At Work

Time to rethink taxes

We know that the lowest 50% of taxpayers pay only 3.3% of total income taxes. We also know there are all types of tax provisions favoring different groups such as homeowners, older Americans, employees of large companies and government, investors, etc. Each provision found its way into the tax code via lobbyists or policy makers with the intent of accomplishing something … and generally ignoring the consequences. Further, once in place, despite changing times and goals, these provisions generally stay in place. All of this distorts the effective tax rate actually paid. 

Isn’t it time to rethink this mess? Of course we all know it is; so what’s stopping us other than easily influenced politicians, special interest groups and the thousands, if not millions, of Americans who have a vested interest in a complex tax code … mere details 😜

Nothing new here but consider this and ask the guy you plan on voting for; why not⁉️

  • No income tax on first $40,000 of income (with some form of phase in possibly using temporary tax credits so there is no disincentive to earn more)
  • No deductions or exclusions of any kind
  • Graduated flat tax from 10% to 35% at the highest level
  • Lower corporate tax rate available with incentives for reinvestment, expansion, hiring and increased worker total compensation. For example, exclude from corporate earnings $1.05 for each $1.00 increase in worker compensation (not necessarily cash). 
  • To cover cost of phase in period and if lower revenue is generated, add a value added tax (VAT) on certain goods and services with tax rebate applicable to households with total income under a specific amount so that tax is not regressive. 
  • Eliminate all pre-tax defined contribution retirement plans, replace with a single vehicle, employer and/or individually sponsored, and make all earnings on such plans tax-free when withdrawn during retirement. Limit annual contribution to 15% of gross income up to $1,000,000 a year. That is, maximum annual contribution (with-tax free earnings) on an after-tax basis of $150,000 (A person earning $40,000 a year who contributes 10% to such a plan could, after forty years have 100% income replacement tax-free not counting Social Security {assumes monthly contributions and 8% average annual return and does not account for any increase in earnings and hence a higher dollar contribution as well} 
  • In conjunction with the above, prospectively eliminate Social Security COLA for all beneficiaries who begin Social Security with the maximum benefit. 

Comments❓

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8 replies »

  1. You can call me a middle-classer …. retiree, father, papa, not rich but doing OK for me. I’ve never held back from contributing to church, worthwhile funds and other causes. I have to admit that the $5,000+ deduction looks great at tax time. Discontinuing the tax benefit would not change my thinking. What would I be losing, maybe 15% of it? But many may not think that way. The real loser, though, might be the charities. I believe that many people might hold back on giving over the $$$ just because the tax benefit is gone. And then, I see those nasty little exceptions coming back — together with the special interest guys and the paid lobbyists who do the pushing. In the end, will we improve things?

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    • Over 2/3 of filers use the standard deduction. I think the government should get out of the business of picking winners and losers with the tax code. Get special interest out of the tax code. Also, the standard deduction should be the same for each taxpayer. As for charities, let everyone deduct any money given to charity above the standard deduction, problem solved.

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  2. I’m reconsidering. I’m thinking of eliminating the income tax and social security wage taxes while implementing an 18% sales tax – no exemptions, no deductions, applied prospectively – so all income is taxed when spent… And savings and earnings thereon are not taxed until spent. Basically, this is an 18% tax on all income less any savings – which are not taxed until spent, or at death (no exemptions or deductions). Long term capital gains for investments in place as of the changeover date would still get a capital gains rate. All other long term gains (including real estate) be taxed the same 18% once realized.

    Totally efficient. Still working on it.

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  3. *No income tax on first $40,000 of income (with some form of phase in possibly using temporary tax credits so there is no disincentive to earn more)
    *No deductions or exclusions of any kind.

    -this would be a really tough sell. No charitable deduction, no mortgage interest deduction. No exclusions (IRA, 401K, 457 plans.)

    *Graduated flat tax from 10% to 35% at the highest level.

    – This is a contradiction in terms. A tax can be flat (one rate)or progressive, not both.

    *Lower corporate tax rate available with incentives for reinvestment, expansion, hiring and increased worker total compensation. For example, exclude from corporate earnings $1.05 for each $1.00 increase in worker compensation (not necessarily cash).

    -Lower corporate rate would be good to bring back corporate money held overseas and stopping corporate inversions but fine sounding incentives usually become loopholes down the road and don’t do much for simplifying the code.

    *To cover cost of phase in period and if lower revenue is generated, add a value added tax (VAT) on certain goods and services with tax rebate applicable to households with total income under a specific amount so that tax is not regressive.

    -Not sure what you mean by this and whether you are thinking a VAT will be temporary to cover lost revenue. A VAT is a completely different animal. It is consumption tax instead of an income tax and is ultimately paid by the end user. Once a VAT is established, does anyone really think it will ever go away?
    Also when a consumption tax is placed on certain goods and not others it can have negative effects on the economy. Recall what the luxury tax did for the yacht building industry and the jobs that were lost as a result.

    – Something not mentioned by VAT proponents is the effect it will have on a person’s savings. Because a VAT has the effect of making the things we buy more expensive, you can buy less with your saved dollars. This makes the value of all your prior savings worth less. It’s kind of like what inflation does to savings over time, but with a VAT it will happen immediately. If a VAT is used to offset a lower income tax rate, the prior savings a person has will effectively be taxed twice on the same money because he paid a higher income tax rate when saving the money and then a higher price for goods, due to the VAT, when he spends the money. If you have no savings, a switch to VAT probably won’t matter much to you but if you are retired and living off your savings it might matter a lot.

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    • Flat in terms of no deductions, but tax on gross earnings. I think trying for one rate is unrealistic given the “fair share” climate we have today despite those accused of note paying fair share pay the bulk of income taxes today.

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  4. I agree with everything you want to do with the income tax system and the IRA needs to have the same rules as the 401 K.
    But, it is never going to happen. We have more IRS agents than we have FBI or CIA agents. The tax lawyers, accounts and tax return preparers make too much money under the current system.

    HEADLINE- Forbes Dec. 1, 2015
    Congress Moves Towards Granting IRS Authority To License Tax Preparers

    With tax season just around the corner, Congress is taking another stab at legislation to license tax preparers. Representatives Diane Black (R-TN) and Pat Meehan (R-PA) have introduced H.R. 4141, the Tax Return Preparer Competency Act (downloads as a pdf).

    The introduction of the bill follows years of efforts by the Internal Revenue Service (IRS) to license tax return preparers, initially without Congressional approval. Those efforts were shot down in Loving v. Commissioner when a federal judge ruled that IRS didn’t have that right. Loving was filed in 2012 by three independent tax preparers: Sabina Loving, John Gambino, and Elmer Kilian. The three accused the IRS, among other things, of lacking the authority to license tax preparers. It turns out, the court agreed. The IRS appealed but lost again at the appellate court level. The IRS eventually gave up on appeals and moved to a voluntary program instead. At the time, IRS Commissioner Koskinen referred to the program as “not the ideal solution” and noted that it would be easier if Congress simply stepped in and granted IRS the authority that the courts found lacking.

    Under the proposed bill, tax return preparers would be required to pass a competency exam, attend annual continuing education classes (at least 15 hours per year) and submit to a background check. Preparer tax identification numbers (PTINs) would also be required (as they are currently).

    The bill also addresses concerns about tax return preparers who are already credentialed. Tax attorneys, certified public accountants (CPAs), enrolled agents (EAs) would likely get something of a pass since the bill allows for exemptions, as appropriate, when credential requirements are comparable to the requirements in the bill.

    Tax return preparers who comply with the licensing requirements as outlined in the bill would be listed in a public database (similar to the PTIN directory already in place).

    This move by Congress may or may not be good for the taxpayer. From what I know about the tax code doing my own taxes and my father’s business taxes, it will add costs to the tax preparer’s, and the customer will pay even more.

    My guess nothing will change with the tax code, there is just too much money to be made under the current tax system for government and public employees to give up, period.

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    • The perspective law you cite has nothing to do with keeping tax preparers employed. It has everything to do with protecting the public from anyone with a laptop and a copy of TurboTax from opening up shop and selling his services to an unwary public. Uncertified tax preparers can do damage just as unlicensed doctors can. When you sign your name on the bottom of the 10-40, you are responsible for its correctness not the preparer.

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      • Jack B The 70,000+ page tax code will keep them all employed. And the new law will cost the consumer more, to get their tax return done. Your odds of being audited are so low anyway, and you will still be responsible for your return, not the preparer.
        Unless fraud is found there is not a big problem with most tax returns. You do not get the deduction and have to pay additional taxes and interest.
        The new law will keep educators employed, (or their websites up and running) providing the certification needed to keep the tax preparer on the job..Again cost passed onto the consumer in higher fees.

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