Well, once again the dreaded Tax Day has come again in the United States. As millions scramble to finish their returns at the last minute, and millions more are reminded for a moment about how painful, frustrating, and stupidly complicated this year’s taxes were, perhaps you will give me a moment to indulge a fantasy:

Imagine there’s no 1040
It’s easy if you try
No capital gains tax
Eating away our pie
Imagine all the people
Keeping all their pay…

Imagine there’s no AMT
It isn’t hard to do
Nothing to evade or cheat for
And no Schedule-C too
Imagine all the people
Earning cash in peace…

You may say I’m a dreamer
But we’re growing every day
I hope someday you’ll join us
And the world will keep its pay!

(With no apologies to Lennon, that socialist twit.)

While many taxpayers are lucky enough to use 1040-EZ (as long as they don’t mind missing out on half the deductions allowed), anyone who has ever: bought a house, received any money for contract work, sold any stock, earned any sizable amount of interest, earned any dividends, used a car or possession for business, or done any of a hundred other fairly common things knows the joy of the full 1040. And that’s a joy that they get to enjoy for a longer time each year, as the code grows in complexity.

This year, in fact, we were treated to the wonderful spectacle of a recursive function in the capital gains worksheet: Box 22 depended upon Box 10, Box 10 depended upon Box 37, and Box 37 (naturally) depended upon Box 22. A literal Catch-22 right there in the 1040! So what did the taxpayer do: why fill out boxes in order over and over again until the numbers stopped changing. Yes, this year’s tax form required iterating over a recursive function. It’s official: advanced mathematics is now required to accurately fill out an American tax form. I guess we should just be thankful the function converges…this time.

So, enough whining. What should we do?

Scrap the damn tax code!

No band-aids, no simple patches like the mid-80s reforms, no more kicking the problem out for another decade or so. Scrap the cobbled together, rickety, ideologically-driven, overly-intrusive, economically regressive thing, and start again.

But what to replace it with? The Flat Tax? The Fair Tax? The As Yet Unknown Tax? No Federal Tax? (That last one’s for states rights fanatics like Angry Midwesterner.) Before I try to lay out a positive, let me shoot down some perennial red herrings:

We can’t have a [flat/Fair/no] tax – it’s regressive!
Now this objection can have a reasonable meaning, which is: the very poor must use the vast bulk of their money for necessities, and the very rich use almost none, so a tax code should respect that each tax dollar is a greater burden on the poor than the rich. And that reasonable objection has a simple and reasonable answer: set a personal deduction large enough to ensure that the poor pay little or no tax.

Sadly, most fans of “progressive” taxes don’t give a damn about the poor—they’re besotted by the sin of envy and want to soak the rich and damn the cost! For these folks, the answer above is worthless because it only benefits the poor, it doesn’t punish those evil, evil rich. You’ll pardon me if I see no reason to respect the wishes of a bunch of folks eager to punish the deadly sin they hate (greed) by enshrining the one they love (envy) in law.

Any tax code we come up with will just get hijacked again—and be just as complicated soon!
This is actually very reasonable, and a useful cautionary warning. But as an objection to doing something it’s pretty wrongheaded. Just because every system can be abused doesn’t mean that some aren’t better than others. Given that the current code kills a sizable forest every time they need to print a hard copy of it, I find it very hard to believe that much simpler systems will somehow be easier to corrupt.

Now is not the time for radical reform—we have massive deficits and are in a recession!
No, now is exactly the time for change, especially if those things are true. Taxes are, almost always, regressive economically: the more taxes the less growth and the greater the chance of recession. Lower taxes, and you spur growth. Ah, but simplify taxes, and you reduce the burden of complying ($200-$500 billion dollars annually), which lowers the effective tax burden (taxes plus fees to file taxes). So a simpler system would spur growth even without lowering taxes. Anyone who’s run their own business, done contract work on the side realizes this. The current system burdens the self-employed with significant costs.

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So, away with these objections, and on to the glorious future!

Well, actually, I don’t have a nicely laid out, detailed plan for tax reform any more than anyone else does. But, to avoid the label of coward, I’m willing to stick out my neck and recommend a general outline of one. First the general principles: the poor should not pay tax (they’re poor), those who work should not be punished (they’re industrious), those who invest should not be punished (they generate capital), those who start businesses should not be punished (they are the engine of growth).

So, the plan:

  1. A flat income tax of 25% Easy to calculate, easy to file.
  2. A standard personal deductible of $20,000 per adult and $5K per child. Make less than that? No tax for you. Creates these effective tax rates:
    Effective Rate by Income
      $20K $35K $50K $100K $250K $1 million
    Single 0% 11% 15% 20% 23% 24.5%
    Single Parent (2 children) 0% 3.5% 10% 17.5% 22% 24.25%
    Family (2 children) 0% 0% 0% 12.5% 20% 23.75%

    Progressive!

  3. No capital gains tax. (That’s right: 0%! Don’t whine too much though, lefties, look on down the page.
  4. No tax on interest or dividends. (That’s right: 0% But wait, progressives, you’ll get your day!)
  5. No corporate taxes. (That’s right: 0% here too! Think about it: corporations don’t pay taxes, they just pass those taxes on to shareholders, customers, or employees. If they simply avoid taxes through clever bookkeeping. Breathe steadily, lefties, good news follows!)
  6. Earned Income Tax Credit: reward the working poor who are stuck, for the moment, with low-paying jobs. Exact mechanic to be worked out, but we should be generous while always making it more profitable to take a better job!
  7. Nothing else. No other deductions. No tax loopholes. No tax shelters. No tax-free trusts. No mortgage deductions. You get a personal deduction, you pay 25% on what’s above it. That’s it.

Now, before I’m hauled outside, doused in environmentally friendly fair-trade organic vegetable oil, and set alight, let me point out why this is a win for the soak the rich crowd:

Who pays taxes in America? Despite campaign rhetoric, it ain’t the poor. In fact, it’s the rich. The top 10% of income earners (those making $103K and up) control around 46% of the wealth but pay over 70% of the taxes! This means, of course, that most of those nice deductions, exclusions, etc. benefit the wealthy. A 25% rate might seem like a tax break, since the current top rates range from 28% ($77K-$160K) to 35% (above $350K), but those rates on on taxable income—after deductions have had their day. A 25% rate on all income above $20K should compare pretty favorably to 28% on income left over after well above $20K in deductions have been applied.

So why would the rich approve? Because a flat tax allows them to calculate their burden easily, estimate the economic costs of various options easily, avoid expensive tax preparation and record-keeping, and eliminate the expensive audits or penalties which arise from the inevitable mistakes in the current ridiculously complicated tax environment.

And, best of all, eliminating compliance costs and flattening rates will spur an economic boom. Wealth, individual income, and tax revenues will rise, and the tax base will grow as new workers enter the pool.

My numbers are rough, and doubtless need fine-tuning. We’ll need a bunch of work to get things right, and we’ll have to work across the political divide to get a tax code that rewards hard work and investment without unfairly hurting hard-working blue-collar folks. But we can do it! We can revolt against this bloated tax code shoved upon us by a political class of lawyers and lobbyists and return to something simple and sensible. Fourteen states have done it, seventeen nations have done it, and we can do it too!

You may say I’m a dreamer
But we’re growing every day
I hope someday you’ll join us
And the world will keep its pay!

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