to submit a report to the IRS explaining why they are losing money, and give a plan for profitability within 2 years. If they cannot achieve that profitability goal, they will be required to file for bankruptcy and/or asset sales to regain profitability for at least one year.

    If any extra revenue is collected in any fiscal year, an automatic refund of the proportional amount you overpaid will be issued, minus the approximately $1/taxpayer cost of printing and mailing the checks. For example, if the government over-collected $18b, and there are 200 million taxpayers in the country, the average refund would be: $90 (per capita income of $33705, times the percentage over-collected). And since this is a flat tax system, a $50k/yr worker would receive back a refund twice that of a $25k/yr employee. If in any two consecutive years there is an automatic refund, the personal income tax rate will be reduced by at least 0.05%. If in any three consecutive years there is an automatic refund, the proprietorship, rental, and corporate tax rates will drop by 0.05% minimum. If in any four consecutive years there is an automatic refund, the interest/other rate will be lowered by at least 0.05%.

    The only other requirement this plan imposes is as follows: the income tax rates are never allowed to increase (with one caveat, described below). This can be ensured by legislating the annual federal budget to never increase spending by more than the current rate of inflation. It is safe to assume that sales of durable goods would increase as individual taxpayers realized more income direct to them. Any increase in sale of durable goods would show a proportional increase in revenues at the federal level. With this new simplified tax code in place, America's capitalistic economy will soon discover newfound energy, and be spurred into a long period of healthy, steady growth.

    This proposal does allow for certain, short-term taxes to be added to pay for extraordinary circumstances. For example, in the event of a war, congress may authorize the collection of up to an additional 4% to be added to the income taxes listed above. This authorization may only be made to pay for defense and intelligence budgets, whose needs have risen due to open hostilities. However, before such additional taxes may be levied, cuts must first both be looked for and applied to other governmental programs and departments,. Such cuts may be rolled back as soon as the hostilities are complete. This temporary authorization may only stand until the next Election Day. If the congress wishes to reauthorize the added tax rate, it must be added as a line item for the nation's voters to consider on Election Day. If the reauthorization fails in the popular vote, congress must make cuts to other departments, consider taking on loans, or wait 6 months to reauthorize the tax increase after it has been voted down.