Recently, Warren Buffet has been bragging about how he uses his lawyers and accountants to manipulates the current tax code to pay no taxes, or just 1% in taxes, or however little he wants in taxes. He uses his situation to call for more and higher taxes on "the rich" - which would include himself. Why would he do such a thing? Obviously, he will continue to manipulate the system and only pay as much - or as little - as he likes, no matter what the tax rates are for "the rich". After all, it is common knowledge that many "rich" people and corporations are able to manipulate the tax code, find loopholes, shelters, and other means to avoid paying taxes on some or all of their income.
I'm not "rich" (unless you compare me to the truly poor in a third world nation - I have a computer, rent part of a house, own a car that usually runs, and can afford enough calories that I am overweight), but even so, I can put the same information into the online tax preparation systems of three different IRS approved tax preparers and get numbers that are vastly different (one would have had me pay twice as much in taxes as one of the others), based on how well the software matched my personal situation, exemptions, and deductions. It shouldn't be that complex. In fact, the tax for should be able to get the job done in ten questions or less.
What is needed instead is to replace our current tax code with a system that works, and is straightforward enough that anyone can do their own taxes. Herman Cain's "9-9-9" plan is interesting, and is certainly a good conversation starter on flat taxes. Of course, whether the flat tax itself will work depends largely on what exemptions, deductions, deferments, shelters, and loopholes remain in the tax code. The best policy would seem to be to eliminate everything but a personal exemption/deduction of a standard amount for the taxpayer and each dependent, and to allow certain types of savings accounts (retirement, education, and medical) to have taxes deferred until the money is taken out. No other deductions or exemptions are really needed.
A fair/flat tax system with a standard personal deduction and very few other exemptions or loopholes, coupled with a national sales tax (or VAT) would be a more effective means of increasing tax revenue, without having to raise tax rates. It would also simplify personal income taxes and allow most of the IRS to be downsized. Imagine the savings on just printing and distribution if the personal income tax paperwork was a single page form, with only one page of instructions.
Once they had the taxpayer’s personal identification information, the form would only need ten questions about income and taxes.
Of course, whenever the subject of a "flat tax" comes up, the "experts" all line up to tell us that it can't work, is unfair, and that it will put the "experts" out of work. Oh, wait, they don't mention that last part. IRS managers, tax accountants, and tax lawyers all have a vested interest in maintaining and continuing the labyrinthine, convoluted, and easily manipulated tax system that we currently endure. If the tax code were re-written to include a flat tax and a single page tax form, the IRS could be downsized considerably, and most tax lawyers and tax accountants would be forced to find new jobs - because nobody would need them for help with their personal taxes. So let's keep in mind that when a "tax expert" speaks up against a "flat tax" proposal, they have a serious conflict of interest that will keep them from being completely honest about the subject.
Here is my example of a 10 question, 1 page tax form that would improve on our current system.
For the purposes of this example, I am using a flat tax rate (including all federal taxes - income tax, Social Security, and Medicaid taxes) of 20%. And an income exemption of $10,000 per individual. The tax rate and income exemption would be set by Congress, and could even be 9%, if the numbers work that way. The personal exemption could be set at a different rate, and could even have two tiers - one for adults, and the other for dependent minors (for example, $10k per adult and $5k per dependent minor).
Taxpayer's name and Social Security Number:________________________________
Income:
1. How much money did you make in wages, tips, retirement payments, pension payments, interest income, sale of property (including real estate, stocks, bonds, or other property), or investment income during this calendar year (Failure to report all income from all sources may lead to severe penalties)? Any income generated while in the United States (and territories) or while you were a resident/citizen of the United States (and territories) will be included. Do not count money placed into tax deferred retirement, education, or medical savings plans - that money will be taxed as income in the year it is withdrawn.
Deductions:
2. How many dependents do you have (remember to count yourself)? If your spouse had no income, they may be counted as your dependent, if they had income, they must file their own tax form. Warning: both you and your spouse can not claim the same dependent/s - if you share custody you may count each as .5 of a dependent. You must provide the names and Social Security Numbers of all dependents on the reverse of this form.
3. Multiply your number of dependents (line 2) by $10,000. $10,000 is the individual income deduction, and is the only exemption/deduction allowed on your personal taxes.
Determine your taxable income:
4. Subtract line 3 from line 1. This is your taxable income. If line 3 is greater than line 1, you have no taxable income. If you have no taxable income, had no estimated taxes withheld from your pay, and paid no estimated taxes, you are finished.
Determine your fair tax:
5. Once you have determined your taxable income, multiply that amount by .20, this will give you your amount of tax owed (20% of taxable income).
Determine how much was already withheld for taxes:
6. Did you volunteer to have estimated taxes withheld, or make estimated tax payments? If "yes", continue to line 7. If "no", pay the amount on line 5. You are finished.
7. How much did you pay in estimated taxes or withholding? If you had taxable income, continue to line 8. If you had no taxable income, you need to be refunded the full amount withheld. You are finished.
8. If line 7 is less than line 5, subtract it. The difference is the amount you owe. Please pay that amount. You are finished.
9. If line 5 is less than line 7, subtract it. The difference is the amount you need to be refunded.
10. Would you like your refund to be credited against future tax bills?
Thank you for paying your taxes this year.
End of form.
How can a flat tax be progressive? If the flat percentage rate tax is applied AFTER the standard personal deduction is taken out of the income, then the percentage of actual income paid as tax increases as the income increases.
As an example, a single worker makes $35k a year, and his supervisor (also single) makes $60k a year. Given a $10k standard deduction, the worker is paying taxes on $25k, so pays $5k if the flat rate is 20%. Meanwhile, the supervisor pays taxes on $50k a year, so pays $10k at the same 20% rate. In this example, the supervisor pays twice as much in taxes as the worker, but is not making twice as much money. The supervisor is paying 1/6th of her income in taxes, while the worker pays only 1/7th of his. While this is not as draconian as the progression that some favor, it is still progressive. Combined with a removal of the many loopholes and exemptions that the wealthy are more often able to use, this would make taxes much more fair/consistent.
Why a combination of a “flat” tax and a national sales tax/VAT? Because sales taxes are a way to get tax revenue from people who aren’t paying taxes in other ways – either because they are working “under the counter” or are otherwise not reporting income.
So the flat tax is "fair" because everyone pays the same rate on their taxable income. It is also "fair" because wealthier people pay a higher percentage of their total income in taxes. In combination with a national sales tax or VAT it is "fair" because it gets people who hide their incomes to pay at least some taxes. It is also "fair" because it would eliminate the loopholes and special rules that often allow certain individuals and businesses to avoid paying any taxes.
Please note that I am not suggesting that this flat tax replace current business taxes - which leaves a market for at least some of those tax experts to stay in business.
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Loopholes, shelters, and a system of deductions geared to support certain groups of campaign contributors all help to make the tax system problematic.
ReplyDeleteFederal flat tax with a personal exemption for adults, a partial exemption for minor children, and a fairly restrictive group of income deductions (actual cash donations to qualifying non-profits, for example) would work great - and the "rich" would always pay a higher percentage, due to the standard exemption – meaning that the flat tax is still “progressive”, while also being fair and equal for all Americans.
i.e. if standard exemption = $20k and universal tax rate = 20%*
Guy who makes $20k per year or less pays no tax (0%).
Guy who makes $24k per year pays $800 in tax (3.33%).
Guy who makes $36k per year pays $3200 in tax (8.88%).
Guy who makes $50k per year pays $6000 in tax (12%).
Guy who makes $200k per year pays $36000 in tax (18%).
Guy who makes $1mil per year pays $196000 in tax (19.6%).
This would also allow the IRS to reduce its size to a small fraction of its current manning, as well as freeing up the talents of tax attorneys and tax accountants for more productive purposes. Business taxes would probably still be complex and riddled with special rules that benefit those who are politically well connected, but it would certainly make life easier for normal people.
Another way to make the tax system more fair is to tax benefits as if they are income. This means that if an employer provides a health policy or housing benefit that costs $10k per year, the employee should be taxed on that $10k as if it were part of their income.
If we used a flat tax in conjunction with a 10% national sales tax on goods and entertainment, we will also be taxing people who manage to keep their incomes off of the tax rolls.
With no sales tax being levied on housing, groceries (food), or utilities (gas, electricity, water, phone, & internet), this tax would also end up being “progressive”, as housing, food, and utilities make up a much larger percentage of the budget for families with less income.
Those with more disposable income would pay the sales tax for goods that they purchase, as well as for entertainment expenses. This means that those who buy expensive cars and replace them frequently would pay far more in sales tax than those who buy economy cars and keep them for a longer period of time, or those who use public transit. Tickets (and service/handling charges) for sporting events, concerts, films, cable television subscriptions, and other entertainment could also be taxed, as these are luxuries. These taxes would need to be paid by the end user – whether it is a private person or a business.
*These numbers are just for demonstration purposes, and don't include Social Security, Medicare, State, Local, and other taxes.