Friday, December 23, 2011

Taxes -- The Semi-Concise Summary

So ... how to fix America's personal income tax problems?

  1. Expand the number of brackets to what they were during the early Reagan years, and bring the top marginal rate back to the 50% it was back then. It was good enough for St. Ronnie; it's good enough for today. 
  2. Get rid of the capital gains tax. Treat all income as ordinary income. 
  3. Junk the mortgage interest deduction. OK, just phase it out then.
  4. Set the trigger for the alternative minimum tax at $250,000 (for a household) and adjust it automatically for inflation.
The result will be a much simpler tax code that raises considerably more money, with nearly all of that additional revenue coming from the top 1% or so. And, with a little luck, we should be able to offer some mild tax relief for the poor and middle class. 

One last thing. One of the more pernicious lies bandied about this past year was that 47% of American didn't pay federal taxes. In fact, everyone who gets paid to work paid federal taxes in the form of FICA -- Social Security and Medicaid taxes. But because these taxes are tallied separately from income taxes, they get forgotten. 

And this really doesn't make sense, because Social Security and Medicaid is what a lot of what the federal government does.

2010 Federal Budget -- Outlay by Category

In 2010, Social Security and Medicaid accounted for about 28% of the federal budget -- and everyone helped pay for it. 

(If you add in Medicare and defense spending, you end up accounting for about two-thirds of the budget -- which is why government is sometimes called "an insurance company with an army.")

It's time for the lie to die. So from now on, FICA taxes are rolled into general personal income taxes. Nothing under the hood will change -- FICA taxes will still be deducted from paychecks as they have been. Technically, your marginal rates will go up, but the FICA taxes you already paid will offset them entirely. You'll net out, but it will be now be clear how much you're actually paying to keep the government going.

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