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Shiva_TD
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Fixing Federal Taxation
Nov 29th, 2013 at 9:48am
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I have spent a long time reviewing federal taxation and identified numerous flaw in our current tax code that needed to be addressed. Below are my proposals

We have two forms of "income taxes" where first are the personal/corporate income taxes that fund general expenditures and we have the FICA/Payroll/Self-employment taxes that are dedicated to Social Security/Medicare so each needs to be addressed separately in two posts.

Personal/Corporate Income Taxes:

All income will be treated equally under the law regardless of source or who receives the income. Eliminate all personal deductions and tax credits and replace them with a flat exemption of $50,000/yr. per household (adjusted for inflation - that I'd like to eliminate but that is a different proposal - and based upon a four-person household which would adjusted based upon household size). All income below that exemption threshold would be tax free and all income above it would be taxed at the single fixed tax rate. The $50,000 threshold was established because it is slightly less than the median household income in the United States.

A "once-in-a-lifetime" exemption related to "windfall" income of perhaps $25 million will be instituted. A person could use this related to any "windfall" income such as an inheritance or winning the Powerball lottery. The individual would decided to use it but they can only use it once. All income above that would be taxed at the prevailing tax rate for the year. 

All small enterprise (e.g. sole proprietorships)  and corporate tax rates would be the same rates as the personal income tax rates and applied to net gross income (i.e. income above the actual cost of production and/or providing the service) of the corporation. Corporations would also receive the same proposed exemption from taxation on the first $50,000 of net gross income just like an private household filing a tax return which would help start-up corporations. Eliminate all "special" deductions for corporations except for the "cost of production" in providing of the goods and/or services. Basically simplify the tax form to what's on a modified Schedule C today that a small business owner uses eliminating all special corporate tax forms.

Include "dividend" payments by the corporation as a "cost of production" as the taxation on these dividends will be paid for by the shareholders of the corporation. This eliminates the "complaint" of double-taxation on the same income.

The tax rate would be a single flat tax rate determined by government spending authorizations each year (including the financial obligation to pay off existing government debt).

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This is a general proposal but it accomplished many things.

1. It eliminates "favoritism" in our tax policies.
2. It funds the government by the upper 50% of income households that can actually afford to fund government.
3. It is absolutely fair because every household has the identical exemption from taxation (e.g. incomes of $50K or below for a household of four) and every household pays a Flat Tax Rate above that exemption.
4. It is Constitutional unlike the calls for Congress to impose a consumption tax with prebates as proposed by FairTax.org currently. The Constitution does not allow a Federal Sale Tax but the 16th Amendment does authorize the income tax.
5. It doesn't play "favoritism" with corporations, which are merely businesses owned by a lot of people, because corporations will pay the same tax rates as small businesses and individuals on gross income.
6. It balances the US budget the first year it's implemented because the tax rate every year is based upon authorized spending by Congress. If Congress increases spending then the tax rates will go up and if Congress reduces spending then the tax rates will go down.
7. The $50,000 exemption from personal income taxes (for a household of four) removes any income tax withholding below that amount and will reduce the need for welfare to mitigate the effects of poverty. It has never made sense to take money from someone in taxation and then give it back to them as welfare money or tax credits. It makes far more sense to not take the money in the first place. Of note this isn't much of a change as about 47% of households already have a zero or negative net income obligation already under current tax.
8. Similar to the proposals for a "consumption tax with prebates" it is actually "progressive" based upon applying the same "exemption" from taxation and the same "rates" above the exemption for all households in America based upon gross personal income of the household.
9. It eliminates off-shore tax havens based upon treaties the US is a party to that depend upon "capital gains" tax codes as the capital gains tax codes are abolished. 
10. By dramatically simplifying the tax codes it reduces the size and scope of the IRS. Because we would only report our gross income the IRS would not have nearly as much personal financial information about us nor would it require nearly as many "enforcement" agents as usually it's the "deductions" that are questioned by the IRS but this proposal eliminates all deductions for private tax filers and only provides for limited deductions (i.e. related to the costs of production including overhead) for enterprise.
  
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Shiva_TD
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Re: Fixing Federal Taxation
Reply #1 - Nov 29th, 2013 at 10:11am
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Here is the biggie as this proposal would dramatically reduce the size of government over time as well as increase the personal wealth of Americans.

The FICA/Payroll/Self-Employment tax is currently 15.3% but is not imposed on all income. This is a proposal for privatization which would all but eliminate Social Security and completely eliminate Medicare at the end of the transition period. That would represent about a 1/3rd reduction in the size of the US government at the end of the transition.

FICA/Payroll/Self-Employment Taxes for Social Security/Medicare

The FICA/Payroll/Self-employment taxes on the first $50,000 in personal income (regardless of source) would be
dedicated to personal (vested) private investment portfolios that are highly diversified and age-adjusted. This would be similar to current 401K's and Roth IRA's with the investment accounts using private investment firms that meet certain guidelines (e.g. no-load mutual funds).

All income above $50,000/yr would be subjected to the 15.3% in FICA/Payroll/Self-Employment tax to fund the transition to privatization of Social Security and elimination of Medicare at the end of the transition.

Based upon historic investment data we can expect a minimum return on investment of 8% and this would result in an average portfolio valued at roughly $3.6 million after a 45 year working career for maximum mandatory contributions. A minimum wage worker would have a portfolio valued at about $1.3 million. In all cases this "wealth" accumulation would provide more income than Social Security at retirement age fundamentally eliminating the need Social Security (except for a small safety net) and would actually provide enough income for the individual to afford private health insurance eliminating the need for Medicare.

A person or employee/employer could invest more in these accounts if they choose to do so increasing their personal wealth at retirement. These investment accounts could not be borrowed against and could only be withdrawn from for retirement purposes. If the person dies before retirement age these funds go to the heirs of the deceased to provide supplemental funding their retirement portfolios.

There would be no minimum age for retirement but "minimum income" criteria would established.

A maximum age (I propose 70 yo) would be established and a safety net provided where a minimum income is established (I recommend $30,000/yr) where a government subsidy would supplement the income of the person from their personal investment account as required to meet that minimum income level. (i.e. the Safety Net provision).

Since the vast majority of people would have well over $50,000/yr in income they could afford private health insurance (est. cost about $15,000/yr for those over 65 yo) eliminating the need for Medicare completely and a safety net providing a subsidy for those with less than $50,000/yr to fund health insurance in those rare cases. Those with $30,000/yr in income (my recommended minimum income that could include a safety net subsidy) would be covered by Medicaid.

As noted the cap would be lifted on the FICA/Payroll taxes and the revenues from incomes above $50,000 per year would be used to fund the transitional phase from the current Social Security/Medicare welfare programs. There is roughly a 45 year transitional period to "privatize" Social Security and Medicare that I estimate will cost about $40-$45 trillion overall. The costs of Social Security/Medicare is actually higher if we don't privatize it. At the end of this transitional period the "taxation" imposed above $50,000 (adjusted for inflation) would virtually cease to exist except as necessary to fund the safety net.

Medicare would disappear completely and Social Security would only exist as a very small safety net and the American People would be far better off financially in retirement.

This would also vastly increase the amount of personal wealth for low and middle income individuals where today the average personal assets are retirement age are only $100,000 and where a significant percentage have nothing at retirement age. Instead of "nothing" even a person that worked at minimum wage would have over $1 million is personal wealth at age 65. We need to note a single fact and that is that 40% of Americans that pay into Social Security/Medicare today die before ever collecting any retirement benefits. Every dollar in taxation they paid is lost in taxation. Under privatization this money belongs to them, plus the return on investment, and that wealth is transferred to their heirs as opposed to being lost tax dollars sent to the US government. Virtually all of this "money" comes from low and middle income workers in America today.

A "safety net" could still exist but because of "privatization" there would be little if any need for it. The current projections of insolvency for Social Security/Medicare are solved without reducing benefits or significantly increasing the tax rates. Because all personal income would be subjected to the "FICA/Payroll" taxes it would greatly expand the revenues to pay benefits during the next 45 years.

Generationally the wealth of American families would also increase as the assets accumulated by one generation would be transferred to the next generation at death.

This is the only pragmatic and responsible proposal I'm aware of related to privatization of Social Security and the elimination of Medicare.
  
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LibertariCAN
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Re: Fixing Federal Taxation
Reply #2 - Nov 29th, 2013 at 10:19am
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I'll have an honest look at this a bit later today.
  

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keauxbi
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Re: Fixing Federal Taxation
Reply #3 - Nov 29th, 2013 at 4:31pm
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6. It balances the US budget the first year it's implemented because the tax rate every year is based upon authorized spending by Congress. If Congress increases spending then the tax rates will go up and if Congress reduces spending then the tax rates will go down.


And thus the republic dies.  In your proposal taxation is tied to spending rather than spending to taxation. 

What WILL occur is that congress will spend whatever it wants, whenever it wants, as much as it wants.  Taxes will be raised no matter how high or how damaging to pay for the expenditures already implemented into law.  Eventually the top tier of Americans that "can afford to fund government" will either be bled dry or will flee the country to protect their wealth and where will government turn to fund its desires?  Just as the income tax was initially only placed on the wealthiest Americans and eventually spread to all Americans, so will this proposal.

The deficits and debt have always been a spending problem not a taxation problem.
  

Keauxbi
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Re: Fixing Federal Taxation
Reply #4 - Nov 29th, 2013 at 4:46pm
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Disregard, written by Shiva.
  
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keauxbi
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Re: Fixing Federal Taxation
Reply #5 - Nov 29th, 2013 at 4:56pm
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I would like to see the math and statistics he uses to come up with this.

        $50,000 exempted for every household
x 150,000,000 households
    $7.5 trillion exempted from taxation.  The federal overlords will not be pleased.
  

Keauxbi
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Liberalterian
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Re: Fixing Federal Taxation
Reply #6 - Nov 29th, 2013 at 5:02pm
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I prefer the Fair Tax.
  
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keauxbi
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Re: Fixing Federal Taxation
Reply #7 - Nov 29th, 2013 at 6:31pm
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Liberalterian wrote on Nov 29th, 2013 at 5:02pm:
I prefer the Fair Tax.


  

Keauxbi
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Josh
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Re: Fixing Federal Taxation
Reply #8 - Nov 29th, 2013 at 7:06pm
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I like big butts and I cannot lie.
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Shiva_TD
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Re: Fixing Federal Taxation
Reply #9 - Dec 1st, 2013 at 8:12am
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keauxbi wrote on Nov 29th, 2013 at 4:31pm:
And thus the republic dies.  In your proposal taxation is tied to spending rather than spending to taxation. 

What WILL occur is that congress will spend whatever it wants, whenever it wants, as much as it wants.  Taxes will be raised no matter how high or how damaging to pay for the expenditures already implemented into law.  Eventually the top tier of Americans that "can afford to fund government" will either be bled dry or will flee the country to protect their wealth and where will government turn to fund its desires?  Just as the income tax was initially only placed on the wealthiest Americans and eventually spread to all Americans, so will this proposal.

The deficits and debt have always been a spending problem not a taxation problem.


Actually the exact opposite is true.

The primary financial supporters for political candidates virtually all come from the top 50% of income earners with the top 1% representing all of the major financers of politics. The problem is that they don't have to pay the taxes necessary to fully fund authorized government expenditures so they don't complain about them.

I ran the number once but didn't write down the calculations but the tax rate to fund $2.5 trillion in general expenditures was somewhere around 35% if one-half of all personal income was taxed in the United States (which is about what happens with my proposal).

As we know the primary funders of federal politicians are very wealthy investors (not workers) all within the very top of the top 1% of income tax bracket. Many of these, such as Mitt Romney with over $22 million in annual income based upon his 2011 tax return, would see their tax burden over double (Romney only paid about 14% in 2011 and I paid over 28% in 2011 with only a fraction of Romey's income).

While doubling the tax burden of someone with over $20 million wouldn't negatively effect their lifestyle (they make far more than they spend for "living" expenses as extravagant as their lifestyle might be) they would be shocked to have to pay 35% in federal taxes and THEY WOULD DEMAND LESS SPENDING!!!

It's very easy for the super-wealthy to support extravagant federal spending today because they don't have to pay for it. They have a lower tax burden relative to income than anyone in the lower 99% of income earners which is what my tax proposal eliminates.

That would change under my tax proposal and those that fund political campaigns are really the only ones that have the influence necessary to reduce government spending.   

Of course the belief that "The deficits and debt have always been a spending problem not a taxation problem" is very myopic.

Deficit spending is both a taxation and spending problem.
  
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