Saturday, March 27, 2010

Tax time: my tax plan

I've blogged about this before, but since it's tax time once again, and in light of the ever increasing spending and wealth redistribution programs of the Obama administration, as well as the ballooning unfunded long-term entitlement programs we're actually growing in total asinine willful ignorance of long-term national solvency, I'd like to revisit my thought/plan for taxes in the US. It might be overly optimistic to wish that someone with real political power would grasp onto this plan, but I still consider it one of the best political ideas I've blogged about, and one which, if somehow enacted, would be a great contribution to the long-term health of the country and the people (for example, I'd consider it more worthwhile a goal than any of the stated short-sighted Tea Party pledge objectives).

In short, the plan would be to cap the maximum amount the government collected in taxes from every individual in the country to a fixed percentage of their income; my current thinking is around 20%, but I'd be more happy with something like 10% (although that would require a drastic decrease in government spending). Note that this limit would be aggregate across all tax schemes, all programs, all income types, and all collection methodologies. As part of enacting the plan, government would be required to allow a taxpayer to refuse to pay any portion of any tax, provided they could document how they had already paid the maximum limit for that year. Optionally, government could provide a centralized mechanism for paying one's taxes (eg: standard payroll deduction), and then distribute the money to all branches of government and programs as appropriate. I'd prefer for the limit to apply for all levels of government, but just for the federal government would be a good start.

Notes on the plan:

- Government would still be free to preserve all existing tax codes, deductions, favors, loopholes, preferences, and the entire gargantuan mess which is the current tax code. This maximum would simply be a cap on total taxes paid. Many people would still pay less than the cap, and government could still redistribute wealth and give preferential treatment through taxation as it does now, just subject to the cap. This plan/change would not institute a flat tax.

- Government should provide a mechanism for someone to pay the maximum, and not file any further tax documentation or have any standard deductions withheld (and provide evidence of max payment, to submit in lieu of any other tax demands). This would save taxpayers and government a tremendous amount of money. Government could (and probably should) provide a streamlined mechanism for determining if you will be paying the maximum, and to allow payroll deduction of the maximum automatically.

- In the longer term, it would be very good if "income" could be computed using a stable currency, rather than the US dollar which might be rapidly depreciating in the future. This is another problem, though, and one which would plague both the current tax system and this new plan, and thus would be worth tackling separately (as I have proposed elsewhere in previous blog posts).

Anyway, that's the recap, with my current thoughts. I welcome comments, as usual.


  1. This would be good at limiting taxes, but it wouldn't simplify taxes that much. The hard part about taxes is working out what is income: How fast can I depreciate equipment? How much a loss on stocks can I apply to gains in my business? I can sell RE and roll it into another RE w/o generating a taxible event. I can't do the same with stocks. I also cannot sell a stock and buy it back to get an instant loss or to change my basis in the stock. I'm not sure whether I can buy a put on a stock I own to lock in gains w/o generating a taxible event (i.e. short against the box).

    These are taxes issues that have come up in my life. I have never had any trouble figuring out the taxes owed once I have worked out my income.

    Maybe this is by design so your plan would not face opposition from the tax industry.

    I don't think a stable currency matters since your plan is based on a percentage of total income. If nominal income doubles due to inflation, nominal taxes double, which is fine.

  2. Yeah; I think everyone in the country would be for simplifying taxes, but the sad truth is that unanimous public opinion does not translate into Congressional action in the right direction; in fact, if anything, the tax code just continues to get more and more complex as people tack on more special-interest handouts, wealth redistribution schemes, and special favors. I've had some of the same tax issues personally, and although I'd love to see the day where we didn't need to pay specialists and/or use specialized software to just figure out how much of a wasteful drain on our finances our failure government was going to be this year, going down the path of calling for massive tax reform directly has proven to be a political failure.

    I get what you're saying about computing actual "income" though, and those problems would still remain with my plan. One thing at a time...

    Stable currency is definitely important, though. If the government creates 100% inflation per year, that's 100% income for each person (in national currency), which is taxable; that is, a hidden tax on savings (as many other economists and other smart people have observed). This encourages people to not save any money, which encourages relying in the government to support them, which (as we have seen especially recently) is a path to failure, individually and nationally. I think it's difficult to understate the damage that inflation causes, both to the economy and psychology of the American people, and/or the insidiousness of manipulating the inflation methodologies to intentionally distort and understate the actual real inflation (as the government has done, particularly under Bill Clinton). If I could only fix one massive problem, it would probably be inflation; but the tax proposal seems like something which could actually be enacted, and has an easy-ish solution.

  3. I agree failing to save is a huge problem. I just wonder how much propensity to save is affected by expectations of inflation. Suppose the gov't announced a policy that they would keep inflation at 0%. Over the course of time, through recessions and expansions, would people overall save that much more money because they expected inflation to be 0% instead of 4%?

    I agree a) not saving and b) waiting for a gov't handout are huge problems. I just don't see inflation as key to them.