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Creating a fair and workable tax system is one way we can leave a better America to our Grandchildren.
The question of, “What’s a Fair Income tax?” includes four questions:
- Flat Tax versus Progressive (graduated) Tax
- Tax rate(s)
- What, if any deductions should be allowed?
- How do business and inheritance taxes fit?
I propose the following as an equitable and simplified tax rate and tax system. Income Tax Rate
- $0 to $10,000 0%
- $10,001 to $20,000 5%
- $20,001 to $30,000 10%
- $30,001 to $40,000 15%
- $40,001 to $250,000 20%
- $250,001 + 35%
Reasoning: Anyone making less than $10,000 per year needs every penny for necessities. Also we don’t want the IRS spending time and money collecting minor amounts of taxes from every kid who mows lawns, baby sits, or works part-time at a fast food restaurant. Therefore, people making less than $10,000 shouldn’t pay any tax. However it is good for all wage earners above $10,000 to be invested in the government process, therefore a gradual increase to the basic level of 20% seems reasonable. Income tax would include Social Security. An informal poll indicated that most people thought that 15% was about right for income tax. If we add 5% for Social Security, (which has ranged from 4 to 6%) we arrive at 20%, which is roughly what the average middle income person pays. Because most taxpayers will fall into the $40, 000 to $250,000 range in essence we will have a flat tax rate. It makes sense to include SS in the base income tax because it is not limited to a savings-for- retirement plan. It includes payments to survivors, payments to the disabled, and similar payments. Also this eliminates the cap on SS payments.
There are three reasons I support a higher rate for incomes over $250,000. First, people with larger incomes can afford it, and America needs to start paying down the deficit. Second, I agree with the social theory of progressive taxes, i.e. people earning larger incomes, are receiving more of the benefits of society and therefore owe more back to society. Third, those with larger incomes are probably making a significant fraction of their money via the fruits of other’s labor (employees, investors) so it seems fair and reasonable to return a bigger fraction. Why don’t I propose taxing the wealthy at a higher rate? If they pay 35% income tax, and state and local taxes are typically 9-12%, that’s a total of 44-47%. I don’t believe in America anyone should be working more for others than for themselves. Therefore no one should pay more than 49% of their income to taxes.
We should eliminate deductions over a five-year period. Individual personal choice should not shift the tax burden to others. For argument’s sake let’s assume I’m a stereotypical conservative and you are a steritypical liberal. If I donate to a Pro-life organization (which you probably oppose), that’s my choice, but it shouldn’t shift the tax burden to you. If you want to donate to PETA (which I oppose) it shouldn’t shift tax buden to me. This is what deductions do. By the same theory, if both of us build MacMansions that’s our choice, but the interest on our loans shouldn’t shift the tax burden to others. Further, the number of children that one family chooses to have shouldn’t shift the tax burden to another family choosing fewer children. All of these are personal choices. In America we should receive the benefit and accept the responsibility of our choices.
This brings us to the queston of how to tax people who make most of their money on investments. Investment income is income and should be taxed as income, at the income tax rate. But won’t that disincentivize the rich (and wealthy) to invest and reinvest, which is good for the economy? I don’t believe it will, any more than it will disincentivise you and me from thinking long-term and making money by investing. Taxes are only paid on profits, and only when we take the profits and put them in our pockets. So the need to pay taxes is a good thing – it means we made money.
I also don’t think that paying more taxes would disincentivize CEOs from working as hard at being business leaders. “Gee, I NEED that extra $5 million in order to do my best work for the company.” Does LeBron James need $46 million in salary and endorsements to play his best in the NBA Championships any more than A-Rod needs $37 and Jeter needs $31 million to put out their best effort in The Series? I think all of these people would try just as hard to be the tops in their profession. The big checks are just a way of keeping score in the Compensation Game. It’s an ego thing.
The next item of discussion is business taxes, and deductions. The US needs a business-friendly tax structure to compete internationally. Businesses should not be viewed as cash cows for the rest of us. Business taxes should be based primarily on the business’s added burden to the community. How much additional fire protection is needed to protect the business and community, how much police protection, new roads, and business oversight? A small additional tax on the business for community quality of life projects like libraries and parks can also be justified because a high quality community ultimately provides the business with better employees. Notice I omitted directly taxing the business’s profits. I propose that we eliminate the double taxation of the business’s profits coupled with the taxation of the owner(s) when they receive distribution of the after-tax profits. The owners will receive more profits, which will then be taxed as income. This would require laws on distributions and timing of taxes that are beyond this blog, but it would be a better system. While I’m on the subject of business’s profits, why don’t we levy a 5 or 10% tax on foreign profits of Ameican companies? Wouldn’t this incentivise them to keep as much business here as possible?
A final thought on business taxes based on input from friends who are small business owners (less than 100 employees): small businesses, as well as large, need to be allowed to include rainy-day and/or equipment replacement funds as business expenses, which would not be taxed as long as those funds remain on the business’s account.
Creating an environment favorable to business, i.e. that encourages and promotes opportunity, brings me to Inheritance Taxes. Businesses that are inherited/transferred as an in-tact business should not be taxed. I will define “Inheritable Business” as any business with physical equipment: farms, restaurants, rental property, stores, dry cleaners, factories, etc. The country as a whole gains when someone is able to create a business. Customers, employees, and the community all gain when the business remains intact, and we all lose when a business must be closed after the owner’s death. Thus tax laws which maintain the integrity of the business benefit all of us. Stocks, bonds, or other funds and negotiables would be treated as cash inheritance and not eligible for the business exemption. Businesses which are sold within five years should also be treated as cash inheritances. I propose setting the inheritance exemption limit at $500,000 on the aggregate, with the amount greater than $500,000 treated as income for the beneficiaries. Further, beneficiaries should be allowed to income average for five years.
We all want to leave our Grandchildren with as good or better a world as our Grandparents left us. A fair and sound tax sytem is one piece.