[OAW]

One of the things that President Obama called for in his recent State of the Union address was for Congress to simplify the corporate and individual tax code. His call was for it to be revenue neutral for the government, but more streamlined and efficient for individuals and businesses from a compliance perspective. Let's discuss if you think this should be done and how. To that end I'll outline a few facts and pose a few questions to spur the debate:

CORPORATE TAXES

- The statutory corporate tax rate ranges from 15 - 35% of taxable income. The 35% tax rate is applicable at a taxable income of $335K or more. One of the highest in the industrialized world.

- The effective corporate tax rate ... that is, the rate that corporations actually pay after tax credits, deductions, and tax avoidance strategies ... is 25% on average. Among the lowest in the industrialized world.



- The effective corporate tax rate by industry is as follows ...



INDIVIDUAL TAXES

- The statutory marginal individual tax rate ranges from 10 - 35% of taxable income depending upon filing status. The following graphic only shows two. See here for the rates for other filing statuses.



- The statutory rates on the following types of income other than wages are ...

a. Long-term capital gains and qualified dividend tax rates range from 0 - 15%.
b. Short-term capital gains tax rates range from 10 - 35%.
c. Long-term gains on real estate tax rates range from 10 - 25%.

- The effective average tax rate paid by income group are ...

a. All - 12.24%
b. Top 1% - 23.27%
c. Top 5% - 20.70%
d. Top 10% - 18.71%
e. Top 25% - 15.68%
f. Top 50% - 13.65%
g. Bottom 50% - 2.59%

QUESTIONS (and other food for thought)

1. Should the US have a federal income tax at all? What about alternatives such as a Value Added Tax (VAT) or the Fair Tax which tax consumption instead?

2. If we stick with the federal income tax, should it continue to be progressive? That is, the percentage of one's income paid in taxes increases as one's income increases? Or should we consider a flat (or flatter) tax structure?

3. Should wage income be taxed at a higher rate than capital gains or dividend income?

4. Should single individuals be taxed at a higher rate than married couples?

5. Should popular individual deductions and tax credits (i.e mortgage interest, child, childcare expense, educational expense, etc.) be eliminated or scaled back?

6. Should populate business deductions and tax credits be eliminated or scaled back?

7. Should government favor certain industries over others in the tax code? Are there certain areas of common national interest (e.g. energy independence, basic R&D, food security, critical infrastructure, public health, etc.) that warrant encouragement/discouragement in the tax code?

Thoughts?

OAW

[Athens]

What I would like to see for taxation is a simple flat tax system with no deductions of any kind.

Personal Income Tax

10% Federal/National Income Tax
10% State/Provincial Income Tax
5% County/Municipal Income Tax

Corporate Income Tax

15% Federal/National Income Tax
15% State/Provincial Income Tax
10% County/Municipal Income Tax

What is currently tax exemptions or deductions would come from Rebates. So say you have a child credit worth $500.00 now as a deduction on income tax. Instead you would pay your full flat rate income tax and those who would have had child tax credits would instead get a rebate check.

Do away with paper money, go 100% electronic and banks mail off a statement of income deposits to the person/company at tax time. Fill out your income tax form excluding money that was not income from the statement and then do a separate form for tax credits and other programs for rebate checks. Stuff like rebates would be marked off as non income on the statement.

Nice, simple and easy.

This is how much I made, minus 25% for income taxes, here is my list of credits I want to apply for. Child Credit, Marriage Credit, New Home Owner Credit.

If I made $70 000 from employment income and another $10 000 in side income my total taxable income is $80 000,

Of that income
10% will go to the Feds $8000
10% will go to the State $8000
5% will go to the County or City $4000

Single, not married, no kids and renting a apartment. Nothing to really apply for in credits.

Now say I made only $20 000 as a low earner and no side income.

10% will go to the Feds $2000
10% will go to the State $2000
5% will go to the County or City $1000

If there was a rebate system for those making less then say $25 000 to get back 90% of that, the person would see a check $4500 at tax time.

Have the banks collect the taxes with each deposit based on the previous years income tax. Not the company one works for.

I don't like consumption based taxes or penalty taxes. Why should some one who lives in a rural area and has to drive be penalized with fuel taxes when there is no transit options. I don't like industry taxes either how one business has to pay more over another just because of the kind of business its doing.

[smacintush]

Originally Posted by OAW 

QUESTIONS (and other food for thought)

1. Should the US have a federal income tax at all? What about alternatives such as a Value Added Tax (VAT) or the Fair Tax which tax consumption instead?

2. If we stick with the federal income tax, should it continue to be progressive? That is, the percentage of one's income paid in taxes increases as one's income increases? Or should we consider a flat (or flatter) tax structure?

3. Should wage income be taxed at a higher rate than capital gains or dividend income?

4. Should single individuals be taxed at a higher rate than married couples?

5. Should popular individual deductions and tax credits (i.e mortgage interest, child, childcare expense, educational expense, etc.) be eliminated or scaled back?

6. Should populate business deductions and tax credits be eliminated or scaled back?

7. Should government favor certain industries over others in the tax code? Are there certain areas of common national interest (e.g. energy independence, basic R&D, food security, critical infrastructure, public health, etc.) that warrant encouragement/discouragement in the tax code?

Thoughts?

OAW

1. No, no income tax at any level. I would prefer a consumption based system.

2. I don't approve of a progressive system at all. There is no ethical basis for taking a higher percentage from one income group than any other. A flat tax would be a step up from what we have now.

3. I don't approve of capitol gains taxes either, and I don't really have an opinion about its relationship to the income tax rate.

4. No. All taxes should be the same for all individuals no matter their marital status.

5. Eliminated.

6. Eliminated.

7. No. All industries should be treated the same.


4, 5, 6, and 7 touch upon a problem with this government that I would like to see go away forever. The government has no business making tax policy based upon value judgements of individual behavior or particular industries. (not referring to actual crime here, so don't go there) Case in point: the mortgage deduction. This is classic carrot-and-stick treatment of what government bureaucrats have decided is best for all of us. It's better to have the "dignity" of owning a home than it is to rent, so they they dangle the carrot of lower taxes for those of us who comply, and those who have chosen not to, well I guess you don't get to keep as much of your own money. You aren't behaving properly.

Taxes are inherently unfair and unjust but when they are taken they should be taken as equitably as possible without regard for whether politicians approve of you or to what degree.

I would also say that beyond the ethical issue of taking a percentage off the top of everyones income by force and of the progressive income tax especially, income taxes are a detriment practically speaking. They encourage spending and the use of credit, and they discourage saving and investment. People are less prone to save or invest when they are so uncertain of what taxes (and inflation) they will have to endure later, and there is less money in their pockets now to save. The great income tax experiment is a failure, and a moral disaster. It needs to go.

Of course all of this is simply academic. We won't see any true reform out of this President or this congress. The best we can hope for is a bundle of closed "loopholes" ("closing a loophole" is merely a euphemism for a specific type of tax increase), new credits and deductions for those that are worthy (read: the less productive and the "green"), and a temporary window-dressing tax cut. It will just be a new scheme to accomplish the same old thing: using the tax code to control and manipulate the people into the preferred behavior.

Besides that, any real reform would necessarily have to be accompanied by a constitutional amendment since in a matter of a few short years the tax system would be well on its way to being just as polluted with garbage as it is now. They can't help themselves.

[OAW]

1. Should the US have a federal income tax at all? What about alternatives such as a Value Added Tax (VAT) or the Fair Tax which tax consumption instead?


I think such alternatives are worth a serious consideration. Having said that, the income tax is so entrenched I wouldn't hold my breath. We're more likely to simply the existing income based system than replace it wholesale.

2. If we stick with the federal income tax, should it continue to be progressive? That is, the percentage of one's income paid in taxes increases as one's income increases? Or should we consider a flat (or flatter) tax structure?

A flatter tax structure seems reasonable to me. In fact, I would advocate a flat tax rate across all income levels above a certain amount. IOW, one's first X amount of income should be tax free in order to give the poor a break. But beyond that, it should be the same rate for everybody. IMO .. the wealthy pay more because they have more to tax. No need for a higher rate on top of that. Of course, this goes hand in hand with #3.

3. Should wage income be taxed at a higher rate than capital gains or dividend income?

Absolutely not. If we have an income based system then income is income. Why should someone who's working a 9-to-5 be taxed at a higher rate than someone who's living off of dividends or capital gains? IOW ... why should the investor class be taxed at a lower rate than the working and middle class? The elimination of progressive taxation is a more than fair trade-off for the wealthy to pay the same tax rate as everyone else.

4. Should single individuals be taxed at a higher rate than married couples?

This is a relic of a time when most married women didn't work. I don't think it should be eliminated altogether. The rate should be the same but perhaps there could be some sort of deduction or tax credit when there is a non-working partner.

5. Should popular individual deductions and tax credits (i.e mortgage interest, child, childcare expense, educational expense, etc.) be eliminated or scaled back?


My answer to this is .... it depends. The goal is to simply the system and broaden the tax base. Not to raise taxes on the middle class. If the combination of a lower rate and elimination/scaling back of certain deductions resulted in a similar or reduced tax burden for the middle class then fine. But a huge increase in the tax burden on the middle class would be problematic.

6. Should popular business deductions and tax credits be eliminated or scaled back?

Presently big corporations are able to get over by shifting money around and employing various loopholes. Standard business deductions should remain, but the number of exotic and one-off type of deductions and credits should be significantly scaled back to broaden the tax base.

7. Should government favor certain industries over others in the tax code? Are there certain areas of common national interest (e.g. energy independence, basic R&D, food security, critical infrastructure, public health, etc.) that warrant encouragement/discouragement in the tax code?

Most definitely. The bottom line is that it's the role of government to look out for the national interest. Corporate America is not going to do it because they are setup to look out for the narrow financial interests of its shareholders ... who may or may not be American. We are in the age of multi-national corporations ... and what's good for them is not necessarily good for the American people. At this moment we have "American" companies creating way more jobs overseas than they are here at home. I see nothing wrong with the US giving a tax break to US companies that have a net job creation in the US ... or a tax penalty to US companies that have a net job creation overseas.

OAW