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Richard A Demers Minneapolis, MN April 1, 2014.  Why is income tax reform needed?  What are the goals of this Citizen’s Proposal?  What income should.

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Presentation on theme: "Richard A Demers Minneapolis, MN April 1, 2014.  Why is income tax reform needed?  What are the goals of this Citizen’s Proposal?  What income should."— Presentation transcript:

1 Richard A Demers Minneapolis, MN April 1, 2014

2  Why is income tax reform needed?  What are the goals of this Citizen’s Proposal?  What income should be taxed?  Transferring income among individuals  Taxing asset transactions  Taxing income by formula  Income taxes and the national budget?  Household examples 2

3  Neither fair nor just  Too many ways to avoid and evade taxes  Too complicated, intrusive and expensive  It harms the national economy ◦ Too much interference ◦ Drag on the national economy  It fails to adequately fund the government ◦ Annual deficits ◦ Ever increasing federal debt 3

4  Raise enough money for government operations in a way that is fair, just, simple and efficient  Eliminate tax biases in favor of some people and businesses at the expense of everyone else  Automatically link taxation with spending  Take control of the details of income taxation out of the hands of politicians who don’t really know what they are doing anyway 4

5  It is not the goal of this proposal to  Reduce taxes  Redistribute wealth  Reduce the size of government  Reduce government spending 5

6 Yes, if we incorporate good ideas from many sources  Libertarian  Taxation should intrude as little as possible in our lives and economy.  People should have some say in how their taxes are spent.  Conservative  Income shouldn’t be taxed more than once - dividends, gifts, estates.  Rely as much as possible on the national economy, not government, to meet society’s needs.  Liberal  We are a community and not just individuals.  We should help people who help themselves to get ahead.  Taxes should be progressive and affect everyone to the same extent. 6

7 Every person, every business and every non-profit – no exceptions  As individuals - infants to corporations  Eliminate Single vs. Married distinctions  Eliminate personal vs. business vs. non- profit distinctions If businesses want to be treated as individuals for other purposes, they should be taxed as individuals. 7

8 Tax all Income – no exceptions  Individuals,  Wages, tips, bonuses, awards, realized options, interest, dividends, pensions, Social Security payments, welfare payments, insurance and annuity payouts, jury awards, alimony, lottery and gambling winnings, etc.  Capital gains taxed as income only if not reinvested  Gifts and estates not considered income  Businesses,  Net, pre-tax business income  Non-profits  Same as service businesses 8

9 No deductions, credits, allowances, exclusions or rebates to anyone or any organization for any purpose "We are all in the tax game together, and what is a privilege to one group of people ends up being a penalty to everyone else through higher tax rates.“ Taxing Ourselves: A Citizen's Guide to the Debate Over Taxes by Joel Slemrod and Jon Bakija, 2008, p. 89. 9

10  Social Security and Medicare are currently financed through wage taxes  Social Security wage taxes not progressive ◦ Only on wages below a cutoff ◦ Greatly increases the tax burden of low income people  Social Security is not an annuity ◦ The so called SS Trust Fund is a bookkeeping gimmick Social Security and Medicare benefits should be financed by the entire nation through income taxes 10

11 Any amount of pre-tax income can be transferred to any other individual or organization where it is taxed as part of the receiver’s income.  Family transfers among members  Windfall transfers to IRAs  Corporate transfers to stockholders as dividends  Transfers to non-profits as contributions  Limitations on transfers All income transfers become part of online public record 11

12 The income of a household can be transferred among its members so each is taxed at the lower rate of a progressive tax. 12 Tax Rate Income Household Member

13 One-time income from inheritances, insurance payouts, lottery winnings, bonuses, high income years, etc  Income can be transferred to flexible IRA type accounts  Taxed as income on withdrawal 13

14  After-expense, pre-tax income can be transferred ◦ To stockholders as dividends ◦ To subsidiaries to enhance their capitalization ◦ To non-profits  Eliminates double taxation of profits and dividends  Eliminates unfairness of different tax rates for wage vs. investment income  Strong incentive for businesses to pay better dividends and to support non-profits 14

15  Non-profits viewed as service businesses  No distinctions made among non-profits ◦ charitable, religious, political, cultural, etc  Net income taxed after operational ◦ Property costs, salaries, supplies, etc  Non-profits can be viewed as transfer agents when income received is transferred directly to beneficiaries 15

16 Objective: Help citizens become rich in assets and part of the so called “ownership society” ◦ Assets: anything that generates a monetary return ◦ Examples: real estate, stocks, bonds, mutual funds, savings accounts, farms, real estate, businesses, etc  Assets can be freely converted from one form to another with no tax consequences  Assets can be freely transferred from one individual to another with no tax consequences 16

17  When sold and any part of the proceeds are taken as income ◦ This makes this proposal a consumption tax.  Losses are the investors responsibility, not the government’s 17

18  Gift taxes eliminated  Estate taxes eliminated  The special treatment of Capital Gains and Losses is eliminated All asset transfers part of online public record 18

19  No quid pro quo transfers  No reciprocal transfers from whom the donor can extract an advantage ◦ Money ◦ Assets ◦ Influence  Violations to be prosecuted as tax fraud 19

20  Why taxes? ◦ To pay for essential governmental services ◦ Which services are essential is not part of this proposal ◦ Should not be to encourage or discourage any activity  How high should taxes be? ◦ As high as necessary to pay for budgeted spending ◦ Tax-cutting without cutting spending is foolish ◦ New spending without new revenues is foolish  Should individuals have a say in how their taxes are spent by the government? ◦ Yes, to the extent that they are willing to transfer income and assets to organizations that can otherwise provide required services 20

21  Why not a flat tax? ◦ Inherently regressive ◦ Does not affect everyone to the same extent  Why should taxes be progressive? ◦ High income individuals receive disproportionately more value from living in a modern society ◦ As an incentive for individuals to transfer income to non-profits  Example: privatize NASA and get to MARS sooner 21

22 Simple way to determine taxes at all income levels ◦ Calculated per individual, not household ◦ The same formula used for individuals and businesses ◦ From incomes of $0 to $1 Trillion-12 orders of magnitude If your income is $x, your income tax is f(x) = $y. 22

23 tax = k × (basic rate × income) – offset  Basic rate depends on income ◦ 0% at $0 and 100% at $1 Trillion ◦ All taxes are on individuals ◦ No special rates for single vs. family vs. business vs. non-profits  offset depends on earned wages ◦ Similar to existing Earned Income Tax Credit  k depends on ◦ National spending budget ◦ Population in each income range. ◦ Calculated repeatedly until the generated tax revenue equals budgeted spending. Actual tax rate = tax / income 23

24 Basic rate = (1.059463 log(income) - 1) 24 Basic rate= x log(income) - 1 1 = x 12 - 1 2 = x 12 x = the 12th root of 2 x = 1.059463

25  Depends on earned wages ◦ Similar to current Earned Income Tax Credit ◦ Calculated per individual, not per family ◦ Encourages all citizens to work for their living ◦ No offset for those able to pay taxes 25 Offset Plateau = $2,000 Phase-in limit = $3,000 Phase-out limit = $100,000 Plateau limit = $4,000 Wages Other income limit = $4,000

26 Ideal tax = 1 × (basic rate × income) – offset Ideal rate = ideal tax / income 26 Ignores spending budget Ignores population distribution

27 27 Most tax revenue from households with a modest income Revenue from high income households also required

28 Goal: Determine if proposal is reasonable  Revenue target is sum of ◦ 2011 individual income tax ◦ 2011 employee FICA and Medicare wage taxes  Limited to personal income ◦ Population distribution from IRS tables  Business, gift, estate and non-profit income not part of model because income distribution not available  Allocates household income equally to all members 28

29 Individual Tax Revenue  Individual, estate and trust income tax $1,175,989,528,000  Employee FICA + Medicare wage taxes $481,552,411,000  Total individual tax revenue $1,657,541,939,000 Estate and Gift Tax Revenue  Gift tax $6,572,384,000  Estate tax $2,506,991,000  Total Estate and Gift Tax revenue $9,079,375,000 Organizational Tax Revenue  Corporate income tax $242,435,939,000  Employer FICA + Medicare wage taxes $481,552,411,000  Tax-exempt unrelated business income tax $412,183,000  Total organization tax revenue $242,848,122,000 Revenue Target of 2011 Spreadsheet Model $1,657,541,939,000 29

30 tax = k × (basic rate × income) – offset where k = 0.692 30 Assumes equal allocation of household income Includes FICA and Medicare financing Model does not include business income

31 31

32  Dad earns $x per year  Mom earns $y per year  Their two children have no income  The family transfers 10% to charities, their church, their political party and cultural non- profits  For tax purposes, they allocate the rest equally (25%) to each person 32

33 Household income$10,000$20,000$30,000$50,000$100,000$250,000$1,000,000 % of income transferred out10% Taxable household income$9,000$18,000$27,000$45,000$90,000$225,000$900,000 % of taxable household income per person25% Each person's taxable income$2,250$4,500$6,750$11,250$22,500$56,250$225,000 log(each person's taxable income)3.3521825183.6532125143.8293037734.0511525224.3521825184.7501225275.352182518 Basic tax rate21.3646369%23.4933971%24.7559095%26.3648770%28.5813424%31.5711276%36.2271747% Basic tax rate * income$481$1,057$1,671$2,966$6,431$17,759$81,511 Phase in offset$1,500.00$0.00 Plateau offset$0.00 Phase out offset$0.00$1,989.58$1,942.71$1,848.96$1,614.58$911.46$0.00 offset$1,500.00$1,989.58$1,942.71$1,848.96$1,614.58$911.46$0.00 Each person's tax-$1,083.72-$1,074.06-$495.62$719.61$3,954.42$14,467.44$70,587.79 Each person's tax rate-48.17%-23.87%-7.34%6.40%17.58%25.72%31.37% Household tax-$4,335-$4,296-$1,982$2,878$15,818$57,870$282,351 Household tax rate-48.17%-23.87%-7.34%6.40%17.58%25.72%31.37% Household take-home income$13,335$22,296$28,982$42,122$74,182$167,130$617,649 33

34  Tax all income  Eliminate all loopholes  Allow income and assets to be transferred without tax consequences  All taxes are on individual persons and businesses  Tax all income using a single progressive formula that spans 12 orders of magnitude  Make all income, transfer and tax information available online and transparent 34

35 A much more complete model is needed! This is a work in progress, a stake in the ground. Please throw rocks at it. 35

36 Tax proposal home page with links to:  Tax proposal essay  Early comments  Spreadsheet model  This slide show  About the author 36

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