Political Reform – Step Three

We’ve previously touched on two federal political reform ideas: single election terms of seven years and moving to non-partisan elections.  Now, it’s time for the third entry in our discussion about political reform.  I have to admit I’m putting this idea out there without the research to be able to tell you the exact impact, but here it goes:  We should move to a flat tax and a simplified tax system.

There are many flat-tax proponents out there. My idea of a flat tax may be different.  Here is the actual proposal:

1040
Image by Robert Hruzek via Flickr
  1. No federal income tax on individuals that gross less than $25,000 per year;
  2. No federal income tax on married couples that gross less than $60,000 per year;
  3. Federal income tax of 10% for all individuals on the amount of income in excess of $25,000 per year;
  4. Federal income tax of 10% for all married couples on the amount of income in excess of $60,000 per year;
  5. No federal income tax on businesses with annual profit less than $1,000,000;
  6. Federal income tax of 5% on businesses on the amount of annual profit in excess of $1,000,000;
  7. Federal income tax applies only to realized income; and
  8. No federal deductions or write-offs.  Tax is applied across the board.

That’s it.  Simple.  Note, the tax is only on the amounts above the baseline.  So, for a couple that made $70,000, the tax amount would be $1,000 (10% of the $10,000 above the $60,000 base).  There is also a built-in break for marriage (imagine that, a government incentive for families rather than the current marriage penalties).  The primary battle would be in defining “profit” for businesses, but that’s not as hard as most folks would like you to believe it is.

As for financial feasibility, I believe this would work.  The last time I saw an in-depth report by the GAO, this sort of proposal would seem to actually increase the tax base, decrease the cost associated with filing taxes, and dramatically decrease the amount of government expense related to administering the tax code.  In short, it would be a financial windfall for the government on all fronts.

Fwiw, I wouldn’t mind the tax being 7%.  I went with 10% because the math is easy.  I’m also open to different numbers when it comes to business tax or the baseline triggers for “real people” taxes.  But I think these sets of numbers are in the right ballpark.

So, why do we need this sort of change? I’ll treat that as a serious question, even though I have a hard time imagining anyone would really want to defend the current tax system.

First, the tax system is overly-complicated.  I’m a reasonably bright guy.  My wife doesn’t work outside the home, so we have just one income to deal with when it comes to filing taxes. Yet, I still will not file my own taxes because it’s just not worth the risk of messing up.  Plus, it’s a major headache.  The few years I did do it myself, it took hours and hours to sort it all out.

Second, the tax system is not fair.  I know we seem wedded to a graduated system, but I really see no reason for it.  The need I see is for simplicity and for allowing folks in lower income brackets some breathing room.  I think this proposal accomplishes that.  The biggest issue with those in upper brackets has been their ability to shelter their income.  We don’t need higher taxes on such folks; we need effective taxes.  Making the application uniform accomplishes this objective.

Third, as a result of a combination of factors (including the complexity of the system and the drain on individuals), the current system is constantly circumvented.  Tax fraud is rampant, according the IRS.  When you put a system in place that is universally disliked and so complicated that reasonable people cannot fill out the forms without significant help, you have a system that is ripe for fraud.

I realize the proposal kills many sacred cows, such as the mortgage interest deduction and deductions for dependents.  But if you have a fair system to begin with, you don’t need all these exceptions.  As I’ve said in prior political blogs, we face a radical problem, and radical problems require radical solutions.

It’s time for a tax-ectomy.

Edit – Fwiw, I was able to check numbers with the IRS. The most recent avg effective tax rate I found based on people with taxable AGI was 12.68%, so a flat tax of 10% sounds like it could work and possibly even bring in more tax revenue (since I’m going on actual income rather than AGI).

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