Reforming the Income Tax: A Citizen's Proposal
Comments

10/05/2011 — LE, Colorado Springs, CO

LE: Check out Tax World: A History of Taxation, a history of taxation and tax... a rich source of information, history, policy, thresholds, terminology, and more.

1. What are taxes? Many consider taxes the birth of civilization – synonymous with the move from a tribal society to a civilized society. Taxes are pretty much necessary in a stratified society (rulers, military, bureaucrats) and require writing.
2. Why are taxes? Taxes are needed to support rulers, military, bureaucrats, and maybe others: merchants, schools, technologists, et al. But they may also be an instrument of ruler/government policy (prevent competition with the government, redistribution of income, buy support, encourage something or other).
3. What kinds of taxes are there? A large number. Income tax is a recent invention. Other kinds of taxes include head, property, sales/VAT, duties, and GOK. Rulers choose the taxes they like based upon government policy, convenience, and custom.
4. How does one reform a tax system? With a great deal of difficulty. One has to look at where one is, where one wants to go, and how to get there. The current U.S. tax system has a large number of supporters: government bureaucrats, people who benefit from the system (politicians, individuals, businesses, and people who earn their keep helping citizens cope (lawyers, CPAs, etc.)).

10/10/2011 — LE, Colorado Springs, CO

LE: I have reviewed only the base document, so my comments apply only to it.

1. It is a work of art, and I am impressed.
2. Whether it will make any waves is doubtful, but it’s worth trying.
3. It cannot be cut much, but the shorter the better; however, some duplication/rephrasing is OK.
4. The energy philosophizing is not needed.
5. Eschew negative statements. Make the document wholly positive (e.g., remove comments about people not liking or won’t read).
6. I noticed only one typo.

10/12/2011 — LE, Colorado Springs, CO

RAD: The following is a reply to LE after a lengthy phone call.

RAD: Here’s the best answer I could think of regarding your “advantage & control” scenario.

RAD: This is admittedly not fool-proof; nothing ever is. But it’s at least as enforceable as today’s rules against insider trading. Actually, since my proposal requires full disclosure of all transfers, requiring the declaration of receivers over which a tax payer has control makes this quite a bit easier to check.

10/12/2011 — LE, Colorado Springs, CO

RAD: Good point about family transfers. I added the following to the same paragraph:

RAD: You are of course right that a growing list of qualifications and rules will tend to water down the proposal – death by a thousand cuts – but one has to start somewhere.

What I’d really like is to find a way to make it go viral on the Internet. Once I have better modeling data I could put an app on the web that would allow people to determine what their tax would be according to the proposal - and maybe provide a way for people to “vote” on which aspects of the proposal they like and dislike. This needs more thought.

11/29/2011 — REB, Trinity, FL

REB: Think about people trading things an asset for an asset; like a house for a house. If I want to sell my home in Trinity and get one in Tampa, I will just advertise it as a trade. That way, neither one of us pays any taxes until we sell it for cash.

RAD: The proposal allows for tax free transfers of assets. You could sell your house in Trinity and put the money into a savings account, and later buy a house in Tampa with those savings, again tax free. If the house in Tampa is less expensive than the one in Trinity, the difference stays in the savings account as an asset until such time as you take it out as income; then it is taxed. The person in Tampa could do the reverse. Now, assuming an equitable trade, remove the savings account from the process and whomever has a profit from the trade has taxable income, unless it is transferred to some other asset, such as a savings account.

REB: What if I want to trade my home and buy an expensive piece of art as an investment? Any money created and taxable?

RAD: This depends on what gets classified as an asset. To me, an asset is anything with the potential to grow in value. It certainly does not include things bought for everyday living or luxuries or toys (however expensive).

REB: Some will want some form of estate tax as families can pass assets from generation to generation and not pay any taxes. That asset could continue to produce money but the asset, possibly VERY valuable, will have not tax for the federal government.

RAD: I'm not too concerned about inheritances. People who don't earn money themselves tend to squander it over one or more generations, at which time it will be taxable income.

REB: I do NOT like the negative income tax with the government paying people money as they have children. The government should not be in the "business" of giving money out to people because their tax form shows they they do not make enough. If there is negative tax, so be it and pay nothing. No, I am NOT a scrooge.

RAD: I tend to agree with you; there are other ways of helping the poor. My preference is for the modeled Offset Log tax with a $0 floor. The spreadsheet models I did are all based on the idea of individual (not household) taxation. Say a family of four has no income, the negative tax would pay the family four times the offset value, and the more kids, the greater the multiplier. Is this an incentive to have more kids and exacerbate the culture of welfare poverty in which they are raised?

My preference is for private rather than government charity to aid the poor. And that's why a progressive tax is important; it encourages the well-to-do to transfer income to private agencies. Conservatives want to see the size and scope of government reduced. Fine, the way to do that is to privatize as many as possible of the services government provides. I mentioned NASA in the proposal, but there's a lot more that can be moved into the private sector where people can decide how their money gets spent.

11/29/2011 — NJ, Minneapolis, MN

NJ: I appreciate the thought that you invested in this proposal. I think it is worth sending it to the candidates for their incorporation into their platforms. I wish that there was a way to get rid of lobbyists and political contributions to campaigns.

RAD: Thanks for the kind words. As noted in the proposal, the spreadsheet model is based on incomplete data. Until I can get that fixed, I'm not very willing to go more public than having a few friends comment on it.

Lobbyists and political contributions are indeed factors that do damage to our nation. They make it impossible for our representatives to consider issues on their own merits.

11/29/2011 — IH, Centreville, VA

IH: This deserves serious consideration. Well done! The implementation of such sweeping changes would likely take years, don't you think? I'm sure that detractors would have fun imagining unusual consequences of various transfers of income and their permutations, but it certainly makes good, mathematical sense.

RAD: Thanks for the kind words. I'm sure there will be people who consider me a complete fool for ever tackling something so above and beyond my area of expertise. What bugs me is that we live in the best educated nation in history, but so few people take the trouble to seriously consider our problems and search for solutions to them. Instead we are inumdated with trivia by the media.

IH: Logically, the weakest statement in the whole essay was the one prohibiting transfers to a receiver over which one has control to gain some advantage. That makes some sense but it is immediately followed by an exception for parents transferring to children. It's a little inconsistent there. Not fatal to the overall set of proposals, though. Really excellent suggestions and very well explained.

RAD: Go back to the extended example in the proposal about the family of four and how it can reduce its tax burden by transfering income among its members. I stated clearly that it was nobody else's business how the parents actually spend the income transferred to their children, over whom they had better have some control. This is a necessary exception for families, but not for anyone else.

IH: Interested to hear if you can get some traction with this at a thinktank, tax policy watchdog group or staffer for a currently elected official.

RAD: Time will tell. My next step is to get more and better input data for the spreadsheet.

11/30/2011 — JW, Easton, MD

JW: What qualifies you to write tax code ?

RAD: I’m not writing tax code. I’m just putting together ideas that I think might lead to a more rational, fairer, and more understandable income tax system. My preliminary spreadsheet model, as incomplete as it is, indicates that I may be on to something. Hopefully I’ll be able to get better data and see where it goes. The more my proposal is critiqued, by thoughtful citizens like you, the better it will be to work out its bugs. The bottom line is that I am someone who likes to tackle tough problems and find solutions to them. Whether my solutions are ever adopted is another story, but at least I tried.

By the way, what makes you think that the legislators who created the current mess had any more of an idea of what they were doing?

11/30/2011 — KB, Roseville, MN

KB: I wouldn't presume to comprehend all of your tax plan. I only know very simply that there is great injustice in our country today and that the rich are steadily getting richer, the poor are getting poorer, and the middle class is being squeezed out entirely. Personally, I believe in unions that give a voice to the average working person, a sound Roosevelt type plan of insurance, (social security) for the future of all those who have worked hard throughout their lives, regardless of their capacity or where with all to fend for themselves." A country is judged by the way it treats it's poor and elderly!" To privatize this system is to show total insensitivity for those older persons who are truly incapable of understanding how to manage or manipulate, if you will, their futures! The wall street predators would very quickly figure out a way to skillfully appropriate their entire life social security savings. To my mind, a future country filled with greedy, self serving people, will only end up by imploding on itself. Although I don't really understand all the complexities in your tax reform plan , I applaud you for having offered your time and effort in presenting it.

RAD: I hope you didn't get the impression from my proposal that I want to privatize Social Security; I don't. But I do want to change the way it is financed so that all the crazy talk about Social Security running out of money by 2030(?) will go away. The problem is that people have a misconception that it is some kind of insurance policy or annuity; it isn't and never has been. It is an obligation by the Federal government to pay benefits to retirees who have accumulated a certain number of work-time credits. The FICA wage tax is actually a second income tax, but a regressive one that is only paid by wage earning, lower income people. The rich mostly escape this tax because of the upper limit on the amount of wages taxed ($106,800) and because most of them get their income from dividends and capital gains (which are also taxed at lower rates than earned income).

What I propose is that the FICA wage tax be abolished and the full amount of the tax be returned to employee paychecks, including the employer paid part since it is a fiction that it is anything but part of the employee's compensation. Part of my proposal is that the financing of Social Security benefit payments should come from a uniformly assessed tax on ALL income. The fiction of the Social Security Trust Fund can be maintained, if necessary, but it is just that a fiction. The so-called bonds held by the Trust Fund could be burned and it wouldn't make a bit of difference in the government's obligation to pay benefits.

12/03/2011 — JMW, Duxbury, MA

JMW: I think your proposals for levying taxes are worth considering, but the real problem--as I see it--of controlling government spending has to do with the military. The last time I checked, the U.S. was spending over 57% of its budget on the military. When you add that to the amount it costs the government to pay interest on the national debt, it's no wonder that we are currently in trouble balancing the budget. When we waste hundreds of billions of dollars paying for wars that have done little or nothing to safeguard the U.S., I think that no fancy footwork regarding taxation is going to solve our fiscal problems. Cut military spending by 30%, and the money freed can be spent on the poor, the elderly, and the unemployed. I admit that I am a pacifist, but even my father (who fought for the English in World War I) felt that war should always be the last resort, not the first, as George Bush seemed to believe. (By the way, I taught for the military in Europe and saw first-hand how wasteful the military can be.)

RAD: In developing the proposal I deliberately excluded any consideration of the spending side of government finance, including military spending. I agree with much that you said in your comment, but it’s simply too much for one person to bite off. Tackling just the taxation side bounds the problem and constrains the bad behavior of our politicians to just issues of spending. Today, there is a fundamental disconnect between spending and taxation. The attitude is that we can always afford another little war or another new weapons system or another social program. Once the country sees what the taxes have to be to afford the proposed budgets, there will finally be a nationwide demand to cut spending. One of the features of my proposal is that tax rates are automatically determined by the spending budget. The constant k in the Log tax formula

Tax = (k × Log10(Income) × Income) + Offset

12/03/2011 — SG, Lampassas, TX

SG: Rich, your tax plan sounds pretty good........but I'd have to raise the rent on my house in Austin by quite a bit to make up for the property tax deduction.

RAD: Eliminating all deductions probably would affect people who itemize deductions more than those who take the Standard Deduction, but it’s not clear by how much. That’s one of the questions that I want to answer when I get better data for a more complete model. In general, my proposal attempts to tax income more equitably (i.e., progressively) over the full range of personal and corporate income. This makes the total income of the nation a key factor in determining the constant k in the proposed Log tax formula. I hope to eventually be able to let people plug their own income data into a secure and private online tool so they can get a feeling of the impact of the proposal.

12/03/2011 — SM, Springfield, MA

SM: It seems that every one of these proposals lowers taxes on the rich, particularly people making >$500k, exactly those people who don't need it. And the people who will make up the revenue for the rich who don't pay?

RAD: It is true that my proposal eliminates taxes that conservatives have always hated (Gift taxes, Estate taxes, double taxation of dividends, and taxes on capital gains) that all favor the rich. But my proposal replaces all of that with a uniform PROGRESSIVE tax on all personal and corporate income.

The tax scheme I propose (what I call an Offset Log tax) has no actual top tax rate, so the rich do not get off tax free as you fear. This will become clear if you take a look at the preliminary model and the detailed description of the model. In particular, take a look at the charts that accompany the model.

12/03/2011 — DE, Bedford, TX

DE: The Demers plan ran off into the weeds when PROGRESSIVE entered the picture. Progressive is an unknown and uncapped percentage and that's not going to fly.

RAD: Don, progressive does not mean uncapped. The only way my plan could hit a rate of 100% is if the proposed amount of spending equaled or exceeded the total personal and corporate income of the nation. Short of that ridiculous event happening, the rate for those with multi-billion dollar incomes could go over 50%, but my proposal encourages them to transfer part of the income to other people and organizations or into tax-deferred accounts. Why would they do this? To lower their own tax rate and to contribute to whatever art, religious, political, scientific, etc. organizations they want and thereby gain social prestige. Don’t discount the later reason. I spent the afternoon at a marvelous art museum that is largely supported by local wealthy families.

12/11/2011 — MG, Montgomery Village, MD

MG: I enjoyed your essay. I am a flat taxer myself, but I think that your proposals would be better than the current system. In particular I agree with you that taxation should be neutral (i.e. just to raise revenue) and that there should be no deductions, exceptions, etc.

RAD: Taxes are a taking of personal property to finance social benefits, but most Americans would agree that it should be done fairly. I very much disagree with the claim that nothing could be fairer than everyone paying taxes at the same rate. A straight flat tax is regressive; it hurts the poor while being only a nuisance to the wealthy. Subtracting an offset from the calculated flat tax does help the poor, while modestly increasing the rate everyone else must pay, but it is still just a nuisance to the rich.

One argument is that to be fair, everyone should pay taxes equal to the benefit one gains from living in our complex society, but it’s hard to measure relative benefit. Another point of view is that fairness means everyone suffering relatively the same from having to pay taxes, but it’s also hard to measure suffering. That leaves income itself as the only viable measure. So to be fair, in terms of both benefits and suffering, the tax rate cannot be flat; it must increase as income increases. In other words, taxes should be progressive.

That’s why I like what I called a LOG tax in my proposal, specifically, an offset log tax. The tax rate one pays increases with the logarithm of one’s income. Other progressive formulas could also be used, but I settled on the LOG tax as being a good example of what I had in mind.

MG: I guess if everybody agreed on what was fair, then politics would be pretty boring.

MG: I have also flirted with the radical idea that we should not tax anybody's current income, but rather levy a 100% estate tax upon the deceased. It seems reasonable to me that I should be allowed the usufruct of my labors as long as I live, but shouldn't my heirs have to make their own way in life? Would this not be more fair, both for them and for society as a whole?

RAD: I must admit that I had to look up “usufruct” -- in Roman Law: the right to enjoy the use of another's property short of the destruction or waste of its substance - from Concise Oxford English Dictionary © 2008 Oxford University Press.

Regarding your idea of a 100% Estate tax, would it actually generate enough revenues to cover government expenses? You’d have to get raw data from the IRS and create a model, as I did, to see how it affects people in each income range.

I went the other way in my proposal, getting rid of the Estate tax and treating inheritances as assets transferred from one generation to another and handling it the same as any other windfall, such as a lottery winning, with the possibility of transfers to other people and organizations or to the future via a tax deferred account. That way, inheritances are fully taxed, but at the lowest possible rate commensurate with the receiver’s life style; the more of their inheritance they want to spend and the faster they want to spend it, the higher the tax rate they must pay.

12/11/2011 — JD, Minneapolis, MN

JD: In summary, I really like and agree with your ideas. I have a couple of questions and one main concern which I mentioned at coffee. "how to market the concept".

RAD: I'm leaving the "how to market" question in abeyance for now, while I concentrate on further developing the spreadsheet model. I am open to ideas on this subject.

JD: If I didn't read carefully enough I apologize but these are the questions.

JD: 1. How are transfers officially authenticated? Some type of 1099 process seems to be needed. I fear a potential for fraud.

RAD: My simplistic view of this is that when a person does their annual income tax forms, they declare all of the sources of their income, including income transfers they received, and all income they transferred to someone else. These transfers must identify the donors and receivers by tax id. This would be similar to a 1099 process, as you mentioned. I imagine the rules for transfers among larger scale entities, such as corporations and non-profits, would be more involved, but that's an issue for accountants. After that, it's up to computers to match transfers to and fro, and check for fraud. While this might seem to be a lot of processing for a nation of 350 million people, it's child's play for today's supercomputers.

JD: 2. Are all "reinvestments" tracked? E.g. Retained corp earnings, transfers to family members, transfers to Bernie Madoff-type people.

RAD: Part of my proposal is that assets can be freely changed from one form to another without tax consequences; from savings to bonds to stocks to mutual funds to physical property. This allows us to get rid of taxes on capital gains per transaction. At the end of the year, the only thing that matters in my proposal is the amount of value that was not reinvested in other assets; in other words, the difference in value between assets acquired and assets sold, which must be reported as income. Again, the actual bookkeeping is a subject for accountants.

Another part of my proposal is that assets can be freely transferred from one person to another without tax consequences. This allows us to get rid of the hated Estate tax and Gift tax. Again, my proposal is only concerned with the value of the assets transferred and not the form. Any part of that value that is not retained as an asset is considered to be income, the same as if a person sold one of their existing assets and kept part of the value as spending money. For example, a person could receive a farm as part of an inheritance without any tax consequences until such time as the farm is sold, and then, only the portion that is not reinvested in assets would be considered taxable income.

A big question in my mind is the extent to which these asset transfer ideas could or should be applied to corporations and non-profits. My proposal generally treats them the same as individuals, but there are scale issues to be considered further.

JD: 3. A few of the changes will be viewed as altering a "sacred cow", eg. Church tax free status, home mortgage deduction, capital gains and losses which can span multi year holding (risk-duration).

RAD: All proposals that seek to eliminate loopholes face this problem, including the much discussed, but highly regressive, flat tax. The best answer is that it's a trade-off between deductions that favor some people at the expense of others and lower rates for everyone.

The more difficult issue is the tax-free status of churches and non-profits regarding income that is transferred to them. My proposal treats all individuals and organizations the same in this regard; income they receive via transfers is taxable unless it is further transferred. Income they retain to finance their operations or to invest is taxable. It may be necessary for them to make a clear distinction between these two categories in their fund-raising; in other words, making sure that their donors are more generous on the operational side.

Regarding the old "separation of church and state" issue, there is nothing new here. Traditionally, churches have been tax exempt because it was argued (by the churches) that government should do nothing that adversely affects religion. The problem, today, is that a substantial portion of the American population (> 16%) belongs to no church and are being unfairly required to subsidize churches because of their tax exemption. In effect, the government has been supporting religion, which violates the separation idea. Fairness demands government neutrality towards religion, neither supporting nor harming it, and that is the position my proposal takes.

JD: 4. Overcoming the resistance to the concept of a fiscal federal budget. "if it's not budgeted, you can't pass a law to spend".

RAD: An automatic relationship between spending and taxation is highly desirable. Congress has been playing around with this idea for quite a while, but they've been going at it the wrong way, insisting that every program have a matching income stream. But that doesn't work because no one want to raise taxes to actually pay for programs. It's why we are so deeply in debt and why there are unfunded mandates that plague local government. My proposal takes a different approach. It automatically sets tax rates (the constant k in my Offset Log tax formula) based on a projection (a budget) of spending. The effect is, as you said, "if it's not budgeted, you can't pass a law to spend". However, I'm sure there are accounting ways around this; for example, by including an " unforeseen contingencies" amount in the budget.

JD: 5. Lastly, I have a concern about unintended consequences. The mathmatical model to portray the whole economy seems overwhelming to develop. It might take a battery of MIT-type research orgs to come close. It's not unlike the goal of going to the moon.

RAD: There are always unintended consequence to every system. We just need to do our best to foresee them and then adjust as we go.

I don't view the mathematical model behind my proposal as being particularly difficult. Calculating the value of k for a given level of spending might take a bit of computing, but it's not that difficult --- if you have good data regarding personal and corporate income. I've been doing it in a limited way in my spreadsheet model. However, you may be correct in terms of econometric modeling of the effect of my proposals of the entire economy.

JD: I think you're on to something but I don't have the wisdom to see how it can be implemented.

RAD: Implementation of the proposal would have to be a multi-step process, starting with a nation-wide debate of the proposal's merits.