|Even though this article was updated in 2008, it still uses all the data for 2006 taxes. The tax tables are no longer drastically revised, medicare and social security tax are now unmodified, and the text was improved upon slightly. Since the tax tables aren't changed much any more, the applet showing the new tax amounts has been removed. Essentially, alot of the more extreme material has been removed.|
This article is primarily about federal income tax in the United States, but it mentions some other taxes as well. It is largely irrelevant to people in other countries, but they may find it interesting.
This rant is about simplifying the federal income tax system. This will save the government money collecting taxes and will save the taxpayers time filling out all the forms. My recommendations do require some changes to law.
These ideas are presented as a step-by-step guide to streamlining taxes. Politicians can perform the steps in order to make tax law simple. Some of the steps make more sense when taken in context of the other steps.
This guide is useless to the common person unless they lobby Congress to make these changes or just like thinking about this sort of stuff.
Eliminate that bit about money going to the Presidential Election Campaign. Just use all of the interest from all the withheld taxes as additional income. If you then want to spend it on the Presidential Election Campaign, go ahead.
Don't bother asking us about it. You don't ask the citizens of the U.S. when you put nuclear waste in our neighborhoods or send us to war, why ask us about something stupid like that? If you think you're fooling us into thinking that an individual has more say in the government than he/she actually has, you're living in a fantasy world.
Head of household is a filing status that gives single individuals better tax brackets if they have one or more dependants. It may seem unnecessary due to exemptions, but it gives single parents and some others a tax break.
The problem with this status is that rich people with dependants wind up saving more taxes than poor people. It should just be a credit so that poor and rich people are rewarded equally for taking care of dependants.
No one should receive more than someone at the top of the 10% tax bracket. The advantage of the higher standard deduction is $240 ([$7,550 - $5,150] * 0.1), and the advantage of having a higher limit for the 10% tax bracket is $180 ([$10,750 - $7,150] * 0.05). This data comes from the tax tables in the 1040.
That's a total tax credit of $420.
Exemptions should be replaced by credits. Here's a list of the exemption savings by tax rate:
|Tax Rate||Exemption Savings (Old System)||Exemption Savings (New System)|
Instead of being a deduction, it should be a $330 credit per exemption at the end of the tax form. If this reduces your taxes to less than $0, you pay $0. Doing it this way means that everyone gets the same credit per exemption, regardless of how much money they make. The poor would pay the same as they do now, but the rich would pay more.
This suggestion may sound harsh (in that rich people with many kids will have to pay higher taxes), but it is fair. The idea that people in higher tax brackets should receive higher subsidies for producing children is ridiculous.
The Standard Deduction is good enough, so Itemized Deductions can be eliminated. The only thing on Schedule A that people deserve to be able to write off is gifts to charity. Optionally, gifts to charity could be a deduction in addition to your Standard Deduction. More realistically, it shouldn't be deductible at all. People should give money to charities to help people, not to get insignificant tax deductions.
This eliminates Schedule A and reduces the complexity of one line on the form 1040.
Some people will pay higher taxes without the Itemized Deductions, but it is dubious that anyone with enough expenses to benefit from Itemized Deductions is going to miss a few dollars of taxes.
There shouldn't be such a thing. Dividends and capital gains should always be taxed at the same rate as anything else. Income is income, regardless of where it comes from. Having "qualified" income that gets taxed less is a disservice to humanity.
Personally, I benefit from qualified dividends and capital gains, but I still think it's a stupid law.
There's a line for paying taxes on tax credits and refunds. That's just stupid. It makes even less sense once Schedule A is eliminated so that there's no way to write off state and local taxes.
Roth IRAs are clearly superior to regular IRAs as retirement accounts, so regular IRAs shouldn't exist. Pick a date at which all traditional IRAs are automatically converted to regular money or Roth IRAs. Since the money was never taxed in the first place, it has to be taxed. But it should be taxed at the lowest rate (10%) and taxed separately from income because it's unfair to screw people over with their retirement accounts.
Since people are paying the lowest tax rate on their former traditional IRAs, they'll save money. Some of them might not understand this though.
It might be advisable to make it impossible to get new traditional IRAs for a decade or two prior to this just so that fewer people have IRAs that get converted. Unfortunately, that would delay the elimination of traditional IRAs, and they might never get eliminated at all.
This eliminates an income line and a deduction line (in the adjusted gross income section) from the tax form. It does, however, require an additional form for the year in which the traditional IRAs are converted.
Why tax social security benefits? It's money the government is paying to you. Allegedly, it's them giving you your own money back. Don't even list social security benefits on the income tax form. Federal income tax will be reduced slightly as a result of not taxing social security, but people on social security are usually in low tax brackets anyways.
Reduce the social security payments by an appropriate amount if they're large enough. Then the government is paying out that much less instead of paying the whole amount and asking for some of it back.
As a side effect, this will help the Social Security Administration a little.
There's a section on the tax form called "Adjusted Gross Income" that involves deducting certain amounts from your income because lobbyists bribed and harassed Congress until they added it to the tax form.
Most of these are stupid. The only adjustments I would consider keeping are "One half of self-employment tax", "Alimony paid", "IRA deduction", and "Domestic production activities deduction".
"Alimony paid" has to stay because the tax on the alimony is being paid by whomever receives it.
If traditional IRAs are eliminated (in step 7), "IRA deduction" can safely be eliminated.
"Domestic production activities deduction" sounds like a good thing, but it should only be on business forms. Also, insignificant tax breaks aren't enough to help domestic production. If you want things to be produced domestically, some other solution needs to be found.
"One half of self-employment tax" shouldn't be allowed. Making self-employed people pay their employer's contributions and then letting them pay marginally lower income tax is a waste of time. Helping self-employed people is good, but this is a stupid way to do it.
This is cow pie. Changing exemptions into credits largely eliminates the need for alternate minimum tax.
There are alot of credits at the end of the tax form. They get subtracted from your final tax. Some credits reward good behavior, but they have nothing to do with income tax. These are all cow pie Get rid of all of them except the "Foreign Tax Credit".
Exemption and head of household credits should not be eliminated either. This step refers only to credits in the current tax form.
In the current system, the elderly and the blind have special exemptions. It would be better to make these into tax credits. That way they reduce a taxpayer's taxes by the same amount regardless of how much income they make. A blind man who makes $100,000 doesn't need a bigger tax credit than a blind man who makes $10,000.
I suggest a credit of $125 for the blind and $125 for the elderly. This is roughly equivalent to the current system for poor people. Old blind people who make $100,000 per year don't need bigger tax writeoffs than old blind poor people who make $10,000 per year.
Tax tables are ridiculous. Right after the tax tables, there's a worksheet for rich people where they figure out their taxes using simple arithmetic. Just have everyone use a worksheet. Then the paper (or file size for the electronic version) for the tax tables can be saved.
People who can't compute their taxes can mail in their form and have the IRS compute their taxes for them.
We can simplify the tax bracket system by eliminating a couple of brackets. There's no point in all the small 2-3% changes. The government's trying to gradually increase the tax rate with how much you make, but what's the point? Just simplify the brackets, you cow %#$#% congress people.
Right now, the brackets are 10%, 15%, 25%, 28%, 33%, and 35%. A better set of brackets would be 10%, 15%, 25%, 30%, and 35%. The cash limits to place the taxpayer in each bracket would have to be modified so that the IRS still gets the right amount of tax money, but the IRS should be able to figure out what amounts that would require.
That only eliminates 1 bracket, but it's a start.
Going even farther, there could be just 3 tax brackets: 10%, 20%, and 35% (poor, middle class, and rich). That would require a bit more computation on the part of the IRS to make it work out, but it shouldn't be a problem.
Just because it's good enough. Having quarterly estimated income tax payments is twice as much work. The interest on the early payments is just being used for the Presidential Election Campaign anyways.
There are 50 states (probably) all collecting income tax. The federal government is already collecting income tax. Why not just have the states pick an income tax percentage and send it to the federal government? The federal government can add 3 lines to its form: one for your state, one that sends you to a table to look up your state's income tax rate, and one computing the tax. It can be added with all the rest of the taxes. The IRS then just has to send the right amount to each state. Since it will all be done by computer, this shouldn't be a problem.
The benefit of this is that state income taxes can be slightly lower since they don't have to pay people to collect them. The burden on taxpayers is also slightly less because they won't need to fill out a state form. Since the states could eliminate their agencies that collect state income tax, their income tax rates could be slightly lower.
This does nothing for local income tax, occupation tax, or any of that cow pie. Unfortunately, it would be ridiculous to include that kind of detail all on one form.
Right now, there's 3 different choices of tax form: 1040 EZ, 1040 A, and the regular 1040. With all these simplifications, we could have 1040 EZ and the regular 1040.
We could have separate forms for people filing singly and jointly, and those forms could include the appropriate worksheet from the previous section right on the form. However, this would result in twice as many forms, which is a bad idea.
Regardless of any of these changes, paying off the national debt should be among the highest priorities of Congress, but it probably won't be.
Eliminating all sorts of deductions and exemptions will result in the government receiving more tax revenue and spending less money on red tape. This revenue and savings should be used reduce the national debt.
If traditional IRAs are eliminated as suggested previously, that will produce a sudden tax surplus. This is a "false" gain in that it's just money that would have been taxed either in the past or in the future. This gain must be used to pay off as much of the national debt as possible so that the people are no longer burdened by paying the national debt.
According to the instructions for the 1040 form in 2006, 7% of the federal government's $2.5 trillion of spending (that's $175 billion) was used to pay interest on the national debt in 2005 . My taxes would be unnecessary if weren't for the bungling of our political "leaders". I learned never to borrow money again at the age of 22 when I discovered the burden caused by college debts. Apparently, the political leaders of this nation are either too stupid to understand the cost of the debt or just don't care because most of it is other people's money.
Coincidentally, 13% of the federal government's income was from borrowed money. That means that 7% of the federal government's income each year is money borrowed to pay interest on the debts it has already incurred.
After the national debt is paid off, Congress can begin to lower taxes. The tax bracket amounts should normally be increased only to match inflation, but the percentages can be lowered.
The best way to reduce the number of taxes. Insignificant taxes, like excise, customs, estate, and gift taxes can be eliminated.
I like the idea of the Fair Tax (being that it's a consumption tax instead of an income tax), but I would rather have it administered by the federal government than by the states. Taxing consumption is better than taxing income because it taxes people for what they use, not for the work they do. People should pay for expending resources, not for creating them.
However, the Fair Tax Act doesn't look like it's going to be made into law. There are several problems with it, but it would be better than the current income tax system. Whether it be better than this streamlined income tax system would be subject to debate.
Copyright (C) 2007-2008 Steven Fletcher. All rights reserved.