Sensible Tax Reform--Simple, Just and Effective

More Information

(1) Sensible Tax Reform
(2) The Impact of Sensible Tax Reform upon American Families
(3) The Impact of Sensible Tax Reform upon American Businesses
(4) The Impact of Sensible Tax Reform upon Social Security and Medicare
(5) The Impact of Sensible Tax Reform upon Very High Incomes
(6) The Impact of Sensible Tax Reform upon Estate Taxes
(7) A Federal Consumption Tax
(8) Table of Contents

(1) Sensible Tax Reform

Sensible Tax Reform--Simple, Just and Effective (STR) is a comprehensive proposal to fundamentally change the nature of the American federal tax system. Our existing federal taxes are complicated, unjust and very damaging to our economy, society and political system. America needs a complete redesign of how our federal government finances itself.

We can no longer simply make more changes to our existing federal tax system and hope to improve it. Repeated efforts to make our current system simple, just and effective have shown again and again that our government in Washington lacks the wisdom and courage to accomplish that. Instead we have been left with an unintelligible tax mess that is beyond repair.

Einstein once said that doing the same thing over and over and expecting different results is a sign of insanity. Yet that is what Washington has been doing for generations. It is time to put an end to that insanity. We need a comprehensive reform that totally replaces the tax mess that we have now.

As many analysts of tax reform have advocated, any meaningful reform of the federal tax system should be simple, just and economically effective. Sensible Tax Reform meets that test. It will completely change the way in which both businesses and individuals are taxed. It eliminates most existing federal taxes and replaces them with a truly revolutionary tax system that will greatly benefit Americans and American businesses. It is much simpler than our current federal tax code, with its 70,000+ pages. It is truly just for both businesses and families--unlike our current system. And, it will provide a very strong economic stimulus, which will accelerate economic growth and create millions of new jobs.

(2) The Impact of Sensible Tax Reform upon American Families

Americans and their families are the principal victims of our country’s complex, unjust and economically ineffective federal tax system of income, Social Security, Medicare and estate taxes. The poor are victimized by high Social Security and Medicare taxes on every dollar they earn, and may owe income taxes as well—despite living at the poverty line or below. America’s middle class pays a disproportionate share of federal taxes, often a much higher average tax rate than do the richest members of our society.

Many of the biggest tax loopholes (e.g., a 15% or 20% tax on dividends and capital gains as well as the $500,000 of tax-free capital gains on the sale of a house) primarily benefit the wealthy. Yet even many of the wealthy can be victimized by our estate-tax system which often treats the very rich much more generously than the “merely” rich.

Sensible Tax Reform will bring revolutionary changes to the federal taxation of households:

  • For families, there will be an elimination of:
    • All Social Security and Medicare taxes,
    • All estate taxes,
    • Most deductions as well as all income-tax credits, exemptions and special tax rates,
    • The alternative minimum tax for individuals, and
    • The marriage penalty.
  • Social Security and Medicare costs will shift to the general federal budget.
  • All taxpayers will be treated alike, with the same tax rules applying to everyone.
  • All income will be taxed alike (including dividends, capital gains and inheritance).
  • There will be a $500,000 annual income exclusion ($1 million for a couple) for personal income taxes--thus completely eliminating income taxes for more than 99% of Americans.
  • There will only be three personal income-tax levels: 15% (starting at $1 million of net taxable income), 25% (starting at $10 million) and 35% (starting at $25 million).
  • The dollar brackets will be indexed for inflation.
  • A federal tax on consumption will replace most of our existing taxes.

STR will greatly improve the finances of American families. Incomes and standards of living will increase.
The ability to save and invest will increase significantly.

The rules will be simple. They will apply equally to all taxpayers. It will be very difficult for any individual or group to manipulate the tax system for its own advantage and the disadvantage of others. There will be a great reduction in the sense of injustice that exists with the current tax system.

(3) The Impact of Sensible Tax Reform upon American Businesses

Businesses in this country pay high taxes. The principal taxes paid are payroll taxes (i.e., Social Security and Medicare taxes -- more than $550 billion in 2016) and income taxes ($300 billion in 2016). [Note that our businesses pay much more in payroll taxes than in income taxes!] Under STR, both business payroll and income taxes will be completely eliminated. In addition, since businesses will no longer be subject to paying taxes, they will have very little tax-compliance burden—or compliance costs. The reforms will effectively “untax” American business.

Sensible Tax Reform will open a new chapter in business efficiency and competitiveness. Managers now frequently complain of being hamstrung by excessive government tax regulation, compliance burdens and heavy taxes. Companies pay more than $850 billion in federal taxes plus an estimated $165 billion in compliance costs—more than a trillion dollars in all. Those are all tax costs that businesses pass on to customers as higher prices, to workers as lower wages or to shareholders in poorer economic performance and lower dividends.

The burden of our current federal tax system makes our businesses less competitive against their global competitors. It hurts both our exports and our ability to compete against cheap imports. The economy of the United States is much larger than the size of China's, and five times the size of Germany's, yet both countries export more than we do. We are clearly underperforming globally, which seriously hurts our economy. Although we benefit a great deal from global trade, we would benefit much more if our businesses were better able to compete in world markets.

The elimination of business tax costs will allow American businesses to:
  • Lower prices.
  • Increase investments.
  • Reduce debt.
  • Pay higher dividends.
  • Increase retained earnings, and
  • Better reward their employees.

All of these will greatly benefit businesses, their customers, their employees and the overall economy:

  • U.S. exports will increase substantially.
  • Imports will decline.
  • Our balance-of-trade deficit will fall.
  • America’s need to borrow from foreign governments and investors will be greatly reduced.
  • Millions of jobs will be created in this country.
  • And, business profits will increase greatly.

One of the key goals of Sensible Tax Reform is to “un-tax” businesses in this country and to liberate them to compete more successfully against foreign companies.

  • For businesses, there will be an elimination of:
    • All federal business income taxes,
    • All business Social Security and Medicare taxes,
    • The business alternative minimum tax (AMT),
    • The need for businesses to collect income and Social Security taxes from their employees, and
    • The obligation for complicated and expensive federal tax-compliance.
  • There will also be a great simplification of business planning and financing.
  • And, all businesses will be treated alike.

Although retail businesses will collect the new federal consumption tax (FCT), businesses will not themselves pay any FCT.

(4) The Impact of Sensible Tax Reform upon Social Security and Medicare

Our Social Security and Medicare taxes are the most regressive of all federal taxes (that is, they fall much more heavily upon the poor and other lower-income classes than upon high-income groups). Even a high-school kid working at a fast-food restaurant is charged 7.65% in Social Security and Medicare taxes on everything that he earns. And those taxes can neither be rebated nor even deducted from income taxes. In addition, employers must also pay 7.65%. While those costs are tax-deductible for businesses, they still add more than $500 billion to their costs every year.

No person or business will pay those taxes under Sensible Tax Reform. The current method of collecting Social Security and Medicare taxes directly from employees and their employers will thus cease. However the Social Security and Medicare benefits will remain the same. The system will be funded from the general federal budget.

The benefits of Sensible Tax Reform for the poor and other lower-income groups will be dramatic. For a poverty-level family with $20,000 of income, their Security and Medicare taxes will be eliminated (and therefore their take-home pay will rise) by $1530 (7.65% of $20,000). For someone with an income of $100,000, their increase in take-home pay will be $7650 (7.65%). Those with higher incomes will save more in dollar terms than the poorer groups, but the savings will be relatively less important to them as a share of their total income.

The self employed generally pay twice as much as do employees. Thus, they will save twice as much. STR will provide a very strong stimulus to the self employed.

(5) The Impact of Sensible Tax Reform upon Very High Incomes:
A Simple-and-Just Federal Income Tax

Under the STR tax proposal, most of us will have neither a federal income tax to pay nor tax-filing obligations. 99% of Americans will pay no income taxes. Only the wealthiest 1% of taxpayers in the country might be subject to the income tax in any given year. For them, the simple-and-just federal income tax on very high incomes will truly be very simple and just.

First, all personal income from whatever source will be totaled. Second, unlimited charitable deductions will be available. Then, a $500,000 income exclusion will apply (up to $1 million for a couple filing jointly).

          Net taxable income = (Total income) - (charitable deductions) - ($500,000 exclusion)

For the less than 1% of taxpayers who will still owe taxes, the tax rates will be very simple:

  • 15% of the first $10 million of net taxable income
  • 25% of the next $15 million of net taxable income
  • 35% of net taxable income greater than $25 million

In 2016, the 15% rate begins (for a family of four) at only $18,551, the 25% rate at $75,3000 and the 35% rate at only $413,350. Sensible Tax Reform will totally eliminate the income tax for the vast majority of Americans. For those with very high incomes, only those three tax rates will apply, but only to vastly higher income levels than at present.

(6) The Impact of Sensible Tax Reform upon Estate Taxes

Estate taxes are the most progressive taxes imposed by the federal government (that is, they fall much more heavily upon the wealthy than upon the poor). Most American have the impression that the estate tax is oppressive. However, in truth, that is not the case. As a result of a very aggressive and well-financed disinformation campaign by anti-tax extremists, the majority of Americans have been convinced that the estate tax, which they dishonestly label as the "death tax", is an oppressive bundern upon a significant portion of estates. That is totally untrue. Only about 1/5 of 1% of estates pay any estate taxes at all. Those estates that do pay taxes only pay on average about 17-18%.

However the estate tax has been jerry-rigged in such a convoluted fashion that it is too progressive. The rules are so incomprehensible and conflicting that planning for estates is incredibly complicated and expensive. Also, they tend to favor very large estates over smaller taxable estates. That is clearly unjust. A just tax system simply and clearly treats all taxpayers the same. The system should automatically provide all taxpayers the most reasonable protection of the tax law. That justice and reasonableness do not exist under our present estate-tax system. It will exist under Sensible Tax Reform

STR removes the entire tax burden from the estate. The inheritors, not the estate, will pay the tax--an inheritance tax, not an estate tax.

  • The estate will be allowed unlimited charitable deductions.
  • The remaining inheritance will be distributed as defined in the will and added to each inheritor’s total income under STR, all income will be treated exactly the same. Each inheritor will benefit further from the $500,000 million annual income-tax exclusion.
  • The remaining net taxable income of each individual inheritor will be taxed at the appropriate marginal income-tax rate (15%, 25% or 35%) if it exceeds the deduction.
The net impact will be a very significant reduction in the taxation of most bequests compared to today’s estate-tax system--inheritors will receive more income. The system will also be much simpler and much more just.

(7) A Federal Consumption Tax

Sensible Tax Reform is a complete redesign of our federal tax system. It will eliminate most of the socially-engineered and politically-engineered distortions that make our existing tax system so incredibly complicated. It will end the susceptibility of the system to manipulation by lobbyists and the politicians whom they influence. It will attempt to be tax neutral. It will be tax reform pure and simple.

STR eliminates most of our current federal taxes: the Social Security and Medicare taxes, the business income tax, the estate tax and most personal income taxes. To replace those taxes, the principal federal tax system will be a federal consumption tax (FCT) that will be very simple, very just and also very beneficial to the U.S. economy:

  • There will be universal taxation of all consumers. Whatever the source of one’s income (whether earned or unearned, inherited or borrowed, whether legal or illegal), everyone will be subject to the same rules and the same tax rate when they make purchases for consumption in the United States.
  • There will be almost universal taxation of goods and services. Only a few very specific, very limited and very easy-to-understand special exceptions will exist.
  • There will be only a single federal consumption tax--probably somewhere between 26-34%
  • A rebate of the federal consumption tax will be made on consumption up to the poverty level.
  • All tax rules will apply the same to all taxpayers.

In summary, Sensible Tax Reform--Simple, Just and Effective eliminates:

  • Social Security and Medicare taxes on both individuals and businesses,
  • Income taxes on businesses and most individuals,
  • Estate taxes on individuals, and
  • Alternative minimum taxes (AMT) on both individuals and businesses.

It replaces them with:

  • A federal consumption tax and
  • A simple-and-just federal tax on very high incomes.

STR will completely “un-tax”:

  • Businesses and
  • The poor.

STR will be:

  • Very just,
  • Extremely simple, and
  • Economically very effective.

We will be able to say goodbye to the massive federal tax code, with its more than 70,000 pages. Gone will be the annual tax-compliance obligation for most Americans and the fear of the Internal Revenue Service. In their place, Sensible Tax Reform--Simple, Just and Effective will introduce a federal tax system that is just, easy to understand and which will provide a very strong stimulus to the American economy.

(8) Sensible Tax Reform--Simple, Just and Effective!
Christopher M. Korth

Part A. The Problem--Our Current Tax Regime

  1. An Unbelievable Mess!
  2. The Burden of the American Tax System
  3. Taxes! Taxes! and More Taxes!
  4. Lies, Damned Lies & the Federal Tax-Writing Process

Part B. The Solution--Sensible Tax Reform: Simple, Just and Effective

  1. Tax Simplification, Justice and Effectiveness
  2. Federal Consumption Tax
  3. A Simple-and-Just Federal Tax on Very High Incomes

Part C. The Impact of the Sensible Tax Reform Tax Plan

  1. Sensible Tax Reform for American Families
  2. Sensible Tax Reform for American Businesses
  3. Sensible Tax Reform for American Goverment

Part D. Making Sensible Tax Reform Work

  1. Transition to Sensible Tax Reform
  2. IS Sensible Tax Reform Right for America