Tuesday, November 8, 2011
The current US Income Tax Code (known as Title 26, of the United States Code) weighs in at a paltry 16,845 pages in length (source US Govt. Printing Office, www.gpo.gov ). Please take a moment and let that sink in, 16,845 pages. Reading at a rate of one page every minute (this is an impossible feat by any standards), it would take 280.75 hours of continuous reading to plow through our tax code. Folks, that’s just over eleven straight days of reading. Anyone else feel a little sick at that thought? So, with this enormous volume (twenty volumes by the way) of text, how is the average American supposed to know exactly what is going to be taxed, what is exempt, what can be deducted, and what will you ultimately be responsible for every April? I’m sorry to say, but this does NOT meet the common sense test.
Instead of the varying percentages that we are taxed at, a flat tax may prove to be a better solution. Presidential hopeful Herman Cain (if he can shake the accusations against him) has stated he would institute a 9% flat income tax if elected to the White House. This idea isn’t a new one. In 1981 Robert Hall and Alvin Rabushka proposed a simple flat tax to replace the horrendous tax system that existed up to that point. The flat tax proposed by Hall and Rabushka was so simple, they claimed that an individual or a business could file their income tax on a piece of stationary no larger than the average postcard.
Reagan initiated a tax reform in 1986 that replaced the multi-layered percentages and instead instituted two percentages, 15% and 28%. The flat tax idea has resurfaced numerous times since then, but has never managed to make it past a good PowerPoint presentation. To complicated matters, lists of deductions and itemizations convolute even Reagan’s simplified tax code.
I, your humble author, again wielding the Magic Crayon of Power, would institute a sweeping reform of the tax code. By sweeping, I mean sweeping it right into the trash. Taxes would be divided into three categories: individual income, small business income, and large business income. Individual income tax is self explanatory. Small business income would apply to businesses with 250 employees or less. Large business income would apply to businesses with 251 employees or more. Pretty easy so far, right?
Individual income tax would be placed at 15% before deductions. This means that whether you earned $30,000 a year (a $4,500 tax liability before deductions) or $300,000 a year (a $45,000 tax liability before deductions), you would pay 15%. Regarding deductions, unfortunately, this section needs to be narrowed. Charitable donations would remain a tax deduction as long as the charity was a registered non-profit organization, and the maximum deduction allowable would be no more than 3% of the pre-deduction liability.
Example: Joe Snuffy makes $30,000 a year and donates regularly to the March of Dimes; he would only be able to deduct $135 (3% of $4,500) from his tax liability. In reality, persons making a lower wage are less likely to contribute vast sums of money to charities strictly for the tax deduction, but the idea is simple.
Other deductions would include a child tax deduction in the amount of 5% for the first two children, then 3% for each additional child, with a maximum allowable deduction of 16%.
Example: Joe Snuffy makes $30,000 a year and has four children. He would qualify for a total deduction of 16% (5% for two children, 3% for the other two) resulting in a deduction of $720. If Joe’s neighbor, making the same wage, has six children, he would only be eligible for a total deduction of 16%). Some may think that this negatively impacts large families with low wages, however, it must be remembered that government assistance programs for working families would be made available (no one minds helping those that need it).
Certain other deductions such as the 1st time homebuyer credit, earned income credit, head of household credit, and would remain depending on the economic state of the nation.
The individual income tax would be simplified to such an extent that every American regardless of income or education level would be able to understand what they are responsible for. By instituting a flat income tax, the fairness is placed back into our tax code. A flat income tax also prohibits undue hardships on lower income families and doesn’t single out the highest income earners in the nation, thus eliminating the “class warfare” allegations that have cropped up as of late.
This is the basic premise of my flat individual income tax. If, after reading this entry, you desire additional information, please feel free to let me know. I will respond with the utmost haste.
Future posts will cover small business and large business income tax as well as a more in-depth discussion of deductions.
5 comments:
I think a flat tax is fair.... you make $100 and at the 9% you pay the FED $9 (do the math for the billionaire) then allow no deductions, it would be equally fair to everyone and revenues wouldn't be negatively impacted. The top % of earners will still pay the lion's share of the taxes and still be equal to the Lamb who made 90% less than the Lion last year.
Same thing with corporations if GE makes $1 Billion thats $90 Million in taxes, where Joe the Plumber makes $100K he pays $9K in taxes
Equality in action.
What I do not like is the 9% federal sales tax... which would make that $1 14oz Coca Cola $1.19 instead of the $1.10 it is now.
Taxes are not a complete solution to whats happening the revenue is there its the spending. We need to tell Washington to literally cut the Crap (or research into Swine odor)
Cliff E.,
I personally believe that removing the deductions from our tax code might anger the citizens more than the current tax code. That being said, IF the flat tax rate were lowered to, as you say 9% or lower, then the deductions become less beneficial. The other issue is that with a flat tax as proposed by Mr. Cain, state and local sales tax would have to be addressed, as would the excise taxes on fuel, tobacco, etc.
I also agree that an increase in revenue is not the "silver bullet" answer and that we must cut spending in conjunction with increasing revenue.
Thanks for the response!
Actually I'd be for a repeal of the 16th amendment. On the taxation measure flat taxing has been brought up many times over the years, I like it because on a personal tax level its simple. On my business side... everything is a deduction, from the connection I posted this with to the gas sitting in my truck's gas tank.
Just for clarification, are you FOR the deductions on the business side? I would assume you are as an business man, however, deductions are exactly why GE's tax liability was so low. Deductions truly benefit business, encouraging small business growth, but at the same time allow large corporations to reduce their tax burdens to such a point that they are simply pocketing profit. If, however, business were required to reinvest a portion of their deduction profit back into the company/employees, then it would benefit not only the upper level managers, but the bottom rung workers as well.
My profit numbers are significantly lower than GE. My percentage margins may be better though.
and hey I paid err am paying for an education in business may as well as get some use out of it.
however my business and any business you only get taxed on your profits. I take a day of Work I invoiced for $1100, to produce the service I provided I spent $200 in fuel, another $20 in consumable supplies and could have easily had another $80 in lodging. Makes my $1100 day into a $900 day... If I had to pay my helper that would have ate another $300 in that income making my total profit for the day at $600... then add my administrative costs to that.. my income was closer to $550 that is what gets taxed less any deductions under a flat tax at Mr Cain's 9% that day would cost me about $81 in federal tax, where under the current tax code closer to $135 (15% tax bracket) But if under current system anyone should take advantage of any "loophole" they can find
I am against a governing body telling me how to use my money but I do like the idea of using deducted amount for a minimum re-investment back into business, however if any business wants to grow they need to reinvest some of their profits, its like a batch of bread dough keep feeding it ingredients it will continue to make more dough.
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