Apr 26 2012

Hybrid Tax System

Published by at 11:42 am under Uncategorized

What do I mean by a hybrid tax system?

Well, it’s simple like a flat tax but with some graduated taxation as well as some built-in welfare. Let me qualify that I really would not prefer a graduated tax system, this is what I could live with.

I assume that there are those out there that think there is no way to go back from a federal income tax. Well, if that’s really true, this is what I would propose for a federal income tax.

This tax system also operates on the presumption that somehow we are going to realize that the Federal Government cannot do all that it is currently doing. It doesn’t have the money, the skills, the human resources, the training capacity, the organization structure, the will and most importantly, the authority do it. So let’s stop it.

But it does have some specific and necessary functions to perform and those will cost some money, so here we go.

I would propose a tax system with the following brackets: Low, Middle and High. I would propose that we tax income that comes in the form of royalties, rents, interest (this would include all capital gains and investments) and wages. Nothing else and there would be no distinguishing between incomes. All would be consider income and all taxed by the same rules. So here are the rules for each bracket.

Earners in the poverty bracket would pay no income taxes at all. The Low level would be based on a dollar figure which would be calculated as 1.25 times the amount required for a citizen to provide the minimum for shelter, food and clothing adjusted for minor dependents and based on national averages. These individuals would receive a check from the federal government totaling half the difference between their income and the poverty level and we would eliminate all other forms of welfare. This may sound harsh but if you look carefully at what behavior this system would encourage you will see that it is ultimately much more compassionate than our current system.

Let me explain. Happiness has no correlation with wealth. However, happiness cannot be achieved without sustaining life. The government cannot provide happiness or wealth, but it could provide the minimum amount for an individual to sustain life. Beyond that, this will have the effect of promoting income production not discouraging it by removing the incentive to earn less. The other effect that the entire system will have is to free up disposable income for individuals for charitable giving to their own family and other causes that they deem important (as opposed to what the government deems important). Some may argue that this will leave a lot of people uncared for and my response would be that I don’t think so. Society, of which government is only one small part, has the responsibility of taking care of it’s poorest. Throughout history, society has created institutions and charities to fulfill this role. Generally, but not exclusively, this has been through religion. In an atheistic society that role may tend to fall more to the government since the government is likely to take the place of religion. While we may have some notable atheists (and in my view we are all totally free to believe what they want), this country remains overwhelmingly religious. I would suggest that if government got out of the way, society, through charity and religion, would care for it’s poor more efficiently and with more compassion than government ever could. Finally, giving cash instead of goods and services would reintroduce the concept of personal responsibility into a class that has long been encouraged to abandon that idea.

Earners in the middle income bracket would pay a flat tax of 15% adjusted only for minor dependents. The middle income bracket would extend from 1.25 to 20 times the amount required for a citizen to provide the minimum for shelter, food and clothing and based on national averages. The adjustment would be 1% for each dependent. Finally there would be no deductions of any kind possible. Our current system of deductions is based on the promotion of behavior with the government being the judge of what is appropriate. Outside of it’s primary role of protecting individual liberties, government should not be in the business of manipulating our behavior. In other words, we want people to be charitable, therefore, we give them deductions for charitable giving. The problem is that it is not governments role to promote behavior with incentives. Even if the behavior is positive and desirable, it’s not governments place to do that. It is the slippery slope that we are already on headlong.

The upper income bracket would pay a flat tax of 20% with no possibility of adjustment or deductions. That’s it. You pay 20% of everything you make from the above listed sources of income.

The fines for not paying your taxes on time would be 100% of what you owed. So if you owed $20,000 and didn’t pay it. You would be fined for what you owe, plus another $20,000 for a total liability of $40,000. Now I may be persuaded to change the fine to graduate over time, but I would insist that it be a short time. Definitely less than 6 months.

Some important points to note here. First, income from inheritance is not considered taxable. That would be double dipping and it is wrong. Next, there is no benefit for being married. This one will be controversial to my socially conservative friends but I just don’t think that it is governments role to promote behavior. If you are over 18 and you have the ability to earn an income, you are considered an adult and have the personal responsibility to take care of yourself. If you choose to get married, which I think you should, then you will have to work out with your spouse how you will jointly meet the combined responsibility. The other thing this would do, and I think is critically important, is it would remove the responsibility of defining marriage from the government. This is a whole other discussion, but I don’t think marriage is a government institution. It is a religious one. As a result, the government shouldn’t be in the business of defining it, performing it, promoting it or denying it. This is a discussion about what makes up society and is the topic of a future post.

Finally, corporate taxes would follow the exact same pattern. Profits would be defined as all income remaining after all business expenses have been deducted and that profit would be taxed at the same percentage rates and within similar brackets with no adjustments or deductions.

The goal here is to close all the loopholes, simplify the system and increase revenue. No tax return should ever be longer than 2 pages.

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