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.