Richard A Demers
Minneapolis, MN
April 1, 2014
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Why is income tax reform needed?
What are the goals of this Citizen’s Proposal?
What income should be taxed?
Transferring income among individuals
Taxing asset transactions
Taxing income by formula
Income taxes and the national budget?
Household examples
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Neither fair nor just
Too many ways to avoid and evade taxes
Too complicated, intrusive and expensive
It harms the national economy
◦ Too much interference
◦ Drag on the national economy
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It fails to adequately fund the government
◦ Annual deficits
◦ Ever increasing federal debt
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Raise enough money for government operations
in a way that is fair, just, simple and efficient
Eliminate tax biases in favor of some people and
businesses at the expense of everyone else
Automatically link taxation with spending
Take control of the details of income taxation out
of the hands of politicians who don’t really know
what they are doing anyway
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It is not the goal of this proposal to
 Reduce taxes
 Redistribute wealth
 Reduce the size of government
 Reduce government spending
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Yes, if we incorporate good ideas from many sources
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Libertarian
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Conservative
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Taxation should intrude as little as possible in our lives and economy.
People should have some say in how their taxes are spent.
Income shouldn’t be taxed more than once - dividends, gifts, estates.
Rely as much as possible on the national economy, not government, to
meet society’s needs.
Liberal
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We are a community and not just individuals.
We should help people who help themselves to get ahead.
Taxes should be progressive and affect everyone to the same extent.
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Every person, every business and every
non-profit – no exceptions
 As individuals - infants to corporations
 Eliminate Single vs. Married distinctions
 Eliminate personal vs. business vs. nonprofit distinctions
If businesses want to be treated as individuals
for other purposes, they should be taxed as
individuals.
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Tax all Income – no exceptions
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Individuals,
 Wages, tips, bonuses, awards, realized options, interest,
dividends, pensions, Social Security payments, welfare payments,
insurance and annuity payouts, jury awards, alimony, lottery and
gambling winnings, etc.
 Capital gains taxed as income only if not reinvested
 Gifts and estates not considered income
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Businesses,
 Net, pre-tax business income
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Non-profits
 Same as service businesses
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No deductions, credits, allowances, exclusions or
rebates to anyone or any organization
for any purpose
"We are all in the tax game together,
and what is a privilege to one group of people
ends up being a penalty to everyone else
through higher tax rates.“
Taxing Ourselves: A Citizen's Guide to the Debate Over Taxes
by Joel Slemrod and Jon Bakija, 2008, p. 89.
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Social Security and Medicare are currently financed through
wage taxes
Social Security wage taxes not progressive
◦ Only on wages below a cutoff
◦ Greatly increases the tax burden of low income people
Social Security is not an annuity
◦ The so called SS Trust Fund is a bookkeeping gimmick
Social Security and Medicare benefits should be financed by the
entire nation through income taxes
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Any amount of pre-tax income can be transferred to any other
individual or organization where it is taxed as part of the
receiver’s income.
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Family transfers among members
Windfall transfers to IRAs
Corporate transfers to stockholders as dividends
Transfers to non-profits as contributions
Limitations on transfers
All income transfers become part of online public record
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The income of a household can be transferred
among its members so each is taxed at the
lower rate of a progressive tax.
Tax Rate
Household
Member
Income
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One-time income from inheritances, insurance
payouts, lottery winnings, bonuses, high
income years, etc
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Income can be transferred to flexible IRA type
accounts
Taxed as income on withdrawal
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After-expense, pre-tax income can be
transferred
◦ To stockholders as dividends
◦ To subsidiaries to enhance their capitalization
◦ To non-profits
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Eliminates double taxation of profits and
dividends
Eliminates unfairness of different tax rates for
wage vs. investment income
Strong incentive for businesses to pay better
dividends and to support non-profits
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Non-profits viewed as service businesses
No distinctions made among non-profits
◦ charitable, religious, political, cultural, etc
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Net income taxed after operational
◦ Property costs, salaries, supplies, etc
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Non-profits can be viewed as transfer agents
when income received is transferred directly
to beneficiaries
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Objective: Help citizens become rich in assets and
part of the so called “ownership society”
◦ Assets: anything that generates a monetary return
◦ Examples: real estate, stocks, bonds, mutual funds,
savings accounts, farms, real estate, businesses, etc
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Assets can be freely converted from one form to
another with no tax consequences
Assets can be freely transferred from one
individual to another with no tax consequences
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When sold and any part of the proceeds are
taken as income
◦ This makes this proposal a consumption tax.
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Losses are the investors responsibility, not
the government’s
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Gift taxes eliminated
Estate taxes eliminated
The special treatment of Capital Gains and
Losses is eliminated
All asset transfers part of online public record
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No quid pro quo transfers
No reciprocal transfers from whom the donor
can extract an advantage
◦ Money
◦ Assets
◦ Influence
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Violations to be prosecuted as tax fraud
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Why taxes?
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How high should taxes be?
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Should individuals have a say in how their taxes are
spent by the government?
◦ To pay for essential governmental services
◦ Which services are essential is not part of this proposal
◦ Should not be to encourage or discourage any activity
◦ As high as necessary to pay for budgeted spending
◦ Tax-cutting without cutting spending is foolish
◦ New spending without new revenues is foolish
◦ Yes, to the extent that they are willing to transfer income
and assets to organizations that can otherwise provide
required services
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Why not a flat tax?
◦ Inherently regressive
◦ Does not affect everyone to the same extent
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Why should taxes be progressive?
◦ High income individuals receive disproportionately
more value from living in a modern society
◦ As an incentive for individuals to transfer income to
non-profits
 Example: privatize NASA and get to MARS sooner
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Simple way to determine taxes at all income levels
◦ Calculated per individual, not household
◦ The same formula used for individuals and businesses
◦ From incomes of $0 to $1 Trillion-12 orders of
magnitude
If your income is $x, your income tax is f(x) = $y.
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tax = k × (basic rate × income) – offset
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Basic rate depends on income
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offset depends on earned wages
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k depends on
◦ 0% at $0 and 100% at $1 Trillion
◦ All taxes are on individuals
◦ No special rates for single vs. family vs. business vs. non-profits
◦ Similar to existing Earned Income Tax Credit
◦ National spending budget
◦ Population in each income range.
◦ Calculated repeatedly until the generated tax revenue equals budgeted
spending.
Actual tax rate = tax / income
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Basic rate= xlog(income) - 1
1 = x12 - 1
2 = x12
x = the 12th root of 2
x = 1.059463
Basic rate = (1.059463log(income) - 1)
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1.E+00
1.E+01
1.E+02
1.E+03
1.E+04
1.E+05
1.E+06
Basic tax rate
1.E+07
1.E+08
1.E+09
1.E+10
1.E+11
1.E+12
Individual Income
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Depends on earned wages
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Similar to current Earned Income Tax Credit
Calculated per individual, not per family
Encourages all citizens to work for their living
No offset for those able to pay taxes
Offset
Phase-in limit = $3,000
Plateau limit = $4,000
Plateau = $2,000
Other income limit = $4,000
Phase-out limit
= $100,000
Wages
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Ideal tax = 1 × (basic rate × income) – offset
Ideal rate = ideal tax / income
Ideal tax rate as % of individual income
Ideal Tax Rate
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
-50%
-60%
-70%
-80%
-90%
-100%
1.E+00
1.E+01
1.E+02
1.E+03
1.E+04
1.E+05
Basic tax rate
1.E+06
1.E+07
1.E+08
1.E+09
1.E+10
Ideal Tax Rate
1.E+11
1.E+12
Total individual income
• Ignores spending budget
• Ignores population distribution
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Dollars
Households and Household Income
Households
1.E+13
1.E+11
1.E+09
1.E+07
1.E+05
1.E+03
1.E+01
1.E-01
1.E+03
1.E+04
1.E+05
1.E+06
1.E+07
1.E+08
Households
Total household income
1.E+09
1.E+10
Income
Most tax revenue from households with a modest income
Revenue from high income households also required
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Goal: Determine if proposal is reasonable
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Revenue target is sum of
◦ 2011 individual income tax
◦ 2011 employee FICA and Medicare wage taxes
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Limited to personal income
◦ Population distribution from IRS tables
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Business, gift, estate and non-profit income not part
of model because income distribution not available
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Allocates household income equally to all members
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Individual Tax Revenue
 Individual, estate and trust income tax
 Employee FICA + Medicare wage taxes
 Total individual tax revenue
Estate and Gift Tax Revenue
 Gift tax
 Estate tax
 Total Estate and Gift Tax revenue
Organizational Tax Revenue
 Corporate income tax
 Employer FICA + Medicare wage taxes
 Tax-exempt unrelated business income tax
 Total organization tax revenue
Revenue Target of 2011 Spreadsheet Model
$1,175,989,528,000
$481,552,411,000
$1,657,541,939,000
$6,572,384,000
$2,506,991,000
$9,079,375,000
$242,435,939,000
$481,552,411,000
$412,183,000
$242,848,122,000
$1,657,541,939,000
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tax = k × (basic rate × income) – offset
where k = 0.692
Individual Tax Rate
Individual Tax Rate
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
-50%
-60%
$1,000
$10,000
Basic Tax Rate
$100,000
$1,000,000
$10,000,000
Proposed individual tax rate
$100,000,000
$1,000,000,000
Individdual Income+ FICA + Medicare
• Assumes equal allocation of household income
• Includes FICA and Medicare financing
• Model does not include business income
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$100,000,000,000
$10,000,000,000
$1,000,000,000
$100,000,000
$10,000
$100,000
$1,000,000
$10,000,000
$100,000,000 $1,000,000,000 $10,000,000,000
Proposed tax revenue
2011 combined tax revenue
Negative values cannot be shown on a log chart.
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Dad earns $x per year
Mom earns $y per year
Their two children have no income
The family transfers 10% to charities, their
church, their political party and cultural nonprofits
For tax purposes, they allocate the rest
equally (25%) to each person
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Household income
% of income transferred out
Taxable household income
$10,000
10%
$9,000
$20,000
10%
$18,000
$30,000
10%
$27,000
$50,000
10%
$45,000
$100,000
10%
$90,000
$250,000
10%
$225,000
$1,000,000
10%
$900,000
% of taxable household income per
person
Each person's taxable income
log(each person's taxable income)
Basic tax rate
25%
$2,250
3.352182518
21.3646369%
25%
$4,500
3.653212514
23.4933971%
25%
$6,750
3.829303773
24.7559095%
25%
$11,250
4.051152522
26.3648770%
25%
$22,500
4.352182518
28.5813424%
25%
$56,250
4.750122527
31.5711276%
25%
$225,000
5.352182518
36.2271747%
Basic tax rate * income
Phase in offset
Plateau offset
Phase out offset
offset
Each person's tax
Each person's tax rate
$481
$1,500.00
$0.00
$0.00
$1,500.00
-$1,083.72
-48.17%
$1,057
$0.00
$0.00
$1,989.58
$1,989.58
-$1,074.06
-23.87%
$1,671
$0.00
$0.00
$1,942.71
$1,942.71
-$495.62
-7.34%
$2,966
$0.00
$0.00
$1,848.96
$1,848.96
$719.61
6.40%
$6,431
$0.00
$0.00
$1,614.58
$1,614.58
$3,954.42
17.58%
$17,759
$0.00
$0.00
$911.46
$911.46
$14,467.44
25.72%
$81,511
$0.00
$0.00
$0.00
$0.00
$70,587.79
31.37%
Household tax
Household tax rate
Household take-home income
-$4,335
-48.17%
$13,335
-$4,296
-23.87%
$22,296
-$1,982
-7.34%
$28,982
$2,878
6.40%
$42,122
$15,818
17.58%
$74,182
$57,870
25.72%
$167,130
$282,351
31.37%
$617,649
Household tax rate
60.00%
40.00%
20.00%
0.00%
-20.00%
-40.00%
-60.00%
$10,000
$100,000
$1,000,000
$10,000,000
$100,000,000
$1,000,000,000
Household tax rate
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Tax all income
Eliminate all loopholes
Allow income and assets to be transferred
without tax consequences
All taxes are on individual persons and
businesses
Tax all income using a single progressive
formula that spans 12 orders of magnitude
Make all income, transfer and tax information
available online and transparent
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A much more complete model is needed!
This is a work in progress,
a stake in the ground.
Please throw rocks at it.
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taxreformproposal.org
Tax proposal home page with links to:
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Tax proposal essay
Early comments
Spreadsheet model
This slide show
About the author
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