Tax Reform

On this day when all eyes are focused on the 1040 form it might be a good time to address the current tax code.  First and foremost, it should be scrapped.

It should be the right of every American to be able to provide for their family’s basic needs before the government begins confiscating their hard-earned money and giving it to someone else. It is unconscionable a person with family working 40 hours a week at minimum wage has any of their wages taxed. The sad truth is when you add in the total taxes (employer & employee) of Social Security and Medicare with the quickly imposed minimums of the Federal, State and Local taxes this low wage earner can quickly be paying between 25 to 30% of their income in taxes. When this individual may be in greater need than many of the recipients of government largess it is the quintessential “Robbing Peter to pay Paul

We should eliminate all taxes – Federal, State, Social Security and Sales – until a person and their family’s income reaches a minimum cost-of-living level. Once a person’s income reaches this level and their basic needs are met, they and everyone else should pay the same standard tax rate on income, no matter how much and from where that income in generated.

To accomplish this:

1) The current tax code system should be completely scrapped.

2) A generous individual standard deduction should be implemented.

3) All itemized deductions should be eliminated.

4) A flat tax should be levied equally on all income (payroll, capital gains, dividends, etc) above the standard deduction.

5) A consumption tax (VAT) should be levied on all non-essential items.

Current Tax Code System

Current tax rules are over 77,000 pages long. It is a labyrinth of regulations designed by politicians to reward their favorite constituents and cronies. The current tax system is grossly inefficient costing billions of dollars and millions of man-hours to comply with. It is riddle with loopholes allowing those with the proper access the ability to greatly reduce or eliminate the payment of taxes all together.

Generous Standard Deduction

There should be a generous standard deduction for every adult and child. An example could be $20,000 deduction for each adult with each child receiving a $10,000 deduction. Therefore every family of four could make $60,000 in income before paying any taxes. This deduction would be adjusted every year to compensate for the rate of inflation. A generous standard deduction will eliminate the need for all itemized deductions and company offered benefits.

Itemized Deductions Eliminated

Itemized deductions are just another unfair way the government picks the winners and losers.

Why should some who has a mortgage be able to ‘write-off’ the interest on that mortgage while another person who is renting and trying to save enough money for a down payment on a house, or a person who has saved diligently their whole life and paid off their mortgage, in effect subsidizes the lower tax rate of the mortgage holder?

Why should some one who owns a very expensive house, and higher real estate taxes, be able to write off more of their Federal taxes than the person who lives frugally in a smaller house. The person in the smaller house will, in effect, subsidize the Federal taxes of the person with the larger house.

Why should someone who lives in Virginia pay more in Federal taxes than someone in New York, only because New York charges more in state taxes, thus a larger itemized write-off for those higher state taxes?

And a final example, and probably most controversial, is the tax-deductible status of religious centers of worship. Why should someone who supports one church, but at a more reserved level, be forced to subsidize the benevolence, and thus greater Federal Income tax deduction, of another person at a different place of worship?

The only fair policy would be to eliminate all tax deductions and treat everyone the same … a standard deduction.

Flat Tax

On all income above the standard deduction a flat tax should be levied that incorporates both Federal Income and Social Security taxes. This flat tax would be applied to all income, no matter if the income comes from payroll, investment, capital gains, dividends, etc. States should be encouraged to implement their own flat tax to compliment the Federal program.

Social Security tax would be add to this flat tax because of the government’s gross mismanagement and mishandling of the Social Security Trust Fund, as well as the totality of the massive unfunded obligations of the Social Security System. The Social Security Trust Fund is trillions of dollars worth of worthless I.O.U.’s to the American people. Let’s face facts, there is no money in a Trust Fund.

All income or benefits would be subject to the same flax tax, whether the income is from payroll, stock options and/or dividends.

Consumption (VAT) Tax

Every industrialized country, except the United States, has a Consumption Tax, or more commonly known as a Value-Added Tax (VAT). The value-added tax is a system of taxation where a tax is placed on every level of production. Companies obtain credits for the VAT taxes paid on products as they flow through the manufacturing process. Not only are domestic manufactured products subjected to VAT but also imported products when they enter a country.

When products are imported into a VAT country their customs assigns the full tax at the Port of Entry. If products are exported out of the VAT participating country a company will receive credits or full refunds on the value-added tax built into those products. There is less fraud in value-added taxation than standard sales taxes because a company can only receive a refund on the built in VAT tax if they pass their valued-added tax onto the next or final consumer. Some countries receive 45% of their government income from value-added taxation.

Under the current US tax system there is no VAT. This puts the United States at a significant tax liability in relation to cross boarder trade with VAT countries. It also hurts the competitiveness of US made products for export.

For example: currently a product made in Finland for export to the United States will not have a VAT assigned to the final product price when it leaves Helsinki. That product in theory will have a lower cumulative tax or product cost than a similar product made in the United States made for sale in the US domestic market.

To enable a family to be tax-free for their basic standard of living the value-added tax should be product specific. To benefit the most disadvantaged workers there should be no VAT applied to unprocessed food, health care and basic needs. Again a person should be able to provide for their family’s most basic needs before the government begins taxing them.

With the basic needs exempt from VAT, a Value-Added Tax will be a voluntary tax. If you do not purchase luxury items, you don’t pay the tax. It would be a tax system that encourages people to save more of their money. It would also put some of the tax burden on the portions of society that escape the normal tax system, for example cash for service or illegal operations.

The Flat Tax and Value-Added Tax should be set at the same rate, a rate that provides a balanced budget. If the Flat Tax is 20% then the VAT would also be set at 20%. So there is not double taxation, C-Corporations should be treated like S-Corporations.  The shareholder pays the tax, and only pays it once.

Conclusion

For the average citizen the current tax system is broken. It penalizes frugality while encouraging debt. If you work for a paycheck you are often taxed at a higher rate than someone who lives off a dividend. The current system rewards those who can afford high priced accountants and penalizes those who go to H&R Block.

We need a tax system that encourages those in our society who are less fortunate to become self sufficient and less likely to become dependent on government largess, to give them an opportunity to become a part of the working class and a chance to advance their position in life.

We need a tax system that empowers a family to be able to provide for their needs first, a system whereby every tax paying individual is treated exactly the same. One that treats all income equally whether you have to work for it, or inherit it

2 thoughts on “Tax Reform

  1. I like a lot of what you wrote regarding the flat tax and the tax exemption of the first essential dollars, but you lost me when you wrote:

    “5) A consumption tax (VAT) should be levied on all non-essential items.”

    VAT are the more opaque of taxes and quickly become exorbitant.

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