Brushfire of Freedom
Ram Rants
This week being tax week brings to mind some of the different taxes we pay, how they are paid, and for what they are used. Recent reports indicated that nearly 50% of Americans pay no income tax. For those in that category, much of what you will see here will be a bit confusing. After all, what’s the big deal, right? Paying taxes is our duty (oddly, not yours, but ok). It is an honor to support others in this nation with the dollars made through our labor.
The current system, known as a “progressive income tax system”, establishes tables whereby those who make “progressively” more money pay a “progressively” greater percentage of their income into the system. It establishes tax brackets that identify points at which the tax percentage goes up.
Let’s take a look at some basic math. Please note that 10% of $200 is greater than 10% of $100 ($20 vice $10). So the individual who makes more money will pay more in taxes with no need to increase the percentage. With a progressive system, the person making $100 and paying 10% pays $10 and keeps 90% of their earnings ($90). The progressive system forces the person making $200 to pay 15% of their earnings in tax ($30) and they would keep only 85% of their earnings ($170). This means that the person earning $200 makes twice the person making $100, but pays three times the amount in taxes. This is why the progressive system is considered “punitive”. It punishes success by making those who earn more pay exponentially more in income tax. This particular system has been so skewed in the past that the “upper bracket” at one time had an income tax percentage of 70%, effectively capping earnings on most Americans.
In an effort to address this disparity, Congress has created a series of deductions that allow you to reduce the amount of income on which you are taxed. The rationale is that a person making more can invest more, own more, and can deduct part of their income based on those investments. If the person making $200 has $100 in deductions, they would be taxed on the remaining $100, but at the progressively higher rate (15%) meaning they would keep 85% of their earnings ($85) after paying $15 in taxes. Thus, even with deductions, earning more is penalized because the percentage of tax paid is increased based on income levels.
One option to our current system is a “flat tax” which is exactly what the name implies. The percentage of income collected remains consistent, or flat, across all income levels. Using the original example, a person making $100 pays $10 and the person making $200 pays $20. Because the percentage remains constant, the person earning $200, twice the person making $100, pays twice the amount in taxes. There is no need for deductions, long forms, multiple forms, tax software, tax attorneys, IRS agents, or any of the other trappings of our current tax code. If we had a flat tax, Charlie Rangel would most likely have been able to understand what he was supposed to pay, and would not be in trouble right now for ethics violations stemming from his rather convoluted tax deduction system. The flat tax significantly reduces complexity and all but eliminates the penalties for success that exist in our current system.
If you’re wondering at this point why we haven't already gone to a flat tax system, please see again the list of things that would not be necessary. This type of income tax program would significantly reduce the federal bureaucracy, and all but eliminate a major branch of the legal practice. Now, guess who spends an awful lot of money lobbying against such a system.
One additional option to our progressive income tax structure would be to completely eliminate the income tax and replace it with a national sales tax, known as a “consumption tax”. An individual earning $100 keeps the $10, and the person earning $200 keep sit all. No income tax. In its place, each time a person makes a purchase they pay a set percentage in tax to the federal government. This has the effect of allowing the wage earner to decide how much they will pay in tax because they only pay when they purchase. The amount is the same for everyone (no progressive amounts), and in theory the person who earns more, buys more, and would pay more in taxes.
The consumption tax has the added bonus of encouraging spending because it leaves 100% of income in the hands of the wage earner. This means that in place of 50% of Americans having their entire income to spend, 100% would have all of their paychecks in their hand and not in the IRS coffers. More money, more spending. More spending, more taxes. More spending, more commerce, stronger economy, more jobs, more wage earners, more people spending, etc.
Sounds like a no brainer, but again, take a look at what happens with a consumption tax. Government loses control of the tax revenue stream because they can not withhold portions of your income. They must wait until you decide to spend your money before they can collect their tax. This results in a reduction in complexity, and many of the advantages of the flat tax (no IRS, etc.). This has the effect of freeing the American people from the slavery of the income tax system, eliminating the need for the 16th amendment, and significantly reducing the governments ability to impact our economy. Again, guess why this idea has not caught on just yet.
There is little question that our existing tax system is punitive. It is by design a hurdle to success in America. It is, by design, a method by which the government can manipulate our economy. It is cumbersome and convoluted as demonstrated by the fact that neither its chief architect (Charlie Rangel) nor its primary enforcer (Tim Geithner) can adhere to its policies and processes. It is tantamount to slavery. There are many options to our current system, beyond those that have been outlined here. It is clear why Congress has not taken steps to make a change. It is time that we help them with the decision.
Contact Ramarious Brushfire Home
Copyright 2010. The published content is the sole property of the author. Any copy, use, or redistribution of any portion of the material without the written consent of the owner is a violation of international copyright laws.