A hypothetical income tax proposal (Not another FLAT TAX thread!)

[Selatius]

Last night there were a couple of flat tax threads and different pitches for them. Ultimately, there's not enough information, at least in my eyes, to justify switching over to such a scheme. There are too many unknown variables, and it would be foolish to jump in blind.

I figured the fall back point would be taking the existing code, cutting out the bogus gimmicks, and make it as simple as possible using several tax brackets and one universal exemption.

I figure it would go something like this:

________________________________________

I. Remove all credits, shelters, loopholes, etc. We're going to do this bare-bones. I'm talking all of it. We're basically going to wipe the slate clean.

II. Reset the tax brackets. I want to set it up like this:

A. Your first 49,999.99 is tax free. You will not be required to file federal income taxes at all if your income falls under this bracket.

B. Everything from 50,000 to 99.999.99 will be taxed at 17%.

C. Everything from 100,000 to 749,999.99 will be taxed at 27%.

D. Everything from 750,000 to 4,999,999.99 will be taxed at 37%.

E. Everything from 5,000,000 to 9,999,999.99 will be taxed at 47%.

F. Everything from 10,000,000 to 19,999,999.99 will be taxed at 57%.

G. Everything earned at or higher than 20,000,000 will be taxed at 67%.

III. This tax will apply to both earned and unearned individual income.

IV. This tax will also apply to corporate income. All corporations are to file as an individual under this tax. (Corporate personhood is a bitch, isn't it?)

V. All income earned within US territory will fall under the income tax.

__________________________________________

Critique the hell out of this tax proposal.

[donco6]

1. My taxes would increase by 43%

Ouch.

[TX-RAT]

3. Sucks for me also

Don't Tax him, don't Tax me, Tax that man behind the tree.

[question everything]

28. Yes, ours by 48%

[SteppingRazor]

2. I have much less of a problem with this than I do with a flat tax...

This is, after all, basically a progressive tax system, which is in the end the most fair system we've yet to come up with.

[fob]

4. Anyway to determine what total revenue this would raise?

[ComerPerro]

5. That would cripple corporations

Depending on what figures are reported as "income".

Mainly because they take in millions of dollars each year.

[whistle]

6. That's pretty progressive and no deductions makes it wide open

...for mis-reporting and under reporting of income, plus extreme corruption of public officials. Item V is a major loop-hole. Item III just gives corporations further incentive to corrupt officials and seek special consideration. Item IV guarantees that corporations will have more power than they currently have by giving the law permission to treat a creature that is created by the state as a person, more powerful than God!

I don't know if tax reform is a solution or just another way for government to get greater control. I thought the tax system as we had it under Clinton was working quite nicely, and that major corporations were held in check pretty well. The problems really began when BushCo took office in January 2001. Let's go back to 1993 with Clinton's reforms and correct the mistakes made under his watch.

[mongo]

7. I'm all for getting rid of tax loopholes for individuals

The first being getting rid of the mortgage interest deduction. That would go a great deal to stop people from overbuilding way more house than they need.

We should tax dividend income and capital gains as ordinary income too.

But as far as corporations go, when you eliminate the big players who already shirk their taxes by moving HQ offshore, etc., the rest of the players are already overtaxed. They pay obscene personal property taxes on all their assets - unless they are a big enough player to get deals with their local and state governments.

Corporate income is either distributed to sharholders which whould then be taxed on the individual level, or is held for future capital improvements/expansion - which in turn generally provides more jobs. So, I think that corporate income should not be taxed at all, as long as dividends are taxed as ordinary income.

[AP]

9. I think we should tax dividends and cap gains at higher rates than

we tax earned income, and we should tax it progressively.

For example 10% on the first 50k in cap gains, 15% on the next 100k, 20% on the next 250k, 25% on the next 300k, etc, and those rates should be higher than the rates we charge earned income in those same brackets. And 2% to those rates, and those would be your rates for dividend income in those same increments.

Add 8% to the dividend rates, and those would be your inheritance tax rates and brackets, and they'd be taxed to the recipient and not the estate.

[mongo]

16. That would favor corporate fat cats over ordinary investors.

Principals in a company can take their cut in the form of a salary or dividends, to some extent. They way it is now, if you take too little salary and too much dividends, the IRS goes after you for avoiding SS tax.

And as far as inheritance tax goes - what about closely held corporations, which make up the majority of corporate entities in America?

If I wanted to leave my busness to my heirs, should they have to pay 23% of the net worth (if it is worth 100K) of the company to keep the business going? I think most heirs to the family business would have to sell out under this scheme. Which in turn would also cause industry consolidation, as big business buy out more of these small business.

[AP]

17. How does taxing dividends more than earned income...

...benefit fat cats?

What it does it makes sure that no janitor pays higher tax on his earnings than an insider pays on dividends.

As for inheritance, passing it on to heirs taxed at progressive rates according to the wealth fo the recipient would encoruage people to pass their corporations to lots of people with little money -- ie, it would have a wealth redistributive effect. If you want to pass on lots of wealth to a few wealthy people, they'd have to pay high taxes for the privilege of getting all that power without working for it.

If you really want to pass your huge wealth on to family members without them paying taxes, then you better have lots of kids and grandkids.

I think your anxiety about one wealthy person not being able to leave a huge asset to one child is a misplaced anxiety. What's so bad about having that person pay taxes? If the corporation isn't big, they won't pay huge taxes, since the reate would be progressive. And say Microsoft were a privately owned corp, what's the problem with Gates's kid having to sell Microsoft to pay the inheritance tax? Why would it be worse for a corporation to own Microsoft than one very powerful individual?

[mongo]

21. a few points

If dividend are taxed higher than ordinary income, fat cats would just take more of their cut as salary rather than dividends, which are paid equally to all investors according to how much stock they hold.

As for inheritance, passing it on to heirs taxed at progressive rates according to the wealth fo the recipient would encoruage people to pass their corporations to lots of people with little money -- ie, it would have a wealth redistributive effect. If you want to pass on lots of wealth to a few wealthy people, they'd have to pay high taxes for the privilege of getting all that power without working for it.

think your anxiety about one wealthy person not being able to leave a huge asset to one child is a misplaced anxiety. What's so bad about having that person pay taxes? If the corporation isn't big, they won't pay huge taxes, since the reate would be progressive. And say Microsoft were a privately owned corp, what's the problem with Gates's kid having to sell Microsoft to pay the inheritance tax? Why would it be worse for a corporation to own Microsoft than one very powerful individual?

MOST corporations are not publicly traded companies. They are closely held corporations - I.E., family business'. My business for example is a C-corporation. Many family farms are now C-corps. Most construction firms are C-corps. These companies can't be traded on the stock market and their stock is not a liquid asset. It is mearly a representation of all the assets of the company.

Under current laws, I am only allowed to sell stock to family members, active partners in the business, and people defined as "savy investors". In the case of "savy investors", usually they will invest money in someone's business in exchange for stock to be traded back over a period of time. In other words, a promissory note.

Let's say my son and I run a well drilling business. We have one rig worth 100K. After maint and upkeep on the rig, maybe we make enough for both of us to live a middle class lifestyle, have health insurance, etc. But we're not rich. We chose a C-corp because 1) we were planning on making money 2) we wanted to shield our personal assets from any lawsuits the business incurs and 3) our health insur ends up cheaper because it is all tax deductible.

What happens when I die? Even at a 20% tax, the rig has too be sold for the 20k tax bill and my son no longer has a business.

What about the family farm? When every piece of equipment is necessary to your business and you have just enough land to make a living on, Your heirs might as well sell off all the land and equipt to the local mega-farm and go do something else. That has been a big problem in the past.

All family business would have to either take out huge life insur policies just to pay the taxes to keep the business going when someone dies, or keep huge amounts of cash in the bank, stifling expansion (and jobs for other people).

I am all for progressive taxes and for taxing all forms of income in the same manner. The wealthy have the biggest stake in keeping our society working and the responsibility. And I do understand that inheritance taxes were created to keep the wealth of the country from ending up in fewer and fewer hands. But extending inheritance taxes downward does just the opposite. It will cause family business to sell out when a principle owner dies.

[AP]

23. If they take it as a salary...

...then they pay SSI on it, which is fine. And at least you have to WORK to earn it. You can't grant options to people that they can take with them, stick in a trust, live off of, leave to their kids or whatever, and enjoy without having to work to earn their value (and which dilute shareholder value down the road).

And even if it weren't completely fair, it's still not right to tax workers' income more than you tax dividends. Certainly you don't think taxing dividends at flat rate less than earned income is fair?

As for your hypo: I'm not sure what you want. Do you want to give your son your company for nothing? It's good for you, but that's not good for the economy. Other people ready to work hard to get value out fo the land shouldn't have to compete with people who get a big jump on them just because their parents were in the business. Granted, you shouldn't have to compete with big corps who have an unfair advantage -- but I don't think giving heirs a big break is the right way to address that problem. The solution to that problem should be something that works for people without fathers in the business as well as working for you.

If it's size that concerns you, then just pick a lower rate for the first 100k in inherited income. What do you think is fair? 0% on the first 50k then 10% up to 150K? Leave it to your son and his wife, and that's 300K right there that will be taxed at $20K. If they have two kids, you have 600K you can leave taxed at $40k. I'm sure they can take out a loan to pay such a low tax bill for such a big asset.

Another thing: why leave it to him in a will. Make him an owner during his lifetime, and you don't have the inheritance problem. There might be some other tax on the transfer, but those would be taxed at cap gains rates, which I think should be lower than inheritance rates and dividend rates, but higher than earned income rates.

Or form a regular C-Corp, and pay him in stock, which would be taxed at the lowest earned income rates. By the time you're finished, he'll have all the voting shares all received at the lowest tax rates possible, and he will have had to have worked to earn it, which is the most socially valuable activity of all commercial activities people engage in.

Family farms deserve the exemptions they get. They are asset rich, produce relatively little income, and it's important to the economy that agro businesses don't control all the farmland, so make them exempt up to the first 1 mil or 2 mil, which roughly matches the special treatment they already get. Again, leave half to each of two spouses and you have up to 2 mil not taxed.

What I'm not prepared to concede is NO inheritance tax on valuable assets, and I don't really like the flat tax on estates that we have now. I don't think that's fair, even if most people avoid it by forming trusts which vest and are taxed at personal rates after a generation. As I said, inheritance should be taxed progressively according to the wealth of the recipient, and although I didn't make it clear in my first post, I have no problem with a zero band for a reasonable amount of income. But I would have a problem with a zero band for an unreasonable amount of income. The numbers I have above were for discussion.

[mongo]

24. So you support a 2mil exemption for farms

Why not other family business? Lets take for example the pharmacy in the small town I live in. It is a generational family business, that has been in town forever. If the owner dies suddenly, and the family has to pay exorbitant taxes, what do you think will happen? I'd say the store is worth at least 500K if not 1 mil.

If this store closes, would we be better off with a CVS? Our pharmacy still lets customers run tabs for their prescriptions if they can't pay on the day they need them. I doubt if anyone would even move into the building as there is a CVS 9 miles in one directions and a Walmart 10 miles in the other.

Sure, they can transfer ownership now, or put assets in trusts, etc. but should they have too? Where is the incentive to build a business like this over your lifetime if the government is going to eat it when you die?

And just for the record, I think that dividends should be taxed as ordinary income. No more, no less.

[AP]

25. The numbers are for discussion. What's the exemption farms get now?

And what's the logic?

Control of air, water, and food are very critical matters in our society and I presume -- I'm only guessing -- that farms get the exemptions they do because some politicians believe that it's important that farms don't get sold to big corporations, which happens more often with land because of the particular, low-profit nature of the business, but the fact that farmers sit on very valuable assets -- land which few people not yet in the business can afford to buy in order to enter farming.

If I'm wrong, or if my numbers are wrong, change them so you think it's fair.

As for the family pharamacy: like I said in my previous post, I think earned income rates should be the lowest, and I think that if a pharmacist wants to leave his business to his son or anyone, then he should pay him in stock until the son has control of the business, and the son should pay tax at low earned income rates.

I don't think there's anything special about passing on wealth to people who didn't work to earn it, and I think that inheritiance should be taxed at higher rates than earned income, and dividend and cap gains too, for that matter.

And the competing interests aren't just big CVS, but also the people who go to pharmacy school and want to start their own pharmacies. They shouldn't have to compete with CVS and with the schmo who got lucky enough to be born the child of a pharmacist.

We need rules that allow that guy to get in the business as well as rules that protect the guy who's in the business from CVS. Preferring big business AND preferring people born lucky is just about the worst thing you can do for the economy. There should be opportunity for everyone, not just for CVS and those born lucky.

And the tax code should reward work, and not reward size or people born lucky.

[mongo]

26. Do you think that people just pop out of pharmacy school

and start their own pharmacy? Or almost any business?

No. They do it on the assets of their parents. That goes for most successful brick and mortar business. The parents own the land, etc. Even if you can get an SBA backed loan - which is not that easy, you still have to have 20% of the startup capital. Did you have 100K in the bank when you left college to start a 500K business?

Even my two bit store took all of my savings, the equity in my house, AND some help from my mom to start. And I don't even own the building my store is in.

We need rules that allow that guy to get in the business as well as rules that protect the guy who's in the business from CVS. Preferring big business AND preferring people born lucky is just about the worst thing you can do for the economy. There should be opportunity for everyone, not just for CVS and those born lucky.

Crippling inheritance taxes favor big business as the little guy as they would be forced to close their family business to pay the taxes. Opening the market up to the only entities with the capital to open.

I don't know what the limits should be. It also depends on what kind of assets we are talking about. Non-controlling interests in publicly traded companies, bonds, CD's should have a lower threshold before inheritance taxes kick in than family farms and other closely held (family owned) corporations. Sorry that you think that spending a lifetime building a business means that my kids will be "born lucky".

As far as transferring control to an heir before you die, that's a crap shoot too - isn't it? The heir could die in a car accident tomorrow.

You may feel cheated because your family doesn't own huge assets, but in every county there are a few families, whose families have lived there forever, who own huge tracts of land. There is a family here that at one time owned all the land on one side of the highway up here south of the store for about 3 miles. They own a car dealership, a Harley dealership - they sold a big chuck to Walmart a couple of years ago. They are sitting pretty. They have strip malls and other commercial interests up there. But still much of the land is just open fields.

But if they had to sell a bunch of land to pay inheritance taxes, who do you think would be able to buy it? The land is worth 150K/acre. Do you think that small entrepreneurs would be buying it or large commercial land development companies? Would you rather see the land in the control of a local business owner that supports the community or a out of state development company?

Face it, the American dream is only really open to people whose families already have wealth. But overtaxing the smaller wealth-holders will only further consolidate that wealth into the hands of the few.

[AP]

29. I think I've made a very reasonable argument,

and I'm finding your responses to be kind of unreasonable.

I'll just repeat it one more time: you shouldn't have to compete unfairly with big businesses, but neither should the person who doesn't have a father in the business. The solution to protecting the small business is no more giving the children of a small business a leg up as it is pinning the entire future of small businesses on shackling the children of small businessmen to the careers of their parents.

And certainly, people who have no children or have children who aren't interested in the business are motivated to entrepreneurialism.

[AP]

30. I think I've made a very reasonable argument,

and I'm finding your responses to be kind of unreasonable.

I'll just repeat it one more time: you shouldn't have to compete unfairly with big businesses, but neither should the person who doesn't have a father in the business. The solution to protecting the small business is no more giving the children of a small business a leg up as it is pinning the entire future of small businesses on shackling the children of small businessmen to the careers of their parents.

And certainly, people who have no children or have children who aren't interested in the business are motivated to entrepreneurialism.

[AP]

8. Everyone within the same bracket should be in roughly the same economic...

...situation.

I don't think people who make 100k-200k are in the same financial position as people who make 500k-800k, so I don't think that's a fair tax bracket.

I also think you need to distinguish income than comes from work, from cap gains, from dividends and from inheritance, taxing them, respectively at higher and higher rates (with none of those rates being punitive).

Also, there's a legitimate reason for corporate income being a tiny bit lower than individual rates at the low end of the spectrum (because they'd all just form LLCs and Partnerships and benefit from a single tax), whereas, I think there's a legitimate reasonf for corps earning more than the highest earning individuals earn to pay higher rates (because super rich corps just have too much power and benefit to wildly from their size for them not to expect to have to pay a little more than everyone else). So corp rates have to be close to individual rates where the corps are small, but I don't think that's the case as they get bigger, but that's only because no individuals earn what the largest corporations earn.

[On the Road]

10. What I Like About it Is

That the maximum bracket keeps going up into the millions. After the 1986 tax restructure, middle class people actually paid a higher marginal tax rate (33%) than multi-millionaires (28%).

Personally, I would start taxation at a lower income level, maybe $25,000. And max the federal tax at 50%. Just my preference. There will always be winners and losers, but from a pragmatic point of view it's important for the changes to be perceived as fair as for the new taxes not throw too many people into bankruptcy.

Pulling all the deductions hard. That means no deductions for IRAs, for health care expenses, for charitable contributions, for state taxes, for property taxes and most importantly, for mortgage interest. That would be a financial killer for a lot of people. And it undermines the very progressive result of high levels of home ownership.

However, the toughest part in simplifying the tax code is defining what is taxable income. The people over $20 million are otherwise going to use sophisticated accounting measures to demonstrate that they made no money. One reason the tax code is so large is the attempt to keep up with new tax dodges and income types.

Overall, I like the direction.

[sweetheart]

11. I presume that americans abroad would pay local income taxes..

and not be double-charged by your tax.

No credits for dependents i see, so that a person filing 50K as an
individual is the same as a single mother with 6 kids... hmmm..

I presume for corporations, when you say "earned", you mean "net profits"
as gross profits would bankrupt most all companies.

[hfojvt]

13. yeah, what he/she said

I think that's funny. I look like a copy-cat, except that your post was not here when I started mine. I even picked the same size family. I chose 7 because I grew up in a family of seven, even though I now think that is way too large.

What can I say except "meow" and :bounce: for thinking alike and :D for a cool username.

[sweetheart]

18. You are psychic

I aways wonder the cadence of certain chats, like a pattern,
the discussion follows an unfolding, like a flower, petal
by petal, and the user name of each petal interchangeable.

:-) woof :-)

[hfojvt]

12. you do not distinguish between families and individuals

so a single person with an income of $50,000 is tax free and a family of seven with an income of $55,000 must pay $850. That does not seem fair to the family.

Second, what is this obsession with a) eliminating taxes for rich people? (as someone who has made less than $15,000 a year for most of the last ten years, someone making $45,000 looks "rich" to me, even if they feel "poor" compared to the super-duper rich) and b) reducing the brackets? Brackets do not make for complexity. With 5 brackets or 100 brackets a taxpayer still just needs to look it up in a table. Second, I currently pay over $1000 on income of $23,000 and I really have no problem with that. My problem comes when families of four only pay $45 on incomes of $40,000. I think it would be much fairer if the child deduction was only $200 instead of $1,000. I simply think that people making from $20,000 to $50,000 are doing fairly well financially (especially if they, like me, have free health insurance) and can afford to pay some taxes. To reduce their taxes to 0 is a huge gift to them that does nothing for the under $15,000 crowd.

Finally, a certain amount of complexity is inevitable. What is income? If I sell my house for $40,000, how much of that is income? All of it, or just the net? What is the net, does it include the interest I paid in buying it (which I did not get a tax deduction for since $1,000 in interest is far less than the standard deduction) and what about property taxes and insurance and improvements/upkeep? Once you move away from gross income to net income, which I think you must do, you have introduced another tax form for detailing that.

[triguy46]

14. a loser for me

Be about 15% more for me. And I don't have a mortgage deduction.

Secondly, what does this do to the states? Most tie their policies to the feds.

[jmowreader]

15. The corporate clause will kill America

Let's look at my employer's financials and you'll see why.

In fiscal year 2004 (which ended on January 31, 2005), we earned $5 billion in profit on $73.1 billion in sales. In other words, it cost us $68.1 billion dollars to run our company. That $68 billion bought merchandise, paid to advertise it, bought new stores to sell it from, paid people to work in those stores and bought electricity and gas to light and heat our facilities.

Under your tax plan, we'd owe $50 billion in federal income tax. A nice windfall to the government for one year, but what the hell do we buy merchandise with for next year? What do we pay people with next year, if all but $23 billion is going to the feds?

[Selatius]

19. I see your point. I should change it to "net income" instead.

[jmowreader]

20. Or just say "unreinvested profits."

Let's throw out a wild-ass notion and say we decided to take that $5 billion and double the size of the Atlanta Transit Facility. (This is the Atlanta Transit Facility:



A Transit Facility is a kind of warehouse, but there's a difference. A warehouse (they're called Distribution Centers now) stores product from vendors, repalletizes product from vendors, and ships product to stores. A Transit Facility relies on vendors' willingness to do custom palletization. If your company will accept orders directly from stores--some will, some won't--and will pack pallets for each of the stores you've accepted orders from, we pay you more money for your service. In exchange, when your truck arrives at the TF, our guys unload it in about ten minutes, drive the pallets across the hall, and put them right on trucks going to individual stores so your truck can go back to your warehouse. It's really a slick system.)

We'd put a few thousand people to work building the facility--the Atlanta TF is fucking huge and doubling its size would put an additional two million square feet under one roof.

The financials of every company who sold us materials to build the project would look pretty damn good that year.

We'd have to hire a LOT more employees to work in the TF once it was done. Warehousemen who drive lift trucks make lots of money, and this will be dispersed throughout the community.

The schoolchildren of Fulton County, Georgia, would benefit in perpetuity; the property taxes on a 4-million-square-foot building are much higher than the taxes on a 2-million-square-foot building.

Add to that the notion that we can keep more SKUs at lower stockage levels. Huh? Let me explain. Let's sell some fans. Home Depot 9999 of Lower Death Valley has room for 1000 fans in inventory, and we sell 25 each of three particular fans--three SKUs--every day. If we can get fans every four days because the TF only does fans every fourth day due to space constraints, I gotta give 30 percent of my storage space to those three SKUs. If space was freed up to do fans every two days at the TF, I'd only have to keep 50 of those fans in stock--and all of a sudden I've got enough room to keep three more styles of fan. This benefits you because now you are more likely to find exactly the fan you want...the bigger TF benefits you even if you don't live in Fulton County.

That's how we can use the $5 billion for good even though it's going into something expressly capitalistic.

(We could take the $5 billion and give it to the United Way. That would be for good too. But I dunno...maybe we spend the $5b on the TF, gain all the benefits I previously described, and donate the added profits from it to the United Way. That works too.)

Now! Let's say we wanted to be non-altrustic and give the $5 billion to our 1000 biggest stockholders--five million per stockholder. Umm...ya know, Hatteras Yachts only employs a couple hundred people, Bertram Yachts only employs a couple hundred people and Ferrari isn't even IN the United States!

This is why I say tax unreinvested profits hard and heavy. Reinvesting gives all the neat advantages Dubya names when he brags about cutting corporate taxes. Just passing out the profits to shareholders probably doesn't.

[iconoclastNYC]

22. Earned Income Tax Credit Lifted Millions

Out of poverty and your proposal puts them back.

Under $20,000 or so, for a family of whatever would need to have an effective negative tax rate (refundable tax credits).

UNLESS

We pass a federal living wage law.

[question everything]

27. You need actual numbers and only the IRS data can help

You need to find out, at each income level, how many deduct their mortgage, property and state taxes and charity - these are the biggies.

Actually you don't need the IRS for this. When I did our income tax on Turbo Tax they gave me comparison on how much of these deductions others in our income level had.

Next, you need to know how many individuals actually would fall in these income levels.

Once you have these numbers than you should be able to calculate the income that would be generated. You don't want to end up with less than what we have now.

I think that most would like to keep the charity deductions, though. Certainly eliminating mortgage would stop the spiraling home prices but this would make it hard on the ones that just purchased in the past five years.

I would still keep deductions for IRA and 401K contributions and I would exempt the first $200, or so of dividends and interest. It used to be - before the 1986 reform, I think. We really need to encourage people to save.

What would you do about capital gain of homes? Still keep the $250,000/$500,000 exemptions? I think that as long as capital gains on houses is recognized as such, that capital loss should be, too.

Last, I think that individuals who pay for their own health insurance with after tax dollars should be able to deduct it from their incomes - just as employers do.

This is more complicated for corporations as you will need to look at what qualify as expenses to be deducted from sales to reach net income. Different ways of calculating deprecations, capital equipment, stock options, employees' benefits, etc., and I don't know how many here are knowledgeable.