Our analyst and commentator Lloyd McAulay writes: \u00a0Discussion of the increase in economic inequality became noticeably more frequent recently. The best selling Thomas Piketty book on \u201cCapital\u201d\u00a0has prompted much of the discussion. A main technique for reducing inequality has been through the tax code. This article\u00a0discusses the personal income tax code with reference to the United States. Other articles will discuss the business tax code,\u00a0the inheritance tax, an asset tax (which is proposed by Piketty) and non-tax matters, such as the minimum wage, relevant to\u00a0income inequality.\u00a0I do not know enough to be sure of the thresholds or even of the rates set forth in the following. But with that caveat, I can structure\u00a0an approach and assume thresholds. The biggest unknown is the amount of income that is now free of taxes or , like capital gains,\u00a0subject to reduced tax rates.<\/p>\n
1. A No Tax Threshold of $60K. I suggest a family income of up to $60,000.00 as the starting point for income tax. This means no\u00a0income tax on the first $60K of any family’s income. I think in our amazingly prosperous economy, that those who are in the lower\u00a0half of income should pay no income tax. Remember that they pay Social Security, sales tax and those taxes, such as\u00a0corporate and real estate, that are part of the cost of doing business and thus incorporated in the price of goods and services. \u00a0My $60K suggestion recognizes that median family income is about $55K. I up that threshold by about 10% to cover the\u00a0fact that I propose no deductions for anything, including charitable contributions, mortgage interest, local income tax, and\u00a0medical expenses. The $60K threshold might be affected by what is collected by items 2 and 3 below. We should consider\u00a0a single rate structure for individuals and do away with head of household and married filing jointly forms. \u00a0This would reduce the threshold under which no taxes are paid.<\/p>\n
2. All Income Fully Taxable. This is just what it says. I urge no special treatment for dividends, capital gains, local\u00a0bond interest, inheritance and other so-called \u201cunearned\u201d income. The $60K threshold means some unearned\u00a0income would not be taxed anyhow. How much tax this approach produces affects the threshold and the tax rate.<\/p>\n
This unearned income should be subject to withholding. Since I treat dividends as fully taxable personal income,\u00a0I would treat them as a corporate expense.<\/p>\n
3. No Deductions. The $60K can be looked at as including a modest standard deduction since median family income is\u00a0probably under $55K. Eliminating deductions is tough to achieve politically. This proposal eliminates a vast amount
\nof so called tax compliance. There will be no deduction for charitable giving, mortgage interest or medical care.\u00a0I have read that there are 300 items now covered by deductions and special tax treatment.<\/p>\n
4. No Charitable Deductions. One advantage is that it gets the government out of the business of deciding what is a charity. \u00a0Why is the Metropolitan Museum a charity and Bartlett Farms not? Why is it a charitable act for MOMA to show films and it is not for\u00a0Loews to show films?<\/p>\n
5. Inherited Income. All inherited income should be treated like any other income and taxed at the rate which applies to\u00a0the individual getting that income. This means no separate estate tax. Briefly: employ an inheritance tax and\u00a0not an estate tax.<\/p>\n
6. A \u201csort of\u201d Flat Rate. On income over $60 thousand and up to about $2 million, I suggest a flat rate at\u00a0an amount to cover tax requirements. I wildly guess that this will mean a rate below 40%. It is a function of how\u00a0much is pulled in by taxing all income. There may be some trade-off between threshold and this rate. Because the
\nthreshold is high, this kind of flat rate becomes what is called \u201cprogressive\u201d. (i.e. mathematically progressive). \u00a0If the \u201cflat\u201d rate is 40%, a person earning $120K, would pay $24K (0.4 times 60K); an overall rate of 20%.<\/p>\n
7. A Millionaire Rate. The amount over $2 million, could be taxed at a maximum feasible rate. Going over 50% probably\u00a0results in too much tax avoidance. This is hard to gauge. The federal rate should take into account state and city rates\u00a0so that the tax payer\u2019s top dollar rate for all three income taxes will not exceed 50%.<\/p>\n
8. Increase the Ceiling for paying S.S. Tax. The S.S. tax and Medicare tax should extend to all income up to where the\u00a0millionaire rate kicks in. These taxes are essentially a flat tax rate component of income tax.<\/p>\n
9. Negative Income Tax. Keep this tax for the lowest earned-income group. It is also called the earned income tax credit.<\/p>\n
The above would reduce the tax code enormously . It would reduce efforts now made that distort economic\u00a0decisions in order to gain legal tax advantage.<\/p>\n
Policy Considerations that are relevant to the above:<\/p>\n
1. Those who benefit most should pay for that governance structure which protects the benefit.<\/p>\n
2. There is an aesthetic, ethical and even moral impulse against great inequality.<\/p>\n
3. It is efficient and thus good for the economy to have a simple system.<\/p>\n
4. It aids public acceptance for the system to be simple. I suspect that the personal income tax code\u00a0could be written in a few pages.<\/p>\n
5. It rewards work by low income workers.<\/p>\n
Our analyst and commentator Lloyd McAulay writes: \u00a0Discussion of the increase in economic inequality became noticeably more frequent recently. The best selling Thomas Piketty book on \u201cCapital\u201d\u00a0has prompted much of the discussion. A main technique for reducing inequality has been … Continue reading ![\"US](\"http:\/\/www.w-t-w.org\/en\/wp-content\/uploads\/2014\/06\/US-Tax-Code-300x214.jpg\")
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