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Time to Review Your Tax Code

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It's that time of year again: time to enjoy the birdsongs of spring, time to get some fresh air, put on that first layer of suntan, limber up the muscles, and enjoy the flowers. And while people frolic in garden this time of year, their thoughts turn to"taxes.

Bleah!

OK. If you want to police the world, implement a detailed welfare system, incarcerate the world's highest prison population, subsidize environmental destruction, fight environmental destruction, subsidize immigration, fight illegal immigration, bail out reckless bankers, and generate reams of regulatory red tape, you need to pay some taxes -- lots of taxes. These things don't come cheap.

But does the income tax have to be so bloody complicated? I mean, come on Congress, there are eight pages of worksheets in the 2013 tax guide just for determining your Earned Income Credit! Do you hate the poor so much? Or is it employers that you hate? Determining which employees qualify for the Advanced Earned Income Credit is yet another nightmare for small business owners trying to compute payroll taxes. (You could make the payroll process painless if you really wanted to, Congress.)

After a preamble like this, you might expect me to begin a pitch for a flat tax or for the Fair Tax. But this is a liberal site, so you shouldn't expect such things, and you won't get them. No, I'm going to make a pitch for a tax system which is more progressive than what we have today, yet simpler than most flat tax proposals out there. Liberals, Occupiers, leftists of all flavors, I present to ye The Simple Income Tax.

The Simple Income Tax features not one, but two brackets: 30% for most people and 40% for income above $400,000/year. We make it progressive for the poor by throwing in a generous per citizen refundable tax credit (a "prebate" in the parlance of the Fair Tax folks). The prebate replaces nearly all the deductions and exemptions of the current system. I make but two exceptions:

  • A charitable deduction. If you are giving it away, it's not your income.
  • A universal savings plan. Greater equality and greater personal responsibility require a middle class which saves money. I'd allow every citizen a fixed amount which could be put away tax deferred (say $30,000/year or so) in the manner of the traditional IRA. But unlike an IRA, it can be withdrawn at any time for any reason, albeit taxed as ordinary income.

That's it. No more mortgage deduction (subsidizing suburban sprawl), no more tax free municipal bonds (subsidizing stadiums and land seizures), no more special rates for dividends and long term capital gains (subsidizing Warren Buffet). Just one tax with two brackets and a prebate.

Some of you might be thinking: "30%? That's way too high for the bottom bracket!" So it would seem, but here is where The Simple Income Tax is simpler than most flat taxes: The Simple Income Tax replaces not only the federal income tax, but FICA and Medicare taxes as well. When you throw in FICA and Medicare taxes, todays 10% bracket is actually a 23.5% bracket. The 25% bracket (which cuts in at a mere $36,250 for a single adult) is actually a 37.4% bracket unless you itemize. I can take care of today's bottom brackets by just making the prebate sufficiently generous. If that mean's being a bit generous to the unemployed, so what. It still pays to look for work.

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(Now, the actual tax rates paid differ from what I said above because of deductions and tax free employer provided insurance. See the tables here for typical rates paid under the current system. And yes, I wrote a fairly detailed computer model in C# to generate those tables. If you are a mathematician or masochist, you can review my detailed tax calculations, and feel free to correct me in the comment area below.)

Some of you might be thinking that my 40% top bracket is too low, that we need to go back to the punitive rates of the 1950s. Fear not! My 40% top bracket is a huge tax increase on Warren Buffet and Silicon Valley billionaires. For I apply it to long term capital gains as well as for earned income. (If the resulting double taxation is too much, the place to cut is at the corporate level, thus funneling more money into pension funds, annuities, life insurance, and the aforementioned universal savings plans.)

Going forward, The Simple Income Tax could also simplify Obamacare. I factored in the Affordable Care Act's health insurance tax credit when I made comparable tax tables for 2014. I suggest eliminating the subsidy and the special tax treatment of employer provided insurance. Instead we could make part of the prebate in the form of a voucher payable towards buying health insurance.

The Affordable Care Act contains a basic income guarantee in disguise. You can see this when you see how much I had to ramp up the prebate in order to match the negative income taxes received by those who game today's system to the max. I needed over $6000/adult/year and $3000/child/year. Alas, the Affordable Care Act subsidy is even more fiendishly complex than the EIC, and not everyone will qualify for the big subsidies, not even the working poor. My prebate is unconditional. Make it high enough to match those who max out the current system (say $8000/adult) and you can use the prebate to replace most of the federal poverty programs to boot.

Now we are talking simple.

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Carl Milsted is a physicist by day and dabbles in economics and political activism in his spare time. For a quarter century he was a member of the Libertarian Party, but has since realized that narrowing the wealth gap and preserving the environment (more...)
 

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