Taxes Stink, More Complications Only Hurt Us All
Let’s talk about the 3 letter dirty word no one likes, but everyone deals with, T-A-X. For our jumbled government RV to properly drive we need clean fuel, taxes, that come from everyone in a fair, understandable way. Our current tax code is over 70,000 pages long and we spend over $10 billion a year on filing our taxes. It takes an average of 20 hours to complete our tax filings vs 15 minutes in Japan and the Netherlands or 2 mins in Estonia. We all know the system is overly complicated and billionaires say they don’t pay enough taxes. The door is open, but when politicians propose another 1,000 pages on top of the current pile and adjust, categorized, incentivize, reconfigure and do a dose doe, we don’t solve anything. This works for our politicians, they can talk a big game, get headlines, take in more donations from billionaires, while the other 99% suffer through it.
What is the point of taxes and the government? You’ll get different answers from people depending on their ideology, but effectively we pay taxes because we need an elected government to help us function as a unified country. Which means providing good infrastructure, national defense and helping those people who can’t help themselves. This letter is solely focused on how we pay our taxes and what we can do to clean up that process to make it fair for everyone.
Step 1, cash is king. If you ask an accountant how much money you made last year they will ask if you mean cash or tax? Why is this even a question, I really don’t know, I need a tax accountant to tell me. I think the simple answer is that if I got money I can use to buy something, that is income, and it should be subject to a tax. I don’t care if it was 1099 income, W2 wages, phantom income, passive income, subject to AMT, carried interest, pretax/after tax, gifted, inherited, tips or service, if it goes into my pocket it should all be the same thing. This levels the playing field right off the bat between the haves and the have nots, all income is equal in the eyes of the state. No additional perks for being rich, no income treatment propping up industries, no penalties for being an employee. We just knocked off 25,000 pages of the tax code right there!
Step 2, there are various ways you can spend money, programs you can apply for and forms you can fill out to reduce what the government considers to be your income. This is how the government tries to direct certain sectors of the economy. The problem is, like most things with the government these incentive don’t ultimately reach those they are trying to help and get manipulated by investors, advisors and greedy people to benefit themselves, not our country. Even if these incentives start off great, they ultimately create bubbles in markets that the government can’t unwind. There are only 2 things that are a tried and true way to help everyone, over the long term, that can be a part of our tax code to reduce income: non-profit giving (see below), and education spending. That’s it, no more offsets, if you spend money to increase the level of education of anyone, you get a little break. Boom, another 25,000 pages eliminated.
Step 3, now that income is what you bring in and tax credits are a thing of the past, let’s adjust the rates we all pay. The main goal is to help the working poor, provide some benefits to the middle class and not penalize people for being successful. Here’s a real progressive tax system (numbers are unrefined examples), with no loop holes:
i. Under $50k = 0% (help the working poor)
ii. $50-$100k = 15%
iii. $100-$250k = 20% (lower the middle class effective tax rate)
iv. $250k-$500k = 25%
v. $500k+ = 30% (don’t penalize people for being successful, but have them payback the system that allowed them to flourish)
If you made $300,000 last year, your tax bill would breakdown like this:
i. 1st $50k is tax free
j. $50-$100k is taxed at 15% ($50,000 x 15% = $7,500)
k. $100-$250k is taxed at 20% ($150,000 x 20% = $30,000)
l. $250,000-$300,000 is taxed at 25% ($50,000 x 25% = $12,500)
m. The ending effective tax rate is 16.67% ($50,000 taxes paid / $300,000 of income = 16.67%)
Step 4, get money to those who need it most. We’re already helping the working poor a bit by increasing their take home pay and we’ve eliminated loopholes for the rich, without penalizing them for being successful. Our overall government revenues have now gone up, and the billions of dollars spent every year on understanding & gaming the tax code can go to more product uses. However, if we give a bloated, inefficient government more money, how can we expect our safety net to improve? We can’t! So, the government is now only going to get 75% of the tax revenues, 25% are going to a non-profit of your choice. This allows money to go straight to causes you want that will directly help those in need. Like most things there are tradeoffs, and unintended consequences, so our federal government won’t be providing a wide range of services for our at risk populations. Non-profits can spring up and get money to directly help, and these organizations will now feel the scrutiny of the IRS, since tax collection will require so little effort. The policing and regulation of non-profits will become very strict and transparent, but their private services will be more impactful than anything our government could ever provide.
Step 5, the government itself must be self-sustaining. Every business in America can only spend what they make or beg from investors with the hope of future returns. For too long our government has been mortgaging our future and our kids’ future without improving the lives of most Americans. Our government needs to provide high quality infrastructure, national defense and basic rules that everyone in this country needs to live by. They do not need to reach into every pocket of our lives, waster money on pet projects, perpetuate a system that only requires more money for the same or less service. These are the restraints our government and politicians need. With the right kind of investment and incentives we can get there in a relatively short amount of time.
Change is hard, but when the answers are more simple than everyone wants us to believe, we have to move forward.
The Middle American