Don’t Tax You. Don’t Tax Me. Tax That Fellow Behind the Tree

Tax reform is a very popular political topic.

It is also a topic that is politically impossible to succeed in.

The US tax code is a bit complicated and people do not like that. Of course they would like lower taxes but many would settle for paying the same taxes with a simpler process. A popular campaign promise has been to make the code so simple you could write it on a post card.

People would like to write down their income and see a simple formula that figures the taxes they owe.

Seems like it would be easy to simplify at first glance.

A person sees what their income is and sees the tax they owe after completing a number of steps.

Why can't you take that tax dollar owed, divide it by your income and presto, that number is your tax rate? Say you make $50K and your tax wound up being $5K. Why not just say everyone pays 10% and call it a day?

You can't do that because not everyone pays 10%. There are a number of people that pay more and a number of people that pay less.

Sure, the people that pay more will be happy to pay less but that's not going to bring in the necessary tax revenue to pay for things.

And the people paying less will scream bloody murder if they have to pay more.

Of course there are several steps in filing your tax return.

You have to list your filing status (married, single etc.) and the people that add up to your exemptions. These are the people included on your tax return - spouse, kids, etc.

Each exemption contributes to a total dollar amount subtracted from your reported income to help determine your taxable income.

Then there are things you can subtract from your income like educator or moving expenses to get your adjusted gross income (AGI).

Next there are deductions you can take to further lower your taxable income. There is a lobbyist and political element to each one of these deductions. Good luck getting rid of any of them.

Then you subtract the dollar amount of the above mentioned exemptions and you will eventually get to taxable income.

Your tax is then determined from this taxable income and refers to a progressive tax table that gives different tax amounts for each level of income taxed at higher rates for higher income levels.

Then there are other taxes and credits that can be figured into that including alternative minimum tax (AMT).

One popular idea for tax reform is to get rid of the deductions, which would increase your taxable income and then lower the rates, which would get the final tax back to where it is now.

Sounds great before you apply the math across the board.

It is mathematically impossible to come up with even a progressive rate system that would return most people to a near approximate of their current tax bill. So we get to the point explained above, where some would pay more and some would pay less and the total tax revenue would not be the same.

If you try to keep some of the deductions, it would be a real fight to see which ones go away.

We simply can't do it. We cannot reform the tax code.

We can only modify rates and tweak the deductions.

Unless ...

We could try a plan to do a massive tax cut across the board. Keep the exemptions, remove the deductions and lower the tax rates to a point where a large majority of people get a tax cut.

This would create a massive deficit right away but also be a huge stimulus to the economy.

The stimulus would create higher incomes which would gradually generate more tax revenue (after the big drop in revenue).

Then you could gradually raise tax rates on some income levels to get tax revenue closer to the norm.

The key would be to stay away from the temptation of bringing back loopholes.

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Tax Reform

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