Having just filed my income taxes (after extension), I’m sort of resenting how the whole thing is set up, and thinking maybe there’s a better way. This year I made a lot more income than I need, and I’ll have to pay wads of tax on it, but next year I may be poverty level.
What about just removing all limits on contributions and withdrawals to 401(k) plans, letting me save as much as I want, letting me withdraw whenever I want, taxing it as income when I do so? That way I could be sitting on a large amount of money, but live like a poor person and be taxed like a poor person. Unless I temporarily want to become a rich person, and be taxed accordingly. That sounds fair to me.
If some argue that I wouldn’t truly be like a poor person because I’d have enough savings that I wouldn’t really worry about starving, I could agree to a small flat tax on total wealth.
All I want to do is spread my tax burden across multiple years to account for the feast-and-famine situation, and also to reflect the fact that I don’t live like a rock star (unless being able to retire at age 60 is living like a rock star, which sadly seems to be more and more true nowadays).
So what’s wrong with that situation? How is it unfair? How could it be unfairly abused? Let’s set aside revenue neutrality for purposes of this discussion.
Disclaimer: I understand the importance of taxes in a modern democracy, would not want to be a millionaire in Somalia, agree with Adam Smith that the absurdly fortunate ought to pay somewhat more, etc.
First off, I wouldn’t call this fair tax, as fair = progressive.
Secondly, the problems I see from it at fair glance is that it would overemphasize investment and skew the job market accordingly. Also, it would put an even greater divide with income inequality (not taking any fairness valuation, just objectively, poorer people will remain poor, rich people will remain/grow even richer).
Lastly, and I could probably come up with more reasons if I had time, there would be a massive lack of tax revenue as the government gets most its tax money from consumers and consumer spending activities. People who followed your plan would be less likely to spend money because the effects of taxation would be more immediate. You would see spending trends to buy only essentials and emergencies. On the plus side, commodities and people who work in them would see more activity and competition (like there isn’t enough already), but it doesn’t encourage any one to take the risk and go to gain more skills and work in more specialized labor.
Could things remain as they are now? Probably, but I doubt it. I think people are more tax conscious than they realize.
What an unfortunate meme. Fair is NOT equal to progressive.
In an “everyone pays their fair share” scenario, there’d be a flat tax. Let’s call it 10%, just for the sake of argument. You make $10,000 this year? Pay $1,000 in taxes. You make $10,000,000? Pay a million.
I could see a compromise where the first X dollars (determined by poverty level) are excepted, but progressive systems heavily favor low-income (as opposed to poor) people.
Assuming that everyone at a specific income level gets an equal percent of their income in services from the govenment.
In reality, the lower middle class probably get the least in terms of % of income from their government in services. They’re not rich enough or not working in the right fields to take advantage of corporate welfare, are not on individual welfare themselves (being barely rich enough to not get the EITC,) are not rich enough to have a lot to lose through a lack of police force, and do not take the extended vacations and purchase the capital goods that the government subsidizes through government built and run transportation infrastructure.
Let’s say that instead of a 401(k) investment account, it’s just a regular tax-free interest-bearing cash savings account. You can still have a 401(k) subject to regular restrictions, but any contributions to the tax-free savings account would count against your 401(k) or IRA contribution limits.
I don’t see how. The money in the tax-free savings account technically would not be income until you take the distribution. If you take income at a higher rate, then you get taxed at a higher rate. There would be no change in income inequality at all.
I don’t see how this would depress consumer activity any more than current income taxes do. This year I’m consciously having to earn less (and thus spend less) so that I can avoid hitting certain tax limits.
I did mention that there could be a small flat wealth tax on the amount in savings, so that the people with huge amounts of savings would effectively need to use some of it or start losing it.
What an unfortunate meme :p. Dear me, no - fair IS progressive, it’s flat taxes that are unfair. IMO. Which of course all either one of us have ;).
Both arguments are correct of course. Progressive taxation is “fair” in one sense, flat taxes are “fair” in an entirely different one. Both are also unfair, depending how you look at things. The difference comes down to worldview as to which type of fairness you prefer.
You’re not wrong in a cosmic sense, but then neither am I.
10% of one’s income is a much greater burden for somebody making $10,000 than for somebody making $10,000,000. For the low-income person, that thousand dollars could mean not being able to afford both food and medications. For the multi-millionaire, well, he’ll have $9 million instead of $10 million and will not be worrying about where his next meal comes from.
Isn’t there some mechanism for paying income tax based on one’s average annual income?
The main problem with calling it a “fair tax” is that everyone calls their tax proposals the “fair tax” (most recently, people advocating a national sales tax), so no one knows what your talking about. “Flat tax” is actually descriptive, and tells us what you mean.
But that aside, the OP seems more interested in whether some form of “tax averaging” should be put into the tax code. Such a thing apparently existed in the US federal tax code, but was removed during the 80’s.
w/r/t/ the “Fair” in the OP, I guess what I’m getting at is the “FairTax” proposal that we should all pay a flat sales tax rather than an income tax, on the idea that money should be left alone until it’s spent because money can’t really give you value until you use it.
That’s not exactly what I’m saying, although it’s similar. Money that I’m saving for the long term isn’t doing anything for me except giving me peace of mind. If I’m living like a pauper, why should I be taxed as anything but a pauper? Tax me when I pay myself, and if I pay myself more, then I’ll pay more taxes. Keep the progressive tax rates, even. Just don’t tax it as income until I’ve decided I’m ready to use it.
I think the OP’s desires would be met by a national sales tax. If you save all of your income, you’ll pay no tax. If you spend every penny, you’ll pay a lot of tax. Exempt groceries, medications, and other things people need. Is it a “fair” system? Who knows? That depends on what “fair” means to you. I imagine “fair” means “I pay less, someone else pays more” to most people.
Edit: The OP seems to have come to the same conclusion while I was typing
This might work, but my knowledge of taxes w/r/t 401(k) is what happens on the macroeconomic level. What happens to people who make an obscene amount of money? Where would they put their money? ISTM that they would just get taxed and would look extremely unfair to the rich.
Poor people need to spend a higher portion of their income on necessities than more wealthy people. As they withdraw funds, they will realize tax immediately and suffer psych trauma of being hit with the tax. The more affluent who suffer from the same trauma will be trend even more to conservation and less spending. Less spending = more opportunity for wealth generation. Less money = less opportunity for wealth generation. On average, with more money able to be invested, the rich will get richer, the poor will stay the way or worse (since they are more susceptible to downturns to the economy). To even this out, but people don’t seem to like, is to create straight out wealth redistribution, cash grants (granted, because of human nature it probably causes more problems that it solves).
I don’t know what you do, but my lawyer, IT, and accountant friends can set up private consulting companies which are basically tax shelters. To clarify my original answer, you stated that tax would occur upon withdrawal, but you didn’t mention a rate. This would skew investments towards government bonds and other tax free shelters. I still think some form of conservation would be in play. The meme would be to only withdraw what you need to minimize the taxation.
I’m pretty sure that this would offset any conservation. If no alternatives exist for investment above the wealth tax rate, then capital will either flee to safer investment/holding havens, or people will spend because they can’t save it. Given what people do already, I’ll assume spending.
It would be essentially neutral to the rich. They already pay income tax now, they’d pay the same under my system if they withdraw money at the same rate they earn it.
The rich wouldn’t really get richer, because they’d still have to pay on whatever they withdrew. Yes, they might be able to accumulate more wealth, due to investment interest (investment does also create jobs BTW), but they wouldn’t get the benefit from that wealth without withdrawing it and therefore taxing it.
I’m talking just the same income tax rates as today. If a wealth tax was added on the saved amounts, then slightly less income tax to offset that.
Firstly, the rich just don’t withdraw money at the same rate they earn it-it’s well-documented that saving rates are higher with higher income–and fairly intuitive (if you’re earning 10k, you’re spending every penny to stay alive… if you earn 50 million, it’s hard to figure out what to spend it on).
Also, depending on your definition of “investment”, the rich certainly might be able to spend it without withdrawing it.
Easy example: invest in stocks. You or I might have a couple of hundred shares. No biggie.
bill gates, if he invests in stocks (or more realistically, gets compensated in stock), might well have a majority shareholding and control the company. The money is still “invested,” but gates gets a nice office, to use the company jet, gets senators to call him up because he’s an influential guy–all benefits he gets while still “investing” his money.
It wouldn’t be neutral for the rich, because it would allow them to defer taxes. Tax deferred is tax saved.
Poorer people have to spend their whole paycheck, so they get taxed right up front. If a rich person can afford to put away 50% of their salary and then spend it a year or two later, they earn a bunch of interest on the money until they give it up. That’s really a tax savings.
I would suggest the original poster read up on negative income tax schemes, which I find very appealing, for my own definition of “fair” in the context of taxation.
Oh, don’t “rolleyes” me until you’ve thought it through. There’s a huge difference between poor and low-income. I know people with huge amounts of assets (retirement accounts, two homes…) that have virtually no income and pay no taxes. On the flip side, I used to have a business that I spent four years building and then sold. During the “building” time, I had almost no income. The year I sold it, I did well. Averaged over the four years, it would have been a reasonable middle-income range. As it was, the year I sold the business, I got screwed on taxes. I wasn’t rich. Almost no assets. But since I made a bunch that year, I was in the highest possible tax bracket.
Right, that’s what I’m talking about. Indefinite deferral, for the purpose of averaging, but you wouldn’t be able to do much with it pre-distribution except maybe invest it in government instruments like T-bills or municipal bonds. Not talking about getting fabulously wealthy here, just averaging feast-and-famine income year over year with some mechanism for keeping up with inflation.