Changing the personal income tax code will be harder than changing the business tax code. Everyone is going to want to keep anything that lowers their taxable income. A simple, fair tax code is possible, but it requires looking at the larger picture and not just at the minutiae of an individual’s tax return.
We have 24 different tax rates right now, between the six income levels and the four taxpayer classifications. That needs to end. We do need to acknowledge the existence of dependents, the primary way that ordinary people reduce their taxable incomes. We also need to acknowledge that there are new forms of dependents, not just minor children. The current rules do not adequately deal with all the possible dependents a person might be supporting.
All of us pay Social Security and Medicare taxes, which are currently 4.2%. It doesn’t matter if all you earn is $10.00 a year, the Feds will get 42¢ of it. Allegedly, we pay these taxes separately because the money collected goes into separate accounts to fund Social Security and Medicare. We know that in fact they don’t get put aside and most of our “national debt” is what we owe to these two non-existent trust funds. Would you like to see an instant way to reduce our national debt? Stop owing money to Social Security and Medicare and acknowledge that we pay as we go. We “owe” ourselves $4.85 trillion. The amount we owe to others is $11.411 trillion. That is only 72% of our GDP, a very respectable debt, even if its not as good as it was before Reagan. With the internal obligations, our national debt is 102.6% of GDP. Part of that $4.85 trillion is pension obligations for Federal employees and others, but most of it is Social Security and Medicare. A very simple law that eliminates the bookkeeping that says these two programs are separate accounts is all that is needed to reduce our national debt.
We are frequently told, mostly by Republicans, that our national budget should be handled like our household budgets, but frankly, is there anything in your household budget that qualifies as “I owe this money to this savings account against my future.”? No. We don’t handle our household finances on maybe’s and when’s. The idea that we are putting money aside to meet future Social Security obligations has been a myth since the first recipient filed for the benefits. We have always been paying from today’s contributions for today’s recipients. So, let’s stop lying to ourselves about it.
Okay, in our proposed cure for our income tax morass, we have just chosen to combine FICA, Medicare and income taxes into one unit. That gives us a starting point for taxes of 4.2%. It’s a stupid number, so let’s raise it to 5%, 5¢ on every ten dollars earned.
The next step is deciding what to do about deductions, tax credits, exemptions and forms of income. Again, let’s simplify. If you earn it by any means, it is income. Period. No separation of source. If you sell your house and make $5,000 on the sale, and don’t use it to buy another house, that’s income. If you receive a dividend from your stocks, that’s income. If you inherit a million dollars, that’s income. Sorry, but a smart person has always been able to avoid inheritance taxes just by jointly owning everything with their heirs. If someone give you $1,000 and doesn’t expect it to be returned, that’s income.
Okay, I can hear the howls over this, but hang in because if the tax rates are low enough, this won’t actually hurt anyone in the middle or lower classes. We already pay straight income taxes on capital gains if our incomes are low enough. Only the rich get to use a lower tax rate for capital gains.
The only deductions we should make from our income to reach our taxable incomes should be the number of people we are supporting. Minor children are easy to figure. It’s the other dependents that are difficult. The law limits how much we can claim for other dependents based on any income they may have and how old they are. Many of us are supporting unemployed adult children, and even our children’s children. Many are supporting elderly parents. Many are supporting extended families. I would like to see a formula by which we can list all persons living under the same roof, how much each contributes to the household and figure out how dependent each one is. That way, if that unemployed adult child is receiving unemployment benefits, that would be figured toward the total that is used to support the household, and balanced against what it costs to support the household. This one is going to need an accountant to figure out, and it better be an accountant who can explain things as simply as Jon Stewart does (his 8 minute explanation of the financial services collapse is the gold standard). I hate the jargon of accountants and tax experts. Far too complicated to understand.
Three of our tax codes are based on marital status or dependents. That should also be ended. We should be filing as households, not people. That way, the family that consists of a married couple with children would have the same tax status as a same-sex couple or an unmarried couple with children or a single person supporting an elderly parent. Lump it all together, income and outgo into one household income. That is the way the census bureau figures it in all statistics about American incomes.
The census bureau divides household income levels in tighter increments than the tax code. Their divisions and the percentage of American households with those incomes are under $15,000 (13.5%), up to $25,000 (11.5%), up to $35,000 (10.9%), up to $50,000 (13.9%), up to $75,000 (17.6%), up to $100,000 (11.5%), up to $150,000 (11.9%), up to $200,000 (4.9%) and over $200,000 (4.2%). Remember Bell Curves? This isn’t one of them. In a true Bell Curve, that 17.6% who earn between $50,000 and $75,000 would be the top of the curve with those below and those above equally forming the sides of the bell. But 49.8% of us earn less than $50,000 and only 32.5% of us earn more.
This is the point where we need an accountant. We need someone with the mathematical and analytical skills of a Nate Silver, someone who can figure out where all the incomes come from, how they are hidden or diverted, how they are reduced and just how much money Americans actually earn. Then, and only then, can we set reasonable tax rates. People throw around a lot of statistics about incomes and taxes, but none of them are truly accurate for figuring out a new tax code. We know that the Koch Brothers are worth over $25 billion each, but that is wealth, not income. We know that the top CEO salary in America is $131 million a year. We know, thanks to Mitt Romney, that it is possible to “earn” over $20 million a year and only pay 13% for income taxes. We have no real idea what compensations are offered in lieu of salary at any level. All these things need to be factored in to decide how much money is out there and what we need to set as tax rates.
As I said a few dozen paragraphs back, all of us pay those payroll taxes so that 4.2% or 5% is a good rate to use as a base. We also know that a true living wage is much higher than minimum wage. It takes around $12 an hour for a single person to live in any of our cities, a base pay of $24,000 a year. Back in the 1970s, when California Governor Jerry Brown was running for governor, he said we could meet our budget needs with a flat tax of 10%. In the 1980s, Steve Forbes raised that to 17%. Herman Cain said 9%. But a flat rate is not going to happen. It would place too much burden on the poor just to place an acceptable rate on the rich. The tax rate will have to continue to graduate according to income.
All I can offer here is a blueprint for changing our tax codes. I can’t offer final statistics for personal income taxes anymore than I can offer a final number for revenues if we clean up our corporate and business tax system. Too much of what we earn, either as individuals or as businesses, is hidden from public view. Only the Treasury Department whose auditors plow through those 20,000 page corporate tax returns and our personal tax returns can tell us with any certainty how much we could collect as revenue with a truly fair tax system.
We all want lower taxes. We also want those lower taxes to be accessible without having to hire accountants who earn more than we do to find the hidden loopholes. The lower our income, the more we pay in taxes, not just because we have fewer options open to us for reducing our taxable incomes, but because we are incredibly honest people who don’t try to play the system.
Simple, reasonable taxes are everyone’s goal – well, at least they are the goal of most of us. We need to stop listening to the rhetoric about middle class and tax cuts and look at the whole picture to determine a way to really reform our tax system and not just put on another feel-good bandaid or tweak another way to avoid paying them.
There are several other ways we need to examine to reduce our deficits without harming the recovery. Taking care of our tax system is one side of it. We’ll look at the other side later.