Reforming the Income Tax:A Citizen’s Proposal

Richard A DemersMinneapolis, MN

April 1, 2014

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Why is income tax reform needed? What are the goals of this Citizen’s

Proposal? What income should be taxed? Transferring income among individuals Taxing asset transactions Taxing income by formula Income taxes and the national budget? Household examples

Contents

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Neither fair nor just Too many ways to avoid and evade taxes Too complicated, intrusive and expensive It harms the national economy

◦ Too much interference ◦ Drag on the national economy

It fails to adequately fund the government◦ Annual deficits◦ Ever increasing federal debt

Why does the income tax system need to be reformed?

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Raise enough money for government operations in a way that is fair, just, simple and efficient

Eliminate tax biases in favor of some people and businesses at the expense of everyone else

Automatically link taxation with spending

Take control of the details of income taxation out of the hands of politicians who don’t really know what they are doing anyway

What are the goals of this Citizen’s Proposal?

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It is not the goal of this proposal to Reduce taxes Redistribute wealth Reduce the size of government Reduce government spending

What are NOT goals of this Citizen’s Proposal?

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Yes, if we incorporate good ideas from many sources

Libertarian Taxation should intrude as little as possible in our lives and economy. People should have some say in how their taxes are spent.

Conservative Income shouldn’t be taxed more than once - dividends, gifts, estates. Rely as much as possible on the national economy, not government, to meet

society’s needs.

Liberal We are a community and not just individuals. We should help people who help themselves to get ahead. Taxes should be progressive and affect everyone to the same extent.

Is real reform possible?

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Every person, every business and every non-profit – no exceptions As individuals - infants to corporations Eliminate Single vs. Married distinctions Eliminate personal vs. business vs. non-profit

distinctions

If businesses want to be treated as individuals for other purposes, they should be taxed as individuals.

Who should be Taxed?

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Tax all Income – no exceptions Individuals,

Wages, tips, bonuses, awards, realized options, interest, dividends, pensions, Social Security payments, welfare payments, insurance and annuity payouts, jury awards, alimony, lottery and gambling winnings, etc.

Capital gains taxed as income only if not reinvested Gifts and estates not considered income

Businesses, Net, pre-tax business income

Non-profits Same as service businesses

What income should be taxed?

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No deductions, credits, allowances, exclusions or rebates to anyone or any organization

for any purpose

"We are all in the tax game together, and what is a privilege to one group of people

ends up being a penalty to everyone else through higher tax rates.“ Taxing Ourselves: A Citizen's Guide to the Debate Over Taxes

 by Joel Slemrod and Jon Bakija, 2008, p. 89.

Eliminate all loopholes

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Social Security and Medicare are currently financed through wage taxes

Social Security wage taxes not progressive◦ Only on wages below a cutoff◦ Greatly increases the tax burden of low income people

Social Security is not an annuity◦ The so called SS Trust Fund is a bookkeeping gimmick

Social Security and Medicare benefits should be financed by the entire nation through income taxes

Eliminate all wage taxes

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Any amount of pre-tax income can be transferred to any other individual or organization where it is taxed as part of the receiver’s income.

Family transfers among members Windfall transfers to IRAs Corporate transfers to stockholders as dividends Transfers to non-profits as contributions Limitations on transfers

All income transfers become part of online public record

Income Transfers

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The income of a household can be transferred among its members so each is taxed at the lower rate of a progressive tax.

Family Transfers

Tax Rate

Income

Household

Member

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One-time income from inheritances, insurance payouts, lottery winnings, bonuses, high income years, etc

Income can be transferred to flexible IRA type accounts

Taxed as income on withdrawal

Windfall Transfers

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After-expense, pre-tax income can be transferred◦ To stockholders as dividends◦ To subsidiaries to enhance their capitalization◦ To non-profits

Eliminates double taxation of profits and dividends

Eliminates unfairness of different tax rates for wage vs. investment income

Strong incentive for businesses to pay better dividends and to support non-profits

Corporate Transfers

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Non-profits viewed as service businesses No distinctions made among non-profits

◦ charitable, religious, political, cultural, etc Net income taxed after operational

◦ Property costs, salaries, supplies, etc Non-profits can be viewed as transfer

agents when income received is transferred directly to beneficiaries

Transfers to Non-profits

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Objective: Help citizens become rich in assets and part of the so called “ownership society”◦ Assets: anything that generates a monetary return◦ Examples: real estate, stocks, bonds, mutual funds,

savings accounts, farms, real estate, businesses, etc

Assets can be freely converted from one form to another with no tax consequences

Assets can be freely transferred from one individual to another with no tax consequences

Asset Transfers

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When sold and any part of the proceeds are taken as income◦ This makes this proposal a consumption tax.

Losses are the investors responsibility, not the government’s

When are Assets taxed?

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Gift taxes eliminated Estate taxes eliminated The special treatment of Capital Gains and

Losses is eliminated

All asset transfers part of online public record

Consequences of Asset Transfers

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No quid pro quo transfers No reciprocal transfers from whom the

donor can extract an advantage◦ Money◦ Assets◦ Influence

Violations to be prosecuted as tax fraud

Limitations on Transfers

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Why taxes?◦ To pay for essential governmental services ◦ Which services are essential is not part of this proposal◦ Should not be to encourage or discourage any activity

How high should taxes be?◦ As high as necessary to pay for budgeted spending◦ Tax-cutting without cutting spending is foolish◦ New spending without new revenues is foolish

Should individuals have a say in how their taxes are spent by the government?◦ Yes, to the extent that they are willing to transfer income and assets

to organizations that can otherwise provide required services

Taxation

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Why not a flat tax?◦ Inherently regressive ◦ Does not affect everyone to the same extent

Why should taxes be progressive?◦ High income individuals receive

disproportionately more value from living in a modern society

◦ As an incentive for individuals to transfer income to non-profits Example: privatize NASA and get to MARS sooner

Tax Rates

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Simple way to determine taxes at all income levels

◦ Calculated per individual, not household

◦ The same formula used for individuals and businesses

◦ From incomes of $0 to $1 Trillion-12 orders of magnitude

If your income is $x, your income tax is f(x) = $y.

Taxation by formula

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tax = k × (basic rate × income) – offset

Basic rate depends on income◦ 0% at $0 and 100% at $1 Trillion◦ All taxes are on individuals◦ No special rates for single vs. family vs. business vs. non-profits

offset depends on earned wages◦ Similar to existing Earned Income Tax Credit

k depends on◦ National spending budget◦ Population in each income range.◦ Calculated repeatedly until the generated tax revenue equals budgeted spending.

Actual tax rate = tax / income

Taxation by Formula

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Basic rate = (1.059463log(income) - 1)

Basic Rate

1E+00 1E+04 1E+08 1E+120%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Basic tax rate Individual Income

Basic rate= xlog(income) - 1 1 = x12 - 12 = x12

x = the 12th root of 2 x = 1.059463

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Depends on earned wages◦ Similar to current Earned Income Tax Credit◦ Calculated per individual, not per family◦ Encourages all citizens to work for their living◦ No offset for those able to pay taxes

Offset

Offset

Plateau = $2,000

Phase-in limit = $3,000

Phase-out limit = $100,000

Plateau limit = $4,000

Wages

Other income limit = $4,000

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Ideal tax = 1 × (basic rate × income) – offset

Ideal rate = ideal tax / income

Ideal Rates

• Ignores spending budget • Ignores population distribution

1E+00 1E+04 1E+08 1E+12-100%-80%-60%-40%-20%

0%20%40%60%80%

100%Ideal tax rate as % of individual income

Basic tax rate Ideal Tax Rate Total individual income

Ideal Tax Rate

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2011 Household Income

Most tax revenue from households with a modest incomeRevenue from high income households also required

1E+03 1E+04 1E+05 1E+06 1E+07 1E+08 1E+09 1E+101E+00

1E+07

1E+14

Households and Household Income

Households Total household income Income

DollarsHouseholds

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Goal: Determine if proposal is reasonable

Revenue target is sum of◦ 2011 individual income tax ◦ 2011 employee FICA and Medicare wage taxes

Limited to personal income◦ Population distribution from IRS tables

Business, gift, estate and non-profit income not part of model because income distribution not available

Allocates household income equally to all members

2011 Spreadsheet Model

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Individual Tax Revenue Individual, estate and trust income tax $1,175,989,528,000

Employee FICA + Medicare wage taxes $481,552,411,000

Total individual tax revenue

$1,657,541,939,000

Estate and Gift Tax Revenue Gift tax $6,572,384,000 Estate tax $2,506,991,000

Total Estate and Gift Tax revenue

$9,079,375,000

Organizational Tax Revenue Corporate income tax $242,435,939,000

Employer FICA + Medicare wage taxes $481,552,411,000

Tax-exempt unrelated business income tax $412,183,000 Total organization tax revenue

$242,848,122,000

Revenue Target of 2011 Spreadsheet Model $1,657,541,939,000

2011 Tax Revenue

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tax = k × (basic rate × income) – offsetwhere k = 0.692

Proposed 2011 Taxes

• Assumes equal allocation of household income• Includes FICA and Medicare financing• Model does not include business income

$1,000 $10,000 $100,000 $1,000,000 $10,000,000 $100,000,000 $1,000,000,000-60%-50%-40%-30%-20%-10%

0%10%20%30%40%50%60%70%80%90%

100%Individual Tax Rate

Basic Tax Rate Proposed individual tax rate Individdual Income+ FICA + Medicare

Individual Tax Rate

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2011 Income vs. Tax Revenue

$10,000 $100,000 $1,000,000 $10,000,000 $100,000,000 $1,000,000,000 $10,000,000,000$100,000,000

$1,000,000,000

$10,000,000,000

$100,000,000,000

Proposed tax revenue 2011 combined tax revenueNegative values cannot be shown on a log chart.

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Dad earns $x per year Mom earns $y per year Their two children have no income The family transfers 10% to charities, their

church, their political party and cultural non-profits

For tax purposes, they allocate the rest equally (25%) to each person

Household Example

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Household income $10,000 $20,000 $30,000 $50,000 $100,000 $250,000 $1,000,000% of income transferred out 10% 10% 10% 10% 10% 10% 10%

Taxable household income $9,000 $18,000 $27,000 $45,000 $90,000 $225,000 $900,000

% of taxable household income per person 25% 25% 25% 25% 25% 25% 25%

Each person's taxable income $2,250 $4,500 $6,750 $11,250 $22,500 $56,250 $225,000log(each person's taxable income) 3.352182518 3.653212514 3.829303773 4.051152522 4.352182518 4.750122527 5.352182518

Basic tax rate 21.3646369% 23.4933971% 24.7559095% 26.3648770% 28.5813424% 31.5711276% 36.2271747%

Basic tax rate * income $481 $1,057 $1,671 $2,966 $6,431 $17,759 $81,511 Phase in offset $1,500.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 Plateau offset $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

Phase out offset $0.00 $1,989.58 $1,942.71 $1,848.96 $1,614.58 $911.46 $0.00 offset $1,500.00 $1,989.58 $1,942.71 $1,848.96 $1,614.58 $911.46 $0.00

Each person's tax -$1,083.72 -$1,074.06 -$495.62 $719.61 $3,954.42 $14,467.44 $70,587.79Each person's tax rate -48.17% -23.87% -7.34% 6.40% 17.58% 25.72% 31.37%

Household tax -$4,335 -$4,296 -$1,982 $2,878 $15,818 $57,870 $282,351Household tax rate -48.17% -23.87% -7.34% 6.40% 17.58% 25.72% 31.37%

Household take-home income $13,335 $22,296 $28,982 $42,122 $74,182 $167,130 $617,649

$10,000 $100,000 $1,000,000 $10,000,000 $100,000,000 $1,000,000,000-60.00%

-40.00%

-20.00%

0.00%

20.00%

40.00%

60.00%

Household tax rate

Household tax rate

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Tax all income Eliminate all loopholes Allow income and assets to be transferred

without tax consequences All taxes are on individual persons and

businesses Tax all income using a single progressive

formula that spans 12 orders of magnitude Make all income, transfer and tax

information available online and transparent

Proposal Summary

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A much more complete model is needed!

This is a work in progress, a stake in the ground.

Please throw rocks at it.

Proposal Status

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Tax proposal home page with links to: Tax proposal essay Early comments Spreadsheet model This slide show About the author

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