"One sure way to determine the social conscience of a Government is to examine the way taxes are collected and how they are spent. And one sure way to determine the social conscience of an individual is to get his tax-reaction. Taxes, after all, are the dues that we pay for the privileges of membership in an organized society."
-- Franklin Roosevelt
Let me start by saying this: none of the tax reforms I discuss here are 100% surefire ways to fix the system. I feel they are good starts, good talking points, and really capture the problem at hand: balance.
Tax policy as a whole should satisfy four main objectives: simplicity, efficiency, fairness, and revenue sufficiency.1 Our current tax code fulfills those objectives... not as much as we would like. Any code with 70,000+ pages can hardly be considered simple. Efficiency is debatable since taxes do get collected and society functions to a degree. Fairness is a problem, especially when we view taxes through the lens of income inequality. Revenue sufficiency is there, but we have other budget and legislative woes which make the revenue less sufficient than it probably should be.
The links below will help you navigate this long thesis on taxes.
Presidential Tax Plans
What Reforms Should Do
Deductions Are Necessary
Presidential Tax Plans
Most of the Republican candidates have put forth tax plans as of right now tackle reform from the angle of simplicity and efficiency. Everyone knows getting a reform of 30 pages passed is a lot easier than getting a reform of 30,000 pages passed. On the Democrats' side, only Bernie Sanders has put forth a somewhat complete plan. Consider these from current and former 2016 candidates:
Rand Paul's Fair Tax Plan - sets a flat tax of 14.5% on all types of income (wages, capital gains, dividends, etc). It contains a $15,000 standard deduction and $5,000 per person personal exemption (ie, family of four pays no income tax on first $50,000 of income). No changes to retirement accounts. Mortgage and charity deductions remain as does the earned income tax credit (EITC) and child tax credit (CTC). All other credits/deductions are eliminated. Payroll tax gets eliminated, estate tax goes away, and all customs/duties/tariffs. Corporate taxes would be eliminated in favor of a territorial system with a 14.5% business transfer tax on all capital income (profits, rents, royalties, etc) and all labor payments. All capital expenses are taken in the first year compared to the current depreciation schedule. The tax also applies to governments and nonprofits. See the Tax Foundation coverage of the plan.
Marco Rubio's Economic Growth and Family Fairness Tax Reform Plan - reduces the number of tax brackets for individual to two- 15% and 35%. Most all itemized deductions are eliminated. A new child tax credit of $2,500 is implemented. The current standard tax deduction everyone is eligible for is replaced with a fully refundable personal credit of $2,000 for individuals and $4,000 for joint filers. Businesses would face a new corporate income tax rate of 25%. Investments and expenses would be fully deductible in the first year compared to the current depreciation schedule. Individual and corporate tax code get assimilated into a single system to prevent the "double taxation" of corporate income (capital gains, dividends, etc). A territorial tax system would be implemented as well. And most business tax credits/special deductions would be eliminated. See the Tax Foundation coverage of the plan.
Jeb Bush's Reform and Growth Act of 2017 - reduces the current number of tax brackets from seven to three with a top rate of 28%. Long term capital gains and qualified dividends are taxed at a marginal rate of 20%. The standard deduction everyone is eligible for is increased from $6,300 to $11,300 for single filers and from $12,600 to $22,600 for joint filers. It eliminates the personal exemption phase out and the limitation on itemized deductions. State and local income tax deductions would be eliminated as would the Alternative Minimum Tax (AMT) and the Net Investment Income Tax that's part of the Affordable Care Act (3.8%). The EITC is doubled for childless filers and taxpayers over 67 are exempt from employee-side payroll taxes. Estate taxes are removed. All interest income is taxed at the lower capital gain and dividend tax rates. Now for businesses, the corporate rate is cut to 20%. Capital investments are fully deductible in the year they are purchased. A territorial tax system is put in place and allows for 100% exemption on dividends received from controlled foreign subsidies. The plan also offers a one-time repatriation tax of 8.75% on deferred profits. All other corporate tax expenditures are eliminated. The corporate AMT is eliminated and interest expense deductions are removed as well. See the Tax Foundation coverage of the plan.
Donald Trump's "Tax Reform That Will Make America Great Again" Plan - reduce the current number of tax brackets from seven to four with a top tax rate of 25%. Single/joint filers making under $25,000/$50,000 would have a tax rate of 0%. It eliminates the AMT and Net Investment Tax from the Affordable Care Act (3.8%). The Estimate Tax is also eliminated. Carried interest gets taxed as personal income instead of at dividend/capital gain rates. Corporate taxes get lowered to a rate of 15% and deferral of foreign income is eliminated. A one-time repatriation scenario would be enacted to allow funds brought home at a tax rate of 10%. Pass-through businesses are taxed at a rate of 15% like regular corporations. It will reduce or eliminate Personal Exemption Phaseout and the Pease limitation on itemized deductions. There will also be other corporate loopholes that get eliminated if they favor special interest. See the Tax Foundation coverage of the plan.
Ted Cruz's "The Simple Flat Tax" - eliminates tax brackets and replaces it with a single flat tax of 10% regardless of income source (wages, capital gains, dividends, etc). A family of 4 making $36,000 or less pays no taxes. The standard deduction becomes $10,000 with a $4,000 personal exemption. All tax credits are eliminated except the Child Tax Credit and EITC. A Universal Savings Account is setup with $25,000 per year in tax-deferred dollars. Payroll taxes are eliminated as is the estate tax. The corporate tax system is replaced by a subtraction-method Value Added Tax (VAT) with a rate of 16% that is origin-based in nature. Businesses can deduct full cost of business equipment immediately. Taxes on profits earned overseas are eliminated. See the Tax Foundation coverage of the plan.
Bernie Sanders' "How To Pay For My Propsals" - force CFC's to repatriate and continuously pay taxes held abroad. Implement a financial transaction tax of 0.5% on stocks, 0.15% on bonds, and 0.005% on derivatives. The Social Security contribution cap would be raised to $250,000. Carried interest would be taxable as ordinary income. Implement a 0.2% payroll tax on wages. Eliminate like-kind exchange rules and minority valuation discounts. Fossil fuel subsidies and handouts would go away. Setup a 6.2% income-based healthcare premium for employers, a 2.2% income-based healthcare premium paid by households, tax capital gains and dividends as ordinary income, limit tax deductions for the rich, and adjust the estate tax. See the Tax Foundation coverage of the plan.
I'd go through all the plans, but Rand Paul, Marco Rubio, Jeb Bush, Donald Trump, Ted Cruz, and Bernie Sanders are the only ones with (quasi) full, detailed proposals that I could find. I know Hillary Clinton has talked about capital gains taxes,2 Ben Carson has touted a 10-15% flat tax,3 John Kasich wants to lower taxes and balance the budget in 8 years,4 Mike Huckabee wanted a Fair Tax (like a VAT) and wants to abolish the IRS,5 Chris Christie wanted to lower taxes and eliminate deductions,6 and I'm sure every other candidate has weighed in on tax reform at some point in 2015. I'm not a fan of the tax reform sound bite politics. Taxes and taxing are not simple. To say it should be simple for the sake of simplicity (one of the four conditions outlined at the beginning of this thesis) is a bit of a cop-out. You could make a single page tax plan that says "$0-50k pays 10%, $50-250k pays 20%, and $250k+ pays 25%" and call it a day, but then you gloss over all the tax deductions and benefits that actually help everyday Americans. This is why I very much appreciate Rand Paul, Marco Rubio, and Jeb Bush for putting together detailed tax plans and I appreciate Donald Trump and Ted Cruz weighing in with their plans as well. I hope every candidate will do so. Playing populist politics by saying "we should abolish the IRS" helps no one except the candidate who will say anything to get votes.
I'm not one to say anything to get votes. I like data and analysis. Logic, reason, and critical thinking are extremely important to me and to policy making as a whole. Democracy depends on it.
What Reforms Should Do
As stated before, tax reforms are meant to serve a number of purposes. They are means of revenue generation for government at all levels, revenue which pays for social programs as well as needed infrastructure adjustments. They also control business investment and play a role in income inequality.
The proposal I'm putting forth is meant to tackle income inequality on a number of fronts while also allowing businesses and wealth individuals to remain wealthy. To me, income inequality is not an issue of "they make more than me" but rather an issue of wealth concentration. Concentrations of wealth become monopolies of power, an incredibly dangerous idea when that money can be used to influence governments. Income inequality fixes are those that give opportunity to all Americans. Many millionaires and billionaires in America these days are self-made, thanks to the tech boom. This is to be encouraged! But it also has to be fair and we also have to ensure the concentrations of wealth do not act to prevent others from also becoming wealthy. Capitalism is about competition and monopoly-like concentrations hinder competition just like wealth concentrations with "favorable" tax systems hinder growth of the middle class.
I also aim to ease the tax burden on entrepreneurs and small business. The goal is to allow for buildup of personnel and savings in order to transition to medium and, hopefully, large corporations able to employ thousands of Americans.
Reforms should also not be regressive. In the proposals I mentioned earlier, the flat taxes are regressive due to their disfavor towards lower income members. The wealthy get tax breaks in all of the plans. Experts say the country will see double digit GDP increases in each plan, but at huge cost.7 Rand Paul's plan would reduce tax revenue by $2.97 trillion over the next 10 years, Marco Rubio's plan by more then $4 trillion of the next 10 years, Jeb Bush's plan by $3.66 trillion over the next 10 years, Donald Trump's plan by $10.4 trillion over the next 10 years, and Ted Cruz's plan by $3.6 trillion over the next 10 years. Clearly these plans will raise debt and/or deficits unless other changes are enacted, like major budget cuts. This is regressive in my mind. I want to come as close to maintaining or increasing tax revenue as possible through tax reforms, creating jobs (or at least opportunities for entrepreneurs), increasing wages, promoting more free market competition, and removing deduction strategies businesses use to avoid paying what they really should.
America was founded in part on the distrust of government. Such culture exists deep in our nation's soul. We fought for independence from tyranny and sought to establish a philosophy that benefits all mankind (in the future, not at that specific moment in 1776). I applaud this culture. The motto of "trust but verify" applies to all government. That's why democracy works as well as it does, because those in power who would seek to oppress can be defeated by an educated populace.
However, since the industrial revolution, a new distrust has emerged. This is distrust of corporations- especially large, wealthy corporations. Their size and power gives them the ability to influence government in ways we are becoming less and less fond of. Campaign finance is a good example of this with many Americans disliking the Citizens United ruling. Americans are starting to question whether the idea of maximizing shareholder value at the cost of societal benefits is really worth it.
My proposal wants to help business, but also requires details to counter how businesses might get out of paying their fair share of taxes. Because of the philosophy that tax burdens will be lessened for certain folks, there will be penalties for companies abusing their size and wealth. If you take advantage of tax easements, hiring deductions, and more while growing to be a large company, I do not want to see you give Americans the finger by shifting profits overseas. My plan seeks to provide a very competitive environment for keeping businesses and profits here in the US, but because of the distrust that has built up, I also wish to see punishments for inversions, "double irish," and "Hollywood accounting" practices.8 People that take advantage of the system to get favorable position and then flip the bird to America are entitled bastards just as much as the unemployed crack addict collecting government handouts without even considering a rehab program. Entitlement and selfishness are universal. These policies seek to curb it.
Deductions Are Necessary
Many people desiring a simple tax code don't realize the amount of effort that goes towards codifying deductions. It would be easy to say all deductions get eliminated, but that's also very unfair and incredibly hurtful to charities and organizations that depend on contributions. Part of the reason our tax code is so ginormous is because of these deductions. Consider the following deductions:
|Standard Deduction||Mortgage Insurance Premium Deduction||Tuition/Fees Deduction|
|State/Local Sale Tax Deduction||Cash Donations to Charities||Non-Cash Donations to Charities|
|Donating Time/Talent||Student Loan Interest||Job Search Expenses|
|Moving Expenses||Military Reserve Travel Expenses||Medical/Dental Expenses|
|Tax Prep Fees||Mortgage Interest||Mortgage Points|
|Points Paid on Home Improvement Loans||State/Local Real Estate Taxes||Business Use of Home|
|Business Use of Car||Business Travel Expenses||Educational Expenses|
|Employee Business Expenses||Appraisal Fees||Fees to Collect Interest/Dividends|
|Hobby Expenses||Investment Fees/Expenses||IRA Losses|
|Repayment of Income||Legal Fees||Safe Deposit Rental Fees|
|Gambling Losses||Casualty/Disaster/Theft Losses||Educator Expenses|
|Health Savings Contribution||Alimony||Self-Employed Health Insurance|
|Penalty for Early Savings Withdrawl||IRA Contributions||Personal Exemptions|
|State Balance Due||401(k) Contributions||Dependent Care Flexing Spending Account|
|Union Dues||Work Uniforms||Turning 65+|
|Vehicle Registration Fees||Jury Duty Pay||Estate Tax on Income in Respect of a Decedent|
|Lifetime Learning Credit||Energy Saving Home Improvements||Soc. Sec. Deduction for Self Employed|
There are 51 tax deductions which likely account for hundreds if not over 1,000 pages of the tax code. And those are just deductions for individuals! The tax rules, themselves, get complicated. For example, consider the concept of transfer pricing which is utilized by companies when they partake in inversions. The tax code on that alone is over 100 pages, and that's just part of it!9 The level of detail is necessary due to distrust. Greed can turn good into evil right quick. Details are there to try and prevent greed from conquering.
Steve's Tax Plan
And now for details of the plan-
Majorly Reduce Corporate Tax Rate
The first thing you need to realize about the corporate tax rate is that it is taxes paid against profit.10 It is not paid against revenue generated. If a business generates $100 million in revenue, that does not mean they pay taxes against $100 million. Please understand this important rule.
Second, consider the amount of taxes corporate taxes brings in to the federal government. The current marginal corporate tax rate is 39.1% (35% federal plus state taxes), much higher than the global average of 25%.11 At that rate, corporate taxes brought in $341.9 billion in federal tax revenue in 2015 or 11% of all tax revenue.12 Such a high rate does affect businesses in today's global economy.
My plan is to reduce corporate taxes in the following fashion -
- Reduce the corporate tax rate to 18% - using the 2015 numbers, this would change the federal tax revenue from $341.9 billion to $175.8 billion (+/-), unless my math is wrong. Note this is a static projection and could be higher or lower based on more robust dynamic models that I am not qualified to build.
- Allow full deduction of capital investments on equipment in year of purchase - if you hire an employee and buy them a chair, you will get to write off that chair in the same year instead of over many years. Depreciation schedules for property and the like would remain unchanged as would those for vehicles- ie, cars, trucks, boats, and jets.
- Dividend payments can now be included as pre-tax business expenditures up to the first $100 million - much like salaries for employees count as business expenditures, so will dividend payouts up to $100 million. The remaining still counts as business profit and will be subject to taxes like normal.
- Startups and small business less than three years old are exempt from taxes on profits less than $250k - because startups and small business are the main creators of jobs in the US and because most of them fail within the first few years, this is a little push to help get the entrepreneurial spirit going. Once the business employs more than 20 people or once the business reaches the age of three, this exemption goes away.
- Owners can only take advantage of the startup exemption at one of their companies - without a check like this, rich folks would just startup a ton of businesses and funnel money through them all, claiming the exemption at each new company of theirs.
- Provide a tax incentive to hire workers - different from the Work Opportunity Tax Credit, this incentive would have to be a percentage-based system on the number of hires each year. It's meant to be a credit for growth of a certain amount. The exact percentages are TBD. I envision a tiered setup because large companies of 1,000+ shouldn't get a tax credit for hiring 10 folks just like a small business of 25 shouldn't have to hire 10 folks to get the same credit. Hires would have to be employed a certain length of time as well to prevent companies from hiring and firing people simply for the tax benefit.
- Provide tax incentive to average wage increase of non-VP+ workers or workers making less than $85,000 annually - if the businesses average wages go up a certain percent, they would qualify for another tax break. There needs to be a distinction in what "average wage increase" applies to lest a CEO receive a $10 million bonus erroneously assigned to the 1,000 people at the company when the other 999 didn't get a $1 raise. This encourages sharing of profits. Remember, employee wages count as revenue which means lesser profits which means less taxes. This is a double tax benefit in that regard while also helping to raise wages of the middle class.
- S Corporations will cover payroll taxes on all profits - S corporations are domestic corporations with 100 or less shareholders. This loophole comes into play when individuals take a share of profit as "salary" and then take the rest as "distributive income" which is exempt from Social Security and Medicare taxes. This plan fixes that.
Adjust and Lower Personal Income Tax Brackets
I have no problem with the number of tax brackets currently. It doesn't matter how many brackets you have, just what the levels and rates are. I would see the seven brackets reduced to five or four if you count the "tax free" bracket at the bottom.
|Rate||Single Filer||Married/Joint Filers||Head of Household|
|0%||$0 to $30,000||$0 to $35,000||$0 to $32,000|
|13%||$30,000 to $65,000||$35,000 to $85,000||$40,000 to $72,000|
|20%||$65,000 to $150,000||$85,000 to $250,000||$72,000 to $200,000|
|25%||$150,000 to $250,000||$250,000 to $500,000||$200,000 to $375,000|
For the bottom tier paying 0% tax, that is 0% outside of necessary payroll taxes for Social Security and Medicare. Everyone still pays into that. Sorry.
Immigrants under the Startup Visa program I outlined in Immigration Reforms would be taxed at a rate of 10% or whatever income bracket they fall into above, whichever is higher. I said the Startup Visa program would be tough but fair and I meant it.
Anyone falling into the 0% bracket would not be eligible for any credits or refunds outside of non-payroll taxes withheld in their paycheck.
Changes to Capital Gains/Dividends
My philosophy on capital gains relates to my philosophy as an everyday middle class American looking to invest and grow a portfolio for the future: my ROI is pretty low, I'm not a millionaire, and the capital gains on changes to my market positions during the increasingly volatile trading sessions kinda hurt. Universal Investment Accounts will solve this problem that I and many other middle class Americans face. But we also know that the super wealthy are able to pay less in taxes due to their income stemming from capital gains, dividends, and other sources not taxed at personal income tax rates. Thus the following changes-
- Capital gains changed to a flat rate of 20%
- Carried interest will be taxed at the following rates - 25% under $250,000; 28% for $250,000 to $500,000; 30% for $500,000 to $1,000,000; 35% for $1,000,000+
- Qualified dividends tax rate as follows - 10% for $1 to $250,000; 20% for $250,000 to $500,000; 28% for $500,000+
- Eliminate capital gains for realized gains of $100,000 or less for those employed in another full time job - the idea here is that if I have my day job and I invest in a stock, making $5,000 in a single trade, I will pay no capital gains tax on that because I'm fully employed with a W-2 and everything already. This is meant to help Americans that are working to actively invest in the economy, giving them more to reap.
- Capital gains on one's primary residence stays - there will be no change to the threshold of $250,000 for single and $500,000 for joint filers on their home sale.
- No more carrying over capital losses year to year
These capital gain rates are regardless of the timeframe in which the asset is held. If you hold it for five minutes or five years, the rate will be the same. This may seem a little unfair, but the change to the dividend rate is meant to balance it out.
Inversions, "Double Irish," Deference, and Intellectual Property
As I discussed in my thesis on intellectual property reform and also a bit in healthcare reform, companies receive government-backed monopolies in the form of patents and copyright. Many times, the federal government- and, thus, the American taxpayer- provides money for research, grants, and the like to spur along innovation. Companies then turn around, get a patent on those innovations, and use that publicly (fully or partially) funded IP to profit from the American people. I'd seek to end this practice by cutting back the number of years of protection for IP funded by government, as I explained in the IP reform section.
I would also grant tax credits to corporations and individuals who receive copyright/patent protection and put their work into the public domain for all to use. How much is to be determined since the quality of patents, especially, needs major review.
Now consider this. Inversions and "double Irish" type tax schemes have grown in popularity to the point where President Obama tried to combat them.13 Companies engage in these practices because of the high corporate tax rates and other silly corporate tax rules here in the US. I've already addressed those above, making the rates well below the OECD 25% average.14 But that's not enough. Corporations still have billions abroad and they want to maximize shareholder value at the expense of playing fair with the rest of the American taxpayers. To give these corporations more incentive to play fair, I propose holding their intellectual property accountable. If you want to have the full force of US law protecting your intellectual property, you must contribute your fair share. Inversions, double Irish's, Dutch Sandwiches, etc. are failures to contribute a fair amount.
The way these schemes work is that a company sells its IP to a foreign subsidiary. They then license the IP from that subsidiary, thus ensuring the profits and costs remain abroad. My proposal is to prevent sale of IP to any foreign subsidiary. Sale of IP to a foreign entity is perfectly fine, but that entity can have no ties to the original IP holding company. It's entirely possible a company might "fire" some employees who then setup a foreign subsidiary and then work out a deal through those employees, but that would be considered market collusion and subject to other more serious federal charges. Alternatively if that is too harsh, I would be open to accepting sales of IP to foreign subsidiaries while also adding a five year licensing ban on the parent company. That's a ban on licensing of the patent regardless of the owner, just in case they thought having the subsidiary sell it to another subsidiary could get around this problem.
As I said, the goal is to keep America from being taken advantage of by American corporations that went multi-national, especially those who have benefited from our nation's legal monopolies concerning intellectual property. There is no other real way to combat this behavior other that eliminating taxes on them altogether, making America a tax haven of sorts. But that's no good either. So rather than have corporations be legally allowed to give Americans the bird, penalties for such action would result in their IP going into the public domain. Is a lower tax bill worth losing the protection of that which drives your company in the first place? We cannot be powerless against such corporate abuses. Our representatives were responsible for allowing companies to engage in this behavior, now it's up to us to correct it.
I also wish to bring those international profits back to the US via a deference amnesty of sorts. For a three year period, overseas income that's brought home will be subject to a heavily reduced tax rate of 10%. This is a very generous offer. Much lower than what the normal rates would be. After this three year amnesty period, rates would go to 14% for all taxes, regardless of amount. Still cheaper than the US corporate tax rate.
At the same time, I want companies to bring those profits back. Deference is nice, but US companies should be funneling their revenues back home for re-investment. Thus I'd also institute a deference failure penalty at two thresholds. If you defer a year's worth of taxes for more than five years, fines will be issued. If you defer for more than 10 years, your IP and the IP of any subsidiaries will become public domain. You will also be ineligible to register for any new IP protections while under this deference penalty.
Student Loan Debt Relief for Community/Government Service
As I outlined in the cost of higher education section, I would offer tax free debt relief to students engaging in federal government or certain community services as their job. All employees and new hires to federal government positions will be given the option of having portions of their salary go towards student loan payments tax free. This means not just DC employees, but national park service members, VA hospital staff, and more. If your salary is $50,000, you could have $5,000 paid towards your loan tax free- that's the full $5,000, not $5,000 before/after taxes. Your taxable income would then be considered $45,000. Students engaging in this practice forgo the typical repayment schedules. With the median income of $52,000, this allows students to pay off loans faster. It's akin to an IRA or UIA (see next section) contribution, but going towards student loans instead of retirement savings. There would need to be minimum payment designations to prevent students from paying too low a percentage on their loan; having $5 taken out of your salary a year against a $20,000 student loan won't work, just like $1000/yr on a loan of $300,000 (med school) won't work. Minimums would be as fair as the mathematicians can make them. State governments could work out similar type deals as can charities/non-profits that qualify as active and in good community standing.
I am open to the idea of making this available to all jobs, not just federal government or certain community service positions. The idea here is that students who use their education skills to give back to their community, their state, and their nation get a nice reward for doing so. If there is a way to accomplish this through any job, I would definitely consider that possibility.
Introduce Universal Investment Accounts (UIA)
UIA's essentially give Americans a universal savings account, but with an investing component to it. Hence calling it a Universal Investment Account. UIA's would replace both Traditional and Roth IRA's. Contributions would apply post income tax, meaning after you get your paycheck, up to $30,000 per calendar year. Money in the UIA can be invested the same way money in an IRA can be invested- choose from stocks, ETF's, mutual funds, etc. It functions like a normal IRA in that regard. Unlike IRA's, the UIA allows for withdrawls at any time, hence the "universal" piece which means "always." Universal Savings Accounts are a fairly recent phenomenon but have been successfully implemented in Canada and Britain to much fanfare and success.15 UIA's take the premise and tweak it slightly.
Because of the universality of these accounts, special tax considerations need to be put in place. Profits will be determined by looking at portfolio value at the beginning and end of a calendar year. In other words, calculations against UIA's will take the calendar year of January 1 through December 31 into account when determining UIA profitability. Profits are determined in the way realized gains are in the stock market. If you buy $100 worth of a stock and the stock value is $200 at the end of the year, you made $100. Unlike stocks, UIA profits and account values would be tabulated at the end of the year regardless of whether you sold assets or not. So the formula would be something like this-
Profit = Σ(UIAdec31 - UIAjan1) - TotalContribution
For example, say I invest $1,000 in three stock A, B, and C which all have share values of $50. This occurs at some point in 2015. I also contribute $500 to the UIA in cash, but don't invest it. On December 31, stock A is worth $2,000, stock B is worth $1,500, and stock C is worth $1,000. Thus my profit is-
Profit = ( ($2,000 - $1,000) + ($1,500 - $1,000) + ($1,000 - $1,000) ) - $500
The total profit is $1,000 based on this model, no matter how many times I bought/sold these stocks during the calendar year.
I want Americans to be able to save and invest while being rewarded for doing so. At the same time, the high contribution limits and yearly growth means wealthy individuals or even savvy middle class Americans could use a UIA to generate even more wealth and evade taxes. If someone contributes $30,000 a year for 10 years, they'll have $300,000 to play with, making large profits much easier to achieve with each growing year. That's not the point to a UIA. Thus I suggest these profit check ranges-
- $0 to $100,000 - 0% capital gain rate
- $100,000 to $500,000 - 15% capital gain rate
- $500,000 to $1,000,000 - 20% capital gain rate
- $1,000,000 or more - 25% capital gain rate
The theory here is that if you are making more than $100,000 a year in your UIA, you're actively trading or have saved up enough so that average market gains generate more than enough income. Americans at that level are then avoiding capital gains they would typically pay for those investments. Hence applying this small "thanks for the help" fee on profits over that amount.
Money can be taken from the UIA to pay for the profitability tax and I would be open to allowing that tax payment to be deductible from the UIA starting amount the following year. For example, if I make $500k in 2016, I'll owe $75,000 in tax. Paying for that via the UIA means the total value at the end of 2017 has the 2016 tax payment subtracted from it.
Other Miscellaneous Tax Changes
- Make permanent the R&D Tax Credit - but companies utilizing this credit will face lessened IP lifetimes. Like I said in regards to IP reform, if taxpayers contribute to innovation, said IP must go into the public domain sooner. It's estimated this keeps $9+ billion away from the IRS annually, but with the change in patent life due to the credit, companies may opt not to take it instead of facing less government monopoly protections.16 What can count as "research" under this credit would be anything falling under Section 174 of the IRC.17
- Eliminate the deduction for student loan interest - only if the education reforms I proposed are implemented. Tying student loan interest rates to treasury yields is already much lower than what gets paid now. There's no need to have this deduction with that and with the tax free community/government service credit.
- Eliminate mortgage interest deductions on second homes - I want a vacation home by the water as much as the next guy, but when people (like me) are struggling to afford even a primary residence, this kind of deduction makes no sense.
- Tier mortgage insurance deduction on primary residence based on income - $250k or less gets the full deduction; $250 to 500k gets 2/3 of the deduction; $500k to $1 million gets 1/3 of the deduction; $1+ million gets no deduction.
- Raise Social Security contribution cap to $170,000 - this is slightly balanced out by lower personal income tax rates for those earners. $170,000 in 2016 rates would face 28% personal income tax rates whereas my plan would put them in the 20-25% range depending on if it was a single or joint filing.
- Eliminate payroll taxes when you collect Social Security at 67+ - if you've hit the age where you're eligible for Social Security, you'll be exempt from future contributions should you choose to continue working. And I thank you for your previous contributions to our economy.
- Tax campaign contributions over $5,000 - Citizens United and the McCutcheon rulings by the Supreme Court may have removed aggregate limits and other campaign donation limits, but it is within Congress' purview to tax. This would apply to individuals and organizations, meaning if your study group got together $10k for my campaign, you would have to pay a tax on it as an organization. The tax rate on contributions would be at the resident's or organization's state sales tax level or 5%, whichever is higher. That prevents everyone from moving to Delaware to contribute as Delaware has no state sales tax.
- Eliminate deductions on international mortgages - congrats on buying that home abroad! I, too, hope for a nice vacation home overlooking the Mediterranean someday. But you shouldn't be able to take a deduction on the mortgage interest or international property taxes.
- Eliminate tax deductions on "gifts" to foreign government entities - 26 U.S.C Section 162 covers a number of prohibited tax deductions involving bribes/kickbacks to foreign government or government related entities. I would see this expanded to include anything of monetary value to such officials. No more tax deductions on those Audi R8 gifts.
- Airline baggage fee revenue now taxable - it will be included with all other revenue the airline takes in. There is a possibility airlines will raise prices to combat the hit to their profits. Airfare is already too expensive, especially given the lower price of oil. Such a fee increase might trigger even more backlash. Or maybe it will make Americans more travel efficient. I'm fine with either.
- Restrict the domestic production activities deduction (Section 199) to manufacturing sector only - this deduction was meant to encourage companies to setup manufacturing here in the US. Other non-manufacturers took advantage of this. Given the change to the corporate tax rate and the level of abuse, this deduction is theoretically no longer needed. Even without it, effective tax rates will likely be less than the OECD average of 25%.
- Eliminate deduction of punitive damages - when an individual or organization is fined, loses in court, and faces punitive damages, said damages can be written off as a "ordinary business expense." This ends that practice.
- Bar deduction of interest on debt held abroad until CFC taxes are repatriated - a subsidiary or foreign entity that takes on debt of any sort will not be allowed to deduct the interest on that debt unless they are all caught up on tax repatriation. You need to pay corporate taxes in order to get a corporate tax deduction.
- Eliminate Fossil Fuel Preferences - as part of a larger energy policy (forthcoming), many tax deductions and other preferences for fossil fuels need to be curbed. This will help push us towards cleaner energy and help generate tax revenue to be used towards those policies.
- Implement a Carbon Tax - as part of a larger energy policy (forthcoming), a carbon tax is both economically viable and simplistic enough to work. Based on CBO estimates, this tax would start at $20/metric ton of CO2 emissions and increase 5.6% per year.18 We need to combat climate change and this is part of the solution. There is concern that such a tax disproportionately hurts low income families, but with the tax rates lower for everyone on the personal and corporate levels, any pain experienced should be offset by the increased paycheck.
- Eliminate deduction for state and local taxes - with this deduction, the federal government essentially subsidizes state and local taxes. States need to be more responsible with their fiscal policies.
- Repeal "Last In, First Out" Inventory Accounting Methods - LIFO is, essentially, a way to defer taxes into the future. Tax deferment of this variety is not needed anymore.
- Add $0.50 Tobacco Excise Tax and Index It to Inflation - the CBO recommends a 50 cent excise tax increase as both a revenue generator and for the health benefits. If folks are going to smoke, I'd rather they smoke marijuana (which I support legalization of... and taxing).
- Miscellaneous Reforms to Reduce the Tax Gap - the tax gap is the difference between taxes paid and taxes owed. Numerous reforms have been suggested as ways to reduce this gap such that taxes are paid as close to on time as possible. I support such initiatives that make government more effective and more efficient.19
Most all of the ideas presented here have been considered at one point or another in recent history. Through the CBO, JCT, Tax Foundation, Tax Policy Center, or other reputable tax sources, revenue analysis exists. What I present to you below is a very rough estimate of what such a plan may do in terms of revenue generation. I caveat this chart so heavily because no one will be 100% accurate on revenue plans in relation to our dynamic global economy. Such awareness is not lost upon me, nor should it be lost upon any candidate proposing economic change.
The numbers below are in billions. Sources for these costs estimate can be found in the endnotes, starting with note 20.20
|Reform||Avg Savings / Yr||10 Yr Savings|
|Lower Personal Income Tax Rates 3-10%||-50||-500|
|Make R&D Tax Credit Permanent||-8.08||-80.8|
|Eliminate payroll taxes for social security collectors 67+||-25.91||-259.1|
|Make airline baggage fees taxable||0.6||6|
|Eliminate student loan interest deduction||0.2||2|
|Tax carried interest at 25/28/30/35% rates||1.2||12|
|Bring taxation of dividends more in line with personal income||16.5||165|
|Require repatriation of foreign income at lower corp tax rate (14%)||15.6||156|
|One time repatriation of foreign income at much lower corp tax rate (10%)||15.5||155|
|Lower corp tax rate to 18% (static)||-210||-2,100|
|$250k tax free profit for startups/small businesses in first three years or until they have 20 FTE's||-25||-250|
|Restrict domestic activities production deduction (section 199) to the manufacturing sector only||6.5||65|
|Close payroll S-Corp loophole||2.5||25|
|Bar deduction of interest on debt held abroad until taxes repatriated||5.1||51|
|Eliminate many deductions allowed by the fossil fuel industry||4.7||47|
|Repeal Last In First Out inventory accounting method||10.4||104|
|Reforms to reduce the tax gap||8||80|
|Changes to mortgage interest deductions (primary tiered, second eliminated)||3.5||35|
|Additional $0.50 Tobacco Tax, Index Said Taxes to Inflation||8.5||85|
|Implement a carbon tax starting at $20/metric ton of CO2 emissions||117.8||1,178|
|Raise income threshold for social security contribution to $170k||46.7||467|
|Eliminate tax deduction for state/local taxes||108.5||1,085|
|Procurement reform and fixes for wasteful government spending||150||1,500|
Estimated Average Revenue Increase / Year - $202.81 billion
Estimated 10 Year Revenue Increase - $2.028 trillion
Were I a typical political candidate, I would immediately make plans for spending $2.028 trillion dollars and justify it based on the estimates and sources given to me. That is a very stupid and very bad idea. No matter how reputable, estimates are just guesses based on continuing circumstances. With change being a constant in existence, such guesses do not make a good foundation to plan upon. So, the options I present below would come in at less than $2 trillion. Better safe than sorry.
- Use all funds to pay down the yearly deficit
- Use excess funds to pay down the national debt
- Recognize the revenue increase and lower taxes further
- Push towards a 21st century energy plan (details forthcoming)
- Put funds towards rebuilding infrastructure (details forthcoming)
- Use funds to build a national gigabit broadband system (details forthcoming)
- Increase funding to programs that need it like NASA, science research, and agriculture research (details forthcoming)
- Offer free college for all
- Fight wars (please don't)
- Many other ideas
Naturally, we cannot pursue all these options at the same time. Thus, of the above, I would push for infrastructure maintenance/upgrades, a national gigabit broadband system, and a 21st century energy policy (hint- it involves renewables and nuclear). Details of all those plans will be made available sooner rather than later. Once that is complete, a full economic picture will be available for all to see. Initial estimates peg infrastructure to be a $600-800 billion project, a gigabit broadband plan to all homes (not just major metropolitan regions) at $150-200 billion, energy policy in the $400-500 billion range, and additional program funding in the $150-250 billion range. Total cost of a little less than $2 trillion, all over 10 years. Like I said, more details will be available in the near future, but the goal is to setup a good foundation from which further reforms can be implemented.
Also note this does not include budget savings from healthcare and other reforms I've outlined, which are tens to hundreds of billions more in savings over the next 10 years. Again, I will cover everything in my overarching economic plan to be unveiled in the near future.
All reforms I outline above are meant to be fair, efficient, and generate sufficient revenue. Their simplicity is... questionable. I maintain that simplicity is relative given the sheer complexity of our global economy coupled with the greed of man. Most Americans will see lower taxes. Corporations will also see lower taxes compared to most of the civilized world. Incentive is given to pay a fair share of taxes in exchange for US IP protections, with penalties ranging from fines to loss of IP. Businesses should not be able to benefit from American law while simultaneously seeking to reduce their fair share of corporate income.
The income levels are hopefully enough to at least match current tax revenue, if not increase it due to the incentives to hire workers and increase wages over multi-million dollar C-suite compensation packages. But there is a good chance it is not. That would be ok given other budget changes I would see enacted. Billions are wasted through our government's inefficient procurement system. Agencies are also forced into a "use it or lose it" spending mentality at the end of the fiscal year because Congress demands every dollar allocated for spending get spent, even if it's not needed. Intellectual property reforms and healthcare reforms will also spur on more generic drugs, increased medicine competition, and ultimately lower Medicare expenses without compromising coverage. Lower tax revenue will never mean cutting back on Social Security or Medicare.
Tax reforms that cost the federal government trillions over the next decade are no good. GDP growth may occur, but GDP growth is worthless if wages go down and if programs meant to aid all Americans get reduced or eliminated. "Hurray for 10% GDP growth, but now Medicare won't cover my pregnancy" are the not words our nation need ever utter. Social and economic necessities must be balanced.
Can these reforms be altered? For sure. They are meant as a starting point. No one else I'm aware of has even suggested using intellectual property against corporations engaging in inversions and other activities. I'm open to seeing rates go up or down or even seeing programs like the UIA change. This hopefully gets the ball rolling on some serious tax reform discussions that ensure fairness across the board.
- See Taxation in the Library of Economics and Liberty.[top]
- See The Details of Hillary Clinton's Capital Gains Tax Proposal.[top]
- See Carson outlines flat-tax proposal.[top]
- See Kasich Tax Plan Aims to Balance U.S. Budget in 8 Years.[top]
- See Abolishing the IRS - FairTax.[top]
- See Chris Christie on Tax Reform.[top]
- See the Tax Foundation coverage of Rand Paul's plan and the Tax Foundation coverage of Marco Rubio's plan and the Tax Foundation coverage of Jeb Bush's plan.[top]
- Inversions are when companies re-incorporate overseas to reduce the tax burden in income earned abroad. A "double irish" is when a company sells or licenses its intellectual property to a subsidiary in a country with lower tax rates, meaning foreign profits that come from the technology become attributed to the offshore entity rather than the America-based parent company. This can turn into a "dutch sandwich" when those foreign profits are then funneled through the Netherlands or other country on the way to a tax haven like Bermuda or Barbados. "Hollywood accounting" refers to the creative math film/tv companies utilize to hide profitability. Basically, a separate corporate entity is created that's expected to take huge losses, much thanks to the huge fee the studio would charge this corporation. This leads to an appearance of "lack of profitability" on paper. See 'Hollywood Accounting' Losing In The Courts for more info and even an income statement of Warner Bros. relating to Harry Potter and the Order of the Phoneix's $167 million loss against $938 million in revenue.[top]
- See 26 CFR Part 1 - INCOME TAXES from the Cornell University Law School Legal Information Institute. For transfer pricing, see specifically 26 CFR 1.482-1 and 26 CFR 1.482-7 and 26 CFR 1.482-8 and 26 CFR 1.482-9. Full text in a single document is available from the IRS as well.[top]
- See Corporate Taxation in the Library of Economics and Liberty.[top]
- See The U.S. Has the Highest Corporate Income Tax Rate in the OECD.[top]
- See Federal Revenue: Where Does the Money Come From.[top]
- See Obama Administration Issues New Rules to Combat Tax Inversions.[top]
- See The U.S. Has the Highest Corporate Income Tax Rate in the OECD.[top]
- See Universal Savings Accounts (USAs) and Universal Savings Accounts Help People Help Themselves. The Universal Savings Account concept was conceived in the early 2000's.[top]
- See Can a Research and Development Tax Credit Be Properly Designed for Economic Efficiency?.[top]
- See 26 U.S. Code § 174 - Research and experimental expenditures.[top]
- See Effects of a Carbon Tax on the Economy and the Environment.[top]
- See Estimated Budget Effects Of The Revenue Provisions Contained In The President’s Fiscal Year 2016 Budget Proposal.[top]
- Numbers for the personal income tax change, R&D tax credit change, Social Security elimination for 67+, and change to deduction of state/local taxes come from the Tax Policy Center Analysis of Jeb Bush's Tax Plan and the Tax Foundation Analysis of State/Local Tax Deduction. Numbers for carried interest, foreign income repatriation, one time CFC repatriation, barring deduction of foreign interest on debt, LIFO changes, tax gap reforms, and fossil fuel deductions come from Joint Committee on Taxation Effects of Revenue Provisions in the 2016 Budget. Numbers for dividend taxation as personal income and closing the S-Corp payroll workaround come from the Citizens for Tax Justice blog citing the Institute on Taxation and Economic Policy, the CBO, the CRS, and the JCT. Corporate rate tax changes are statically calculated by the Tax Foundation as are the revenue numbers from mortgage interest changes. Numbers for savings from procurement/government waste reforms are based off my own numbers which are based off of GAO reports and other reputable sources. Some math of my own was done when policies did not exactly match. [top]