So far, we've maxed out individual income tax rates at 10.0% of gross income. Now, let's compare some of our corporate giants, and the income tax they paid in 2010.
Microsoft 10.0% of gross revenue
Morgan-Chase 7.3% "
Exxon 5.6% "
G E 0.7% "
Gen Motors 0.5% "
Ford 0.5% "
As you can see, some of our corporate citizens have learned how to game the system and avoid tax liability to the federal government. I'm sure that some of the credits and exemptions that helped them avoid liability for federal taxes were put into the tax code for some lofty, worthy, goal.
I'm equally sure that some of those lofty, worthy, goals are no longer necessary...and I'm also sure that some of those tax breaks were put into the system for selfish, partisan, and greedy reasons, not in the least bit concerned with the public good.
It's time to re-think the business income tax. First off, the business tax is not based on the income of the business...it's a tax based on the remaining PROFITS of the business, AFTER the business has written off all of its expenses and taken its credits and exemptions.
The name of the game for the business is to write off as much as it can, so it doesn't show too much profit to pay tax on...and, even if the business tax rate sounds high, it's a small amount because it is only based on the profits of a business, not on the gross income of the business.
Plus, few, if any, businesses really PAY a business tax, no matter what the tax rate is. Whatever the cost of the tax, or regulation, or mandate is, the business really has only two choices. Choice number one is to charge the customer for that cost (to make a profit and stay in business), or, choice number two, eat the cost out of profits (and go out of business, if there aren't enough profits to cover the costs).
The taxes (and regulations) on business are really hidden costs that government covertly forces businesses to pass on to customers. Tinkering with the business tax rate is a convenient way for politicians to favor some industries and companies, without taking responsibility for rising consumer costs. It raises bodacious campaign contributions while leaving very few fingerprints leading back to the politician.
So, let's create a federal business tax similar to the individual income tax, or the state sales tax. Let's make the business tax a flat 5% tax on every sale. It can be handled just like a sales tax, added on to every transaction so that the consumer can see it every time they purchase goods or services.
It should require a 60% majority congressional vote to increase the business tax, and the increase should only be for a specific purpose, and for a maximum of two years, without an additional 60% majority vote every two years to continue the tax.
You could hide this tax from the consumer and make the business pay it, but the net effect would be the same: the business would have to add it to the price of the goods to make a profit anyway. By showing it to the consumer, you would make it more difficult for politicians to hide the cost from consumers.
This tax would not have to be indexed for inflation, since the dollars it raises will automatically rise with inflation and fall with deflation. The tax would apply to all products and/or services sold by licensed businesses. It would be very similar to the "value-added" tax system that is common in Europe, but would be nowhere near as expensive.
The 10% maximum income tax rate and the 5% business tax rate would be much easier to forecast than the current impenetrable fog our current tax system has become, making this "Five Ten Begin Again" format much easier to predict and budget from. It would be a key building block leading toward balancing the budget. It could lead to an awareness of the finite dollars the federal government has, and to setting the priorities on which those finite dollars are spent.
Combine a 10% maximum income tax rate with a 5% business tax rate, and we would be very competitive throughout the world.
I know it would take a miracle to get our current politicians to pass "Five Ten Begin Again". There is no way they will vote to change the system that benefits them so much. But, if you don't have a target to aim for, you will never hit a goal.
We can elect new politicians who accept "Five Ten" as a goal. We can try to change the tax code through constitutional initiatives voted on at the state level. We can shine light on politicians who hide in the shadows and use the tax code to extort campaign contributions, or to hide the true cost of the programs they advocate.
"Five Ten" is not locked in stone. It could turn out to be "Eight Ten", or "Ten Ten". I am not the Congressional Budget Office. I cannot cost out this proposal, but its purpose is to eliminate political tinkering with the tax rate and to come up with enough money to come somewhat near the money the government is currently receiving. From that point on, spending should be limited to the revenue coming in.
This business tax would not eliminate the need for generally accepted accounting practices for business. While there would no longer be any need for the tax code to regulate business profits, there would still be a need for enforced accepted accounting practices to assure that businesses are competing fairly with each other and are providing proper information to investors.
Whether these regulations are best provided by government or by private accounting or business organizations is another discussion for another day.
Tuesday, February 21, 2012
Thursday, February 16, 2012
Proposed Federal Income Tax Brackets
PROJECTED TAX BRACKETS 2011
(To be adjusted for inflation every year)
% of
Income Rate $ Tax in Bracket Total Tax $ Total Income
Up to $20,000 0% $0 $0 0%
$20,001-$50,000 2.5% $750 $750 1.50%
$50,001-$75,000 5.0% $1250 $2000 2.67%
$75,001-$100,000 7.5% $1875 $3875 3.88%
$100,000-and up 10.0%
$100,001-$1,000,000 10.0% $90,000 $93,875 9.39%
This is a progressive tax rate, with higher incomes taxed at a higher rate than lower incomes, but it does max out at 10%. I believe the total tax burden to an individual (including federal income, state income, local, and property taxes) should not be more than 20%, in order to act as an incentive to achievement.
This 20% (derived from 80/20 Land of Plenty) does not include business taxes, FICA taxes, and Medicare taxes, which will be discussed later on.
As stated in the overview, politicians should only be allowed to increase the tax rates only in an emergency for stated, specific purposes. The increase would require a 60% majority and would automatically expire in a maximum of two years, if it is not re-approved with the 60% majority.
These tax rates would apply to ALL sources of income, including such controversial ones as proceeds from the sale of a house, social security income, and inheritance proceeds.
Tax withholding should be done from all sources of income, including interest, dividends, capital gains, etc., as well as from salaries. Individuals could request what percentage to withhold (similar to exemptions claimed in the current tax system) from 1% to 10%. On unusually large, infrequent transactions such as the proceeds of a sale of a house, individuals could choose to withhold up to 15%, to avoid getting hit with a large tax bill on their normal income at the end of the year.
One may wonder where the money needed to run the federal government will come from if the maximum individual tax rate is 10%. First off, nobody pays the maximum rate on all of their income under the current system. You cannot compare a rate that is not being paid to a rate that will be paid, although I concede that individuals will pay less under my tax proposal. The difference will be made up (1) by eliminating tax exemptions and deductions and (2) with a business (or sales?) tax discussed in the next post.
Under these tax brackets, a family where the primary wage earner earns $50,000 and the spouse earns $20,000 will have a total federal income tax burden of $750.00 ($750 for the primary and $0 for the secondary).
Under the 2010 tax brackets, the couple mentioned above, filing jointly with 2 exemptions and using the standard deduction, would have a tax burden of $6,651.00. The savings to this couple would be huge.
But, there will be additional money coming in to the federal government from the proposed business (sales?) tax discussed in the next post. Some of the savings this couple received will be affected by the business tax.
(To be adjusted for inflation every year)
% of
Income Rate $ Tax in Bracket Total Tax $ Total Income
Up to $20,000 0% $0 $0 0%
$20,001-$50,000 2.5% $750 $750 1.50%
$50,001-$75,000 5.0% $1250 $2000 2.67%
$75,001-$100,000 7.5% $1875 $3875 3.88%
$100,000-and up 10.0%
$100,001-$1,000,000 10.0% $90,000 $93,875 9.39%
This is a progressive tax rate, with higher incomes taxed at a higher rate than lower incomes, but it does max out at 10%. I believe the total tax burden to an individual (including federal income, state income, local, and property taxes) should not be more than 20%, in order to act as an incentive to achievement.
This 20% (derived from 80/20 Land of Plenty) does not include business taxes, FICA taxes, and Medicare taxes, which will be discussed later on.
As stated in the overview, politicians should only be allowed to increase the tax rates only in an emergency for stated, specific purposes. The increase would require a 60% majority and would automatically expire in a maximum of two years, if it is not re-approved with the 60% majority.
These tax rates would apply to ALL sources of income, including such controversial ones as proceeds from the sale of a house, social security income, and inheritance proceeds.
Tax withholding should be done from all sources of income, including interest, dividends, capital gains, etc., as well as from salaries. Individuals could request what percentage to withhold (similar to exemptions claimed in the current tax system) from 1% to 10%. On unusually large, infrequent transactions such as the proceeds of a sale of a house, individuals could choose to withhold up to 15%, to avoid getting hit with a large tax bill on their normal income at the end of the year.
One may wonder where the money needed to run the federal government will come from if the maximum individual tax rate is 10%. First off, nobody pays the maximum rate on all of their income under the current system. You cannot compare a rate that is not being paid to a rate that will be paid, although I concede that individuals will pay less under my tax proposal. The difference will be made up (1) by eliminating tax exemptions and deductions and (2) with a business (or sales?) tax discussed in the next post.
Under these tax brackets, a family where the primary wage earner earns $50,000 and the spouse earns $20,000 will have a total federal income tax burden of $750.00 ($750 for the primary and $0 for the secondary).
Under the 2010 tax brackets, the couple mentioned above, filing jointly with 2 exemptions and using the standard deduction, would have a tax burden of $6,651.00. The savings to this couple would be huge.
But, there will be additional money coming in to the federal government from the proposed business (sales?) tax discussed in the next post. Some of the savings this couple received will be affected by the business tax.
Tax Overview
The following few posts will all refer to the Federal Tax Code. I do not claim to be a tax expert, but common sense and logic could make our tax system a lot simpler and fairer, and in this and the following posts, I will make my case to rethink the income tax, business taxes, social security and medicare taxes.
Before getting into tax specifics in following posts, I want to cover the broad strokes with this overview. First, politicians must not be allowed to tinker with the tax code to incentivize behavior. Every tax break in the code got there because some politician got votes or money for it. Our tax code has become a monstrous conglomerate of tax breaks, incentives, loopholes, and political favors brokered by lobbyists and granted by politicians.
Everyone wants a favor or a tax break...and, if politicians can grant favors for votes, they will.
Rule #1 NO TAX BREAKS, NO EXEMPTIONS, NO DEDUCTIONS, NOTHING!!!
Rule #2 Lower incomes pay lower income tax rates. Maximum income tax rate for
individuals is 10%.
Rule #3 All income tax brackets adjusted for inflation every year.
Rule #4 Income tax rate applies to all income, salaries, interest, capital gains,
social security, proceeds from home sales, company car allowances, etc.
No exceptions!
Rule #5 Income tax rates appy to each individual that earns income,
no joint incomes.
Rule #6 Save 10% of all taxes collected the first 5 years to fund a 50% rainy day
reserve fund, to cover emergencies such as paying off debt, financing a
war, or disaster relief. Unused funds in the reserve could be loaned to
banks at a low interest rate to fund safe, well-qualified, home and
business loans. Once the rainy day reserve is fully funded, politicians
can spend all of the income tax collected (less replenishment of any
rainy day funds spent the prior year).
One purpose of this tax program is to prevent politicians from abusing the tax system to reward benefactors and punish opponents. Another purpose to to provide a simple, predictable, and direct method of taxation that is easy to understand and to forecast, and which would require politicians to budget their expenditures to their available income.
In case of emergency, politicians could raise tax rates only for stated, specific purposes, and only if the rainy day fund did not cover the emergency. All increases in tax rates would have to be voted in by a 60% majority and re-approved every two years.
Now that the overview is done, let's go on to more specific details.
Before getting into tax specifics in following posts, I want to cover the broad strokes with this overview. First, politicians must not be allowed to tinker with the tax code to incentivize behavior. Every tax break in the code got there because some politician got votes or money for it. Our tax code has become a monstrous conglomerate of tax breaks, incentives, loopholes, and political favors brokered by lobbyists and granted by politicians.
Everyone wants a favor or a tax break...and, if politicians can grant favors for votes, they will.
Rule #1 NO TAX BREAKS, NO EXEMPTIONS, NO DEDUCTIONS, NOTHING!!!
Rule #2 Lower incomes pay lower income tax rates. Maximum income tax rate for
individuals is 10%.
Rule #3 All income tax brackets adjusted for inflation every year.
Rule #4 Income tax rate applies to all income, salaries, interest, capital gains,
social security, proceeds from home sales, company car allowances, etc.
No exceptions!
Rule #5 Income tax rates appy to each individual that earns income,
no joint incomes.
Rule #6 Save 10% of all taxes collected the first 5 years to fund a 50% rainy day
reserve fund, to cover emergencies such as paying off debt, financing a
war, or disaster relief. Unused funds in the reserve could be loaned to
banks at a low interest rate to fund safe, well-qualified, home and
business loans. Once the rainy day reserve is fully funded, politicians
can spend all of the income tax collected (less replenishment of any
rainy day funds spent the prior year).
One purpose of this tax program is to prevent politicians from abusing the tax system to reward benefactors and punish opponents. Another purpose to to provide a simple, predictable, and direct method of taxation that is easy to understand and to forecast, and which would require politicians to budget their expenditures to their available income.
In case of emergency, politicians could raise tax rates only for stated, specific purposes, and only if the rainy day fund did not cover the emergency. All increases in tax rates would have to be voted in by a 60% majority and re-approved every two years.
Now that the overview is done, let's go on to more specific details.
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