Updating the Simple Tax

In case you don’t recall, the Simple Tax started as a somewhat tongue in cheek response to the FAIR tax. Thing is, the more I play with it the better it looks.

The core principle is this: we do not tax businesses on revenues, we tax them on income after expenses. Why shouldn’t we let people exclude their expenses — ALL their expenses, and then tax the net income. If we do that then all the arguments against different tax rates go away. The minimal costs of living are the basis of almost all the exemptions and deductions.

However, it’s a given that if you allow all expenses, it’s remarkably easy to “spend” everything regardless of level of income. Therefor I want to introduce a leveling agent. (There is another reason for doing this as you’ll see in a moment.)

This is the basic flow-chart, then, of my recommendation.

1) Determine gross income. Gifts, in-kind receipts, inheritances, interest and dividends, wages, etc. If it increased your bank balance and wealth, it’s income.

2) Calculate your expense ratio. Compare your gross income to the federal poverty level for your location — usually state, some ‘high cost’ areas have a supplemental value. Divide income by the local FPL and subtract it from one to get the expense ratio. Yes, it’d be easier to use a table. Yes, this table will wind up looking a lot like current tax tables.

3) List your expenses in two groups which I’ll call reducible and irreducible. Reducible expenses will be multiplied by the expense ratio while irreducible expenses will be taken whole. Add the results together to get total expenses. Irreducible expenses will include things like donations to licensed non-profits, “other” taxes paid (but not pre-paid income tax), and so forth. Yes, this is the loophole for complexity down the road.

4) Determine your net income by subtracting the larger of total expenses or local FPL from gross income. Multiply this by 20% (another change, I used to say 50%) to determine the taxes owed. If you’ve pre-paid taxes by withholding or other techniques you may be due a refund.

You pay tax on what doesn’t go to expenses, modified by the fact that the more you earn the smaller proportion you need for cost of living regardless of what you actually spend. If you make a million dollars then you can set aside $200,000 of that for the government — a lot of people could live on that $800,000 you have left.

The only other nasty complexity I have is in regard to people who have a wildly variant income from year to year. I am mixed about allowing income averaging. At this time I’m saying “no”, but it’s still under consideration.

Yeah, it got serious on me. That’s one reason why the 20% line instead of 50%. At the present time the allegedly average “true” income tax rate on millionaires is in the vicinity of 19%. I create no net change, probably.

Have fun.

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2 thoughts on “Updating the Simple Tax

  1. What you propose is nothing new — except you claim “all expenses” are “deductable”, while others want a standard deduction.

    It’s called a flat tax and it’s nothing new.

    But the devil is always in the details — and the Flat tax as proposed by Newt, for example, (and Forbes, and CATO) has a flat rate on income from work. But unearned income — capital gains, for example, would not be taxed at all. They mention that in the last few moments of their rant, as if it’s not important.

    Notice what their tax is NOT — it’s not flat. It’s like calling Dolly Parton Flat. It’s like calling Pike’s Peak flat. It’s like calling — you get the idea. IT’s not flat. No taxes- zero — on income they like. But on workers taxes, on small business, on those who do the work and operate the business, those people with “ordinary income” — that is all taxed the same.

    There is a truism about tax plans, and their name. Whatever the name is — it’s NEVER that. It’s the opposite of that. Flat tax — isn’t flat. Fairtax – isn’t fair.

    I like a true flat tax — whatever you make, from any source, tax it the same as others pay. If you make 50K from putting roofs on, fine, tax that the same way you tax someone making 50K on Chinese solar panel stocks (my favorite stocks). If you make 1.2 million a year, operating on brains — great. Tax that the same as someone making 1.2 million on leverage buy outs, or credit swaps, or naked short selling.

    That would be a flat tax. Want to have some fun? Suggest that to Newt or CATO or Forbes. Suggest a real flat tax. Suggest that those who make 1 million on leverage buy outs should pay the same as the heart surgeon who makes his million in the operating room. They will scream bloody murder. They will foam at the mouth, stutter, and pass out. When they come to, they will say, of course of course, except, we can’t tax leverage buy outs. Only they will say “Oh, we can’t tax income twice”.

    Well, they are slime dog snakes and liars. The leverage buy outs, the credit swaps, that is no more “taxed twice” than the heart surgeon is taxed twice. No more than the roofer is taxed twice. The heart surgeon spent 14 years and half million dollars getting his skills — he invested in those skills. Why should he ever pay taxes on his income then?

    These “tax experts” shouldnt be trusted as far as you can throw them.

    Flat tax is fine – a real flat tax. Beaware of every tax plan, there is always some lying devious creep behind it, hoping you don’t figure it out.

    • Look again. Because of how I apply expenses, it’s a progressive tax.

      I agree with many of your points, but not on the idea that a flat tax is better. There is a certain minimum income that is necessary to survive, and taxing anyone who earns at that level is pushing them underwater in an almost literal sense. Where that line is depends on a lot of factors, and for reasons of equirtability I used the gross income to FPL ratio method.

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