Thursday, April 21, 2011

New Flat Tax Idea

There are several conservative "Flat Tax" ideas out there.  They all suffer from huge flaws that instantly tax poor people far more than the wealthy (which we already do, but they make it worse.)

They have the benefit of simplifying things, which of course lets complex people get around them.  For example, they might give a flat tax on every penny earned, but forget about sales tax, property taxes, social security, medicare, etc. all of which hit the poor much harder than income tax.  Then there is the purely sales tax method, which works great if like most rich people, you save 99% of your money.

So I hereby propose a simple "Flat Tax" idea that is a bit more liberal.  For all of you schmucks out there that think 'simplicity' is great, try this one.  (Note, I got this idea from an earlier post - to solve the defecit by adding a new tax on 500 million + people.  This modification replaces federal income tax with a similar but larger idea.)

The estimated net worth for all US citizens in 2008 was about $63 Trillion dollars.  The IRS collects about $2.4 trillion dollars for tax year 2008.

So, a flat Net Worth tax of about 4% should cover the taxes.

Assuming we were to do this, then suddenly most tax inequalities vanish.  Yes, the wealthiest 25% of US households own 87% of the wealth, but guess what, that means they are paying 87% of the taxes.

The major problems are as follows:

  1. It tremendously encourages spending - and more importantly, renting.   Middle class starts selling their homes and renting out palatial palaces instead.  Better to spend that money now, as opposed to save later.
  2. Lots of things are hard to value - or worse, there are multiple values.  Do you value a stock at what it is selling for per share, or at the book value?  Worse, private companies can be worth a lot on paper and not much at auction (or vice versa).
  3. Privacy invasion - the IRS no longer knows only what you do (and how much you earn), but now knows EVERYTHING you own. 
  4. Illiquid and indivisible investments create large tax payments without generating cash.

Solution 1:  Simply continue the existing exemptions in some modified form (Retirement plans, medical saving plans, and housing exemptions) .

Solution 2: can be solved by declaring that the income reporter can choose whatever value they wish to state, but are legally required to sell the item at 10% above that price (exception for everything exempted in Solution 1 - including your home).

Solution 3:  The privacy issue could be ameliorated by harsher penalties for IRS information misuse.

Solution 4: can be dealt with by either using retirement funds, an ETF like system, and/or a multi-year payment system whereby you taxes are delay-able for up to 10 years, depending on the investment. That is, if it is very illiquid and indivisible, then you can pay 20% at the end of 5 years instead of 4% every year.  If the investment goes up, this nets the government more tax, if it goes down, it saves you tax.

Now think about this world.   The poor no longer have to bear the brunt of the taxation.  No longer will Mr. Buffet (who earns almost everything via capital gains), pay a smaller percentage than his servants.  In addition, there will in effect be no capital gain problem any more. It will be taxed at the same rate as wealth added by working.  At the same time, an investment that loses money automatically reduces your wealth and therefore the amount of tax you owe.

I am not seriously proposing that this idea be America's only tax system - but it is far better than most other flat tax ideas I have seen.

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