Another Comprehensive Approach: The Fair Share Tax Reform Proposal

February 14th, 2012

I just came across a fellow internet econocrank’s tax proposal, and find it quite interesting — especially its proposed progressive tax on net worth, which echoes the flat tax on financial assets that I’ve bruited. It also reflects many of the notions I suggested I’d implement if I was the Dictator of America.

The basic problem with this and all comprehensive tax reforms, of course, is that the political system doesn’t work this way, can’t work this way, never has worked this way. We only move forward, improve the system, over centuries — with fitful, stumbling, fumbling steps, forward and backward, never addressing the whole economic ecosystem.

It makes biological evolution look downright intentional and speedy, by comparison.

All that said, I like this proposal. See what you think.

1. Federal Income Tax:

All income and compensation is taxed at a 20% rate except:

- Income under a realistic poverty line (eg $15,000 for a single person), which is taxed at 2% instead

- Income used to pay for large medical expenses (>10% of income) is tax-free

- Income placed into tax-free education-retirement savings account (with modest caps)

- No other adjustments, deductions, or exemptions

Effective rates: 10% on $60,000;  15% on $160,000;  19% on $1,000,000.

Totals about 65% of federal revenue.

2. Federal Net-Worth Tax:

All net worth (accumulated wealth), except the first ~$800,000 is taxed at a progressive 1-1.7% rate.

This tax replaces property, capital gains & estate taxes. Net-worth is the best measure of how much a household has profited from the economic infrastructure governments (all taxpayers) provide.

Effective rates: 0.2% on $1million;  1.0% on $3million;  1.7% on $27million and over.

Totals about 20% of federal revenue.

3. Federal War Tax: Everyone contributes to any war effort: A 6% surcharge increases a federal taxes bill of $10,000 to $10,600 while the nation is at war.

4. Eliminate all these taxes:

- Social Security Taxes – Social Security & Medicare funded from general revenue instead

- Estate Taxes & Capital Gain Taxes – Replaced by more efficient and fair Net-worth Tax

- State Income Taxes in their current form – Replaced by more efficient and fair surcharge – See #5

- Property (real estate) taxes – Replaced by more efficient and fair surcharge – See #5

- Sales taxes, tolls, etc. – Replaced by more efficient and fair surcharge – See #5

- Corporate Taxes – Profits distributed to corporate owners and taxed as income.

5. All states and local governments eliminate all their current taxes and instead set and collect a surcharge on a household’s combined Federal Income and Net-worth Tax.

6. Excise taxes only on products that have a cost to society that is not reflected in their price … e.g. cigarettes, gasoline.  Totals only about 10% of federal revenue.


Cross-posted at Angry Bear.

  1. beowulf
    February 15th, 2012 at 09:49 | #1

    Last month there was an op-ed in, of all places, the WSJ advocating a net asset tax (essentially, an annual estate tax).
    “Ronald McKinnon, professor of International Economics, Stanford University. His recent op-ed in the Wall Street Journal… is “The Conservative Case for a Wealth Tax.”
    http://onpoint.wbur.org/2012/01/19/is-it-time-for-a-wealth-tax

  2. Clonal Antibody
    February 19th, 2012 at 08:13 | #2

    I think you are going down a very complicated path. The high income tax brackets work and work very well. This is what I wrote as a comment to Randy Wray

    The point of the 91% tax bracket – and that is what the top bracket was until 1964 – is not to tax somebody at that level, but rather to provide an incentive to that person to give away his/her wealth (that is what tax deductions for charitable and public purposes are for) Perhaps this can be achieved at lower brackets, but history shows that likely not to be the case. See Emmanuel Saez’ work.

    The incentive works at two levels – first it encourages foundations and charities aimed at public purposes. Second, if starting charities and foundations does not appeal to the individual, they redistribute income that they would have taken, and give them as higher wages to their employees. “If I can’t keep it, I would rather give it away.”

    The high tax brackets are a form of incentive. The mistake Eisenhower administration made in 1957 was to lower the 91% tax bracket from beginning at $1.6M to beginning at $200,000. Of course, as you rightly point out, this would not have brought in any more tax revenues. It only riled up many people. This mistake was IMO the single biggest factor in RMN’s loss to JFK in 1960. In today’s dollars, the 1.6M would be about $12M

    My suggestion is to reinstate the tax structure that existed in 1957, peg the rates to inflation, and to encourage states to institute an additional Land Value Tax, and discourage both sales taxes and value added taxes.

  3. Clonal Antibody
    February 19th, 2012 at 08:49 | #3

    @Clonal Antibody
    I would also add, that reinstating the 1957 brackets would be a good thing, after eliminating FICA, and increasing the standard deduction per person to $1500 (1957$), or raising the bottom bracket to kick in at $6000 (1957$) Keep Social Security pegged to working life income, keep Social Supplementary Income, and institute “Medicare for All”

  4. beowulf
    February 19th, 2012 at 15:49 | #4

    @Clonal Antibody
    Fascinating point about Eisenhower adjusting down the tax brackets, thanks for sharing.

    Your mileage may vary, but I don’t see how a (to use McKinnon’s proposal) an annual 3% net asset tax (with an exemption covering all but the top one or two percentile of families) would be more complicated, in practical terms or politically, than increasing the top marginal rate from 35% to 91%.

  5. Clonal Antibody
    February 19th, 2012 at 16:16 | #5

    Beo,

    The problem with the Net Worth Tax is not so much in the concept of the tax itself, but rather in the definition of Net Worth. The valuation of various assets at the “current market price” is an extremely inaccurate figure. Payment of the tax is in $, however, to deliver the tax to the government requires liquidity. Most assets that make up the net worth, at least for “High Net Worth” individuals are not very liquid, particularly if 3% of the net worth was to be liquidated every year to pay Uncle Sam. Income taxes, however are paid on a what would be considered cash income basis, and can be factored in when income transactions occur.

    Politically, raising the income tax is easier today, than any time in the past thirty years.

    I would say begin taxing at a single income of $20,000 at the 15% level. Continue the same brackets till you hit 33% which begins at $175,000

    Start increasing the tax brackets from that level. You will get little push back from the 99% whose taxes will not rise. Particularly if you eliminate FICA.

  6. beowulf
    February 19th, 2012 at 23:00 | #6

    “The problem with the Net Worth Tax is not so much in the concept of the tax itself, but rather in the definition of Net Worth. The valuation of various assets at the “current market price” is an extremely inaccurate figure.”

    No reason to re-invent the wheel, the IRS already has all the regulations and forms figured out vis a vis the estate tax, which is, after all, a one-time net worth tax (the one difference would be that couples who file jointly would count as one “estate” for the purposes of an annual net worth tax).

    “The Estate Tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death (Refer to Form 706 (PDF)). The fair market value of these items is used, not necessarily what you paid for them or what their values were when you acquired them. The total of all of these items is your “Gross Estate.” The includible property may consist of cash and securities, real estate, insurance, trusts, annuities, business interests and other assets.
    Once you have accounted for the Gross Estate, certain deductions (and in special circumstances, reductions to value) are allowed in arriving at your “Taxable Estate.” These deductions may include mortgages and other debts, estate administration expenses, property that passes to surviving spouses and qualified charities. The value of some operating business interests or farms may be reduced for estates that qualify.”
    http://www.irs.gov/businesses/small/article/0,,id=164871,00.html

  7. Clonal Antibody
    February 21st, 2012 at 14:32 | #7

    @beowulf
    Beo,

    As an Estate tax this works, but very likely not as an annual levy. The reason is primarily due to the lack of liquidity of accumulated assets. As an estate duty, assets can be liquidated to fulfill the tax liability, and as assets are liquidated, the value of those assets may revalue the tax liabilities – in other words, the assessed value of a property could be $1000,000 – however, at the Estate auction, the asset can only be sold for $500,000. Then, the Estate tax can be reevaluated, and the tax paid out of the proceeds. This process could be a difficult one when done on an annual basis.

    However this could be a useful artifice to prevent the rich from acquiring many real assets, and also possibly to lower the possibility of asset bubbles. In other words, it would motivate the rich to hold more of their wealth in liquid assets, or to make sure that the real assets they hold have a low assessed value!

  8. beowulf
    February 21st, 2012 at 23:29 | #8

    @Clonal Antibody
    Naturally Bill Vickrey had this problem sorted out decades ago.
    “However, as first argued by Vickrey (1939), the incentive to defer gains and realize losses can be eliminated even in the absence of ex-post equivalence between taxation upon accrual and realization. If “virtual” tax payments are capitalized at the risk-free net-of-tax interest rate and charged at realization, investors would be ex-ante indifferent between accrual and realization based taxes because certainty-equivalent after-tax returns would be equated.
    If the actual path of an asset’s value is unknown and taxes are levied upon realization it is not possible to replicate the ex-post terminal wealth that would result under accrual taxation. In this case, the Meade report (Meade, 1978) proposed to approximate accrual taxation by assuming that assets appreciate at the implicit rate of return over the holding period. Accrual taxation would be approximated by capitalizing these annual “virtual” tax payments by using the net-of-tax interest rate.”
    http://www.freepatentsonline.com/article/National-Tax-Journal/101414962.html

    Since passive foreign investment company holdings are taxed like this (using the Meade approach) at ordinary income rates, the dirt simple approach is amending one subsection of the tax code (26 USC 1(h) to be precise) and simply taxing all capital gains as if they were PFIC holding [I’d strike existing text and insert]:

    “Notwithstanding any other provision of law, if the taxpayer disposes of a capital asset then the rules of Subsection 1271(1) shall apply to any gain recognized on such disposition in the same manner as if such gain were an excess distribution in respect of stock in a passive foreign investment company.”

    Done and done. Since the dividend rate is, for some reason, pegged to the long term capital gains rate, it’d be bumped to 35% at the same time. Also, unlike other kinds of capital gains, the FPIC regime doesn’t provide heirs with a stepup tax basis.

  9. beowulf
    February 21st, 2012 at 23:30 | #9

    PFIC regime, not FPIC. :o)

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