T Nation

A Taxation Proposal


#1

Version 2.0

Changes in Italics.

Okay, this will be long and incomplete for now, but here goes…

Follow along here: https://www.irs.gov/pub/irs-pdf/f1040.pdf

Warnings: This is NOT a simplification of the tax code. I think that’s a pipe dream and as most know I’m not a flat tax fan, consumption tax fan nor will I likely argue for anything other than a convoluted progressive tax scheme, if we’re going to have an income tax.

So let’s take care of the hypocrites first: Form 8777

This form will flow to be the new line 45 (shifting all other up one). On this form will be “voluntary additional income taxes paid”. It will be a place for all those “fair share” crybabies to put up or shut up, and in addition to this, allow them to self direct 65% of it. That’s right, you want to kick in more for SS, or education or military spending? You can on this form. On the form will be listed a bunch of departments and programs (SNAP, WIC etc) where if you elect to pay an additional $1,000, $650 will go to that program, $350 to the general account.

We’ll even have infrastructure with a listing for the state to which the finding will go. Mah roads.

Now let’s take care of the lower wage earners:

For earners with less than $50/100k of AGI, they get an automatic, above the line deduction of $12k. This effectively means you can earn up to $12k and pay zero tax on it. The next $8 is automatically taxed at 10%. So someone that makes $20k will owe $800 in tax, no exceptions, it’s the bare minimum. Character of income is irrelevant, except taxable SS or pensions. Retirement payments aren’t subject to the mandatory tax. For AGI’s over $50/100k but less than $300/500 the numbers flip and the minimum becomes $1,200. Over $300/500 has no auto above the line, and has a minimum tax of $3000/5000

The new standard deduction is $20k/40k for all earned income, $5k/10k for unearned. If you don’t utilize your unearned SD, it can be applied to your earned income if your AGI is less than $100k/200k, phasing out by $125k/$250k

This means, Omar Jones and his Wife Detri can make up to $70,000 between each other and owe $800. Then every dollar they make up to $88,550 is taxed at 10%, so on and so forth using the marginal rates. That means if they made $100k together, they would pay $5,873.

The first 70k is _effectively_wiped out. That leaves 30k of income taxable (100k-50k standard deduction & automatic above the line of 12k +8k) the first 18,550 is taxed 10% so $1,855 and the rest (30k-18550) $11,450 taxed at 15% or $1,718, then add the $800 min for a total of $4,373 or effectively 4.3% of their income.

If you have over $1m of any combination of income, your standard deduction or itemized deductions MUST REDUCE INVESTMENT INCOME, LOWEST RATES, FIRST. It should be noted here that this will greatly reduce the need for something like AMT.

So under this new scheme, lower wage earners get a YUGE tax break, and higher earners still get the benefit of the higher itemized that comes with that kind of income, but it will push up effective rates as the long term cap gains and qualified Dividends are wiped out first.

(Note itemized rules dont’ change, other than the income limit reductions shitty Obama put back in.)

But Beans what about mah charitable deductions? don’t worry homie I’m right there with you, give a lot of money and time to charity.

If you itemize, there is no change. If you take the standard, you now get an above the deduction for charitable deductions, it will be the new line 35.

Group 1 has 50% limit on deductibility of charitable donations, lifetime carryover, including estate taxes. To be in group 1:
Earned income <$300k/600K
Investment income <$25k
AGI <$400/800

Group 2 has a 30% deductibility limit, same lifetime limit. (can only reduce AGI by a max of 30% using Charitable donations) To be in group 2:
Doesn’t qualify for group 1
AGI <$3m for both married and single

Group 3 has a 25% deductibility limit, with a lifetime carry over.

Tables

Current tables change to for married (take half for single):
0 - 18550 = 10%
18551 - 300,000 = 15%
300,001 - 999,999 = 20%
1,000,000 - 5,000,000 = 23.5%
5,000,001+ = 27%

Alternative min tax

This shit becomes simple as fuck.
If your AGI <500k/1m, you are exempt.
If your AGI is 500k/1m - 2.5m/5m you min tax rate is 21%
If you’re above that your min rate is 24%.

Taxpayer can elect to “save” 50% of their total AMT (amount of additional tax over regular due to high wage earnings) and apply it as a credit to their estate taxes. So for instance, if someone pays $32million in AMT over 60 years, they get a $16million credit on any estate taxes upon transfer.

Otherwise, 20% of the prior years AMT can be used as a credit for current year’s AMT to the extent your income is from investments. So if 20% of your prior year AMT is $8,000 and 40% of your income is investment income, you get a $3,200 credit. This helps cut the pain of losing the favorable Cap Gains and Dividend rates with the simplified AMT.


#2

Additional Retirement

The IRS will allow up to an additional 5k of your earnings to be deferred into Treasury Bonds a year, that will not pay out (but accrue) interest until you are 70. Interest will be calc’ed at whatever the AFR is, but payout cannot exceed 10x what was paid in. At 70 you are allowed to take a lump sum, tax free on principle, and do whatever the hell you want with it, or defer it in it’s entirety to your beneficiaries upon your death, 100% tax free.

So rich people won’t need to take it into their estate, and allow the government to defer the payment out, and you avoid any estate taxes.


#3

I don’t think one of my clients would want to pay voluntary additional income tax. Why include it? Sounds like a charitable contribution to the government … Would it just be to placate the “fair share” crybabies as you say?


#4

What percentage of US household’s make over $60K? If I’m following correctly aren’t you reducing the tax pool even further than it already is?


#5

Yes, for the most part it is placating.

What it also does is gives people some sense of ownership and involvement. It gives you a hell of a lot more “say” in what goes on than a vote, and it’s actually doing something productive rather than bitching and moaning on facebook about how others don’t pay enough. This allows you to pay into a system you love.

I mean, imagine if Bernie said “hey, looks like I’m not going to win this, but I’ll keep fighting, put any more donations you’d send me to form 8887 and code it to Student Loan relief”

And no, none of my clients would fill it out either lmao. It’d be a dust form in our software for sure.


#6

yes.

This isn’t revenue neutral by any sort of math I don’t’ think, and certainly places more burden on high wage earners.

But what it does do is make tax planning easier and makes the worst possible hit 27% of every dollar over 5m. And 23.5% for every dollar between 1 & 5m. (This isn’t much different than what I normally see anyway, so not much changes.)


#7

How about a flat consumption tax that replaces the income and the capital gains tax? I think there are a couple of advantages:

  1. It’s progressive by nature. Higher consumption means higher tax liability. I would build in exceptions for necessities, but that does muddy the waters a bit.
  2. It incentives saving both generally and for retirement.
  3. It affords taxpayers greater monetary flexibility and choice in how much they will pay in taxes.
  4. The rate can be manipulated (double edge sword) during times of recession to promote spending.
  5. It should eliminate a significant portion of IRS bureaucracy, but a portion of the IRS will need to pivot to collecting this tax from businesses. It will have the same effect on public accounting (sorry Beans)…
  6. No more individual tax filing will be required.

The trick would obviously be to figure out a suitable rate, what if any exemptions should exist, and if the rate should be fixed or variable.

I think that would be the hardest selling point. If memory serves, only about half of US households pay federal income tax and that’s around $50k or so.

If I was in this group my concern would be what will happen to these rates in the future. You’ve effectively reduced the number of people with skin in the game so when a recession hits or another war is fought this smaller percentage of people will need to shoulder an even greater share of the burden, right? Thinking as a client, why would I care if planning is easier? That’s why I pay you $400/hour…


#8

You end up with a huge cliff at $100k.


#9

How so?

Not saying you’re wrong, saying point it out so I can fix it.


#10

No lol.

If one is to use the assumption that velocity of money is paramount to growth (which I like to use) then an income tax depresses velocity of money somewhere in the middle. A consumption tax depresses it in the beginning.

The sad and likely truth is we’ll never be anything but a service and consumer driven economy again. So the last thing I want people to think is “I shouldn’t buy that because I of the taxes.” I’d rather people say “my taxes and bills are paid so I can go buy that.”

It’s similar to why a transaction tax on trading is a horrid idea.

Oh, I’m well aware this isn’t going to be all that popular lol, on that front.

That said, it’s easier to sell “nominal tax changes, so what in your favor sometimes” to high wage earners, than it is to sell Bush tax cuts to lower earners. Even though Bush era cuts reduced the burden of EVERYONE, because high earners pay so much more of the taxes, it’s easily spun into “benefits the rich”.

This isn’t a complete package, that’s in part why I want feed back.

As is, yes. Which is why I wanted you to post lol.

Going to need some sort of business credits here to increase hiring…

The main goal here so far is as follows:

  1. shut the fucking progressives up without taxing the nation to death
  2. stop crushing lower to upper middle incomes so they can never become upper upper (I’m currently here lol)
  3. lesson the R/E bubbles

I know I’ve got to work in some relief to upper earners too in order to sell it.

Planning involves actions on your part. I can only tell you the consequences of actions. If we all know the top hit is 23.5%, there is less need to delay certain things or we can accelerate things if the tax savings from waiting aren’t higher than the increased margin.


#11

Can you explain this further? With the income tax, my wages are depressed before they even hit my bank account. Isn’t that depressing the velocity of money from the beginning?

I do get that, but to play devil’s advocate, take home pay is higher and people are still more than likely going to buy what they want anyway. Honestly, I think you’d see a spike in monthly spending if people started bringing their gross pay home. How many people get the interest free loan to Uncle Sam back and then turn around and spend it. You’d really just be creating a smoothing effect.

Speaking of which, what are you doing, if anything, with corporate income tax?

lol

Under the current system, how much would a household making $100K pay in fed income tax? I’m curious how much of an impact the adjustments you’re proposing would have.


#12

But, what about the poor IRS employees that will be negatively impacted? Oh, I know we can ship them over to the other sinkhole that is the USPS.


#13

From your beginning yes, but you are at the end of the initial cycle.

Build capital
Invest in venture
Hire earners
Sell products
pay earners

then

shed capital into new venture/reinvest for growth.

You then take your wages and create step 4 for a business above. So yes, taxation robs YOU first, but robs velocity of money in the middle. This is borderline semantics, and if someone can show a strong case that velocity of money isn’t very important it all bunk. But it’s the general assumption I’m running with right now.

Depends on the person. It wouldn’t change my spending, just increase my savings, which is the faster I move the fuck out of MA. I alredy have a budget that pays all my bills, saves between 14-25% of my yearly earnings and allows me to piss away a handsome sum on whatever the hell I want. So it does nothing for me.

But, I make good coin and so does my wife…

I have buddies that would spend more, but more of them would be like “holy shit I can finally save for retirement”.

You could be right…

C Corps? Ehh, not too much until I see how the rest unfolds. I’ve got some credits in mind though.

100k? As in W2 income, AGI or taxable income?


#14

Thanks for the explanation. That makes sense.

Ya, I think our perspective is a bit skewed because of the nature of our work. It would help me save as well, but I also do my best not to give Uncle Sam an interest free loan whereas I have friends in non-finance/accounting fields that not only don’t care that they’re giving the Fed a break, but actually like it. Their typical reasoning is “It’s built in savings for ______(insert expense)”.

It blows my mind, but it is what it is.

As in W2. I realize that’s sorta difficult because of varied deductions. I’m just curious how much more, in general, the working/middle class would get back/save in taxes since you mentioned this should give this group a leg up to reach the upper class.


#15

Married couple in MA, probably 10-11k, so 10 or 11% effective rate, obviously depending.

Cost of living and owning vs renting will shift that number around. Owning in higher cost of living brings it down, renting brings it up irrelevant.


#16

It’s hard to argue with basically a 50% reduction in your effective household rate.

How much less revenue do you think your plan will generate? One of the criticisms I had of Trump’s plan was the lack of budget cuts to coincide with his tax cuts.


#17

If everything else stayed the same? a lot, too much likely.

So that is why I need to finish fleshing out my pay increase incentives. (Yes @nickvr6 I’m going full on statist lol.)


#18

this is a fascinating thread. I don’t have anything to add in substance as this is outside my expertise but I’ll be reading. Very interesting plan!


#19

If I understand your proposal correctly, what I mean by a cliff is that there is a huge tax advantage to making less than $100k that vanishes the minute you make a dollar more than $100k. If I make $99,999, I can take a $60k deduction (for my wife and me). If I make another dollar, I’m stuck with the regular deduction. I think that a good tax system should never cause your take-home pay to go down if you get a raise.


#20

That isn’t the way I’m intending it to flow. Please quote that portion that is leading you here so I can clean up the language.

Edit: I think I see what you’re talking about. I’ll clean it up later. I know why you are thinking that.

I want to add more anyway, so I’ll clean up that issue when I do…