How shockingly easy it is to replace the Tax Code with a 9% Flat Tax on Income over $75,000.
This is a dream of mine: an age where taxes can be small and simple, where no single person pays over 10% of their income to the federal government.
It’s also ideal for a situation in which poor and middle income people don’t owe anything to the federal government. Instead of the daunting path, where the IRS is the bane of businesses and individuals, this would be a time where no one really would have reason to complain.
However, with the giant, complex, tax code we have now (consuming about 20% of GDP on the federal level), how do we get there?
So for starters, let’s just do a very basic run down on the budget and current tax code.
The current budget
We currently spend a little under four trillion dollars per year and 50% of that spending comes from income taxes. Of those income taxes, about 75–80% comes from the incomes of the top 20% of income earners, 25% comes from payroll taxes geared more toward entitlements and 10% comes from corporate taxes. About 2% comes from capital gains and estate taxes, and the rest is debt which is more or less 10% by now.
So, let’s breakdown the current budget very simply: let’s breakdown the four trillion dollars.
About half is non discretionary spending, meaning it is planned and promised to people, for example Medicare & Social Security, It can be cut just as easily as anything else, but it’s not going to be easy to get passed through Congress.
The other half is discretionary, for example defense spending. However, discretionary vs non discretionary is really just a tactic for the left to claim defense is half the budget when it’s not.
This is how the budget really looks in most basic forms (the following numbers are approximations):
Medicare – 25%
Social Security – 25%
Medicaid – 5%
Welfare/Food Stamps – 5%
All other departments (education, energy, commerce, etc.) – 20%.
The first thought would be that it is totally impossible to get to where we want to go, after reading the budget; four trillion dollars, broken up into things that hard to cut, and a tax code which has people paying as high as 40% on just their income.
The goal is to knock out estate taxes, capital gains, and payroll taxes, and link everything into one flat tax; a tax that only affects people and businesses making over $75,000 a year. This may not seem feasible, but it is.
The first thing we would need to do is look at our current tax code a little closer. We do have corporate taxes and income taxes that are at high rates, but people don’t realize that the deductions are kind of insane.
The government has made mountains of paperwork, which Americans spend hundreds of billions of dollars on yearly, through accounting costs, all to navigate the tax code. This can turn a 25% rate into a 5% rate or a 40% rate into a 0% rate, depending on what the person or business has.
An example of a flat tax
An example of this is the tax plan that Rand Paul proposed when he ran for president.
He proposed a simple 15% rate on businesses, and people, making over $50,000 a year, which impacts only the income over that $50,000. It would phase out payroll, estate, and capital gains taxes, and instead combine everything into one flat rate with very minimal deductions.
His proposal was shown to be not only budget neutral, but something which actually saves middle income people money in most cases.
That was his flat and fair tax plan. I would personally look for a 9% rate on income over $75,000 while keeping the budget balanced as the starting point.
The way it works.
Step One: introduce the Rand Paul flat tax plan. Go to a 15% flat tax on income over $50,000 a year, phasing out other taxes. Say the case to get rid of accountants, get rid of corporate gaming and have it so lower income people are fine.
Step two: spending sustainability/cuts. Spending cuts are hard, but in this case, not impossible. The emphasis here is less on spending cuts to cut taxes, but spending cuts to just take out the budget deficit we currently have. For that, we need a proper phase out of 10% of the budget.
Let’s talk about what we won’t do. We won’t cut social security. We won’t cut Medicare. We won’t deny anyone food stamps, Medicaid or welfare. Those are the politically untouchable. Instead, we focus on the 20% of the budget focused on big departments and 20% focused on defense.
We do a ten year phase out of funds for them, knocking out 25% each over one decade. Meaning, we take the defense budget and chop it 25% then we look at the EPA, the Department of Education, the Department of Commerce, HUD, and the Department of Transportation and so on. We aim to cut 25% from each, or take more from certain departments.
In this plan, there’s the reality of political unpopularity and losing jobs. The truth is, to cut defense 25% and these other departments, there would be about a 300-500b cut to government. Meaning, we probably lose a couple of million jobs, if not more.
So we do it over the course of a decade and by do it over the course of a decade, we fire them right away, but pay them to show up to work.
Just structure it in a way where it’s a mass severance package in which, for the first two years, they are fully salaried and given benefits for not doing anything. After that point, it’ll operate similar to unemployment where they will be required to get real work, but the government will fill in gaps in wages/benefits for the remaining eight years.
Due to these cuts, cost drop overnight; due to liability cost declining, existing offices not needing to be used, and factoring in planned retirements/death. Also, if just half of these people are able to get jobs paying 80% of what they were before, the government saves about half of what was cut within three years. This model is the happy way for people to depart the government and the easiest way to market a 10% cut to spending.
Step Three: Stability in spending after the fact. If government just made a rule saying that for ten years, spending cannot go up at a pace which is above 50% of GDP growth, the government will be stable in a decade. Meaning Social Security, Medicare, Medicaid, welfare and the remaining discretionary expenses have growth capped to half of whatever GDP growth is for ten years, that’s all which is needed to keep it balanced.
That’s it. Starting with the Rand Paul tax plan, moving to a 10% cut in the budget, and just making growth in government hit a slower pace will make it so in a decade.
Include in that a flat tax rate of 9% on income over $75,000 per year, phasing out estate, payroll and capital gains taxes.
The vast majority of Americans won’t have to pay taxes and spending to GDP drops from 20-22% to about 13% saving higher income Americans money as well. It’s not an insane goal with basic discipline; this flat tax should be the new chant for the liberty movement rather than that one about theft.
This post was written by Charles Peralo.
The views expressed here belong to the author and do not necessarily reflect our views and opinions.
Latest posts by Charles Peralo (see all)
- Why The Government Should Pay Off Student Loan Debts - May 23, 2017
- How shockingly easy it is to replace the Tax Code with a 9% Flat Tax - May 16, 2017
- Why Peter Schiff Isn’t a Serious Economist - May 11, 2017