Matt HealeyFriday,3 January 2014

The Snap:

It is now time to get back to the income inequality series because I have more time to do research while waiting for the “New Years” to figure out how to work a stair master. They should figure it out just in time to quit for the year but that is a side note that I have discussed before. So far the discussions have been around technology and education. I now want to turn to an idea that I proposed a while back, tax code reform.

The Download:

Let’s look at the current tax code. Now I have a simple question: Do you think you could read the entire tax code in 2014 before it changes again in 2015 ()? Before you answer, keep in mind that according to this site, the code is 73,954 pages. As a reference point, the first 5 books in the Game of Thrones series tops out at 5,343 pages and the entire 7 book Harry Potter series comes in at 4,194 pages. So if you read both of the series in the same year, you would get to 9,537 pages, or, just over 10% of the tax code. So, if you can read 100 pages per hour, which is fast, it would take a little over a month to read the entire code with no breaks for anything like eating or sleeping. Based solely on this, there needs to be a change.

The change needs to be radical simplification (). A little research indicated that the federal government took in approximately 2.5 trillion in 2012 (Table 1). It also showed the income distribution of the 211 million Americans over 15. Based on this I made some simplifying assumptions. The first was that everyone in an income range made the exact middle. So for the range of $50,000 to $52,500, I assumed that everyone in that bracket made exactly 51,250. I also assumed that the 13.97 million people who made over $100,000 were broken up as follows: 6,985,000 of them (half) made exactly $250,000. 4,985,000 of them made exactly $1,000,000 and 1,000,000 of them made $5,000,000. Based on that I assigned marginal tax rates as follows:

$0-$15,000 0%

$15,000-$25,000 1%

$25,000-$50,000 5%

$50,000-$75,000 10%

$75,000-$100,000 15%

$100,000-$500,00 $20%

$500,000-$1,000,000 25%

$1,000,000+ 30%

Based on these rates, the US treasury would be able to take in a little under $2.9 trillion. This does two things; It lowers the marginal tax rates and increases total revenue. However, for it to work, there need to be two critical components. The first is that all income counts as income. There is not provision for capital gains (which would be adjusted for inflation) to be taxed as a different rate, or dividends to be taxed at a different rate. All income would be treated as income. The second is that all tax deductions must go away. No mortgage interest deduction. I think that it will help with income inequality because generally the wealthy have lower taxes because investments are taxed at a lower rate than wages. So since a greater portion of the top 1% income come from investments, we do not truly have a progressive tax system ().

The side benefit to this would be it would make filing taxes much easier and we could drastically scale back the IRS.

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