Exemptions, percentages, deductions, taxable and non-taxable, EIC, interest earned... The tax "code" is named appropriately – it takes a code breaker for anyone to use, let alone re-write. Tax preparers – the people who are SUPPOSED to know what they're doing – get it wrong 56% of the time. Normal people actually do better, with mistakes on "only" 40% of tax forms.
But if tax codes are so hard to deal with that half the people out there can't do it right the first time, why do we have it so complicated in the first place?
The answer to that question isn't simple, but it's primarily based on the way we collect taxes. We take a percentage based on income. But we've defined income in odd ways. Some of it is employment income, Some of it is disability income. Some of it is capital gains income. And, of course, there are many others. Then we have the other side where you have a set numeric value for deductions without taking into account the cost of living in the region where someone paying taxes and taking deductions lives. Finally, you have varying tax rates with the shrinking middle class, having the most employment income with the fewest sources of "other income" and ways to avoid paying taxes, getting taxed the most (on an actual dollar amount and as a percentage of what they earn).
It's a major fuster cluck.
There have been calls to simplify the tax code, most of which amount to little more than a "flat tax". Yes, it's simple, but it's patently unfair. Herman Cain's infamous 9/9/9 tax code would have increased taxes dramatically on the poor and given an amazingly HUGE tax cut for the wealthy. If you overtax people who can't afford it, they do odd things like dump tea into east coast harbors and talk about revolution. Only today the dumping would be of luxury cars, with their owners locked in the trunk, and the talk would be about class warfare.
These things don't make for a stable country or a good economy.
Now, everyone who's read all of my posts here knows how I stand on economic issues. Tax the wealthy the most because (duh) they have the most money to tax, cut taxes for the rest so they go out and spend their money in enough places in enough amounts to get the economy going and keep it going. But until now I've not come up with a relevant tax plan that could actually do this FAIRLY.
"Until now" being the operative words.
Behold my simplified tax plan:
In a nutshell, the idea is to make all income taxable, to consider the "minimum liveable income" level for the taxpayer's region, to calculate tax levels proportionately to the cost of living in the taxpayer's region, and to tweak things with easy-to-understand, plain language deductions that will determine what taxes you owe on your income.
Tax fairness should be how things work. And by fairness, I don't mean everyone paying the same tax RATE. As I've already mentioned, that's inherently UNFAIR, and it's also too simple-minded. The idea is based on what we have now - a scale. And the simplification comes from two things: Deductions and income.
That's all you deal with.
Income is all income regardless of source. That simplifies everything right off the bat. Social security? That's income. Disability? That's income. Capital gains? That's income. IRA's withdraws? That's income. But these things are only income when you take control of it – however briefly. If you make a withdraw from an IRA, that withdraw is obviously income. If you sell stocks, even if you reinvest it immediately, if the sale resulted in a profit, that profit is income. Inheritance? There's major income. No source of revenue is safe from being tagged "income".
If this seems complicated for the wealthy, it is. Screw them. The wealthy can hire people to figure out how much "profit" they had during the year, track the transactions and pay the taxes on them. They have the resources to do that and they are the only ones who would really NEED to do that. Most regular folks people have simple statements that show how much profit (interest income, etc.) they made that year and that goes into the "it's income" category. If you're a day trader, buying and selling every few minutes, and having to track the taxes on every transaction, I expect your head will explode. Then again, I also expect that it wouldn't take a rocket scientist to figure out a simple way to keep account of what income was made for a tally of taxes due. And you don't get a tax break for LOSSES, so if you lose your shirt after making a fortune, you still had income. There will be no "net income" (which is just a way of subsidizing someone's risky behaviors). In this way, investments once again add the risk they inherently have. If you made it, it's taxable. If you pissed it away, that's on you, you still owe the taxes on the excess you made. If you never made money on that investment, there's no insult added to injury.
Insurance payments on paid accounts are considered payment for losses and are not considered "income". Food stamps, welfare and other hand-outs ARE considered income. The onus of reporting your income is on you, as it already is. Only you report everything you made, whether you lost part of it or not, no matter the source.
Get the idea? If you made it, it will be income.
The next part will be relatively straight-forward. A table of deductions. LOTS of deductions. Are you a student in college living on your own? A deduction per semester per six hours of study. Kids? a deduction or three for each one (depending on what the deduction amounts will be). Disabled or Blind? Deductions. Senior? Deductions. The deductions are where the "breaks" come from, so that even if all sources of revenue are considered "income", the deductions change what you will pay in taxes. And the deductions are scaled so that they reflect a reasonable rate of taxation. Add up your deductions so you know what number to put in the "deductions" line on the tax form.
Federal taxes would be based on where you live using the average cost of education for your region. What's a "region"? That depends, but I'm going to say it is based on zip code. And if you own more than one domicile, even if you rent it out or share it or keep it strictly as a vacation home, the taxes you pay will be based on the HIGHEST tax rate of all the zip codes you enter. "Legal residences" would be in the highest taxed regions. The cost of education reflects the cost of living for most places. An average cost of living should produce an average cost of education. If the cost of education is demonstrably lower or higher than the cost of living, then the cost of living will be used. Basically, the idea is to tie the taxes to the region where the higher costs of living will be taxed at a higher rate. If you can afford to live there, you can afford to pay the taxes.
Conversely, the cost of living means the "poverty level" is HIGHER in places where the cost of living is higher. So the last part of the puzzle is to start taxing at the point where you start earning a liveable income for your region. If you make below the poverty level for your region, you don't pay federal taxes. Your deductions tell you at what level of income your taxes actually start and it's scaled from there based on your income and the cost of living.
Although this SOUNDS complicated to set up, for the individual, its very simple. They add up total income from all sources. They add up their deductions. They look at a table that has their income in rows and deduction numbers in columns – all based on their region's cost of living or educational costs – and they'll see the taxes they owe in the column with their deductions. This may prove challenging to print, depending on the number of deductions possible. But the table method is simple and if it's numbers, it can be tweaked each year with relative ease. Of course, this isn't that hard to set up to be done online. If online isn't an option, one could call the IRS and request printed tax forms for their area. On-demand printing makes this more cost-effective for the government. One could even have it done by PHONE, by entering one's zip code, their income (to the nearest dollar) and their deductions, then be TOLD what their taxes are.
But the simplicity comes less in what the government has to do than by what the taxpayer has to do. They add up their income, add up their deductions, find the amount of taxes they owe, put in the amount they've paid and figure out if they get some back or have to pay more. That's it.
The "hard part" about doing taxes is done BEFORE the tax tables are published, and is done by the federal government instead of YOU. They would determine the liveable income level using the cost of living or educational costs of that region below which, as mentioned, no one would be taxed. They would then create a percentage of income to tax based on the COL's or EC's for each region using the liveable income level of that region as the starting point for taxes. Deductions would push up the starting level of taxable income, and would scale the same way.
This way, all income is reportable regardless of source or type. Taxes are fair based on this because if you don't make a liveable wage, why are you paying federal taxes? You already pay state taxes and sales taxes and both of those are hurting you. If you are making a liveable wage, your tax rate will always make sure you are taxed so that you make a liveable wage. The amount taken out in federal taxes won't make you suddenly be below a liveable wage for your region.
Nothing is complicated for the tax payer and it's all pre-calculated based on region COL's or EC's for the region and deductions. So your tax form would have five lines. Income from all sources, deductions, taxes due, taxes paid and the difference (if any), which is what's due the government or your refund. Your refund would not be considered income.
There are instances where some people will pay more – but they'll be more able to afford it than others. Medical expenses? We have Obamacare. You should have insurance. If you're making a liveable wage, that should include such expenses. If you're not, well, the most we can do for you is not tax you. Maybe they can scale deductions based on the KIND of medical expenses you have. But you don't do any more complicated math than adding up your deductions and figuring out whether you owe or are owed.
A lot of tax preparers will be put out of business by this, but I don't necessarily see that as a bad thing. Most of them can't do the job right, anyhow.
But this idea addresses the notion of fairness in taxes (the wealthy pay the most, the poor pay the least) by basing things on income, liveable wages and region. Making sure those who can't afford it aren't taxed and making sure those who can, are, and dumping the whole damn mess of figuring out a fair tax onto the government instead of the people by using the cost of living or educational costs (whichever is the most accurate reflection of the region). By making all income taxable, and tweaking things via deductions (which should be easily understood which you can check off), it simplifies the whole thing for the people who are actually trying to DO their taxes.
No muss, no fuss, no tricky crap.
The government may get a headache figuring out how to tax people, but the taxpayer won't, and that's the whole point to simplifying the tax codes.
