Friday, September 07, 2007

Progressive, Fair Taxation

Here are some thoughts on tax reform...

I've been reading alot about the so-called "Fair Tax" that is being thrown around by conservatives and even some of my fellows in the Radical Center. First of all, the tax is at best simple. At worst it is nearly regressive (I say "nearly" because I have run tax models with lower tax burdens for lower income people. Without considerable spending by wealthy people, however, the tax can become practically regressive. Therefore, I submit that a progressive income tax should remain. I would insist on some pretty major changes (an overhaul if you will), but the spirit of our current tax system should remain.

There should be built into the tax code deductions for necessary expenses, investment, and state-mandated fees. The personal exemption should be increased to about $10,000 per person ($15,000 for military). I would rid the tax code of complicated tax credits. There would no longer be limits or exceptions with regard to deductions. And if a negative tax liability is realized, a portion (probably 10%) should be credited to the household up to 100% of payroll taxes paid.

In essence, a family of four would not pay any taxes, and would probably see a credit for income less than $40,000 (+$5,000 for every active military individual). Tax rates would have to be raised across the board, but wouldn't likely affect individuals negatively until reaching the upper 5% of incomes. An effective "maximum wage" would be enacted as well. Taxable income over $5 million would be taxed at 100%. Of course, this is more an incentive to invest in stocks, funds, or ones own business than a condemnation of wealth.

Here's a partial list of changes I would suggest:

1. Increase personal exemption to $10,000 per individual in household.
2. Eliminate all caps and income exceptions for currently available deductions.
3. Make state sales tax deductible regardless of other considerations.
4. Make Payroll taxes deductible and eliminate payroll tax income caps,
5. Make all involuntary fees and taxes deductible. (i.e., auto liability insurance).
6. Eliminate all tax credits.
7. Raise the percentage of, and increase the number of tax rates.
8. Make all investments in real business* tax deductible.

Hopefully, that is as clear as mud. Tell me what you think, and feel free to ask questions.

*real business--A business that deals in goods or services. Guaranteed investment such as a interest bearing checking account or savings account would not be deductible. Bank-related stocks would be deductible.