There is much discussion now about reducing the $14 trillion accumulated federal budget deficit and to begin by attacking the $1.5 trillion annual deficit. There has been much huffing and puffing, with the Republicans trying to make it seem that they are forcing the President and his party to cut our debt by threatening to not increase the nation’s debt ceiling which would cause financial markets to collapse and probably lead to a worldwide recession. The Republicans claim that they must do this now because it has been kicked down the road for too many years.
The deficit issue was dealt with by President Clinton in the 90s. We were on track to have a $2 trillion surplus by now. The deficit was caused by Bush II who got us into two costly and unnecessary wars while drastically cutting taxes, especially for the rich, his base. The result was an economic disaster of epic or even biblical proportions. His tax cuts did not add jobs to the economy but did make our richest much richer.
The tax cuts that Bush put in place were scheduled to expire this year but were extended for two years in a deal the President made with Congress. These cuts cost us hundreds of billions a year in lost revenue. Our two wars add another $200 billion a year and our more than 700 military bases around the world, cost us another $600 billion. When all defense related costs are added in such as CIA military operations, VA benefits, State Department related costs, the total defense cost is more than One trillion dollars each year. While Social Security, Medicare and Medicaid account for 40% of our budget, the cost of these safety net programs is paid from special trust funds that come from payroll taxes paid by past and current employees and their employers. Their cost, therefore, does not affect our budget deficit, at all.
It is clear that the major budget cuts must come from defense spending which has been supplemented by vastly increased expenditures in our intelligence community since 9/11. Fraud and waste in government programs as well as foreign aid, farm subsidies and tax breaks for large oil companies must be dramatically reduced. But spending cuts are not enough. The tax code must be changed to not only generate more revenue, but to also be simpler, fairer and less cumbersome.
I propose a very simple federal income tax for individuals. It would be designed for one purpose - to collect revenue for needed government functions. It would no longer be used to encourage or discourage behavior. It would be as Senator John McCain described it - the redistribution of wealth. That is what taxes are supposed to be.
Under my plan all income would be counted and combined for a single total. So the salary, interest, dividends, capital gains, Social Security benefit payments, pensions and luxury voluntary fringe benefits (like optional Cadillac health plans or take home cars) would all be added together for each individual or family return. There would be only a standard deduction, around $15,000 for an individual, $30,000 for a family. There would be no other deductions. The total net income, which would not include mandatory payroll deductions for Social Security and Medicare, would then be taxed using only four or five tax brackets.
As an example imagine that there is a couple that earned $50,000 in net salary, $20,000 in Social Security benefit payments, $10,000 in interest and $5,000 in capital gains. The total is $85,000. The couple would deduct $30,000 in a standard deduction, leaving them a net income of $55,000. The first $50,000 could be at a 10% tax rate or, in this case, $5,000. The remaining $5,000 of net income would be taxed at 15% or, in this case, $750. The total tax would be $5,750 or 6.7% of their gross income.
As another example, imagine there is a couple who earned $200,000 in salary and $300,000 in capital gains and received a free executive car for their personal use worth $10,000 in gas and depreciation. Their total would be $510,000 (unless they opted out of the free car). Using the standard deduction, they would net $480,000. The first $50,000 would be at 10%. The second $50,000 (from $50,001-$100,000) would be taxed at 15%. The next $150,000 would be taxed at 20% and the remaining $230,000 (net income over $250,000) would be taxed 25%. (Incomes over $1 million could be taxed at 30%.) So in this case, the couple would owe $5,000+$7,500+$30,000+$57,500 = $100,000 in taxes. That equals a 20.8% tax on their gross income.
The taxes owed could be figured and reported in a matter of minutes. There would be no loopholes and there would be no attempt to use the code to encourage larger families by giving deductions for each child; to get renters to buy homes; to reimburse some of the cost of college tuition; to deduct some excess medical costs; to support the use of green energy; to provide earned income credit or making-work-pay credits. It would be simple, easy, clear, fair and would raise our revenues by more than $200 billion a year by getting the very rich to pay more than their current average of about 15% and would tax more people who now don't pay any tax at all.
The only real loser in this plan is the income tax preparer. People in this profession would have to focus on corporate taxes including for the self-employed who would still have business-related deductions and a tax code which is very complex and should also be streamlined.
There you have it. My answer to the budget crisis. Stay tuned for my plan to save Social Security and Medicare.
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