Sensible Tax Reform--Simple, Just and Effective
B. FAQs: Essentials of Sensible Tax
Reform
| (1) What are the key parts of Sensible Tax Reform? |
| (2) How would Sensible Tax Reform change business taxes? |
| (3) How would Sensible Tax Reform change Social Security and Medicare taxes for individuals? |
| (4) How would Sensible Tax Reform affect Social Security and Medicare benefits? |
| (5) How would Sensible Tax Reform change personal income taxes? |
| (6) How would Sensible Tax Reform affect estate taxes? |
| (7) Will there be an estate-tax deduction for charitable donations under Sensible Tax Reform? |
| (8) Will there be an estate-tax exclusion under Sensible Tax Reform? |
| (9) What will the estate-tax rate be under Sensible Tax Reform? |
| (10) How will heirs be affected by the change of tax rules on estates under Sensible Tax Reform? |
| (11) Will Sensible Tax Reform really reduce estate taxes? |
| (12) What new taxes will Sensible Tax Reform introduce? |
| (13) How does Sensible Tax Reform differ from the flat tax? |
| (14) How does Sensible Tax Reform differ from other federal consumption taxes, such as the Fair Tax? |
(1) What are the key parts of Sensible Tax Reform?
STR will bring very major fundamental, even radical, changes to our federal tax system:
- Almost all federal taxes for American businesses will be eliminated.
- Social-Security and Medicare taxes will disappear.
- Estate taxes will end.
- Only individuals with very high incomes will pay any income taxes.
- The alternative minimum tax will be eliminated.
- A new federal consumption tax on retail purchases will be introduced.
Since the new STR tax will be a retail tax, it will not be imposed upon businesses or government agencies. Sensible Tax Reform will effectively “un-tax” American businesses. For individuals, the myriad of current taxes will be replaced primarily by the federal consumption tax alone.
Back to Top(2) How would Sensible Tax Reform change business taxes?
Businesses in this country currently pay three primary federal taxes: Social Security, Medicare and income taxes (and possibly alternative minimum taxes as well). Businesses are required to match the Social Security and Medicare taxes of all of their employees: 7.65% of wages, salaries, commissions, bonuses, etc. up to $118,500 of pay (2016) and 1.45% above that amount (which is the Medicare tax only).
In 2015, businesses paid more than $500 billion in Social Security and Medicare taxes plus $344 billion of federal income taxes. [For many years, businesses have paid more in payroll taxes than in federal income taxes.]
Under Sensible Tax Reform :
- Businesses will pay no income taxes.
- Nor will they pay Social Security or Medicare taxes.
- And, most of their tax-compliance burden will end.
- Retail enterprises will collect the federal consumption tax (FCT) from their customers and will remit those taxes to the federal government, but will owe no taxes of their own.
Businesses will effectively be “un-taxed” at the federal level under STR.
Back to Top(3) How would
Sensible Tax Reform change Social Security and Medicare taxes
for individuals?
Social Security and Medicare taxes are the most regressive taxes which most Americans pay. Even kids working in a fast-food restaurant must pay 6.20% of their earnings for Social Security and another 1.45% for Medicare for a total of 7.65%--from the very first dollar they earn. Those taxes are not only nonrefundable but they are not even tax deductible. Someone earning $100,000 pays $6200 in Social Security taxes and $1450 in Medicare taxes (Total: $7650).
Employees (as well as their employers) pay the full 7.65% up to a maximum income of $118,500 (2016). However, the Social Security tax (6.20%) ends at that level, leaving only the 1.45% of Medicare taxes for higher wages. Thus, someone earning $1 million or even $50 million pays only $7347 in Social Security taxes--just $1147 more than does the worker earning $100,000. For someone with $1 million of earned income, the average combined tax rate is only 2.08%--versus 7.65% for the kid flipping hamburgers or the family at the poverty level. That is a very regressive tax!
The elimination of the Social Security and Medicare taxes under Sensible Tax Reform will be a significant gain for most Americans. A family of four with $20,000 of income (which is well below the current poverty level) would receive an increase in income of $1530 (resulting from a decrease of the taxes). The family with $100,000 of earnings would receive an increase in their take-home income of $7650. Both families would enjoy an 8.3% increase in their take-home income from the abolishment of those two payroll taxes.
Back to Top(4) How would Sensible Tax Reform affect Social Security and Medicare benefits?
Social Security and Medicare benefits would not be affected by the introduction of Sensible Tax Reform. Only funding the programs would change. Instead of the current regressive taxes upon employees and their employers, the two programs would be funded out of the general budget of the federal government.
The American Social Security system is underfunded. Medicare is drastically underfunded. The Medicare prescription-drug program is totally unfunded. [It is totally funded out of general goverment revenues.] These programs require major changes under either Sensible Tax Reform or our current tax system. However, addressing the shortcomings of Social Security and Medicare is a different crisis for the federal government, which will need to be addressed separately. It is not part of this tax-reform proposal.
Back to Top(5) How would Sensible Tax Reform change personal income taxes?
Personal income taxation will be very simple:- All sources of personal income (salary, wages, bonuses, dividends, capital gains, rents, inheritance, etc.) will be treated alike.
- There will be no tax credits.
- There will be only one deduction (financial donations).
- There will be only one income exclusion: $500,000 per taxpayer.
(total income) - (financial donations) - $500,000 = (net taxable income) - There will only be three tax rates: 15%, 25% and 35%.
- 15% for the first $10 million of net taxable income;
- 25% for the next $15 million and
- The maximum of 35% only on net taxable income above $25 million.
In contrast, under our current federal income-tax system (2016), those three tax rates kick in at $18,550, $75,300 and $413,350 respectively. STR federal income-tax rates will generally be much lower than under our current system. And, because of the $500,000 exclusion, few individuals (less than 1% of taxpayers) will pay any income taxes.
Back to Top(6) How exactly would Sensible Tax Reform affect estate taxes?
The estate tax is another one of the federal taxes on individuals which will be fundamentally changed by Sensible Tax Reform. Estate taxes are the most progressive taxes imposed by the federal government (with a rate of 40%). However, very few estates actually pay any estate taxes. Even under the current system, less than 1/5 of 1% of American estates pay any estate tax at all and the average effective tax rate is less than 17%!.
Despite how few people actually pay estate taxes, a very aggressive, well-funded and deceitful attack by a very small group of very wealthy families has most Americans believing that the estate tax is an oppressive “death tax” which affects much of the population. These deceivers further claim that the estate tax imposes horrible burdens on the heirs, who often must sell the family farm or business to pay the taxes. That is a total and deliberate distortion--a complete fabrication, outright lies!
Without such distortions, the real shortcomings of the estate tax can be recognized:- The rules for estate taxes are so complicated that few people can really understand them.
- Planning to design estates and wills to minimize taxes can be very difficult and expensive.
- The very largest estates often pay a much lower effective tax rate than smaller taxable estates.
- Families with similarly-sized estates might pay very different levels of taxes from other estates because of different approaches to estate planning.
- In addition, the marginal tax rate on estates is quite high: 40%.
Indeed, the estate tax can be a serious bunden. The rules are not clear and everyone is not treated alike. [The rules are so complicated that several law firms have actually patented convoluted schemes for avoiding estate taxes that only their clients could use. That makes a farce out of our tax system.]
The estate tax needs serious reform for the real flaws of the current system--not the exaggerated flaws that some dishonestly allege. Under Sensible Tax Reform--Simple, Just and Effective, the rules of wealth transfer in estates will be very simple. The estate will not be taxed. The heirs will be taxed. That is much more than a simple change of process. It will very greatly simplify and reduce taxes on the transfer of estates. [See the following questions for details.]
Back to Top(7) Will there still be an estate-tax deduction for charitable donations
under Sensible Tax Reform?
Yes, an unlimited deduction for financial donations to legitimate charities by estates will be part of the STR tax reform.
Back to Top(8) Is there an estate-tax exclusion under Sensible Tax Reform?
No, the estate will no longer be subject to any taxation. A deduction will be made for charitable contributions. The remainder of the estate will be distributed directly to the heirs.
Back to Top(9) What will the estate-tax rate be under Sensible Tax Reform?
0%. There will be no estate tax. After charitable deductions, the entire estate will then pass directly to the heirs. No estate tax will be assessed at all.
Back to Top(10) How will heirs be affected by the change of tax rules on estates
under Sensible Tax Reform?
All heirs will receive their entire share of the estate, without reduction for estate taxes. Their inheritance will become part of each heir’s annual income--$500,000 of which will be tax free.
For example, consider a $35 million estate with $15 million of charitable donations, a spouse receiving half of the estate and two children each receiving one fourth:
= $35,000,000 - $15,000,000 = $20,000,000
None of the estate will be taxed under Sensible Tax Reform. In this example, the surviving spouse will receive $10 million which will be part of his/her annual income that year.
Similarly, each of the children will receive the $5 million requested to them. That amount will be added to all other sources of income for each individual inheritor. From that, their own individual income exclusion ($500,000) plus their charitable donations will be deducted. The remainder will be taxed at the appropriate federal income-tax rate, which would begin at only 15%. This contrasts with our current estate-tax rate of 40%! Under STR, heirs will be able to receive much more from their bequests than they receive now.
Back to Top(11) Will Sensible Tax Reform really reduce estate taxes?
Under STR:
- There will be an unlimited deduction for financial charitable donations.
- Bequests will pass to heirs free of any estate tax (versus 40% now).
- The bequests will be combined with the heirs’ other income to determine whether they owe any tax at all.
There will be neither federal estate nor inheritance taxes. Rather, inheritance income will be treated along with all of the other income of each heir and be subject to income tax only if the heir actually has very high income. Each will have their own annual $500,000 income-tax exclusion plus their own charitable deductions. And then the tax rate will begin at only 15%--instead of 40%.
Under the current estate-tax system, whether someone has inherited $5 million or $500 thousand, that will be from what is left after any estate taxes. Under STR, different heirs will be treated differently according to the amount of their inheritance, which will be much more just than our current system. The $5 million heir would likely pay income taxes on his/her share--but only at a 15% rate. The $500 thousand heir, on the other hand, would probably not pay any income taxes at all.
Back to Top(12) What new taxes will Sensible Tax Reform introduce?
STR will introduce only one tax--a federal consumption tax (FCT). There is currently no FCT in the United States. 45 states, as well as many cities, charge sales taxes, but the federal government does not.
The U.S. is currently the only industrial country without a federal consumption tax. The new consumption tax would be the primary source of revenue for the federal government. There will be no federal income tax on business. However, a personal income tax will be retained for very high incomes.
Back to Top(13) How does Sensible Tax Reform differ from the flat tax?
Flat tax usually refers to a flat income tax, typically between 15-20%. For example, Steve Forbes, when running for president in 1996 and 2000, advocated a flat income tax of 17% for all individuals and businesses.
Forbes’ proposal, as well as other flat-tax proposals, would essentially be a modification of our existing federal income-tax system. It would simplify it, but make it even more regressive for the vast majority of Americans. Our federal tax system would remain a convoluted and unjust mess.
Back to Top(14) How does Sensible Tax Reform differ from other federal consumption taxes, such as the Fair Tax?
The Fair Tax is also a proposal for a federal consumption tax. Like Sensible Tax Reform, it proposes a flat tax on the retail purchase of most goods and services. The Fair Tax rate would be about 30% (based upon the cost of the purchase — the same way that all other sales taxes are calculated).
As also with STR, businesses would not be taxed at all under the Fair Tax since the tax would be applied only to retail consumption. Individuals would also not pay any income tax but only the new federal consumption tax. A rebate of the federal consumption tax would protect the poor.
However, despite its name, the Fair Tax is not nearly fair enough in many respects. It would be much more regressive than our current federal tax system for the middle class. The poor spend all of their income and the middle class most of theirs while the very wealthy spend only a small portion of what they receive in income.
Thus for the very wealthy the total Fair Tax would be a much smaller share of their income than for the middle class. For example, a family with $100,000 of income would effectively pay 20-30% of their income in federal consumption taxes, depending upon their spending and saving habits. On the other hand, a family with $100 million of income and $15 million of purchases would pay only 4.5% on taxes. A hedge-fund manager with $1 billion of income and $20 million of purchases would effectively pay less than 1% in taxes. That is a regressive tax! [The measure of the regressiveness of a tax should always be calculated relative to income, not consumption.]
In addition, the wealth and income gaps in America have gotten dangerously high. Indeed, the income gap (the difference between the average income of the poorest 10% or 20% of the population and that of the top 5% or 1%) has widened to the levels in such countries as India and Russia. That is not something of which Americans can be proud. We are retreating from the standards of living and well-being that have been a critical part of America's social and economic progress. The Fair Tax would greatly increase these income and wealth gap trends and further aggravate economic and social divisions in this country. Tax justice demands that, in addition to a federal consumption tax, there also be an income tax on very high incomes. The Fair Tax has no taxes on income--no matter how high. That is disturbing.
Other aspects of the Fair Tax that are disturbing are the severe stresses that the application of its 30% tax would impose on certain sectors of our economy. Under their proposal, used goods such as used cars and houses would be tax exempt but not new cars and houses. Advocates hope that prices of new cars and homes would fall sufficiently to still be competitive with used cars and homes. In actuality, the tax would greatly increase the cost of new versus used. The American automobile and home-construction industries would be badly injured.
Overall, there are many good aspects to the Fair Tax. Its foremost advantage is its simplicity. And its proponents should be strongly commended for introducing a serious consumption-tax proposal at the federal level. However, the plan falls far short of justice and practicality. Sensible Tax Reform: Simple, Just and Effective offers a federal consumption tax but without the shortcomings of the Fair Tax.
