Simple Tax Reform

Off Topic Politics and World Issues
1

2007 total income taxes paid were ~$1.1 trillion on adjusted gross income of ~$8.8 trillion, for an average tax rate of 12.68%.

Tax Foundation (Table 1)

I could stop right here and suggest a 12.68% flat tax on all income, showing indifference to earned income, capital gains, and dividends. However, this would result in a net tax increase for all earners except the top 10%. While one could easily argue this is fair, I don’t see much support.

Let’s go a step further and look at payroll taxes: Trustees Report Summary

Total payroll taxes for 2008 were $871 billion, half of which was paid by individuals. (yes, I realize I’m not using data for the same year, but for the sake of this post the numbers will be close enough and this is all I could find) If you completely nix the income exemption on SS just like in medicare, but for individuals only, it comes out to an additional tax of 4.95%, well under the 7.65% that most income earners pay. The employer portion of the tax is left unchanged.

Add this 4.95% to the 12.68% and we are left with a total tax of 17.63%. Now add 7.65% to the tax rates seen in Table 1. If we were to go to a Flat tax of 17.63%, the bottom 50% (many of which actually don’t pay any tax and actually get paid) would see an average incremental increase of 7%. Check out the income threshold ($33,000) and take note of how many full time workers are below this level. Don’t forget that this number is per return, so it would require a married couple to make only $16,500 each.

Next, those in the top 26%-50% would see an average incremental increase of 3%. With incomes between $33,000 and $66,000 this is going to be the portion hardest hit, but the average earner in this group at ~44,500 will see a tax increase of just $1335.

The 11%-25% group is where things start to even out. This group would see an average incremental increase of .55%. I ignored the small number of mostly single filers in this group that has the very top portion of their income excluded from the social security tax.

The 6%-10% group are the first ones to see a benefit. They would get an average incremental decrease of 2.7%. I am again ignoring the fact that not all of this income is currently subject to SS tax, as it would still mostly be single filers that are excluded, and I can’t find this data. Most two income households are still paying the full tax at this level.

For the top 5%, I’m going to assume they pay 6.2% social security tax on only the first $200,000 of income, which is a crude estimate but I cannot find any data on this. In this case the current total tax of the top 2-5% is ~23.5%, giving them an incremental decrease of almost 6%.

For the top 1% I am afraid to guess an average income and try to figure the actual percentage of social security tax, so I won’t figure it for them, but for the top .1% I feel it won’t skew the results at all if I pretend they don’t pay any social security or medicare tax, as this groups income almost exclusively comes from capital gains which are not subject to payroll taxes. This would give them an incremental decrease of 3.8%.

This would limit all tax returns to a single page. Simply find your AGI and multiply by .1763 for your total tax. Withholdings would also be much easier and would be pretty much exact for wage earners.

Discuss.

2

Exactly why, when more than 50% of voters now pay no or virtually zero income tax or actually receive net money from the IRS via the Earned Income Tax Credit or other “credits” which actually are cash money, will politicians succeed by saying that these actually ought to carry even a small part of the load?

3

[quote]Bill Roberts wrote:
Exactly why, when more than 50% of voters now pay no or virtually zero income tax or actually receive net money from the IRS via the Earned Income Tax Credit or other “credits” which actually are cash money, will politicians succeed by saying that these actually ought to carry even a small part of the load?[/quote]

Yep. Only a complete systemic collapse will cause of change of such magnitude.

“Even more alarming, experts say, is that those figures will climb to an unprecedented 200 percent of GDP by 2038 without a dramatic shift in course.”

The welfare state will more likely evolve into a smothering fascism. Obama will be happy, as we’ll all be equal; equally destitute.

4

[quote]Headhunter wrote:

Yep. Only a complete systemic collapse will cause of change of such magnitude.

“Even more alarming, experts say, is that those figures will climb to an unprecedented 200 percent of GDP by 2038 without a dramatic shift in course.”

The welfare state will more likely evolve into a smothering fascism. Obama will be happy, as we’ll all be equal; equally destitute.

[/quote]

A Revolution would happen if this becomes the case.

5

[quote]Bill Roberts wrote:
Exactly why, when more than 50% of voters now pay no or virtually zero income tax or actually receive net money from the IRS via the Earned Income Tax Credit or other “credits” which actually are cash money, will politicians succeed by saying that these actually ought to carry even a small part of the load?[/quote]

Exactly how they can succeed is a better question.

The only real decision we have in this matter is whether or not we want tax reform to happen voluntarily or involuntarily. I’d much prefer voluntarily and as soon as possible.

Of course, if Social security and medicare were instantly thrown out, you could subtract that additional 5% - creating a mere 2% increase for the bottom 50% and a decrease for everybody else. If only we hadn’t blown the trust fund already this would be an ideal solution.

6

Why not turn over medicare and social security to the states? That would instantly reduce federal spending, and would allow for people to track the money better. The amount of money needed to run the programs would instantly fall thus lowering the taxes on everyone.