Income tax reform proposal: Part 2, some background

I was originally going to add this and tomorrow's post to the original post on the income tax policy, but realized that it would take you about half an hour to read through it and you'd probably break the scroll wheel on your mouse.  Ok, that might be a bit of an exaggeration, but I figured it would better to separate the topic into three separate posts.

So, here's part 2.

Let me explain some of my philosophy behind my view of the tax code, both as it currently stands and how I would reform it.  As the tax code stands, it is thousands of pages long and riddled by hundreds of deductions/credits/exemptions favoring various groups and interests.  In my opinion, that is the government trying to influence our actions.  Want to buy a car?  If you buy THIS type of car, you'll get a tax credit, but you won't if you buy THAT type of car.  If you are deciding whether to buy or rent, you get a tax deduction for buying (the mortgage interest deduction), but don't get one for renting.  And so on and so forth.

Another pet peeve I have with the current tax code is that it isn't fair in the slightest.  For the sake of making it a simpler explanation, I'm disregarding folks across the spectrum who itemize their deductions in a way that drastically lowers their tax bill--I'm only considering hypothetical people who take the standard deduction and that's it.  Under that scenario, the more money you make, the higher percentage you pay in taxes, which seems to me that it punishes you for being successful.  Before you cry that I am a fat cat who only supports the rich, let me preface this by saying I am firmly in the middle class, and much closer to the poor than I am to all those "millionaires" who make $200,000 or more a year.  I pay a higher percentage of my income in taxes now than I did when I first entered the work force.  I don't like that idea at all.  A personal anecdote: A friend of mine from college's dad got a promotion at work five or six years ago.  With his promotion came a roughly $7,500 raise...which bumped him into the next higher tax bracket.  With that raise and correspondng higher tax rate, his take home income actually declined by about $500 for the year.  So his $7,500 raise ended up costing him $8,000.  Sure sounds fair, huh?

So, where do I stand on the issue of the progressive tax structure and all you can eat deduction/credit/exemption buffet?  Trash 'em.  If you want to talk about people actually having to "pay their fair share," make the tax code fair to all, not just the targeted special interests.

Here's how it would break down (building on part one of the tax trifecta):

• Eliminate all the deductions, credits, and exemptions (except for the foreign tax paid exemption).  This will put everyone on the same page starting out.  In addition, it puts you, the citizen, fully in charge of what you'll do with your money.  The government's influence extends only to taking its cut from your paycheck.  It won't have any say over whether you buy this car or that one.  Or if you want to rent vs buy a house.  Or if you want to give to charity or keep your money.  Etcetera.  Your money, you decide what to do with it.
• Flattening the tax code puts everyone on the same page.  You will no longer be punished by higher taxes as you earn more income.  You pay the same rate on your income, whether you're making $25,000 a year or $25,000,000.  The more income you have, the higher your tax bill will be, but the rate you pay will be the same.  That way, no one can claim that another group is getting preferential treatment through the tax code.  Everyone is equal.

Is there anything from the current tax code I'd keep?  Yep, there are a two big things:

• Tax treatment of 401(k) plans.  I'm all about people saving for retirement, as seen in my Social Security proposal.  The 401(k) structure would continue almost unchanged, except that the limits on annual contributions would be eliminated.  Using either the traditional or Roth 401(k), you could put as little or as much of your income away for retirement as you'd like.  Totally up to you.  The reason I don't mind this is because you will end up paying the income tax on it, whether you do it now or when you start drawing on the payments at retirement.
• I'd possibly keep the tax treatment of medical insurance payroll deductions.  At this point, I can't say for sure, since I haven't come up with my healthcare reform proposal yet.

These reforms will have several effects:

1. The tax base will be very substantially widened, due to many more people now having to pay taxes, due to the eliminations of the loopholes in the tax code.
2. You are now placed in total control of your money, and have no pressure from the government to use it in one way or another.
3. With the widening of the tax base, your actual tax rate will most likely decline (5000 people each paying $500 in tax gives the government more revenue than 500 people each paying $4,500 in tax, for example).
4. Class warfare through the tax code will cease to exist.
5. The US personal income tax code could be written on a single page.  It would take you about 30 seconds to file your taxes, and that could be done on a postcard.

Thoughts?  Comments?  Criticisms?  Suggestions?



NOTE: This is part two of the #1 NYT best selling trilogy on my income tax reform proposal.  Episode III, The Revenge of the Tax Statistics, will debut tomorrow.