My Tax Proposal
1. Eliminate all deductions in the individual income tax code
2. Eliminate the corporate income tax.
3. Tax capital gains and dividends as regular income.
4. Eliminate the death tax as well as the write-up of asset values at death
I don't have any idea if this revenue positive or negative (I suspect it would be short-term positive, and long-term very positive), but I don't care. This would:
- Substantially reduce the government's ability to play preference games and give crony special help in the tax code.
- Completely eliminate the huge unproductive drag of corporate tax law expenses and substantially reduce the cost of individual tax preparation.
- Eliminate the enormous unproductive drag of estate tax planning
- Eliminate forced sales of family farms and businesses at death in order to pay the taxes (taxes are paid instead on capital gains when sold).
- Substantially reduce government-induced distortions on flows of capital (e.g. current promotion of home ownership over renting, of corporate debt over equity financing, of capital gains over income, etc).
- Eliminate most double taxations in the code, since there is now only the individual income tax.
I would be happy to make this revenue neutral (even if it required an individual income tax rate hike) and sell this to the Tea Party and Occupy Wall Street alike as a plan to reduce waste, corporatism, and crony meddling. The OWS might be upset about 2 & 4, but corporate profits eventually show up as either capital gains or dividends, so they will eventually get taxed on the individual income tax return. Ditto death taxes - currently they are largely offset by the ability to write-up asset basis at death and aggressive tax planning. And anyway, the death tax is a trivial sources of government revenues.
Postscript: I know there is all sorts of literature that supposedly promotes a lower capital gains tax as an economic positive. Frankly, I don't trust it any more than any other literature genned up to promote special tax breaks to any group because that group is supposedly economically more important. In my mind, a lower capital gains tax rate (which means a higher regular income tax rate) is just another way of government expressing an artificial preference for one economic activity over another. Specifically, a lower capital gains rate creates a preference for real estate and stock investors over business owners. Currently, I invest in a second home and flip it for a profit and I get a tax break on the capital gains. But if I invest in a business instead that pays off with regular income, I get no tax break. Why? Why is one type of investing better than another? The answer is that it is not, but the people who buy and sell equities and real estate in large quantities have more political clout than small business owners.
Postscript #2: And Medicare taxes have to go up, at least until the program is restructured.
Postscript #3: This is a great example of what I want to make go away. I consider it far more destructive in the long run than a percentage point rate change. In case it is behind a paywall, here is a bit of it (these giveaways to the rich were in the very same bill that was supposed to be to soak the rich):
Thus Michigan Democrat Debbie Stabenow was able to retain an accelerated tax write-off for owners of Nascar tracks (cost: $78 million) to benefit the paupers who control the Michigan International Speedway. New Mexico's Jeff Bingaman saved a tax credit for companies operating in American Samoa ($62 million), including a StarKist factory.
Distillers are able to drink to a $222 million rum tax rebate. Perhaps this will help to finance more of those fabulous Bacardi TV ads with all those beautiful rich people. Businesses located on Indian reservations will receive $222 million in accelerated depreciation. And there are breaks for railroads, "New York Liberty Zone" bonds and so much more.
But a special award goes to Chris Dodd, the former Senator who now roams Gucci Gulch lobbying for Hollywood's movie studios. The Senate summary of his tax victory is worth quoting in full: "The bill extends for two years, through 2013, the provision that allows film and television producers to expense the first $15 million of production costs incurred in the United States ($20 million if the costs are incurred in economically depressed areas in the United States)."
You gotta love that "depressed areas" bit. The impoverished impresarios of Brentwood get an extra writeoff if they take their film crews into, say, deepest Flatbush. Is that because they have to pay extra to the caterers from Dean & DeLuca to make the trip? It sure can't be because they hire the jobless locals for the production crew. Those are union jobs, mate, and don't you forget it.
The Joint Tax Committee says this Hollywood special will cost the Treasury a mere $248 million over 10 years, but over fiscal years 2013 and 2014 the cost is really $430 million because it is supposed to expire at the end of this year. In reality Mr. Dodd will wrangle another extension next year, and the year after that, and . . . . Investing a couple million in Mr. Dodd in return for $430 million in tax breaks sure beats trying to make better movies.
Then there are the green-energy giveaways that are also quickly becoming entitlements. The wind production tax credit got another one-year reprieve, thanks to Mr. Obama and GOP Senators John Thune (South Dakota) and Chuck Grassley (Iowa). This freebie for the likes of the neediest at General Electric GE -0.82% andSiemens SIE.XE +0.20% —which benefit indirectly by making wind turbine gear—is now 20 years old. Cost to taxpayers: $12 billion.
Cellulosic biofuels—the great white whale of renewable energy—also had their tax credit continued, and the definition of what qualifies was expanded to include producers of "algae-based fuel" ($59 million.) Speaking of sludge, biodiesel and "renewable diesel" will continue receiving their $1 per gallon tax credit ($2.2 billion). The U.S. is experiencing a natural gas and oil drilling boom, but Congress still thinks algae and wind will power the future.
Meanwhile, consumers will get tax credits for buying plug-in motorcycles ($7 million), while the manufacturers of energy-efficient appliances ($650 million) and builders of energy-efficient homes ($154 million) also retain tax credits. Manufacturers like Whirlpool love these subsidies, and they are one reason that company paid no net taxes in recent years.
roxpublius:
sold
January 2, 2013, 10:48 amap:
Index the basis of investments so that the only capital gains which are taxed are real increases in value, rather than the increase of price due to inflation. This reduces the incentive for government to inflate currency in order to increase tax
revenue.
.
January 2, 2013, 10:54 amJon Nyman:
My tax proposal and reasoning:
The mafia says, “Pay us money so we can protect you.” The business owner says, “I don’t want protection I’m doing just fine!” The mafia says, “Well, you aren’t protected from us. Pay up or else!” (OK the mafia really says, well, we wouldn't want something to happen to your wife or children would we?) The business owner says, “Oh, yeah, hears all the money you want, thank you for doing business with us!”
Hhhmm, sounds like the government to me. The only difference is the government pretends to be legitimate – by calling it “taxes” instead of “extortion.” I am grateful for all the good government does just like I’m grateful for the “charitable” works the mafia does.
Let us stop advocating that the government/mafia “tax” us at all. Then, we could move on from these discussions.
January 2, 2013, 11:34 ambecomingmorelibertarian:
Well stated. How do we get this idea drafted on the hill?
January 2, 2013, 11:46 ammorganovich:
a couple comments:
1. cut cap gains to zero. taxing cap gains is double taxation. you paid on earning the money, and now, because you successfully invested it (and took risk in so doing) you have to pay again? does not seem fair or desirable. if you tax somehting, you get less of it. we need more, not less investment. i think you may just be talking your book a bit here. i presume to oppose corporate taxes on a double taxation basis? how is that any different that a cap gains tax in this respect? what we really need to do is get rid of cap gains and make dividends expendable for companies (and then taxed as income for the recipient) and wipe out all the double taxation.
2. your proposal to zero corporate taxes is incompatible with the rest of your ideas. i would immediately start a new company and transfer all my assets into it. this company would also become the entity that anyone who paid me dealt with. i would no longer have individual income of any kind from work or investment and my taxes would be zero. the company would have a headquarters (my house), company cars, send me on trips, pay for meals etc. i could keep any actual salary i needed at damn near zero simply by being a conglomerate that included a travel writing division, a food critic segment, etc. everyone would do this. taxes would rapidly fall to essentially zero. you just cannot put an arb like that into a system like taxes.
i liked cain's plan better: 9% flat tax in income. 9% tax on corporate earnings. 9% VAT. done. easy to administer, far more encouraging to investment, and lacks the behavioral arbitrage that the 0 business tax creates.
January 2, 2013, 11:59 amLTMG:
Another *potential* benefit is that due to tax simplification the size of the IRS could decrease. Do you really think it would?
January 2, 2013, 12:01 pmmesaeconoguy:
1000% agreed.
Zero chance of any of it happening.
What just passed last night was the final affirmation that the US wants to look like Europe – high taxes, bloated, labyrinthine bureaucracy, and 1.2% annual GDP growth.
We are only slightly behind them in government percentage of GDP, and entitlements just became even more unsustainable.
You don’t just magically do a 180 and get out of this.
Happy New Europe
January 2, 2013, 12:25 pmMichael Landfair:
Six Reasons To Keep Capital Gains Tax Rates Low.
Inflation - The government is the source of inflation. It is the
January 2, 2013, 12:27 pmreason that house prices appear to increase when it’s really the dollar
that is losing value. Why should anyone pay current income rates on the
gains. Capital gains rates are a way of indexing for inflation.
“Lock-In” - taxes are assessed on the realization of gains. If
capital gains rates are high, an investor will avoid a sale and that
locks in capital that could start a new investment.
Double Taxation - shares of a company rise because of future
earnings, which are taxed at the corporate level and taxed again on sale
of shares. Dividends are the result of earnings which are taxed and
when paid to investors are taxed again.
Competitiveness - “Capital has become highly mobile across borders…”
when the taxes on capital are higher here, it will move to countries
with lower rates and there go jobs!
Growth Companies - “Reduced capital gains taxes encourage entrepreneurship.”
Government Revenue - “A recent Congressional Budget Office study
found that the longer-term responsiveness of capital gains realizations
to the tax rate is quite large. It found a persistent elasticity of
-0.79, which means that a 10% cut in the tax rate would increase ongoing
realizations by 7.9%.”
tex:
Of course your corp owning all your assets eliminates the protection of your assets which the corp was designed for, i.e. sue your corp and you lose it all including your house.
January 2, 2013, 12:47 pmMatthew Slyfield:
Adding the following provisions shouldn't be an issue for most of the tea party people and might help sell the OWS crowd.
When corporate personhood was first established this was done by the courts as a recognized legal fiction for purposes of tort and contract cases. Add provisions to explicitly return corporate personhood to a limited legal fiction.
At the time that corporate personhood was first established corporations were not immortal they were established for a finite life span. Most of the problems a lot of people see in corporate personhood are actually the result of the intersection of corporate personhood and corporate immortality. Repeal corporate immortality.
January 2, 2013, 1:44 pmmarque2:
The only issue I see is if there are no corporate taxes and dividends are taxed at personal income tax levels, corps will never give out a dividend again. Might have to monkey with that a bit (no corporate tax on all corporate income distributed as dividend?)
January 2, 2013, 2:30 pmnehemiah:
No corporate income tax period. Corporate taxes are shifted to consumers through product/service pricing. If corporations cannot sustain an acceptable ROI they should dividend or buyback stock so that shareholders can reinvest for better return. Get the tax planning out of corporate finance and you'll encourage better financial management.
January 2, 2013, 2:46 pmmarque2:
OK, but you are still discouraging companies from issuing dividends. If dividend taxes are zero on a personal level, then corps are encouraged to distribute more $.
I see your point though.
January 2, 2013, 2:48 pmnehemiah:
On the right track. My hunch is that taxing cap gains and dividends as regular income in combination with eliminating personal deductions will provide more than enough revenue to offset the loss of corporate taxes and the death tax. This could provide some room to take the marginal rates down a bit.
January 2, 2013, 2:51 pmjdkattar:
Great proposal. While you're at it, how about a flat tax.
A couple of adjustments needed for corporate taxes, though, in the interest of fairness. First, dividends and cap gains for foreign shareholders would escape taxation, so maybe make corporations pay those taxes to the IRS at the prevailing rate. Second, cap gains are tax deferred, which is a huge advantage, so maybe require taxes on mark-to-market gains rather than realized gains. Oh, and make capital losses fully deductible.
January 2, 2013, 3:06 pmherdgadfly:
Since a corporation is no more likely to be sued than an individual taxpayer, forget the "asset protection racket" and buy into the "no income tax dodge." At least if you get sued, the theory is that there should be more liquid assets available with which to defend.
January 2, 2013, 3:30 pmMingoV:
Tax capital gains and dividends as regular income.
--This often is double taxation: I earn money and get taxed on it. I invest part of what's left and get taxed on any profits. At the very least, there should be an inflation deduction.
But if I invest in a business instead that pays off with regular income, I get no tax break.
January 2, 2013, 3:32 pm-- How does one invest in a business and get regular income instead of bond interest, stock dividends, or stock capital gains? If you own a business, then you either pay yourself a salary or pay personal income tax on profits, but owning a business is not the same as owning stocks or bonds.
perlhaqr:
It's worse than that.
When the Mafia charges you protection money, they actually leave you alone.
When the government charges me protection money, they spend it on hiring people to harass me.
January 2, 2013, 3:47 pmEarl Wertheimer:
You don't address spending. Although I agree with the taxation changes, what prevents the government from increasing the tax rates to pay for additional spending?
January 2, 2013, 4:13 pmDavid:
In #4, it sounds like you'd remove the "stepped-up-basis" - is that correct? A challenge with that is that record keeping would need to be a lot better to track assets. Example: my great-grandmother worked for AT&T. Say she bought some stock, and willed that to my grandfather, who willed it to my mom, who willed it to me. Over the last 90 years, *how many* spinoffs, mergers, splits, acquisitions, etc has AT&T been through? I would feel sorry for an accountant who had to figure it out, except that he could bill by the hour.
January 2, 2013, 6:49 pmjohn mcginnis:
Guess I am a radical. Your #3 proposal pretty much maintains the status quo. Personally I would eliminate tax on any capital gains.
As to the rest this is my proposal --
By passage of this Amendment the 16th Amendment is nullified and hereby replaced.
1) Congress shall have the ability to collect taxes at any single
rate they so prescribe but no single taxable entity shall pay more than a
17% rate.
2) Business entities shall pay no tax.
3) Use fees other than import fees are abolished.
4) Congress has 5 years from passage of this amendment to balance the budget. As an enforcement action –
a) For any two year period that the budget is balanced members of Congress are eligible to receive a pay raise.
b) For any two year period that the budget is not balanced the pay rate of the members of Congress shall be reduced the equivalent % in pay of the % of the deficit.
January 2, 2013, 7:58 pmmesocyclone:
So your corp owns some corps, etc...
In this case, having a tax on personal income but not on corporate income creates just the kind of tax-avoidance behavior that is to be avoided. It is inherently a preference on one kind of income over another. It would also create all sorts of book-keeping nightmares (accountant full employment) as the IRS went after imputed income from your use of corporate assets.
January 2, 2013, 8:36 pmRuss Armstrong:
Suppose I borrow money to buy a house, get some FHA money at 3% down, pay interest only, live in it a couple years, then sell it at a hefty gain (2003 -- 2007). Since I deduct the interest from my taxable income in those two years, I probably don't pay any more after tax than I would have paid to rent the same house. When I sell, I get lower capital gains taxes on my profit. Other than my 3% down, what did I "invest?" I think capital gains on the profits from the sale of a house should be proportional to the amount of the principal that the owner had paid down, and the rest of the gain should be taxed as ordinary income.
January 2, 2013, 9:16 pmCraig Loehle:
A fundamental problem is that people seem to think that a corporation is a "person" and can keep its riches. By double-taxing corporations they are hurting their own retirement funds.
I would add one more suggestion to those above: for political campaigns we currently think transparency will help, but ways around this exist, and the fact that it is transparent does not prevent influence buying. Instead, make contributions truly anonymous so that the CANDIDATE can't find out who gave $ to him. In this way, free speech is maintained because you can give as much as you want to anyone, but you can't buy influence and get crony capitalism.
January 3, 2013, 7:39 amme too:
you own a business by owning the stock. Owning a bond means you own a promissory note from a business but have no ownership of the business.
January 3, 2013, 7:54 ambigmaq1980:
I'll take a mix of john's and coyote's. I especially like the cap on rates to single entities and elimination of fees (even the Supreme Court recognizes those as taxes ala Obamacare). If corp tax is zero, then I can take the cap gains and dividends taxed at regular income level. I think it is essential to eliminate all deductions and make it a simple, back of a postcard submission process - for the reasons coyote stated. And, inheritance tax is a double taxation - so yes, chop that off. Unbalanced budget becoming a criminal act has some merit - 2 years may be a reasonable time period to calculate that over.
Two other things to consider:
1) What if there is a war (and we probably need stricter laws than now for declaring such - including criminalizing unilateral use of force while not declaring war or without Congress' approval; and, a sunset clause on existing wars, requiring re-approval - don't want a POTUS who perpetuates it, and decides alone on when to stop). There always will be a risk of war which may require debt - but having a balanced budget and zero debt would put us in a much stronger military position facing any potential enemy.
2) I would also seriously looking at all Federal "poverty reducing" programs and roll them into a negative tax rate mechanism, where a portion of the gap between actual income and the poverty line comes as a "refund", creating an incentive to earn.
January 3, 2013, 8:24 ambigmaq1980:
It also would affect the accounting "industry" big time. There would be thousands of people suddenly unemployed or underemployed. You bet the constituencies have a significant lobby each.
Unfortunately, it would take a crisis, where the public feels the need to significantly reign in government - today, it does not look like folks are there yet to support this.
January 3, 2013, 8:29 amMondak:
Most of it sounds okay.
My additions:
- Short term capital gains taxed at 90%
- Long Term Capital gains taxed at 0 or near 0%
Selling equities a 1/4 second after buying them provides no economic gain. Investing in good companies long term provides the proper market signals.
January 3, 2013, 9:11 ammarque2:
Why would you charge so much on short term cap gains? People who do short term investments frequently do a lot of good.
Example - house flippers. In my neighborhood, they have purchased the derelict houses in my area, and fixed them up - one was even torn down and completely replaced. They want to sell the fixed up house right away. I see this as a fantastic service - by cleaning up the blight in my neighborhood, and increasing my property value by making the neighborhood nicer. Your 90% tax on short term cap gains, would totally erase any incentive for the flippers to come in and fix up the houses - hurting not only the flippers, but me as a regular property owner even though I am not involved in the flipping.
January 3, 2013, 10:03 amtex:
All taxes are bad for the economy, even if necessary for a net benefit to the economy (property rights, rule of law, etc). However, some forms of taxation are worse for the economy (i.e. we are totally worse off) than others. Some economists have studied this and the last I read, but do not have at hand, ranked property taxes as the best for the economy and Corp Income taxes and capital gains taxes as the most harmful.
As I recall personal income taxes were significantly less harmful than corp income taxes. This is one reason the Scandinavian countries (Sweden & Finland) can be so successful in spite of being socialistic. The personal income tax is high while the corp income tax, and other business related taxes are low by world standards. They want your money in business activities and they want foreign companies to set up businesses there.
January 3, 2013, 10:10 amMondak:
The blighted was there because someone went in to make a quick buck in the first place.
January 3, 2013, 10:12 amtex:
Unless you are rich indeed, lawsuits are prone to wipe you out. Being sued, it is frequently better to let um take it, and try again. We don't have “loser pays” in the US and simple cases going to trial costs $100,000s. A family construction company, worth a few million, was unjustly sued by a insurance company, and was wiped out though winning $1M in the end. Its own lawyers had claims on all assets and at the end went before the judge and claimed the winnings as well for all the work it had done and the judge approved. I understand the family was invited to the hearing but with no legal standing – it was between its lawyers and the judge. The business was totally gone, but the at least the family kept their homes and some savings (many small business owners keep most of their assets in the business to grow the business).
We have trolls of all sorts (patent, disability act, discrimination existent or not, etc without end). Commercial law suits can go on until one side runs out of money (usually out of cash is sufficient) “guilty” or not.
January 3, 2013, 10:17 ammarque2:
The blight was there because people purchased homes they couldn't afford, and dumped them.
January 3, 2013, 10:53 amAnd even if your point is true, why would you want to stop someone coming in to fix them up? Should the falling houses remain forever as memorials?
Mondak:
The house across the street is a short term problem. The homes will go back into the market when there is enough value there to support them. If people are flipping them already, then it sounds like you are pretty close to being there regardless. They bought them in the first place because they were looking to get rich quick and didn't understand the math.
In the meantime, CEOs are not managing 50 year old, billion dollar companies to inflate quarterly results. The next Enrons can't happen not because of more regulatory oversight, but simply because that kind of shell game needs to be fueled by more folks looking for the quick hit. Other bubbles (dot com, real estate, tulips etc.) don't happen because the market will reward companies and investments focused on consistent long term results and not some withered quasi ponzi scheme.
January 3, 2013, 11:37 amJeff:
I would go for constraining the government to a single consumption tax on retail sales, where Congress can set two very transparent variables. The first variable is the rate, that applies to all retail sales, no exceptions. The second variable is an amount of an annual credit to be paid to all American citizens, no exceptions. The credit protects those least able to consume. So as an example, if the rate were 10%, and every citizen received $3,000, every citizen would have $30,000 worth of consumption offset by the credit. Those who consume less have positive cash flow, those who consume exactly $30,000 are even, and those who consume more are paying net tax.
With no other taxes or fees, this favors investment over consumption, and has an element of voluntarism at the higher end where consumption is a choice. Those least able to afford it are protected by the credit, and those most able to afford it are paying the bulk of the taxes.
While we are at it, require a balanced budget, take away the ability to borrow, take away the ability to issue fiat currency, and we have a transparent method of government financing that is driven by two variables set by Congress. I would be very curious to see how the voters respond to that.
Perhaps I will before I wake up. :)
January 3, 2013, 11:52 amnehemiah:
Dividends can be overplayed. Back in the 1990's would you rather have had Walmart paying out a dividend or reinvesting in their growth model that was rolling out a 28% plus ROI. Sometimes you ride a hot hand.
January 3, 2013, 3:18 pmmarque2:
Good point, there are different stages in a company, start up, rapid growth, Cash Cow, and decline. If the company is start up or rapid growth, yeah they should keep every penny. In the Cash cow stage and the decline (if well managed) - there little growth, not much new investment needed, the only purpose is to pay out a dividend. The company can hoard for awhile, but at some point the cash has to come out.
January 3, 2013, 3:41 pmcpyddub:
"Tax Proposals" and "Tax Restructuring," not only out of the White House, but Washington DC and the public sector in general, have nothing to do with revenue generation but with their punitive nature and with the ability to grant exemptions. So rotisserie "Tax Proposals" ignoring the agitated cultural and class warring, and that emphasis, can't be taken any more seriously as they (aren't) being taken in Washington.
January 3, 2013, 4:25 pmThere's no care for which taxes, at any raised rates, by those who pay no taxes (this includes government workers), and there's more of them voting right now than any of you.
markm:
Corporate income tax with no tax on dividends discriminates against startups and rapidly growing companies. That's a worse drag on the economy than unwise investments by the cash cows.
January 4, 2013, 4:40 amJon:
@perlhaqr:disqus,
Yeah, tell me about it. I just had CPS over at my house because my 5 yr old daughter was holding a baby in a restaurant. I asked for a warrant and the woman told me she didn't would, I insisted, so she threatened to have armed men come and enter regardless and she said she could possibly have my kids taken away. Talk about harassment. These people are truly psychotic. Who would go to someone's house and threaten them like that? Only people w/o a conscience. The local newspaper won't even touch stories like that.
January 4, 2013, 7:25 ammarque2:
Startups and at early on, rapidly growing companies don't show profits anyway. You have a good 5 - 6 years of losses.
January 4, 2013, 11:37 amCardin Drake:
It really is a problem if you tax capital gains as ordinary income. At reasonable inflation rates, it's not that noticeable. But when the government is printing money the way we are, it is almost certain to trigger rampant inflation. And at that point, capital gains taxes amount to wealth confiscation. Imagine the frustration of trying to keep keep your money in some sort of stable asset with 25% to 50% inflation rates, and then having to pay the government 40% of your "earnings" when you were actually losing ground to inflation. This scenario is much more likely in the next ten years than people would like to admit.
January 5, 2013, 10:19 amHarry:
Good ideas, Coyote. Is there any room for indexing capital gains, so the government does not benefit from inflating its paper money? It benefits from inflating money in other ways, too, like repudiating debt, but that is a different story.
January 5, 2013, 7:41 pm