Introduction:
The United States of America is broke and borrowing huge amounts of money just to pay its bills. People will eventually tire of lending to the United States government. When that happens—and history shows it will happen suddenly—the United States will enter an economic crisis worse than any living American has ever seen. We need to take action now to put our country on a sustainable economic footing and reduce our dependence on borrowing so our children and grandchildren can continue to live in the land of the free.
This and all other proposals on this site are constrained by JOI’s limited knowledge and imagination. Suggestions for improvement are welcomed. Further discussion of the rationale behind this plan can be found here.
The Plan:
- Eliminate all existing federal taxes and most fees.
- Eliminate all existing federal wealth-redistribution programs, with limited grandfathering provisions for Social Security and Medicare.
- Create a single income-redistribution program to replace all of those eliminated. This program would be tied to a flat personal income tax. 100% of the personal income tax collected would be redistributed to the citizens with none withheld for administrative costs or other expenses. The amount paid out would automatically adjust to equal the amount collected.
- Fund all other government expenses with a retail business income tax. This flat tax would be based on 100% of income from retail sales with no deductions.
- A retained-business-income tax would encourage businesses to pay taxable dividends instead of accumulating cash. This tax would be payable and refundable on a 10-year rolling basis.
Questions and Answers:
• How would the personal income tax work?
• Who would receive redistribution payments
• How would the redistribution amount be determined?
• How would the retail-business income tax work?
• How would the business retained income tax work?
• How will the Social Security option work?
• How will the Social Security option be funded?
• How are families and dependents addressed by the personal-income tax?
• What about the personal exemption?
• How much is the single deduction?
• What may the single deduction be used for?
• What sources of income would be subject to the personal-income tax?
• What about self-employed individuals?
• What about stock shares and stock options given to employees?
• Why a flat personal-income tax instead of a graduated tax rate?
• What should the tax rate be?
• What current wealth-distribution programs would be eliminated?
• What are the tax implications of second-hand retail sales.
• What about charity fundraisers?
• What about retail purchases direct from foreign merchants?
• How does the retail-business income tax affect low-wage earners?
• Will the retail-business-income tax compete with state sales taxes?
• Will this plan prevent federal deficit spending?
How would the personal income tax work?
The personal income tax would be similar to the current personal income tax, but would be greatly simplified in that:
◦ Business taxes would not be mixed with personal taxes.
◦ Each individual would get the same personal exemption.
◦ There would be only a single deduction. That deduction would go into a tax-advantaged account limited to certain specified purposes. The maximum annual deduction would be the same for all taxpayers regardless of income.
◦ The tax rate would be flat.
Who would receive redistribution payments?
Every American citizen would receive the same redistribution payment except those 65 and older would receive double. Those 45 or older on the effective date of the plan would have a one-time opportunity to opt into Social Security in lieu of receiving the normal redistribution payment. Payments for incarcerated felons would be applied toward the cost of their confinement.
How would the redistribution amount be determined?
The personal redistribution amount for a calendar year would be calculated based on the amount of personal income tax collected and the number of claims from two years prior. So the amount distributed in 2023 would be calculated from the actual tax collected and the number of eligible citizens reported on tax returns for tax year 2021. In this way, the amounts can be known in advance for planning purposes.
How would the retail-business income tax work?
A business would record the total value of its income from sale of retail goods and services, and submit a fixed portion to pay the retail income tax. An annual de-minimus exemption would prevent having to collect tax from hobbyists who sell a few items. Sales to businesses with business tax IDs would not count as retail sales. Retail services include associated fees and interest on retail debt.
How would the business retained income tax work?
This tax is not expected to collect much money, but would encourage businesses to pay dividends instead of retaining income to increase stock prices. (The dividends would be taxable under the personal income tax, but the capital gains from stock price increases would not.) It is calculated by subtracting business costs from total income on a rolling ten-year basis and calculating a flat-rate tax on the difference. If the retained income is negative, the business can request return of previous tax payed within the ten-year window at the same flat rate. Paying dividends would count as a business cost. The cost of capital investments would be counted immediately, avoiding the need for depreciation. Purchasing financial instruments such as stock or bonds would not be business costs; neither would selling them be business income. Buying business assets from another company with cash would count as income for the selling business and expense for the purchaser. A non-cash merger would simply combine the tax liabilities and/or credits of the two companies.
How would the Social Security option work?
The Social Security option will be available to those who will be age 45 or older upon the effective date of the new system. There will be a brief one-time opt-in period, and no one will be allowed to opt in afterward, however a person can opt out at any time. Those opting into Social Security will not receive redistribution payments and will continue to pay FISA taxes at current rates on earned income. Social Security benefits will be calculated under the current rules, which allow for payment reductions if funding runs short.
How would the Social Security option be funded?
FISA tax and redistribution benefits from those who have opted for Social Security will be paid into the existing trust fund, and Social Security benefits will be paid from that fund. Under the current system, if the trust fund runs short Social Security benefits are automatically cut. Under the proposed system if the trust fund runs short, IRS will calculate the amount that would have been collected if all workers were paying the FICA tax to determine if benefit payments should be reduced automatically to mimic the current system as closely as possible. Social Security shortfalls will be paid from personal-income tax collections prior to calculating the normal redistribution amount for the year.
How are families and dependents addressed by the personal-income tax?
Because the personal exemptions and deduction limits in the personal-income tax apply on an individual basis, the tax and reimbursement amounts will be the same whether family members are listed on the same tax return or on separate returns. It will not even matter if non-family are listed as dependents. However, the redistribution payments will be by tax return, so an individual who wants to receive a separate payment must file a separate return.
What about the personal exemption?
The size of the personal exemption is a political decision, but should be indexed to the per-capita personal income tax collected from two-years prior. Increasing the exemption will reduce the amount available for redistribution, and benefit the working-poor at the expense of the non-working poor. Decreasing the exemption will have the opposite effect. Each person should get the same exemption.
How much is the single deduction?
The optional single deduction would go into a tax-advantaged account. It is important that the maximum deduction amount be the same for everyone regardless of income. That maximum deduction size would be a political decision. People should be allowed to remove money from the account for non-approved purposes by paying tax on it at the regular, flat rate, and then deduct that tax if they replace the money later. A taxpayer who does not use his/her entire deduction in one tax year should be allowed to take it in future years. For example, if the maximum deduction is $10,000, a taxpayer who deducts $8000 the first year and withdraws $3000 of that the second year, paying tax on the withdrawal, would be allowed to deduct up to $25,000 the third year ($10000 – $8000 + $10000 + $3000 + 10000 = $25000). Increasing the single-deduction amount will tend to benefit the middle class while reducing the amount available for redistribution.
What may the single deduction be used for?
Money in the tax-advantaged account from the single deduction may be spent for approved purposes without paying tax. The list of approved purposes would be a political decision. For example payments from the account for health insurance and medical care should be tax free. A child’s deduction might be used to pay for education. Congress may decide to add other tax-free uses.
What sources of income would be subject to the personal-income tax?
Most sources of personal income would be subject to the personal-income tax, including wages, tips, interest, dividends, and the estimated value of benefits and perquisites received from employers. Redistribution payments would not be taxable; nor would gifts, inheritance, capital gains, or second-hand sales of personal goods. (Capital gains are addressed by the business retained-income tax.) Social Security income would be partially subject to taxes under the same provisions as now. Money withdrawn from a tax-advantaged account for non-approved purposes would be taxable as normal income.
What about self-employed individuals?
As the personal income tax includes no business-expense deductions, small businesspeople will want to keep their business finances separate from their personal finances as much as possible. The business should obtain a separate tax ID. For a self-employed individual, personal income would be the value of the money, goods, and services that the individual takes from the business for personal purposes. Rules may be needed to clarify this.
Why a flat-rate personal-income tax instead of a graduated tax rate?
Graduated taxes are complicated and just as much revenue can be generated by a flat tax. The personal income tax, when combined with the basic redistribution plan, is naturally “progressive,” meaning that it transfers wealth from those with more personal income to those with less personal income. By adjusting the tax rate, personal exemption and deductions, the system can be made as progressive as desired without resorting to multiple graduated tax brackets. Setting a rate that maximizes revenue will provide the greatest yield for redistribution. Under the current graduated tax system, the wealthy use deductions and other tax-avoidance strategies to reduce their tax burden. A simple system with a single, limited deduction can reduce tax avoidance and increase the amount of tax collected.
What should the tax rate be?
Tax rates will be a political decision. There is always a trade-off between tax rates and economic activity. High tax rates reduce economic activity resulting in lower tax collections, but low tax rates also can reduce tax collections. Ideally, the rates should be adjusted to maximize collection of taxes. Personal-income-tax collection will be maximized when people have a lot of income, which will maximize the amount redistributed. People with a lot of income, whether earned or through redistribution, will tend to buy more retail, generating more retail-business-income tax to support government operations. The business-retained-income tax rate should be 10% of the personal-income tax rate, as it is calculated on 10-years of income.
What current wealth-distribution programs would be eliminated?
There are too many federal wealth-redistribution programs to name, but any federal program that provides payments (other than wages earned), goods, or services to individuals either directly or indirectly through contractors or states would be eliminated. Examples include “welfare” payments, food stamps, housing assistance, unemployment insurance, disability, and many others. (Employee pensions and other benefits are part of the employee’s wages.)
What are the tax implications of second-hand retail sales.
◦ If an individual resells an item originally purchased at retail, no tax would be due because the item was already taxed when new, as was the income used to originally purchase the item.
◦ If a business resells used retail goods without upgrade, the sales would not be subject to retail-business-income tax. (But any value taken from a business by an owner for personal use would count as personal income for tax purposes.)
◦ If a business restores or upgrades used goods for resale, and the parts and labor used to restore or upgrade the item are obtained at retail, the sale of the item would not be subject to retail-business-income tax.
◦ If a business restores or upgrades used goods for resale, and does not purchase the parts and labor at retail, the retail value of the parts and labor used would be subject to retail-business income tax, not to exceed the actual selling price of the goods.
What about charity fundraisers?
A charity would be allowed to sell retail goods during up to two fundraisers per year without paying the retail income tax. Both fundraisers combined may not exceed 72-hours total. The 72-hours may apply to either the period in which the funds are collected or to the period in which the goods or services are provided. Example 1: tickets may be sold in advance for an event during which goods and/or services are are provided within a single 72-hour period. Example 2: Funds raised during a single 72-hour event may pay for services or goods to be provided later.
What about retail purchases direct from foreign merchants?
Most imported retail goods are imported by a U.S. company for resale, in which case the U.S. company making the sale would pay the retail business income tax. If a U.S. retail customer ordered directly from a foreign merchant who shipped goods directly to the consumer without paying the tax, it would give the foreign merchant an unfair price advantage over domestic merchants. A possible way to deal with this would be to require that such transactions be arranged through a U.S.-based agent who would collect and pay the tax.
How does the retail-business income tax affect low-wage earners?
The retail-business income tax will lead to increased prices of retail goods. Those with lower incomes tend to spend larger fractions of their incomes on retail goods than those who earn more, and those with higher incomes tend to spend more per person. The overall system compensates for this by directly transferring income from those with higher incomes to those with lower incomes, and by providing personal exemptions from the personal income tax.
Will the retail-business-income tax compete with state sales taxes?
All taxes compete with each other. Anywhere the government pulls money out of the economy or puts money into the economy affects all other parts. Like the state sales taxes, the retail-business-income tax will increase the cost of goods and services, suppressing sales. However, by adjusting the personal-income tax rate to maximum tax collected, it will be possible to maximize the amount of income redistributed. That way the less wealthy, who will be most affected by the income redistribution, will have more to spend on retail goods, helping sustain sales tax and retail-business tax collections.
Will this plan prevent federal deficit spending?
No. This plan will eliminate the contribution of wealth redistribution programs to deficit spending, but the only way to prevent deficit spending would be to take the power to create or borrow money away from the government.
Additional explanation of the plan is at this link.
2021/01/26 revised.
2021/03/03 minor correction.
2022/01/18 This plan calls for the eliminating Medicare, but does not address how to phase the program out. I intended to post on that subject soon after posting this plan, but have not done so. The phase-out of Medicare will need to be addressed.