The current tax code has become so complex and rife with so many credits, deductions, and exemptions that it must be completely overhauled. I propose a simplification of the tax code which will make our government more efficient, and keep more of your hard earned dollars in your pocket. Before reforming the system we must first answer a few basic questions.
What this tax reform will accomplish?
These changes to the tax system will increase the tax base. It will simplify the tax code for both individuals and companies. It will keep more money where it belongs, in your pocket. This will make filing taxes easier. This will help to balance the budget and eliminate deficit spending to ensure future generations do not suffer because the government can’t pay for everything it promised today. But taxation is only one side of the coin, without spending cuts tax reform is meaningless.
Why do we have to pay taxes at all?
- Taxes are used to pay for the military, major infrastructure, to pay federal employee wages, and provide social welfare payments to those in need.
- Federal income taxes and corporate taxes are used to pay for most of the government’s day to day operations.
- FICA taxes are used to pay for social security payments to the elderly and disabled and to pay the medical bills for those using Medicare
How much do Americans pay in taxes?
- In 2015 individuals paid $1.541 trillion dollars in federal income taxes
- Corporations paid $344 billion in federal taxes
- Social Security and Medicare taxes were $1.065 trillion
- The government also received $98 billion in excise taxes, and an additional $201 billion in other taxes
- In 2015 the Federal Government collected $3.250 trillion in taxes and spent $3.7 trillion
Do we pay too much, too little, or the right amount of taxes?
Most people believe they pay too much in taxes, and I agree. The Federal Government has had a deficit every year since 2002, and is expected to run a deficit for the next 10 years and more. This has caused the national debt to increase from $6.228 trillion on September 30, 2002, to $19.947 trillion the day Donald Trump was sworn in as President, an increase of over 200%! Every year the government spends more money than it collects in taxes. This means the government has to issue more and more debt. To stop the government’s dependence on debt it has to either cut spending to match taxes, increase taxes to match spending, or a combination of the two. The longer we wait to reform government spending and taxes the more severe and painful the future correction will be.
Can’t we just tax the rich and make them pay more?
Yes, the government could increase taxes on the richest Americans, but the richest 1% already pay a large amount of the taxes the government receives. In 2013 the richest 1% paid 37.8% of all income taxes the federal government collected, while the bottom 90% paid 30.2%. This means the richest 1.3 million people in the US paid more in income taxes than 124.5 million Americans combined. On average the richest 1% pay 27.1% of their income to the government, and the bottom 50% pay an average of 3.3%. Does this really seem fair?
How do we make the tax code fair for everyone?
- Increase the number of people who are paying income tax. Right now about 45% of Americans pay no income tax after deductions and credits. For every person who doesn’t pay income tax, someone else has to pay more. If everyone pays at least a little bit of income tax, then everyone can pay less, which means more money in your pocket to spend on what you want.
- Eliminate most of the tax credits and deductions in the tax code. If you make the tax code simpler, it makes it harder to cheat, and ensures no one is getting special privileges. Taxes should only be used to collect revenue, not try to influence your behavior.
- Quit treating income differently based on how it’s earned. If you get paid $100 dollars in salary, earn $100 from selling stock, or make $100 from your small business you now have $100 and it should be taxed the same. The richest 1% shouldn’t get special tax breaks just because they make their money in the stock market while the average American gets taxed differently because they are paid an hourly wage.
- Eliminate arbitrary caps on FICA taxes and retirement savings.
So what would this new tax code look like?
Personal Income Tax
First we’ll start with the income tax brackets so you can see what you would pay in federal income tax based on what you make.
For single filers and married filing separately
|If your taxable income is between||Your tax bracket is|
For married filing jointly
|If your taxable income is between||Your tax bracket is|
For an example, let’s assume you are single and your taxable income is $50,000. This would put you in the 15% tax bracket. Your taxes would be calculated this way:
($20,000 - $0) x .05 = $1,000
($40,000 - $20,000) x .10 = $2,000
($50,000 - $40,000) x .15 = $1,500
Total income tax owed: $4,500.00
Another way of describing how you are taxed is the first $20,000 of taxable income is taxed at 5%, your next $20,000 is taxed at 10% and the final $10,000 is taxed at 15%.
Even though you are taxed as high as 15% (your marginal tax rate), your effective tax rate is only 9%, so you keep $91.00 out of every $100.00 you earn. Under the 2017 tax code someone with $50,000 of taxable income filing single would owe about $8,200 in taxes, and taxed at a top rate of 25%, making their effective tax rate 16%. Under my plan the average American with $50,000 in taxable income would see a tax cut of $3,700. This is more money in your pocket to spend the way you want.
The biggest concern people have with any new tax proposal is how it will affect those who are at the bottom of the income bracket. My policy makes sure that they are not unduly burdened, but still pay a small amount into the benefits the government provides for everyone. Someone making minimum wage and working full time would earn $15,080 a year ($7.25/hour x 40 hours/week x 52 weeks). After the standard deduction of $10,000 they would have $5,080 in taxable income. This amount would be taxed at 5%, meaning they would owe $254 in income tax. I don’t believe anyone would find paying less than $300 a year in income tax unreasonable, even for those making minimum wage.
What about Companies and People Who Don’t Pay Any Tax?
This is a concern many have, and is important to address when talking about what is a fair tax policy. In 2014 there were 13 companies on the S&P 500 who paid nothing in income taxes and two more who paid less than 1% on $23.514 billion in profits. If these companies paid the average effective corporate income tax rate, for companies with more than $10 million in assets of 22%, this would have resulted in tax receipts of $5.173 billion. In 2014 about 45% of Americans paid no federal income tax after credits and deductions. That is 77.5 million people who paid no income tax. Now, most people who paid no income tax make less than the median income of $53,000. However, about 12% of people who paid no income tax made between $75,000 and $100,000. Let’s assume these 77.5 million people, who paid no income tax, made just $35,000. If they paid only a 5% income tax, this would result in $135 billion in tax revenue. That’s 26 times more than what would be brought in by those 15 S&P 500 companies paying no tax.
Capital Gains and Dividends
Under the current system earnings from capital gains are taxed at a different rate than earnings from normal wages. The argument is often that someone investing has a higher risk of losing money than someone who earns a salary, or that taxing capital gains at too high of a rate reduces investment. Loss of principal is a known risk of investment, it doesn’t reduce investment as long as investing is the best way to increase your wealth. In the past we have had capital gains rate of 28% and it did not stop investment. If you make $100,000 a year it all spends the same and benefited you the same. Eliminating the distinction on taxing how income is earned would eliminate one of Wall Street’s favorite tax loopholes, carried interest. This would also ensure that those who are making the most money have a higher effective income tax than those making $50,000 a year. Warren Buffet has often talked about how he pays an effective income tax rate of about 15% since his income is nearly 100% from dividends and long-term capital gains. Under my tax plan someone like Warren Buffet would pay closer to 30%. I will keep the distinction between long-term capital gains and short-term capital gains with short-term gains having an additional 10% tax. For example, if someone on Wall Street made $1,000,000 from long-term investment or dividends, their earnings would be taxed at the percentages in the above tables with the final $680,000 being taxed at 30%. If the same Wall Street executive made $1,000,000 from a short-term investment, such as an option contract, or sold a stock position held less than a year, they would pay 15% on the first $20,000 earned and 40% on earnings over $320,000.
Corporate Income Tax
For most of the post WWII era, the United States was the best place to have a business. The American workforce was the most efficient and well educated, and government policies helped many US companies become multinational corporations and leaders in technology. But in the late 1980s the world’s developed economies began to reduce their corporate income tax, and the United States did not keep pace. Because of this, the US had the highest marginal corporate income tax in the developed world, until the recent tax cuts. Decreasing the corporate rate to 21% gives America a much more competitive footing. Before the recent tax cuts, the OECD average corporate rate was 25%, the EU average was 22.3%, and the G20 average was 28.2%. According to the St. Louis Fed in 2016 national income was $2.280 trillion. At a tax rate of 21% this would bring in $478 billion in revenues to the federal government, or about $130 billion more than in 2015. However, due to the multitude of credits and deductions, it is likely revenue will decrease slightly, even as total profits are likely to be greater. Reducing the marginal rate was a step in the right direction. The next step is the simplification of the corporate tax code by eliminating the multitude of credits and deductions, and end the practice of allowing different types of companies to carry their losses forward for a different number of years.
Tax Credits and Deductions
Today there are so many tax credits and deductions that even filing your personal income taxes nearly requires a Ph.D. My plan would eliminate all credits and most deductions. Below are the deductions which would be kept with some modifications.
Health Savings Accounts Deduction
Individual deductions would be increased to $4,000 and couples filing jointly would be able to deduct up to $8,000. There would be no limit to total contributions. You decide how much you want to save for medical expenses.
Contributions to Education Savings Accounts
Individuals would be able to deduct up to $2,500 and couples filing jointly would be able to deduct up to $5,000. There would be no limitation to total contributions. You decide how much you need to save for your children’s education.
Contributions to Personal Retirement Accounts
My plan would allow individuals to deduct up to $5,000 and couples filing jointly up to $10,000. The plan would remove limits on how much you could contribute to your personal retirement account, allowing you to save what you feel you need to pay for your retirement.
Qualified charitable contributions would be allowed up to 25% of either an individual’s or couples taxable income after all other deductions.
The standard deduction would be $10,000 for an individual and $20,000 for married filing jointly.
Under the current tax plan FICA taxes are paid by both the employer and the employee. The only change in the FICA taxes would be to eliminate the earnings cap for Social Security wages, and remove the Medicare surtax for income over $200,000. By removing the cap on wages this will keep the Social Security Fund solvent for the next 75 years. This will ensure that Americans will not have to take a reduction in benefits in 2023 when the Social Security Trust Fund is expected to be unable to meet its full obligations.