Eric's (quarterly?) Post Number 5

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Eric Korpela Project Donor
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Message 546912 - Posted: 15 Apr 2007, 22:58:37 UTC
Last modified: 16 Apr 2007, 0:31:42 UTC

A lot has gone on since last time I posted here.

The cold I had last time I posted turned to pneumonia, which responded well to antibiotics. A big "Yay!" for western medicine, which has likely saved my life once more.

I took last week off to do my taxes. Those of you who don't live in the U.S. might not understand why someone would need to take 2% of the year to figure out how to pay the taxes accrued during the rest of the year.

I'm not going to complain about the amount of my taxes. Compared to the rest of the world they are quite low. How low depends upon how you calculate income, which is one of the difficulties of the tax code.

There is taxable income, tax deferred income, tax free income. Under taxable income there is wages, interest income, capital gains income, ordinary dividend income, qualified dividend income, self employment income, farming and fishing income, retirement income, social security income, miscellaneous income and a few others I'm sure I'm missing. Believe it or not, Angela and I had all of those except social security income, and, of course all of them get different tax treatment. (Yes, we got retirement income, even though neither of us is retired. And you don't want to know how we got farming income, because I'm not sure I fully understand it myself.)

The other side is deductions. Deductions are the complicated part. Deductions are a combination of attempted social engineering combined with special give aways to specific industries.

For example, there are deductions for interest on loans used to buy a home. The original purpose was to promote home ownership. Which it does. It also confused a lot of people into thinking that the interest deduction was a good reason to keep a home loan even if you could afford to pay it off. And, of course the banks would like you to think that it's worth paying them $10,000 in order to save $3,500 in taxes.

I'm not going to complain about the charitable contribution deduction. One reason is that it pays part of my salary (thank you for your donations). The other reason is that there are many things that the federal government isn't spending money on that it should be. Since the government won't spend the money, charitable organizations have to step in.

But there are lots of other deductions, like deductions for oil and gas exploration, owning a toxic waste dump, and many many more.

That said, I'd like to see the tax code greatly simplified, even at the cost of seeing higher taxes for myself and Angela. Overall our combined state and federal tax rate was about 24%. Which is not bad at all. Of course I spend 2% of the year figuring that out, so maybe call it 26%.

The question is, how to simplify it. I'm not a believer in a flat tax. I'm a true blue Wisconsin liberal (which is kind of like a Berkeley liberal with guns and beer and a penchant for red checkered flannel) and a strong believer in a progressive tax system, where high earners are taxed more than low earners.

In a properly designed progressive tax system, the system should distribute the pain of taxes evenly, rather than the taxes themselves. Since the value of an additional dollar of income is less to someone earning $1M per year than to someone earning $1000 per year. To one, it's one 400th of a ticket to Hawaii. To the other it's another bag of rice. To put it another way: Have you ever given a dollar to a pan-handler? If the answer is yes, you probably did so because the dollar was more valuable (even to you) in their hands than it was in yours.

It naturally follows from this argument that there is an income level below which no taxation is tolerable. And that income level can be calculated fairly easily. It's the level where income is equal to the cost of housing, food, medical care, and educational expenses. Below that level, the tax rate should be negative.

So here's my reformed tax code.


  • All income would taxable at the same rates (including capital gains and dividends, social security, etc.), except tax deferred income. Tax deferred income is income deposited into retirement accounts which will be taxed at a later time.
  • Expenses for the following are directly deductable from income:

    • Housing would deductable, with the standard deduction being the smaller of the county median annual cost and twice the state wide median. The maximum deduction the smaller of twice the county median and twice the state wide median. There should be carryover, so if someone pays cash for a house, they can take the deduction over a period of 15 years. However such a deduction would reduce the basis of the home for capital gains.
    • Food is deductable with the same relation to median as for housing.
    • Transportation costs would be deductable with the same relation to median.
    • Necessary and preventive medical care would be deductable (with limits based reasonable charges. No more charges of $90 for a thermometer). This deduction includes medical insurance.
    • Educational expenses for study at public schools or universities are 100% deductable. Study at private schools is deductable up to the median public school spending per pupil.
    • Chartiable contributions used for public services, research, and other public purposes should continue to be deductable from income. Organizations that currently perform both public benefit work and work that is primarily for the benefit of the members of the organization will need to separate out their donations such that only the charitable donations are deductable. Yes, church with the 47" plasma TV in the coffee lounge, I'm looking at you. And yes, universities, overhead or fees that you charge on donations would not be deductable.


  • These deductions should be subtracted directly from the income. Call this number "disposable income".
  • The tax computation would take some finesse. One idea is:

    • tax_rate=max_rate*(1-exp(-kappa*sqrt(disposable_income/deductions)))


    where max_rate is the maximum tax rate, and kappa is chosen for reasonable rates at middle income. With a 90% max rate and kappa=0.35 my tax rates would remain the same. For negative disposable income the formula would need to change kappa to -kappa and disposable_income to -disposable income. In other words the tax rate would go negative.



Of course, this is just an idea, and it will never be implements, because it would cost too many powerful people too much money.



(I had to leave so I entered what I had written. I'm back now to add a bit more. What this forum needs is a save function.)

I want to point out the numbers above are just values to throw out there to stimulate discussion. I'm not saying that 90% is necessarily a good place for the top bracket, although I can easily believe that a dollar has less equivalent value to Bill Gates than a dime does to me.

I'm also not saying that I should be paying only 25%.

And this is combined state and federal tax. There would need to be negotiation between the states and the federal government to achieve something like this. Maybe state taxes paid would need to be 75% deductible from income.

The method I laid out might seem a bit complex. Compared to the existing tax code, which is 16,845 pages long, it's pretty darn easy.



--
Eric


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Message 546953 - Posted: 15 Apr 2007, 23:34:24 UTC
Last modified: 15 Apr 2007, 23:45:50 UTC

Red checkered flannel you say? Not a lumberjack in a former life were you?
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Of course, this is just an idea, and it will never be implements, because it would cost too many powerful people too much money.

This is where voting comes in handy (provided of course that it is free and fair - a difficult one to ensure), the powerful might just begin to see themselves as not necessarily untouchable/invincible and be prepared to make a few concessions to keep themselves in the manner to which they have become accustomed.
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Sometimes I think we are alone in the universe, and sometimes I think we are not. In either case the idea is quite staggering.
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Message 546993 - Posted: 16 Apr 2007, 1:06:29 UTC - in response to Message 546953.  
Last modified: 18 Apr 2007, 21:46:55 UTC


Red checkered flannel you say? Not a lumberjack in a former life were you?


Maybe a former one. In this life I was one of the few boys in my high school who didn't spend late spring peeling pulp.


For those of you who didn't grow up in the big woods, peeling pulp means removing the bark from cut aspen on its way to becoming paper.

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Message 547046 - Posted: 16 Apr 2007, 3:42:14 UTC

And you don't want to know how we got farming income, because I'm not sure I fully understand it myself.

Farming out workunits, possibly?
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Message 547278 - Posted: 16 Apr 2007, 18:25:38 UTC

Eric, I can sympathize with anybody with hairy income tax preparations. In my case it was filling out 15 Forms 1116 to claim the foreign tax credit for 43 countries from three foreign index mutual funds.
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Message 547331 - Posted: 16 Apr 2007, 21:03:53 UTC
Last modified: 16 Apr 2007, 21:06:43 UTC

LOL....

Nice dissertation! :-)

Bet it makes you glad you only have to deal with your BOINC, SSL, and other "rational" obligations the other 51 weeks of the year.
;-)

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Message 547347 - Posted: 16 Apr 2007, 21:40:31 UTC - in response to Message 546953.  

Red checkered flannel you say? Not a lumberjack in a former life were you?

Whew! I was afraid Eric was a Lumberjack.

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Message 547588 - Posted: 17 Apr 2007, 4:09:21 UTC - in response to Message 546912.  

A lot has gone on since last time I posted here.


I took last week off to do my taxes. Those of you who don't live in the U.S. might not understand why someone would need to take 2% of the year to figure out how to pay the taxes accrued during the rest of the year.

I'm not going to complain about the amount of my taxes. Compared to the rest of the world they are quite low. How low depends upon how you calculate income, which is one of the difficulties of the tax code.

There is taxable income, tax deferred income, tax free income. Under taxable income there is wages, interest income, capital gains income, ordinary dividend income, qualified dividend income, self employment income, farming and fishing income, retirement income, social security income, miscellaneous income and a few others I'm sure I'm missing. Believe it or not, Angela and I had all of those except social security income, and, of course all of them get different tax treatment. (Yes, we got retirement income, even though neither of us is retired. And you don't want to know how we got farming income, because I'm not sure I fully understand it myself.)

Eric



<<<<
Glad you recovered from the pneumonia. It can be nasty stuff.

Your take on taxes is good. I would like to pass it on to my congressman in Maryland, with your permission. It can be depersonalized if you desire, without last name should be sufficient.

We just got our taxes done a few days ago. Both state and federal. Electronc filing of course. Started a month and half ago.

Being retired for over a decade we didn't miss any work time, except yard mowing. One reason for on line filing is that we could use our checking accounts for the refund on one side and amount due on the other. A credit for our Prius bought a year ago helped create the former. Some of the bucks will buy a new computer. More work units...

duke.
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Message 548649 - Posted: 18 Apr 2007, 18:30:32 UTC - in response to Message 547588.  
Last modified: 18 Apr 2007, 18:30:50 UTC

Feel free to pass it along, as is, or anonymized, your choice. If it gets something done, all the better.


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Message 550892 - Posted: 22 Apr 2007, 14:02:48 UTC
Last modified: 22 Apr 2007, 14:04:17 UTC

Sounds good -

we already have a progressive system in place in Austria, and for people who do not run their own business, all taxes and health/retirement-related costs are deducted from your earnings before you even get your hands on them.

...-> disposable income, in your plan.

Works out well, except that we managed to spoil it by filling it with loop-holes which took revisions to the code, which complicated it, and so the cycle started over.

What this needs to succeed is one more key element. No lobbying, no funding political campaigns for kickbacks.

Without this, it will just turn back into what it was, even if it'll take a bit of time.

Regards,
Simon.
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Message 554364 - Posted: 26 Apr 2007, 22:18:44 UTC
Last modified: 26 Apr 2007, 22:22:46 UTC

As far as the tax code for individuals goes, that is a start, but a huge part of the tax code deals with other entities: Partnerships, Corporations, Etc.

Personally, I'd like to see a corporation's taxes simplified nearly as much as you describe for the individual's. For a start, I'd like to see the corporation's taxable income directly related to the income statements released for investors (with multinationals, you'd have to figure out the income attributable to the us, without opening huge loopholes like exist currently) with the exception that income distributed as dividends should only be taxable once, payable by the owner (shareholder) or the company, but not both.

Edit in response to Simon: You know, the Romans outlawed that sort of lobying for money. You were not even allowed to pay for legal representation. Of course people got around this by writing into their wills large payments to those who helped them in the senate.
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Message 557118 - Posted: 1 May 2007, 3:28:11 UTC - in response to Message 547347.  

Red checkered flannel you say? Not a lumberjack in a former life were you?

Whew! I was afraid Eric was a Lumberjack.

My first thoughts as well...
Grant
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