Today’s income tax system is a mess. The code is filled with perverse incentives. Its complexity weighs down our economy, hitting businesses large and small. And the forms are just plain evil. The two-page flowchart for determining eligibility for the Earned Income Credit strongly suggests that we are secretly under the thrall of malevolent space aliens.
Tax reform is in order. Alas nothing much will happen according to the talk I hear. The Republicans are divided and the Democrats are united against. So in the interest of defending our planet against the aforementioned space aliens, I hereby offer up some tax reforms which should give pleasure to all three major factions in power.
- To Democrats, I offer up ideas that dramatically increase the taxes on this country’s billionaires, provide money to the working poor, and discourage monopolies.
- To Establishment Republicans, I offer up ideas to dramatically simplify tax compliance for both individuals and businesses. For the benefit of the remaining Religious Right members of this coalition, I will also provide a tip on eliminating the very worst marriage penalty that lurks within our system.
- To Trump Republicans, I offer up ideas on how we can bring some manufacturing jobs back home, and eliminate the subsidies for mass immigration.
And now, on to the tips!
1. Treat capital gains as ordinary income. Democrats take note: the lower rate for capital gains is the biggest loophole for the super rich in the tax code. The long term capital gains rate peaks at 20% whereas the top rate for ordinary income peaks at 39.6%. Republicans take note: this loophole is so huge and so unfair that it has our richest billionaires voting Democrat and begging to be taxed more. It’s time to oblige them. Double Warren Buffet’s tax rate and he might become a bit less liberal. (And just why should earned income be taxed at a higher rate than unearned income, anyway? Malevolent space aliens again?)
Many Establishment Republicans will argue that raising the capital gains rate will reduce revenues, since there are many ways to defer realizing capital gains. They have a point. But we can close the worst loopholes without adding much complexity.
2. Treat borrowing against an appreciated asset as a taxable event. If you have an asset that has appreciated, and you borrow against it, you are realizing the value, even if you aren’t selling the asset. The Tax Man should act accordingly. As a side benefit this will deleverage the economy significantly. Since debt destabilizes, this is a Good Thing. (But do note: at the same time we tax the gain, we also raise the cost basis against which future capital gains/losses are calculated.)
3. Treat taking an asset out of the country as a taxable event. You should be free to take your financial assets out of the country after you have paid taxes on the income earned within the country. (Trump Republicans should like this one!)
4. Eliminate the death taxes but set the cost basis for gifts and inheritances to zero. With this measure we preserve family businesses, crush the unproductive Death Tax dodging industry, and still tax wealthy heirs when they cash out.
5. Merge Social Security and Medicare taxes into the federal income tax. Today, employers have to collect five federal taxes plus unemployment insurance for every paycheck. This is a major burden to small businesses. We can get it down to just one flat federal tax. This holds even if we keep some higher brackets for the truly rich—those making a half million or more per year. FICA is 7.65% for both employer and employee portions, or roughly 14.2% of total pay. So how about simply applying a 25% flat tax for The 99%? Use that withholding rate for everyone and let the super rich worry about estimating the difference. (Follow the link for calculations comparing this flat tax vs. the current system. I wrote a fairly high fidelity model of the tax system taking account such core deductions such as home mortgages, state income taxes, etc. in C# to make the tables. You can read up on my derivations here.)
Replacing payroll computations with a simple multiplier of .25 makes life considerably easier for small businesses! But what about the working poor, those who currently pay less than 10% income taxes?
6. Replace the personal exemption, the standard deduction, and most other tax deductions with a citizen dividend. The dividend would be the same for Warren Buffet as for a burger flipper. Let’s keep it simple. For Buffet the dividend would be utterly insignificant, and besides, we have already doubled his tax burden way up by treating capital gains as ordinary income. For Democrats, this measure means free money for the poor. For Establishment Republicans, it means going from welfare to a minimum wage job becomes worth the effort. For social conservatives it takes away the enormous marriage penalty the poor suffer. And for Trump Republicans, it means illegal aliens pay more taxes. (And maybe legal guest workers too. I’ll leave that decision for the reader.)
Now that we have rescued small business, reduced poverty, and solved the illegal alien problem without building a wall or resorting to mass deportations, let us turn to Big Business.
7. Allow big corporations to use cash accounting. Instead of corporations having to keep track of a wide assortment of depreciation schedules for everything from computers to factories, let corporations deduct for capital goods as they pay for them. Yes, this means big corporations can expense capital improvements, but only if they pay cash. If a corporation finances a purchase, the corporation can only deduct the current year’s payments. This would be an enormous reduction in tax headaches for corporations. Keeping track of depreciation schedules requires keeping two sets of books, effectively.
8. Set the import tariff rates to approximately the domestic tax rate. Once upon a time, we taxed imports more than domestic production. Today, we do the opposite. The rusting Rust Belt is the result.
For countries with which we already have free trade agreements—such as NAFTA—we can make an exception. And we might want to make exceptions for some truly poor countries—such as Africa south of the Sahara as a form of foreign aid. But it is well past time to stop giving China foreign aid, given as how China is on track to become a rival superpower.
Progressives take note: you cannot significantly tax multinational corporations without having comparable tariff rates. Such corporations will simply use accounting magic to realize their profits in tax havens. (See America: Who Really Pays the Taxes by Donald L. Barlett and James B. Steele for details on how this game is played.)
And speaking of progressives, here are a couple of simple antitrust measures:
9. Graduate the corporate income tax with very wide brackets. Today, the marginal tax rates for corporations hit 34% above a mere $75,000/year! Then, the rates bounce around between 34% and 39%. The rates are not progressive! The top rate is for income between $100,000 and $335,000 and then it drops. I would suggest starting at 15% and then add 5% for every factor of ten in corporation size. If we defined size by profits, this would mean a tax table something like this:
|Taxable Income||Tax Rate|
|$100,000–$1 million||$15,000 + 20% of the amount over $100,000|
|$1 million–$10 million||$195,000 + 25% of the amount over $1 million|
|$10 million–$100 million||$2,445,000 + 30% of the amount over $10 million|
|$100 million–$1 billion||$29,445,000 + 35% of the amount over $100 million|
|$1 billion–$10 billion||$344,445,000 + 35% of the amount over $100 million|
|$10-billion–$100 billion||$3,944,445,000 + 45% of the amount over $10 billion|
Such a measure would encourage huge corporations to break themselves up to reduce their tax rates – no micromanaging by federal judges necessary.
10. Allow domestic corporations to deduct dividends from the current year’s profits. Here is how we treat bond interest and dividends on an equal footing without giving the super rich a lower tax rate than a family doctor. We also encourage big mature corporations to send cash to shareholders instead of retaining earnings to become bloated conglomerates. Do note that I would restrict this deduction to the current year’s profits. No creating a tax loss by paying out a dividend! Trump Republicans take note: this applies to domestic corporations only! The rationale is straightforward: domestic dividends result in taxable income for individuals here in the U.S.
There you have it: something for all three factions in Congress and the White House. Now start negotiating, Mr. President!
And deport those malevolent space aliens while you are at it.