A tax plan where everyone, including the middle-class, wins

A tax plan where everyone, including the middle-class, wins

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President Obama said in the State of the Union that we need the rich to pay a little more. We can do that with a flat tax.

As inevitable as death / Image: DonkeyHotey, used under Flickr Creative Commons license
As inevitable as death / Image: DonkeyHotey, used under Flickr Creative Commons license

WASHINGTON, January 21, 2015 — An important element of President Obama’s State of the Union and the chatter afterward is Federal Income Tax policy.  Everyone wants something, and there seems to be no plan that allows everyone to get what they want.

Or is there? There is a federal income tax plan that will give Obama more revenue to spend on social programs, give Congress the lower tax rates that they deem necessary, give taxpayers the fairness and equity they want, give businesses incentives to expand, bring home the $2 trillion held by U.S. businesses outside of the country, and almost eliminate the corrupt IRS.

The plan is easy to administer, produces no market distortions, increases economic growth, reduces unemployment, helps to alleviate poverty, and reduces income inequality.  It also solves the problem of having capital taxed at a lower rate than labor, and eliminates the need to pay professionals to complete our very complex tax forms. Virtually everyone gets what they want.

READ MORE: The fix for government spending, taxes and economic growth

Here’s the plan: All income above a livable minimum is taxed at a single rate, no matter how that income is earned or used. There are absolutely no deductions for anything.

There are a number of different combinations for pairing the tax rate with the livable minimum, but the most appealing is when the livable minimum is set at twice the poverty level and the single rate tax is set at 15 percent. The corporate rate is also set at 15 percent.

How would that impact a typical family of four?

Suppose the family adds up all income from wages and salaries, rent, interest, profit, capital gains and dividends; the total is $70,000. The livable minimum is $50,000.  They owe tax on $20,000 which amounts to a $3,000 tax bill. The tax return is a simple form that anyone can complete without hiring a professional.

Let’s see how this plan gives everyone what they want.

This plan would generate about $200 billion more revenue annually than the current tax code, giving the President more money to spend on his programs. The lower tax rate would give Congress exactly what they want. Taxpayers would view this as fair since every taxpayer pays exactly fifteen cents of every dollar earned above the livable minimum. High income earners pay more total taxes than middle income earners, but every American pays the same rate.

The corporate tax rate of 15 percent increases profit in the short term and creates more incentive to invest in the long term. It also allows U.S. companies to bring the $2 trillion back to the U.S. The low 15 percent rate may even encourage foreign firms to locate here.

READ MORE: Reviewing the facts, fantasies and fallacies of The State of the Union

The low tax rate would accelerate economic growth, leading to more jobs which reduces unemployment and reduces the number of people relying on government assistance. The greater demand for labor would pull wages up, and the new jobs would reduce poverty as well as income inequality.
All income is taxed at the same rate, so capital and labor at treated exactly the same. Since there are no deductions for anything, no market distortions are created. Everyone wins.

The objection to this plan is that it looks like a tax cut for the wealthy at the expense of everyone else. The reality is that the wealthy currently pay rates lower than 15 percent. During the 2008 election, Warren Buffett asked why his tax rate is lower than his secretary’s; she paid 25 percent and he paid only 13 percent.

Buffett, like all high income earners, employs the most expert tax lawyers and tax accountants whose sole task is to structure his income so that tax liability is minimized. As a result he ends up with a 13 percent rate, or lower, as do many other wealthy people.

The reality is that under this plan, high income earners will pay more taxes.  They won’t mind, though, because this plan frees them to make business decisions based on economic factors rather than tax considerations.

If we fully consider this plan, we will find it is a winner for everyone and we all get what we want.

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