Taxes

Note:  This is an update of an idea I originally posted in 2018.

In my previous blog post titled “Government” I addressed the idea of fairness and taxes.

I have a solution for federal taxes that Congress is welcome to consider/use free of charge.

My plan relies on changing how we tax the very rich but it also helps businesses become more competitive and I think it is a solution even billionaire investor Warren Buffett or the world’s richest men, my Seattle area neighbors Bill Gates and Jeff Bezos would approve.

For lack of a better name I call it Jim’s Tax Plan.  Here are the highlights/benefits:

• Fully funds the Federal Government This includes all programs of the Federal Government except for Social Security and Medicare which are funded separately.  Jim’s Tax Plan provides financial support and stability for the Federal government including what I see as it’s most important role: Providing for the Common Defense.

• Eliminates all corporate and business taxes  Makes US businesses the most competitive in the world.

• Eliminates inheritance taxes No death taxes – family businesses & famers can continue to the next generation.

• Keeps Personal Income Taxes Revenue Neutral No overall additional taxes on personal income are needed.  I recommend substituting a Flat tax for rich and poor alike that will be simple to compute and easy to understand. Jim’s tax plan could, however, work with the existing personal income tax.

• Rewards high income (high productivity) individuals  The plan redistributes wealth, not from the rich to the poor, but from the less productive rich to the more productive rich.

• Balances the Budget Many people from all political positions are uncomfortable with deficit spending.  While there are some valid arguments that under certain circumstances limited deficit spending is OK, the vast majority of people I know think that the Federal Budget should be balanced so that Revenue = Expenses.

• Eliminate the Threat of Government Shutdowns caused by the Debt Ceiling   This benefit relates directly to the previous balanced budget benefit.  If there is sufficient revenue to cover the Federal Budget annually, there would be no need to raise the debt ceiling.

“OK Jim, you’ve got my attention, what’s your idea?”  

If you are middle income, please read on.

If you run a business and are in the middle class, I think you will like my plan.

If you are reading this and are both very wealthy and have very high income based on your skills and hard work, I think you might be surprised that Jim’s Tax Plan works OK for persons like yourself.

Rich People who work hard, generate lots of income every year, and who are real “job creators” will do fine under Jim’s Tax Plan. So will the sons and daughters who inherit family farms or businesses and continue to work hard and operate them effectively.

If you are very rich but don’t produce much; spend your money frivolously; accumulate wealth by basically taking it from others (legally or illegally) without delivering value; or basically just live off inherited wealth, you are welcome to read on, but you will probably not like Jim’s Tax Plan.

Under Jim’s Tax Plan the Federal Government would replace the current income focused tax system with a two-part system.  Every citizen would pay the highest of the following annually:

1. 1. A flat tax rate of 13.9% on all income with no-deductions.

OR

1. 2. A tax of 4.7% of one’s net worth.

“What the heck are you talking about Jim?”

What I am suggesting is that the basic premise of our current federal tax system is flawed, relying almost solely on taxing income.  We tax income twice, once when it is received by companies and then again as personal income.  It is fair and equitable to tax the higher of either income or net worth.

“How is this even possible Jim?”

By collecting the greater of the two tax rates (Not both) we can guarantee revenue that will equal the Federal Budget: The net tax rate being based on the percentage of the Federal Budget as a fraction of the total net worth of US Families.

Right now that rate would be 4.7%.  I computed this by dividing the 2021 Federal Expenses of $6.8 Trillion by the current $144 Trillion in household net worth. (6.8/144=.0472 or 4.7%) Note:  Source for Net Worth is The Federal Reserve.

“If the Government automatically receives enough revenue to cover expenses won’t this lead to unbridled spending?”

 Not necessarily.  Congress and the sitting President would need to work out an annual budget that their constituents will accept.  Under Jim’s Tax System taxes would only increase in direct proportion to any increases in the Federal Budget.  Currently we have a system that hides the actual cost of the Federal Budget and has led to deficit spending.  Spending is not directly linked to revenue, Jim’s tax plan would change that.

“So how would this impact most Americans?”

For most Americans there would be a change/no change.

Median Family Net worth is about $121,700.  Half of all family have more than this and half have less. ( Source:  Federal Reserve)

Median Family Income in 2021 was $79,900 (Source: US Department of Housing and Urban Development)

According to the IRS the Current Average Effective (After all deductions,the amount people are actually paying) tax rate is 13.9%

The median taxpayers are already paying significantly more than the 4.7% of their net worth. (.047 X $121,700 = $5,719 vs a flat tax of 13.9% (The current average effective tax rate) 0.139 X 79,900 = $11,106)

What this means is that under Jim’s plan the vast majority of taxpayers would just continue to pay their taxes via withholding out of their salaries.

In other words, little or no change.  Exception being the implementation of a flat tax, which, although I support it, would not be necessary to enact Jim’s tax plan.

“So what you are saying Jim is that we can balance the budget by adding a second means of taxation which would mostly impact the very wealthy?  The very wealthy are already paying the lion’s share? How is this fair to them?”

It is true, as conservative entities such as the Heritage Foundation have been saying for years, that the rich pay a very large percentage of taxes.  These sources are also quick to point out that up to 30% of the population pay no federal taxes at all.

We currently raise federal revenue by using a tax system that is so complex not even tax accountants can fully understand it.  Jim’s Tax Plan is a better way to generate the revenue needed to operate our government.

Jim’s Tax Plan shifts a large portion of the tax burden from high-income persons to those with high wealth.  Although sometimes these are the same people, often they are not.

Currently we penalize those who are the most productive (as measured by income) while favoring those who have lots of wealth but who may not actually produce much (as measured by reported income and/or losses which reduce their tax liability greatly).

Jim’s Tax Plan redistributes income, not from the rich to the poor, but from the non-productive to the most productive.   It also aligns taxation more closely with the benefits received, at least at the macro level.

Jim’s Tax Plan realigns the system to obtain a large portion of the revenue needed from a tax on the net worth of every American and especially the very wealthy.

The top 1% of the population currently possess about 32% of the total Net Worth of U.S. Households. (Source: Federal Reserve, Survey of Consumer Finances and Household Total Net Worth Report).

If we add a net worth tax and also keep personal income taxes and other sources of revenue the same (i.e. revenue neutral) we can balance the budget

“Why are you taxing everybody at the same rates Jim? Even the poor?”

We all have a stake in this country.  Everybody should pay something.

Even the very poorest among us do receive benefits of our democratic republic, if only the basic freedoms.

The less you have, the less you pay.  Few of us will choose poverty to avoid taxation.

“How is this fair? Adding the net worth tax will generate most of the additional revenue from the wealthy.  Why should the wealthy people pay more than the rest of us, even if the rates are the same for all?”

 Taxation under Jim’s Tax Plan would follow the principal that those who get more protection should pay more.     

The wealthy benefit the most from the protection our military and homeland security and the legal system provide to protect assets.

The top 1% of our population have, by far, the most to lose if the Federal Government does not protect their assets.  Without a strong military and homeland security, foreign forces would be able to take and/or destroy their wealth.  Without a legal system to protect assets such as patents, copyrights and legal recognition of property ownership, the wealthy could not hold on to their wealth.  Without a stable and mostly peaceful society to live in, wealth would be worthless.

Look at government services as a form of insurance – the more you have to lose, the more you need insurance. Like with home insurance, the more you have to protect, the more you pay.

Currently there is a group of relatively very few people who are getting the most protection.  They need to pay for it. Currently the super-rich are not paying their fair share for National Defense or for a stable society.

Side Note from a retired 29-year military veteran: It is also the case that the burden of actually providing the human cost for National Defense falls almost exclusively on the poor and lower middle class.  It is their sons, daughters, nephews and nieces who serve in the military.  With extremely rare exceptions, these volunteers are not from the families of the super-wealthy.

“High income people are already paying the lion’s share of taxes.”

This is true under the current system.  While it may seem radical, what I am proposing merely shifts the system to favor those high-income people who are the most productive by charging the non-productive wealthy more fairly for the benefits they receive from society (mainly, being able to keep their wealth).

The differentiation between “income” and “wealth” is fundamental to Jim’s Tax System.

“How can anyone maintain wealth under Jim’s Tax System?”

Let me answer this by giving examples of how Jim’s Tax Plan would actually play out.

Let’s say you bust your ass and increase your annual income over a number of years to $300,000 annually and in the process pay off your mortgage and accumulate a net worth (Assets minus liabilities) of $1 Million (For point of reference a net worth of $1M is about 8 times the median).  Your tax liability would be the greater of 13.9% of your income ($41,000) or 4.7% of your net worth or ($47,000).  In this example the net-worth tax would kick in and the individual would pay that tax instead of the income tax.  It would more or less be a wash at this level of income and wealth.

For the super wealthy the equation starts to get to the heart of Jim’s Tax Plan, generating revenue to balance the budget.  If, for example, you inherit $10 Million dollars and do nothing productive you will owe $470,000 annually. $100 Million pays $4.7 M and $1B pays $47 M.  Under the current system, those among this lucky group that produce absolutely nothing or if they are ineffective and lose money they pay little to nothing in taxes.  The previously mentioned complexities of the current tax system offer many ways to avoid paying any taxes. To a certain extent the current system rewards ineffectiveness by allowing loses to be written off.

4.7% per year is not too much to ask from the very wealthy.  If they did absolutely nothing more than buy an index fund they can earn 8-10% annually.  Over the past 100 years the average annual return from the stock market is over 10%.

That means that if a wealthy person did nothing more than make a simple investment, their wealth would still grow annually even after they paid their fair share of 4.7% to run the Federal Government.

Where is the motivation to achieve?”

Really productive people have an excellent opportunity to accumulate wealth under Jim’s Tax Plan should they desire to do so.  Remember that Jim’s Tax Plan eliminates Corporate Taxes altogether. That frees businesses to make smart market-based decisions free from tax-system imposed incentives and decisions.  It would be easy for owners of these productive corporations to exceed 10% annual return on their investment.

There would no longer be a difference between tax deductible and other expenses.  There would just be expenses.  Either it makes business sense to spend money a certain way or it does not.  This decision is better made by the owner of the business than some politician in Washington.

Despite what the Supreme Court says in Citizens United, Corporations are not people.  People own corporations and under Jim’s Tax Plan revenue would be collected from those owners as a part of the net worth tax.  Individuals would be taxed only once annually.  This tax would be collected as either a net worth tax or an income tax, whichever is higher, but not both.

Successful businesses will thrive, poorly run ones will fail.  With Jim’s Tax Plan American businesses will have a tremendous competitive advantage not having to pay corporate taxes.

QUESTIONS?????

Taxation is a complex issue with no easy answers, but I welcome your critique and questions about this idea.  Please let me know what you think, especially if you think this plan cannot work, by clicking on Comments below.

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