New tax code would give Americans vested interest

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The tax filing deadline earlier this week makes this an opportune time to discuss taxation in America.

A progressive shibboleth is that some Americans don’t pay their fair share of federal income tax. They are right in point of fact but dead wrong about who doesn’t pay their fair share.

Let’s recap a few basic facts before I present my proposal to remedy the situation.

  • America has the most progressive tax system on Earth. The rich pay a higher share of tax than in any country; our corporate tax rate is the highest in the developed world.
  • When including credits, the bottom 60 percent in the US pays only 1 percent of the total tax. No other nation has near 60 percent not paying tax, thus making us the least regressive on the planet.
  • In recent decades the share paying no taxes has more than doubled; the US has become much more progressive both over time and relative to other nations and by wide margins.
  • Social Security is modestly progressive lifetime and Medicare is extraordinarily progressive. The entire tax  system including payroll taxes is progressive.

New Minimum Federal Income Tax

There is something terribly wrong when the richest nation in the history of mankind has 60 percent of its citizens paying virtually no income tax. So, how do we fix it?

I am okay with the lowest income quintile not paying income tax; the bottom 20 percent of Americans can get a pass until their income increases. The second lowest and the middle quintiles however should be required to pay the new minimum income tax.

The second from bottom cohort should pay a low rate of 10 percent subject to a minimum of, “a arguendo,” $100 per month. The middle cohort, half of which earns above average income, should be subject to a rate of 12 percent to 15 percent with a minimum of $200-$250 per month – all indexed for inflation.

It is critical for our constitutional republic that the tax base is broad and every citizen (bottom cohort excepted) feels the sting of  higher taxes. 

If tax rates in general rise or fall, the new minimum tax would rise or fall proportionally. Instead of 60 percent paying no income tax, that number would be reduced by 67 percent down to only 20 percent.

This would give nearly all Americans a vested interest in reducing spending and taxes and controlling government – not to mention the quiet dignity of being a taxpayer and contributing to the common weal.

New Maximum Federal Income Tax

When polled, Americans consistently respond no one should pay more than 25 percent-33 percent of income in taxes. I therefore propose no American should ever pay more than 40 percent of income in taxes of all kinds.

To effect this I would impose a new maximum tax that works as follows.

The new maximum tax form would include spaces for adding all taxes paid including, “inter alia,” all the following:

Federal income tax, state and local income tax, payroll tax including Social Security and Medicare, real estate tax, sales tax, death tax, intangibles tax, automobile taxes and fees, gasoline tax, transfer taxes and any other tax meeting a “de minimus” threshold.

Finally, I would cap it off by including each person’s share of corporate taxes paid because, as everyone should know, corporate taxes always are paid by real people. Companies could send out a tax form each year reporting the share of corporate tax paid by each shareholder. Once the total taxes reach 40% of income, the taxpayer may reduce the federal income tax by whatever amount is required not to exceed the 40% maximum.

Note: Acknowledgement is due John Cochrane who proposed something similar to the maximum tax in a recent Wall Street Journal op/ed.


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