In order to accomplish the four primary characteristics of good tax law:
1. A functional tax system adequately funds government services.
2. A functional tax system is comprised of functional law: Understandable and easy to apply, stable and predictable.
3. A functional tax system is fair.
4. A functional tax system is effective at influencing socially productive decisions about money, time, resources.
I propose the following revisions in order of importance.
- Tax ALL entities and ALL income on the same progressive rate structure.
Entirely eliminate all preferences for long-term capital gains and income from dividends, including all spinoff forms of that preference, including section 1256 gains on futures trading, and all carried interest preferential taxation for private equity investment bankers.
Increases tax revenues from current subsidy of income from long-term capital gains and dividends. Simplifies tax computation, reporting and enforcement. More understandable. Equally taxes income from work, rental and other services, and unearned income from ownership.
- Eliminate ALL deductions from income with the exception of deductions for any expenses incurred to earn specific income. No above the line deductions for health care expenditures, retirement plans, educational expenses; no itemized deductions for medical, mortgage or sales tax interest, state or municipal taxes, charitable contributions, and for all entities.
If a subsidy is to be retained at all, retain it in the form a tax credit, in which each taxpayer receives the same % tax benefit.
Increases tax revenues from current subsidy. Simplifies tax computation, reporting and enforcement. More understandable. No longer higher subsidy, the higher the tax bracket. Eliminates favored beneficiary interests. Reduces inflation in costs of health care, education, homes.
- ALL entities with limited liability status (corporation, LLC, limited partnership) would be taxed as distinct entities. All entities in which the shareholders are personally responsible for all entity debts (not limited) would be taxed as a proportional flow through entity (taxed as if they were an individual on their individual return).
Increases tax revenues by taxing all entities as well as their distribution of profits. Aligns favored legal status (no shareholder exposure to entity’s debts) with tax responsibility.
- ALL limited liability entitites would be required to publish audited financial statements, on their global income. All limited liability entities doing business in the US, would be taxed on all of their audited global income, with the reconciliation for total taxes between countries determined by tax treaty between the countries. (There would be then no possibility of offshoring profits.)
Increases tax revenues by taxing all corporate entity’s income in US. Simplifies enforcement for corporate entities. Eliminates off-shoring of large corporations’ profits.
- For all individuals, a once per lifetime net worth tax, based on the same progressive rate schedule as other taxation, applicable at either age 60 or death, depending on the taxpayer’s discretion.
Retains estate tax revenue. Adds discretionary timing of tax levy.
- Elimination of other ad hoc tax features including the exclusion from $250,000 gain on sale of a private residence, the alternative minimum tax. Passive loss limitations would be eliminated.
Simplifies tax preparation and enforcement.
Suggested marginal tax rate structure:
Up to $20,000 $0
Up to $40,000 $0 + 12.0% over $20,000
Up to $80,000 $2,400 + 19.0% over $40,000
Up to $160,000 $10,000 + 26.0% over $80,000
Up to $320,000 $30,800 + 33.0% over $160,000
Over $320,000 $83,600 + 40.0% over $320,000
Applies to all entities.