Guest post by Christopher Hanford:
First of all, I favor income taxes over consumption or value-added taxes because the government is incentivized to maintain a regulatory structure that fosters private sector growth. We make more, they make more. I don’t think they should incentivize us to consume more, for example.
My plan for Federal Income Tax applies to both wage earners and businesses and has three parts. They work together to allow taxpayers to maintain control of their earnings and to be smart about money. The plan also makes sure that businesses pay some tax. It greatly reduces compliance costs and the time it takes to audit a return, thereby allowing many more returns to be audited. The three parts are:
- Interest earned on Savings Accounts and CDs at Banks and Credit Unions would be tax free.
- Withholding on workers’ earnings would be decided by the worker, and there would be no penalty for having none withheld. Self-employed workers and businesses would not have to pay quarterly taxes. All workers could have money withheld if they want, and they would decide how much would be withheld. Or they could just as easily deposit that money into their savings account, earn tax-free interest on it, then access it when they need to pay their taxes, which would be due on March 1st of the following year.
- The first $35,000 of gross income (or revenue) would be tax-free, and this amount of exclusion would be indexed to inflation. Any earnings above that would be taxed at 10%. There would be no other deductions except for pass-through items. Dividends paid out to shareholders, and Partnership payouts, would not be taxable to the payer, just to the receiver, for example.
This applies to both businesses and individuals. There would be no more filing jointly, each individual would file separately.
A few examples:
- A person has a $50,000 salary. They can quickly figure that since the first $35,000 will not be taxable and the remaining $15,000 is taxable at 10%, $1500 is due March 1st the following year. This person will pay federal income taxes of 3%. ($1,500 is 3% of $50,000.)Divide $1500 by 12 months and that is $125 per month they could choose to have withheld or that they could set aside in an account at their bank that would earn tax-free interest.
Under the current system, many people have too much income withheld, get a large tax refund, and are happy about it, but that is horrible money management. Getting a tax refund means you gave the government an interest-free loan for the year. Better to earn tax-free interest on that money yourself.
- A person makes $200,000 a year. Their taxable income the first year is $165,000 at 10%, so $16,500 is owed. They paid 8.25% of their income as federal taxes. Again, every year the exclusion would be adjusted by the inflation rate, so the second year the exclusion would likely be more. This system would incentivize the government to keep inflation low.
- A corporation has revenue of a billion dollars. Their taxable income is $999,965,000. Their tax bill is $99,996,500. Their effective tax rate is 9.99%. They have no other deductions or depreciation schedules. If they want to build a new factory or spend on R&D, that is their business as long as they pay their tax on March 1st.
There would be many deep ramifications of replacing our current system with this. Restructuring of businesses, as they jettison their tax attorneys and reduce previously deductible expenses would be one, but I think most importantly, it will reduce compliance costs, in both time and money, for taxpayers.
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Christopher Hanford is a financial advisor in Benicia, CA.
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This guest post was submitted in response to my query about how the best way to deal with the current economic situation. This post does not necessarily reflect my thoughts and feelings.
Your comments and reactions are, of course, appreciated. Just play nice. I have standards. And I don’t want to have to delete you.