Making Taxation Fair While Improving the Economy
The United States Internal Revenue Code is very complicated. Income is treated in a variety of different ways depending on its source and size. Even though it can be argued that the code is simpler than in past decades, it carries rules and regulations that unfairly privilege shareholders, homeowners, business owners, and rent-seekers.
In this article, I will suggest some specific modifications that can be made to the tax code, but first you must have an understanding of the tax code.
Basics of Federal Income Taxation
Generally, the tax code is progressive, which means the higher the income of a tax-filer, the higher the tax rate they will pay; tax liabilities grow disproportionately with income.
In order to calculate your income tax liability, you add up your entire income from all sources; these will include all employee compensation, capital gains, dividends, and pass-through income. After taking deductions, you will have your Adjusted Gross Income.
You can either take the standard deduction, or deduct the value of eligible expenses called itemized deductions. Itemized deductions
The standard currently sits at $12,200 for single-filers, doubled that for married joint-filers, and $18,350 for heads of households. A head of household is an unmarried individual who lives with a another person but covers at least half of the cost of keeping up a home.
Your AGI is broken down by source of income and into brackets, with each bracket having a different rate of taxation. For example, the first bracket is $0-$9,700 for single-filers, and is taxed at a rate of 10%. This means you will pay up to $970 in tax on your first $9,700 of taxable income.
Pass-through income, which is income from partnerships, limited liability companies, S corporations, and sole proprietorships, is taxed at the same rates and brackets, but has a 20% deduction, reducing the effective rate of taxation by a fifth. The rational for this deduction was that small businesses would be relatively disadvantaged due to corporate tax cuts.
Finally, we have capital gains and qualified dividends, which are taxed separately from regular income in the following brackets and rates:
Capital gains from assets held for over a year are taxed at just over half the level of regular income, which is category-five bull excrement. Families with capital can sit back and while their asset managers make them a large passive income and grow their compound their wealth.
What’s even worse is this means capital gains don’t stack on regular income; a single-filing investor can make $15,000 a month and pay a lower tax rate than married joint-filers making the same amount of money.
It doesn’t help that incorporated tax filers can deduct asset value depreciation, interest paid, and other business expenses from their adjusted gross income, significantly reducing their other tax liabilities.
My only argument in defense of shareholders is that corporate profits are taxed and then taxed again when they are received in the form of capital gains or dividends, which is unnecessary double-taxation.
Don’t Forget Payroll Taxes
In addition to income taxation, payrolls are taxed to help fund Social Security and Medicare. Employers pay half of the tax, employees pay the other half. The rates are 12.4% for on all income up to $132,900 for Social Security, and 2.9% for Medicare, with an additional 0.9% on single-filing income exceeding $200,000.
It is argued by some progressives and even moderates that current Social Security tax scheme is regressive, imposing a flat tax for the middle and blue-collar classes, and a lower effective tax rate for those filing over $132,900. I would argue this is not exactly unfair since Social Security benefits are roughly proportional to Social Security contributions if you make a middle income or higher.
Making Taxation Fair Again
1. All Income Should Be Treated Equally
All personal income, regardless of its source, should be taxed under the same brackets and rates. No secretary should pay a higher tax rate than their boss.
2. Itemized Deductions Should Be Eliminated
Itemized deductions allow tax filers to deduct from their adjusted gross income by virtue of living in higher tax states or owning more expensive homes. There shouldn’t be tax advantages for big spenders.
3. Eliminate the Corporate Income Tax
We unnecessarily double-tax when we tax both corporate income and the profit received by the shareholder. Not only is this not fair, the corporate income tax is widely considered to the most economically harmful tax.
4. Raise the Alternative Minimum Tax
To ensure that high-income earners are not paying lower rates than middle-class households, the AMT should be raised to 30% on an income of $1 million and 50% for an income of $2 million.
If these reforms are made, Americans will finally be equal on tax day. Filing will be much simpler, there won’t be any more double-taxation, and the rich will no longer pay lower tax rates than middle class families. All of this with a lovely cherry on top: a reduced deficit!