Principles of Tax Reform


Principles & Benefits of Ideal Tax Reform





1. Single flat marginal rate

Reduces revenue volatility. Steeply progressive marginal rates guarantee revenues grow faster than personal income during expansions and fall faster in downturns. The boom-bust revenue cycles enable spending booms in good years and feed cries for tax hikes in lean years. Marginal incentives stay constant. Revenues should track personal income. If properly structured, could be as low as 14%.


2. Low marginal rate

Fosters stronger capital formation. Marginal incentives stay high. Marginal incentive defined as 1 minus tax rate.


3. Progressive effective rates

If there is any merit to progressivity in the tax code, it is far better to make "effective" rates progressive rather than marginal rates. This can be accomplished through a unified exemption.


4. Consolidates income tax and payroll tax

Ends tug of war between income tax payers and payroll tax payers that stands as the biggest obstacle to true tax reform. Unites all taxpayers and aligns incentives to keep marginal rates low.


5. Refundable exemption

Makes it possible to completely lift the burden from the poor, without a patchwork of counterproductive credits. Makes possible a self-help line of credit that could come before the safety net.


6. Taxes domestic consumption

Ends double taxation of investment, puts fuel in engine of growth (production) not caboose (consumption). Same tax base as Fair Tax.


7. Equal treatment of business and individuals

Individuals and businesses pay the same tax rate on the same tax base.


8. Equal treatment for all business entities

Extends "partnership treatment" to corporations so all business entities have equal treatment. Corporations will remit tax on shareholder earnings not distributed as a dividend using a form similar to a "1099". Non-cash transaction for shareholder for reporting purposes.


9. Equal treatment of capital and labor

Businesses are taxed on goods and services produced for domestic consumption. Once tax is calculated, it is levied against both capital and labor in proportion to their use in the production process.


10. Equal treatment of workers and shareholders

The determination of the business tax (which is based on domestic consumption not income) affects just one line item on the income statement: tax liability. Net income is calculated the same way it is now. Business income then flows through to shareholders and is reported on the personal return, where it is taxed identically as labor income.


11. Introduces a good

"Buffett Rule"

Buffett will report his share of Berkshire Hathaway earnings on his personal return, making clear that he really does pay more tax than his secretary, and at a higher effective rate.


12. Exempts exports

Corporations will exempt export sales from the tax base. Exports face tax in the country of destination, so this puts U.S. made exports on a level playing field in world markets. This leads to more domestic investment. This is not an export subsidy per WTO, but merely consistent treatment of the tax base, which is defined as domestic consumption. When income is the tax base, it is a subsidy.


13. Imports included in tax base

The first buyer from the port does not deduct an imported item from the tax base, placing the item on a level playing field with domestic goods. This is not a tariff per WTO rules, but merely consistent treatment of the tax base, which is defined as domestic consumption. When income is the tax base, it is deemed a tariff.


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