We’ve all heard of the clever branding of the estate tax as “the death tax.” But what about the ridiculous expenses and complications of paying taxes themselves and the perverse incentives they create?
I have spent the last year making sure that I knew where every single last penny I have came from and where it went. I have receipts. I have spreadsheets. And in doing this, I was able to do pretty good with my exemptions. My tax bracket, based on gross income should be 25%. People go around imagining in their head that they actually pay that rate. But of course, they only pay their maximum rate on the increasing chunks of their money. My “adjusted gross income” is still in that same rate. But then I take deductions and I can get down into the 15% rate. Then credits get added onto that. The 15% rate’s top end is within kissing distance of the AMT exemption, so if you pay any tax at all, you probably won’t get hit there either… and AMT has deductions too, after all! California has a more straightforward rate for me of 9.3%.
By the time all is said and done, I pay about 5% of my gross income in state and federal income taxes. A professor in law school I had made fun of us for renting. She told us we were suckers because we didn’t get the mortgage interest tax deduction. True, but we also don’t pay property tax. I pay about as much in property tax as in income tax, and, off the cuff I think it just about washes with the benefit of the mortgage interest deduction. I also know within a pretty good degree of accuracy how much I pay in sales taxes, too. Throw in Medicare. Put it all together and I pay about 11% of my income in taxes.
But a lot of people in my position would say they pay 25%. Then they go–oh shit, state taxes too!!!–another 10%. It’s one third! And Social Security! I hear so-called serious people on TV say that it can approach 50% for some people. By some people, they mean the top 2.5% of income earners who probably are even better at not paying taxes than I am, and I’m pretty good. I just use deductions. I don’t channel my income in weird ways, or even doing anything as relatively simple as get things at a lower capital gains rate.
It’s all a lie. And it’s a useless lie too. No, it’s an evil lie.
I like the idea that everyone should have to figure their effective tax rate on their returns. I like the idea that everyone should get a receipt from their taxes to see what it goes towards as some have suggested. But I would like even better if the government could figure out a way not to charge a flat tax, but what I’m calling a “Simple Accelerating Tax.” A flat tax means someone making $1,000,000 a year pays the same as someone making $50,000 (assuming there are no deductions). Let’s say that’s 20%. That leaves the first dude with $800,000. Still very nice. But it leaves the second guy with $40,000. That’s a huge difference. What I’m calling a “simple” tax is one without deductions and credits or pre-tax dollars or any of that shit. The trouble with “simple” taxes is that we use a marginal system to tax different amounts at different rates. But the barriers are more or less artificial. Say the thresholds are at $10,000, $100,000 and $500,000 at 10%, 20%, 30%, and 40%. If I’m the first guy, I keep $41,000 this time. That’s an extra trip to the grocery store and a tank of gas every month. The second guy will only keep $653,000 this time. Still awesome. But, why is someone making $101,000 so different from someone making $99,000? They aren’t.
Using a little calculus, we could still have progressive taxation, but without clunky steps. It would accelerate. The higher it gets, the higher it gets. The resolution could go down to the dollar or the penny. We could fit a curve to start at 0% at $0 and rise to 33% at $1,000,000 and above, but not on a straight-line. After 100k (or whatever, adjusted for inflation, of course), it would start to get closer. Imagine a parabola on its side.
Under this scenario, the first dude might pay 9.9212% and keep about $45,000. Now, that’s a huge difference for him. The second guy would keep $666,666 of his money. Almost the same as the second example.
This would be amazingly simple to do. No one would have to know calculus. In fact, no one would have to know math at all. Just match your income to what’s on the table. It would be so easy, it would be very unlikely your withholdings would be off by much. Your tax return would be the size of a postcard.
The entire revenue side of the federal budget would be drastically simplified. Just pick the right number to balance the budget or stimulate the economy as needed. Collection would be simple. The whole transaction cost based economy of tax preparers would wither and people in the financial industry could learn how great retraining and labor mobility is for once. Congress could even still pay people to do things they like by sending them checks if they fill out a claim form. Example: instead of, say, a child tax credit, they just send you a check if you have a kid. Or, whatever. (In other words, lobbyists could still achieve their results.)
But the way it is now, we pay a huge “tax on tax.” Sometimes it’s easy to quantify, like the amount we pay a tax preparer or the stamp we put on what we file, or the tax software we use. But most of the time, the keeping of receipts, dealing with all of the forms we get, and doing all of the preparation (not to mention how much waste, fraud, and abuse–do I get points for the GOP buzzwords there?–is lurking in all of that) involves a lot of wasted time, which has value too.
The flat tax is a backdoor boondoggle for the wealthy. Simplified taxes have rough steps. What I’m proposing has neither weakness.