I’m going to ask this until I get some responses. It seems to be widely acknowledged that the US tax code is in shambles. What should be done to improve the system? Do we need different tax brackets, tax rates, etc? Do we need to throw out the entire system and start from scratch?
LTMC: From my standpoint, there are multiple solutions. A flat tax on personal income with all credits and deductions replaced by an exemption up to a statutory percentage of the federal poverty line would simplify the code while creating inherently progressive tax rate that provides relief to the poor.
For example, let’s assume a federal rate of 35% on all income. The federal poverty line for 2012 is roughly $11,000. Let’s say we set the exemption at 133% of the federal poverty line. That’s just about $15,000. So let’s look at the tax burden of a few different taxpayers with different incomes:
1. $15,080 (minimum wage)
Income Tax burden: $80*.35 = $28 = <1%
Income Tax burden: $10,000*.35 = $3500 = 14%
Income Tax burden: $20,000*.35 = $7000 = 20%
Income Tax burden: $30,000*.35 = $10500 = 23.33%
Income Tax burden: $40,000*.35 = $14000 = 25.45%
Income Tax burden: $535,000*.35 = $187250 = 34.04%
As you can see, the functional rates are naturally progressive, but they increase at a decreasing pace as your income goes up, towards the limit of 35%. And everyone always pay zero taxes on their first $15k of income.
Now the numbers I’m using are just for demonstration purposes only. You could easily tweak the numbers to one’s preference, whether you want to craft a proposal that would be roughly revenue neutral, increase revenue, or reduce it. But even a revenue neutral proposal of this sort would shrink the size of the federal bureaucracy. You don’t need an expansive IRS when anyone who knows multiplication could figure out their individual federal tax burden.
This is just one proposal, of course. And again, I stress that the numbers are for demonstration only, and don’t necessarily reflect a realistic breakdown of how the numbers would look in practice. But the concept is there, and could conceivably be a solution that simplifies the code without sacrificing the poor on the altar of a horribly regressive tax system.