WASHINGTON, Sept. 28, 2015 — Presidential hopeful Donald Trump just released his proposal to change the tax code. His goal is to make the system more fair, eliminate loopholes, raise sufficient revenue, make tax filing easier and give tax relief to low-income earners. He believes that high-income earners should pay disproportionately more than low-income earners. That is, he wants high-income earners to pay not only more tax dollars, but also a higher tax rate.
His plan almost got it right.
Trump’s plan calls for individuals earning less than $25,000 and families earning less than $50,000 to pay no federal income tax at all and have a simple form to complete. That’s close to the current system, so this is nothing new.
Once earnings exceed those amounts, his plan sets tax rates at 10, 20, and 25 percent. He also wants to set the capital gains tax rate at 20 percent, which is below the current 23.8 percent rate on most capital gains. He would reduce the corporate tax rate to 25 percent, but allow corporations to bring income earned outside of the U.S. into the country and be taxed at a 10 percent rate.
By affirming a zero tax rate for lower income earners while slimming the “progressive” tax structure down to just three tax brackets, his plan would simplify the tax system and make it more fair than the current one.
Trump says he will eliminate loopholes so that the wealthy pay their fair share, although he has not specified which deductions he would allow and which ones would be eliminated. In total, he says, tax revenue will decline slightly but will eventually be made up by higher growth in the economy.
His plan almost gets it right, but not quite.
By retaining a progressive tax structure, he taxes higher-income earners disproportionately more than lower- income earners whose income exceeds the 0 percent tax cutoff point. Although his plan is less progressive than the current tax code, it still reduces incentives for the biggest contributors to the economy.
There is a better way that reaches all of the goals while accelerating growth so that tax revenue will actually increase.
A better plan would involve imposing a single rate tax of 15 percent on all income earned above a livable minimum — say, twice the poverty rate — with no deductions allowed. All income would be taxed the same, whether it comes from wages and salaries, rent, interest, profit, dividends or capital gains. Corporate income would also taxed at 15 percent.
This plan makes tax filing very simple. A household would simply add up all income earned, subtract the livable minimum (about $25,000 for an individual and $50,000 for a family of four) then multiply the balance by 0.15; that would be the amount due. Filing is easy: There is no need to keep receipts of expenditures, and no tax preparer is needed to assist in the preparation of the IRS’ often mindlessly complicated forms. Those forms would be largely eliminated.
This plan would accelerate economic growth, probably doubling the 2.2 percent annual growth rate the government asserts we have averaged for the past six years. As a result, total tax revenue would also increase. Since wages and salaries would be taxed at the same rate as capital gains, every dollar earned would be treated exactly the same. Have you ever wondered why income earned from capital is taxed at a lower rate than income earned by labor?
There is really no reason for that, aside from the current loophole.
This plan would also eliminate all market distortions. No longer would renters of homes be penalized by the tax code in favor of home owners. Since there would be no deductions for anything, renters and home owners would be treated exactly the same.
Some may worry that by eliminating the deduction for charitable donations, the total amount of such donations would fall. Exactly the opposite is likely to occur. People would now have more money to make donations, and they would do so because they would feel compelled by personal belief in the value of a given donation rather than donating solely for tax reasons as a great many individuals do now.
In 1982, Congress reduced tax rates and eliminated some charitable deductions. Many feared there would be a huge decrease in donations. The reality was that charitable donations increased.
While Trump is trying to fix the tax code and reach his goals, he has not gone far enough. The Busler tax plan, outlined above, reaches all its goals by establishing a system that is easy to administer, causes no market distortions, significantly increases economic growth, raises more revenue, simplifies the tax system, eliminates all loopholes and is (arguably) the most equitable.
Now who could possibly oppose that plan?
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