Tuesday, April 25, 2017

The Jim Jackson Simplified Income Tax Plan



I posted the first version of my tax-simplification plan in February 2012. Five years later, I made a couple of tweaks, but the essence stays the same. It's clear, simple, and best of all would be completely transparent. I've emphasized that last aspect more in this updated 2017 version.

I challenge President Trump to match me in boldness and effectiveness in generating revenue to run the government and being transparent about how the Federal government spends our money.

Personal Income Taxes:

1. All income, regardless how earned is treated equally under the Jim Jackson plan. A dollar earned by wages, dividend, interest, capital gains or pass-through from some corporate-like entity are all taxed the same. Everyone should feel they have a stake in funding the public services provided through the Federal government.

2. Every person is taxed individually. If a couple owns a joint account, each is taxed on 50% of the income. If one spouse works and the other stays home to take care of the children, pets, sick relatives or lays on the beach, only the income earner is taxed.

3. How you spend your money, if legal, is no matter to Federal government or its income tax structure. There are no deductions for mortgage interest, medical expenses, casualty losses, contributions to charity. Nor are there credits or deductions for the individual or their dependent children or extra deductions for being older than someone else, or blind or anything. Taxable income equals gross income.

4. I propose graduated rates. Having four brackets seems fine to me, but if tax experts prefer three or five, I’m not going to argue. The first bracket should be 5%. To repeat, everyone who earns income should contribute to the Federal government. (And yes, I know some will need more support than their income is taxed. That’s fine; provide them the services they need or make a direct payment to cover the need. Do it directly, don’t try to cram it into an income TAX system.) The top rate should be 45%. I personally think it should be higher, but at 45% the income earner ends up with more than the government. Make the other two rates 15% and 30%.

5. I propose a five-year transition. In the first year, everyone can choose to pay either on the new tax plan or 20% new and 80% old. The next year, the same choice, but with 40% new and 60% old. After five years, we are totally under the new plan. Once a person chooses to pay entirely under the new tax plan, they can’t revert to the transition.

I know that my proposed transition will initially bring in fewer taxes than the plan without transition because everyone will choose the alternative that works best for them. Here's where I'll rely on the experts, since I do not know what income levels each tax should kick in since I don’t have the data, time nor requisite skills to determine the revenues from my proposal. Given the current budget deficits (and my proposal for corporate income taxes), we clearly need more income than we are getting. Here's what I would charge the experts to do: Set the income levels so that if there were no transition, the current level of Federal government expenditures would be fully paid for (after reflecting the minor income the government receives from fees, tariffs, etc.)

This solves the economic catastrophe if we were to immediately eliminate the current budget deficit. The difference between the projected post-transition income and actual income paid will be the budget deficit for the first year. The projected deficit shrinks over the five-year transition to zero.

Another reason for the transition is because a lot of smart people who earn their living off an overly complex tax system will need to retrain for productive work. My proposed transition provides a planned obsolescence of their skills. Just think how the economy can grow if these bright people apply their minds to productive activity.

6. Note that personal income tax rates will need to be higher than they would otherwise be to reflect the elimination of corporate income taxes (see below). I charge my experts when setting the income breakpoints for the brackets to make sure that this primarily effects those well off who receive substantial income from interest, dividends, partnership income, etc. Hence the need for a 45% rate.

Corporate Income Taxes

1. Eliminate all corporate income taxes. End of plan. No transition. No deductions for anything. [I challenge you, President Trump to be so bold and comprehensive!]

2. This plan eliminates all loopholes. That means, if Congress wants to “encourage” some business activity, they must cut checks to provide corporations incentives, not hide the largess within “tax breaks.” This provides clear transparency regarding government spending and will allow better and more effective analysis of the results gained for money spent.

3. Eliminating the corporate income tax means the US should become a tax-haven for corporations, bringing back some jobs from overseas. Let the other governments figure out how they want to respond. [Again, President Trump, will your plan provide as much of an incentive?]

4. It also means corporations will be making more money, which they will eventually have to pass through to shareholders in the way of dividends, which (see above) are fully taxed. It's unclear how much of a lag there will be between the increased cash flow and increased dividends. Much of the billions held overseas to avoid U.S. taxes will be repatriated and paid out to shareholders (or go to increased investment, which would also be a good thing). I do recognize that those who own U.S. equities will disproportionately gain value as stock markets would react positively to the elimination of corporate income taxes. However, individuals will need to use it or lose it (see estate taxes below) and therefore will convert significant portions of those gains from unrealized to realized (taxable) income.

5. Since corporations get no deductions for charitable, political or other contributions, they might wonder why they should make them—or at least shareholders should be asking that question since the money is coming directly from their future dividends.

6. Government lobbying will continue, but taxpayer scrutiny of political votes will be easier when the only way they can give money to corporations is through direct payments, not hidden as deductions and credits deep within the corporate income tax. It should also focus attention in political races to how each side proposed to spend money, which I believe would be healthy.

7. Personal income tax rates will need to be higher to reflect the elimination of corporate income taxes—which is fine in the long run but might cause some larger deficits in the short term. Unlike other budget deficits, this one is self-correcting since it is only a temporary imbalance until the increase in corporate net income is passed through to investors.

Estate Taxes

1. A hereditary oligarchy is an anathema to a broadly representative government. Therefore, if someone didn’t manage to spend or give away their money before death, the government shall help them do it through the estate tax.

2. This item more properly belongs under the income tax section, but it occurs after death and Republicans have labeled the estate tax a death tax anyway, so I’m including it here. What am I including? At death, the difference between market value and book value of all assets is income in the year of death. The individual could have sold the asset, realized the gains and paid taxes. They chose not to make the sale while they were living, but now they are dead and income taxes are owed.

It does not matter whether we are talking about shares in Apple or the family farm that has increased in value or a small private business. Income has been earned and it shall be taxed. Life insurance agents will be happy that they still have a role in estate planning for small businesses.

3. After paying any income taxes, estates over $1 million dollars (adjusted for inflation from the date the limit was first $1 million) are taxed at a 50% rate. The very rich will still be incredibly rich, but less so than with no estate tax.

4. Estate tax planners still have a modicum of work to do since planned giving/ gift taxes etc. will still exist. However, note that under the proposed plan, the Government gets its 50% off the top before any distributions to heirs, charities or created foundations.

Summary:

I estimate (based on nothing concrete) that the Jim Jackson tax plan eliminates 99+% of the current tax code and regulations. By eliminating all deductions, it allows each individual to decide for themselves without government incentive how to spend their income. It forces government to make explicit expenditures to corporations or individuals rather than hide them in the tax code, which will allow the public to better understand where we are spending our money and whether the government is effectively addressing the needs of the people.

Does the Jim Jackson tax plan need to be fleshed out? Of course, but I suspect I already included more than sufficient detail to attract plenty of attacks from the entrenched corporations and wealthy, not to mention the anti-corporation liberals.

~ Jim

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