Generally speaking, the goal will be to foster economic growth and create new jobs with a simple business and individual income tax system. The only tax credits allowed will be a 5% payroll tax credit for employers and a credit to banks that loan money within this country. All taxes will be based on the person’s ability to pay. Therefore, the only taxes allowed will be income taxes, sales taxes and some use taxes.
Under the current income tax system, individuals pay a minimum 10% federal income tax and a maximum of 35% plus state income taxes. The top rate is actually higher because of limited deductions which push the top rate closer to 39%. And, dividends from corporations are double taxed under the current system. Now that President Obama has been re-elected these taxes will undoubtedly be increased.
All persons will file income tax returns as individuals (as opposed to married, head of household, etc.) This will eliminate the marriage penalty. Second, each taxpayer will be entitled to a $10,000 standard deduction with no exemptions and no itemized deductions. The tax rate will be a flat 15% of all income over $10,000. Note that individuals will not pay taxes on business income because the business will pay the tax and all distributions to the owners/stockholders will be tax free.
All businesses will file their income tax returns as pass-through entities. The business will pay taxes at the corporate level at the standard 15% rate. Therefore, any distributions (i.e. dividends) will be tax free to its shareholders, thus eliminating the double taxation of business income. The business will issue a three line K-1 to stockholders showing each stockholder’s portion of the income, tax credits and income taxes paid. This will be necessary because, in some cases, the taxpayer may be due a refund of taxes paid by the corporation because of the $10,000 standard deduction.
All businesses will be able to compute their taxable income on the “cash basis” where all amounts paid for products and services purchased within this country will be immediately deductible with the exception of land and buildings. Amounts expended for land will not be deductible and buildings will be depreciated over 10 to 50 years. If equipment is purchased and financed with a loan, the company will have the option of depreciating the asset or writing off the loan payments as they are made.
There will only be one tax credit allowed to non-banking companies. The purpose of the credit will be an incentive for businesses to hire workers in this country. The credit will consist of a non-refundable tax credit equal to 5% of gross payroll for employees who work and live in this country. For example, if a business has $2,000,000 of taxable income the tax, at 15%, would be $300,000. If that company’s gross payroll is $3,000,000 then it will receive a $150,000 tax credit ($3,000,000 X 5%) and its tax liability will be reduced to $150,000 ($300,000 – $150,000) making the effective tax rate equal to 7.5%.
These simple income taxes will eliminate the need for separate regulations on AMT, passive investment rules, capital gains, dividends, tax shelters, etc. which will virtually eliminate the Federal Income Tax Code.
Inheritance taxes were partially designed to ensure that no person or family accumulated substantial amounts of wealth, as happened in Europe. These families oftentimes became more powerful than the government. However, in Europe, the estate generally went to the eldest son. In the United States estates are generally divided up among many children. Therefore, the accumulation of large estates is more difficult than in Europe.
Our current system requires that the entire value of the estate be taxed at death. This means that income is taxed multiple times. First, it is taxed when it is earned. Second, if it is reinvested then the dividends/interest/capital gains are taxed again. If the income is invested in real estate it is subject to property taxes. If the income is spent then it is taxed again through consumer sales taxes. Finally, when the taxpayer dies, it is taxed again. When the heir dies the estate would then be taxed a fourth time. This multiple taxation is totally immoral.
If estates are to be taxed the fair way would be to tax the appreciation in the value of the estate. This would eliminate all double taxes and the assets would be passed on to the heirs with the stepped-up basis. This would be a fair method of taxing estates if they are to be taxed at all. It would also eliminate all of the estate planning that people are now forced to do.
Therefore, if we choose to tax estates, the inheritance tax will be limited to 15% of the appreciation in the value of the estate instead of taxing the total value of the estate. The estate tax will not apply to homes, personal belongings or small farms. For any asset whose cost cannot be determined its cost will be calculated using the purchase date and adjusted for inflation. Estates will have the right to pay the tax over 5-10 years at a nominal interest rate.
Payroll withholding taxes will be withheld by the employer at the current tax rate – i.e. 15%. Employees can apply for a refund if this results in overpayment due to the $10,000 exemption. This will greatly reduce the complexity of calculating payroll.
Unemployment taxes and benefits will be determined by each employee. Each employee will have the option to pay 2.5% of their wages into an individual unemployment account, much like an IRA, and will be matched by their employer. This money will belong to the employee and can be withdrawn anytime the employee is unemployed or underemployed. However, when the funds run out the unemployment runs out. If the funds are unused then the taxpayer can withdraw them at retirement along with their IRA.
Individual retirement accounts, as opposed to Social Security, will be set up for each employee. Each employee can contribute as much as they choose but the employer’s match will be limited to a match of 5% of the employee’s wages. These funds can be invested by the employee or they can be pooled and invested by the government, but only in broad indexed funds. They can never be used to purchase government debt as this amounts to stealing if the government cannot repay these loans. These funds will always belong to the employee and can be passed along to heirs when the taxpayer dies. The employee will determine when they want to retire and will determine how much they draw out of their retirement account each year.
Withdrawals from the unemployment and retirement accounts will only be taxed after all of the employee’s original investment has been withdrawn. All amounts over the original investment will be taxed at 15% just like any other taxable income.
It should be noted that once the employee retires, he will have a substantial nest egg that can be used to cover medical expenses instead of relying on Medicare. For example, if an employee enters the workforce making $20,000 per year, gets annual raises of 5% , invests the maximum of 10% per year (5% employee plus 5% employer), and gets a 5% return on the investment, then he will have $606,000 in his retirement account after 40 years. If this $606,000 were invested at a 5% return the retired employee would have $30,300 per year retirement income without touching the principle. And, unlike the current Social Security system, the money will belong to the taxpayer and can be passed on to the taxpayer’s heirs.
The government will set up and manage a mutual fund type of investment for these funds. However, no employee will be required to invest in these funds if they choose to invest elsewhere. The mutual funds will be simple to manage. The Dow Jones Industrial Average contains 30 stocks and the average appreciation has been 7% per year. This return could be dramatically improved by eliminating the two worst performing stocks and doubling up on the two best performing stocks. In addition, the fund should either get out of the market at major tops or short the market at major tops. This could easily increase the returns to 12% per year.
The employer would only need to file one return each month showing each employee’s name, social security number, gross wages and taxes withheld. These taxes would be remitted to the Federal Government and they, in return, would remit the unemployment and retirement contributions to the investments designated by each employee.
Analysis of Pension Plan Returns assuming a 5% annual growth in wages:
Initial Salary Contribution Rate of Return Years Value
$20,000 10% 5% 40 $ 606,000
$20,000 10% 6% 40 $ 744,000
$20,000 10% 7% 40 $ 923,000
$20,000 15% 5% 40 $ 909,000
$20,000 15% 6% 40 $1,116,000
$20,000 15% 7% 40 $1,385,000
Note – the 15% contribution includes unemployment contributions and it is assumed they are not used by the taxpayer.
As you can see, if the taxpayer is in control of his own retirement plan, the funds can be invested and will provide a much better retirement than the current Social Security system. The average return from the stock market is 7% so these projections are realistic.
State Tax Revenues will be limited as follows:
- All state income taxes will be piggy-backed on the Federal Income Tax system. Each state will set their own tax rates. For example, if the federal income tax is $2,000 and the state rate is 20% (making the effective State rate 3% of income) then the state tax owed would be $400 ($2,000 x 20%).
- Consumer sales tax rates will be determined by each state. The tax will be assessed on all final sales of all merchandise and services with the exception of land, buildings and bank income. This will be different from the current system in that there will be no exempt sales except as noted above. Purchases from outside the country will be subject to a 7.5% Use Tax in order to promote purchases within this country.
- Gasoline taxes – will be levied at a maximum of 15% of the gas sale (as opposed to the current system of charging a flat rate of $ .506 to $ .565 per gallon) and it will be clearly marked on the invoice, like CST, so the customer will know what they are paying. Gasoline taxes will go into a separate fund to pay for road repairs and new construction and cannot be used for any other purpose.
- Sin taxes will only be collected by the states. Any state that collects sin taxes will be required to place these funds into a separate account and they can only be used for treatment of the “sinners.” For example, cigarette taxes could only be used to treat smokers diseases.
- User taxes will be permitted for such things as drivers licenses, license plates, hunting & fishing licenses, etc.