Another proposed change to the tax system

Great Debates
1

One of the major objections I’ve heard to the progressive income tax is that “it punishes success” (whatever that means)- the idea is that if you tax the richest X% of the population, people will have a disincentive to work hard, be creative/inventive, and by so doing, make gobs and gobs of money.

So, I periodically kick around the idea of how to restructure the tax system. A while back, I floated a system where the first $10K a person earns is theirs free and clear, then the next 10K is taxed at $1 per $1000, then the next $10K at $2.00 per $1000, etc…, which would basically keep money in the pockets of lower income working people, not levy huge tax “penalties” on the upper middle class, who would probably be hard-working educated professional types (in other words, not punish them for being successful), and would still allow people to become millionaires while only paying a modest percentage of their income in taxes.

That went over like a lead balloon.

So, here’s my newest proposal.

Full rent or mortgage payments on a worker’s primary residence would be fully tax-deductible. Whether you live in a $200/mo sleeping room or a mansion with payments of $10,000 per month, it’s totally non-taxable. Only one dwelling per person/family please, vacation homes or hotel rooms maintained in Texas so you can avoid paying state income tax are not deductible. Sorry, George Sr.

The payments, cost of fuel, repairs, and insurance premiums on one car per working adult in each household would be totally deductible, whether you’re driving a '69 Dodge Dart or a Humvee. If nobody in the household owns a car, then the cost of bus fare/cab fare for all transportation needs.

The cost of groceries would also be deductible. Save your receipts, whether you shop at Super Hell-Mart or Whole foods. Whatever you spend feeding yourself and your family is not subject to income tax.

Next, figure what percentage of an average household’s income is spent on clothing, adjusted for the number of children, whether you work in a professional field that requires special clothing/has a dress code requiring clothing you normally wouldn’t buy for yourself. Deduct this percentage from the annual income of the person or household.

Deduct another percentage for household goods and appliances (broom, dustpan, vacuum cleaner, personal care items like shampoo, soap, bath linens, bed linens, sanitary napkins, household cleaners, laundry soap, toilet paper, those little necessities of life)

Utility costs, deduct 'em.

Medical costs (including OTC medications), deduct 'em.

After the basic necessities of life are covered, deduct a percentage of what’s left over for savings/investments- say, something like 10%.

All of this would be based on a wage or salary earner. If a person is self-employed or owns a business, then their cost of doing business would naturally also be deductible.

Next, institute a progressive income tax on what’s left. I’m not going to name any percentages, but I’m thinking it should probably be more or less what we have in place now, but weighted a lot more heavily toward the top 2% of income earners.

With this tax structure, the greatest share of the tax burden would fall on the people who had the most money, but without “punishing hard-working people for being successful”. Instead of having the taxes taken off the top and having to live on what’s left (which is a serious burden on low-income workers), a person could pay for food, clothing, shelter, the heating, light, and phone bills , save or invest for their retirement, all in proportion to their income, then pay taxes on what was left over.

2

Lead Balloon.

Damn, that’s going to be the most horrific tax season of all time. I get to deduct all my groceries, but only a portion of my household cleaners? They’re on the same receipt! I’m going to have to pore over about 500 receipts that I’ve been holding on to. Totalling up line by line what is a grocery item and what isn’t. Then, I have to keep them for years as backup. Just think about the poor schlubs who shop at super walmart, they could have anything on that receipt.

Tax season is already complicated enough, I don’t think any tax reform should be considered if it doesn’t reduce complexity.

3

Three problems:

1 - That is terribly complicated. There’s no way whatsoever that any kind of reasonable estimate of withholding can be made at the beginning of the year. How the hell do I know how much soap and car repairs I will need in the next 12 months? The result would be huge variations in year end payments and refunds: one year I might geta giant refund, the next I might owe a whole bunch, even if my income did not change, simply because I spent my money differently.

2 - Strikes me as unfair. I can go buy $1,000 business suits and write them off, because I have the income to lay it out and wait to get it back at the end of the year. I’m not sure that the mechanics out there are going to buy high-priced coveralls. Why should I get more tax breaks for spending more on my clothes? Hell, why don’t I buy $5,000 suits and write it off?

3 - You’ve basically made a huge portion of consumer spending exempt from taxes, save for things like televisions and vacations. I have no doubt that government revenues would drop like a brick under this plan, meaning that we’d either have gigantic deficits or drastic spending cuts.

4

isn’t that exactly the tax system that we have already, just with different numbers?

  1. total up everything you earn.
  2. deduct basic expenses (dependants, mortgage, business expenses)
  3. tax what’s left on a progressive scale.

you can increase deductions and raise the tax percentages, but in the end it’s the same system.

5

Look, this is another terrible idea.

The simplest way to handle this is to expand the value of your personal exemption, so the first $xxxx of your income is exempt from taxation. Don’t change the tax rates much, maybe add a percent or two for revenue neutrality.

What your proposal attempts to do is to exempt spending on “neccesities” on the theory that the poor have to spend a larger portion of their income on neccesities than the rich. But you’ve hugely increased the amount of record keeping needed, you have to save reciepts for just about every purchase!

Much simpler just to say: “Well, the average poor person spends $X on neccesities every year. So we’ll make X the amount of the personal exemption. If you have less income than X you pay nothing, if you make more than X you only owe taxes on your income-X.”

The other problem is that your plan encourages spending. If you spend all your income on luxury food and clothing you pay no taxes. If you save you pay a lot. The best tax plans are the simplest, since they are the easist to plan for and comply with and the most difficult to game. Everyone pays (income-X) at Y% is simple, easy to comply with, and very difficult to get around by purchasing fur-bearing trout farms and suchlike. A smooth increase in Y as income increases isn’t so bad either, as long as the percentage doesn’t get too large. If Y is capped at present values of around 35% that’s fine.

But you can’t expect poor people to save receipts for every purchase, and add everything up at the end of the year. It imposes a really unfair accounting burden on people.

6

Another problem is that you’re providing a strong incentive for certain consumer choices for no particular reason. The person who wants to drive a modest car but spend extra money on designer clothes is taxed much more heavily than the person who buys an expensive automobile and cheap clothes. Is there any policy benefit to that? What about if I decide to save money by walking or using public transportation. I’d actually have to pay more in taxes than the guy who buys a Hummer he can barely afford.

Also, I can’t tell from your progession rate whether that’s linear, exponential, or some other increase, but unless you have a maximum rate in mind, you’ve also established an income ceiling, which will stifle the economy. It is questionable whether people will try to earn more when the marginal tax rates are high. It is certain that they won’t when the marginal tax rates are 100%.

7

Hmmm, some interesting points here.

I’m operating under the basic assumption that on average people spend about the same percentage of their income on food, clothing, shelter and transportation.

So, since I’m figuring clothing and household goods as a flat percentage of income, let’s figure the grocery bill as a flat percentage as well, assuming lower income people will shop at places like Food 4 Less, and the wealthier folks will go to Whole Foods or Wild Oats, and middle income earners will go to Von’s.

The main thing I take issue with under the current tax system is that people who rent can’t deduct any of their housing costs (at least not federally, some states allow a renter’s deduction). Homeowners can at least deduct the interest on their mortgage. The standard deduction is something in the neighborhood of $7500 a year. Here in Vegas, a modest one-bedroom apartment goes for something around $600/month, figure in the cost of utilities (which are outrageous ) and the standard deduction doesn’t even cover the cost of housing, let alone food, clothing and transportation.
Ravenman, you did bring up some excellent points. I’m going to try to address them.

I really don’t have a problem with this. One year, your car is running fine, you pay your taxes at the end of the year, everything is hunky-dory. Then, the next year, your engine block cracks and not only do you have this huge repair bill, but you get to deduct it from your taxable income, so your tax bill goes down proportional to the cost of keeping the vehicle that gets you to and from work on the road.

Valid question. I really don’t have an answer for this. I was thinking in terms of, well, the mechanic who works for a chain that requires him to wear a coveralls as a uniform but doesn’t provide the uniform for him (and, really, those things ain’t cheap), or health-care workers who are required to wear scrubs, or the casino floorman (or, hell, corporate management type) who is required to wear suits on the job. If your job requires you to wear clothing special clothing, but doesn’t your employer doesn’t provide it, it should be deductible. And anyway, part of my idea with this little scheme is not to “punish success”, (whatever that means), so if you worked hard and are making enough money that you can afford Armani suits, have at it.

Well, hopefully, if lower income earners could deduct the actual cost of housing and transportation, their tax burden would be reduced so that assistance such as food stamps would be unnecessary, or at least substantially reduced. Also, since I’m only allowing for a flat percentage of income after the necessities to be deducted for savings and investment, that should reduce the amount of tax shelters for the uber-rich. Anyhoo, right now, I’m thinking strictly in terms of personal income tax. We could probably make up the lost revenue by not allowing U.S. owned corporations to avoid paying income taxes by chartering their companies overseas. But that would be a whole nother thread that I’m really not up for starting right now.

iamthewalrus(:3=)

Well, no tax system could ever be perfect, and I guess this is the flaw in mine. Maybe we could have an “idiot” tax that would provide a disincentive for people to buy vehicles they can’t afford. Anyhoo, I doubt the extra amount of tax the modest-car driving Gucci-wearer would pay would be as much as the difference in the cost of the car payments.

neither can I. I just pulled it out of my ass, really.

OK, how 'bout 80%? Yeah, it’s steep, but remember that someone in that tax bracket would still only be paying $10 on their first $10K of taxable income.

8

I think any tax system needs to deal with a fundamental flaw - people are taxed on their revenue while corporations are taxed on their profit. If I pay rent on an apartment I get no tax benefit. Even if I buy a house I only get a partial benefit on the interest. Yet a corporation can rent posh office space in the heart of downtown at $5000/mo and get to expence it off before paying taxes.

Isn’t it amazing how these large corporations make a ton of money yet have so many expences (naming rights to stadiums, private lear jets, etc.) that they pay little in the way of taxes? Meanwhile the average American works paycheck to paycheck trying desperately to feed their kids, put gas in the car, etc. and for the effort they get a standard deduction, a few exemptions, and screwed with a capital “F” on 15 April.

9

Of course, the advantage is that expense deducations encourages companies to invest in something - anything - and keeps the economy volatility up. But yes, it’s complicated. One of the bigger disadvantages of the OP’s propsal is that it will destroy private investment. In other words, people will tend to form corporations and other tax shelters under that plan, and will back off from investing personally because they won’t be able to keep their cash.

10

You’re missing the point. Right now, people pay their taxes in increments (either per paycheck or quarterly) based on their estimated tax burden by the end of the year, which, for most people, is fairly predictable. For the most part, people don’t end up with huge refunds unless they want them, and people don’t end up paying large amounts of year-end taxes unless they really goofed up. (Of course there are exceptions like poor Aunt Nelly, but I’m talking about the overwhelming number of taxpayers.)

If you expect people to pay taxes throughout the year, they must have some kind of estimate of what is expected of them – but that’s pretty much impossible since things like car repairs, purchase of clothing, and other necessities are not purchased in the same way that bread and milk is. Therefore, the incentive would probably be for people to massively overpay their taxes, fearing being stuck with a huge tax bill because Peter didn’t actually have his clutch replaced as he expected in 2007.

However, the numbers are so far out of whack it isn’t even worth going into detail. Food stamps cost the government $41 billion a year. But Americans certainly spend more than half a trillion dollars on food each year – that’s $500 billion of income spent that would never be taxes. Even at very low rates of taxation, the amount of government revenue foregone by excluding from taxation income that $500 billion spent on food far, far, far exceeds the what we could ever cut from food stamp spending.

Of course, this doesn’t even touch on other huge sectors of consumer spending that will no longer be subject to taxation. Believe me, the numbers are nowhere near in your favor.

What’s more, it sounds like you’re setting up a negative tax for the poorest of the poor. What if a dirt-poor person makes $2,000 a year, but charges on his credit card $10,000 worth of necessities – food, clothes, soap, etc. Will he get an $8,000 refund?

11

Well, I think the withholding system sux anyway. What about if, at the end of the year, people totalled up what their tax bill was and paid it out in installments over the following year? That way, people would be paying out on what they actually earned, less deductions, instead on what it was estimated they were going to earn.

I think I covered that by limiting the deductions for savings/investment to a flat percentage. That way, the wealthiest couldn’t exempt huge portions of their income by sinking it into investments in Kobe beef bull semen. Making it harder for large companies to avoid paying taxes by chartering overseas would probably take up most of the rest of the slack.

Go back and re-read my second post. If we assume a person is spending a certain percentage of their income on food, clothes, soap, etc., (adjustable for the number of dependents) then they only get to deduct that percentage of their income.

The problem with standard deductions is that they are really not based in the actual cost of living. Somebody living in Las Vegas is going to be paying a lot more in rent/mortgage payments that a person living in an identical dwelling in South Bend, IN, because real estate prices have skyrocketed over the past couple of years, and apartment complex owners are raising the rents accordingly. So, if someone living here gets the same standard deduction as someone back home in Indiana, then the government is in effect taxing the Lost Wages resident’s disposable income more heavily than someone who lives in an area where the housing costs are lower.

12

If someone’s income drops in a subsequent year, they’d be screwed. And I don’t understand your objection to withholding. It is really a very efficient means of paying taxes. It’s a hell of a lot easier than keeping receipts for groceries for a whole year.

The number of people who you seem to be targeting for additional taxes is basically extremely small compared to the number of taxpayers who would, in all likelihood, end up paying nothing in taxes. There is simply no way that you can tax the richest 100,000 people enough to make up for tens of millions of lower-income taxpayers never paying taxes again. It just does not work. It’s stuffing ten pounds of taxes into a five pound bag.

Yes, but standard deductions also are not based upon income. I’d say the free market is much more effective at compensating individuals for the difference in cost of living in different locations than is the tax code. For example, medican income in San Francisco is $61,000, in Las Vegas $48,000, and in Bloomington, IN $35,000. Surely you can’t believe it is coincidence that the cost of living in those cities correlates with the median income?

13

Japan actually does that for “local” taxes. The national taxes are based on the current year’s income, but the local taxes are based on the previous year’s income. All nice and fine if you income is going up, but it it goes down, most people are in troubles since few people save money to pay taxes.

OK, I’m missing something here. It’s *wrong * to have a progressive tax, but it’s OK to allow progressive deductions? Same thing, isn’t it?

As others have pointed out, the complexity of this would overwhem the system. It would also seriously increase the potential for abuse.

14

I like Kobe beef

15

Although you might, for whatever reason, disagree with the non-data portions of this article, it does at least explain what punishing success means in terms of high marginal tax rates, and demonstrates how economies prosper after marginal tax rates (rates on the highest incomes) are lowered.

16

Yeah, Mexico’s economy really took off in the 1990s after the cut in marginal rates. That must be the reason that the United States had to bail Mexico out of its financial crisis in 1995: the economy was just doing too well.

17

So, the goal is to have those with a greater ability to pay contribute more to the coffers? Well, I have a very novel plan to accomplish that very thing. How about if we make the guy who makes $50k pay 20% of his income over $30k, which would be $6k. And we make the guy who makes $200k pay 20% of his income over $30k: $34k? The higher wage earner is paying substantially more than the lower wage earner, which is what your trying to do. There would be no exemptions beyonf the $30k, so you could file your incoome tax with a piece of paper the size of a postcard. I call it the Smooth, Even, Unmarked by Bumps or Identations Tax. Though I think there’s probably a better name out there somewhere.

18

Close, but almost. The goal is to have those with a greater ability to pay contribute a greater percentage of their incomes to the coffers to a) help offset the regressiveness of property and sales taxes, and b) to get a bit more money in the coffers to provide the services everyone wants.

19

According to analysis by Allan H. Meltzer, “A Mexican Tragedy,” On the Issues, January 1996, American Enterprise Institute, the US didn’t have to bail out Mexico, and it’s problems certainly weren’t due to a drop in the marginal tax rate. Mexico’s problems were due to reckless spending by the Mexican government that began in 1994, following a change in valuation methodology of the peso, and higher deficit spending, including a dizzying spree of budget increases in the first six months that soared above 12%. The bailout had the same effect as bank and savings and loan bailouts, rewarding risky economic policies, and shifting the economic recovery burden from the spendthrifts to the populace. In three days, between December 20-22, the peso fell 35% against the dollar. The central bank (Bank of Mexico) had begun buying up government bonds from panicked Mexicans early in the year and through the elections in an attempt to stave off inflation, but eventually lost most of its foreign reserves trying to prop up the peso. As Meltzer put it, “History in Mexico and other countries shows that even had the government defaulted on its bonds, once it had adopted anti-inflationary policies and renegotiated its debts, foreign capital would have flowed into the country again. Instead, the U.S.-IMF bailout shifted the burden from bondholders to the Mexican public.” Meanwhile, the success stories of cutting marginal rates, combined with reasonable fiscal policy, are aplenty, as the link I had given shows.

20

Oh, you mean the Devoid of Fairness Tax Plan. Or are you referring to the Others Were Put On This Earth to Pay For You Plan. Well, I can improve it. Why don’t we just take the top 100 (or 1,000) richest people and tax them 90% or so. C’mon someone with 10 billion certainly could live qute comfortably on 1 billion, couldn’t he. Or how about if we just cap everyone at say $500 million. Just think of all the good we could do for society with that money! In fact, the benefits look so great, let’s make it a hundred mil. What do you say? Are you in? Wait, what’s that? The NEA wants more money? You want free healthcare? A 5 to 1 student to teacher ratio in all schools? How about Olympic-size swimming pools in all schools. And a computer for every kid—no, two computers, one for home and one for school? No problem. I’m sure those rich people could get by on $50 mil, probably even $25 mil. Heck, I know I could!