When I first planned this article it was titled “The 3% Tax Rate” and my intention was to demonstrate that a 3% federal income tax rate combined with a 3% state income tax rate combined with a 3% county OR city tax rate (as applicable) should be sufficient for every one of those entities to exist, operate and not go into debt providing necessary services. Then I realized two things: 1) that’s a total of 9% in total taxes, and 2) people would still be playing the “how much of my income can I exempt before I pay those taxes?” game. So, as I rethought the situation, here’s what I came up with: a 10% total tax rate; no exemptions; no exclusions.
The biggest assumptions that have to be accepted for this to work are:
Assumption One: No exemptions, no exclusions. EVERY adult who earns an income will pay 10% of it in taxes.
Assumption Two: The federal government would be mandated to not only operate within the revenue generated by that 3% income tax rate, but also to pay off its standing debt. Assumption Three: Incurring new federal debt would be prohibited and the current standing debt would have to be paid off by 2025.
Assumption Four: The new tax structure would go into effect with the 2013 tax reporting year which would impact the 2013/2014 federal budget year, so Congress would have between now and the end of September 2013 to enact a balanced, deficit reducing budget for the ‘13/’14 fiscal year.
Assumption Five: Since the cities, counties and states would be raising A LOT more money through income tax, no more “federal assistance” monies would be forthcoming starting October 1, 2013.
Assumption Six: Nothing in this outline impacts business tax, property tax, etc. This is purely a discussion about PERSONAL INCOME tax (although I think that the huge increase in personal income tax seen by states, counties and cities should offset any and all sales tax, gas tax, etc.)
So, here we are: a 10% flat tax enacted (in my fictional world) on all income. If you earn $10,000 in 2013, then you owe $1,000 taxes on your tax returns. If you earn $100,000, then you owe $10,000. If you earn $1,000,000 then you owe $100,000. This isn’t brain surgery. It’s moving a decimal point. Anyone can do it. Accountants might not be required for PERSONAL INCOME tax returns anymore.
Let’s use an income of $100,000 as our example.
Person earns $100,000 and files his (or her) tax return showing $10,000 due in taxes. That $10,000 represents 3% to the federal government ($3,000), 3% to the state government ($3,000) and 3% to the county or city government wherein that person resides ($3,000). The final 1% is for the charity program(s) of the payee’s choice. So that’s $1,000 to charity. That’s a total of $10,000 in taxes and donations but the filing is hugely simplified and the math is easy.
How much did you earn in 2013? $100,000
How much do you owe in taxes for 2013? $10,000
The STATE government collects it all and distributes $3,000 to the federal government and $3,000 to the appropriate county/city. The $1,000 charity distribution is sent to the specified organization(s). Oh, look – we just did away with the need for about 99% of the Internal Revenue Service.
Now let’s talk about how much money, via income tax, this would actually raise. To do so, I’m going to have to use “median household income” numbers from 2011 (most recent report I can find) and a few estimates that are reasonable. Bear in mind that the median household income is supposed to represent how much taxable income the average HOUSEHOLD had (in this case, for 2011). Many households had far less and some households had far more. Many households have two wage earners. Using the median income per household simply allows me to do the math without having to demonstrate average income for every person.
In 2011 the reported (from the government budget office) median household income in the United States was $50,502. There were an estimated 117 million households in the U.S. that year. That means that a total personal income of $5.9 TRILLION dollars was earned. From the same government office we can see that a total of $1.09 TRILLION was taken by the federal government in personal income tax. That $1.09 TRILLION does not include the money states, counties or cities took in personal income tax. Keep that in mind as we do the math and realize that the federal government took 18.5% of all personal income earned in 2011 just in TAX. That doesn’t include how much more was taken in social security payments, medicare/Medicaid payments, etc. The $1.09 TRILLION that the federal government collected represented over 47% of the federal government’s total revenue came from personal income taxes collected. The second largest source of revenue for the federal government was social security taxes combined with medicare taxes.
Now let’s do some math using my 10% flat tax rate.
That average household which earned $50,502 in 2011 would have to pay $5,050 in total taxes. Projecting out the totals, the collected tax revenue would be:
$177 Billion for the federal government
$177 Billion for the state government
$177 Billion for the county/city government
$59 Billion for charities
Now, yes, that’s a significant reduction in how much money the federal government collects in personal income tax. Such would no longer be the federal government’s primary source of revenue and the government would certainly have to find a way to operate within the new budget restrictions. Then again, let’s think about a couple of things that would alleviate any pressure on the federal government:
A state bringing in $177 Billion in revenue shouldn’t have budget problems, especially when each county and/or city is bringing in the same thing. The need for “trickle down” financial assistance should be relieved immediately. Federal assistance, grant and miscellaneous funding programs could be dissolved.
Even a state as big as California, with its notorious budget problems, should see its financial issues resolved if you compare the $177 Billion of revenue to its 2012 general operating budget of $91.3 Billion. Heck, that’s an $85.7 Billion surplus!
Let’s look at a different state: I’ll pick Maryland since it’s on the opposite coast and somewhat in the middle. For 2012 the Maryland general operating budget was $32.4 Billion. With a revenue generation of $177 Billion, Maryland would enjoy a $144.6 Billion surplus! Consider what a county could do with that kind of money.
Let’s recognize one other thing: the states with the highest density of population would also have the highest income tax revenues. That’s good because those states have matching higher service demands. As an example, consider that states with higher populations have higher needs for public safety services, hospital and emergency care services, etc. States with lower density populations have lower demands.
So, what about those cities with high percentages of people on welfare? Well, my friends, welfare would be part of that 1% each person got to choose would go where when they filed their tax returns. If I made $100,000 last year and I’m paying my $1,000 toward charity, I’d have a few options:
Option 1: check a box that allows the federal government to decide where it goes in federal services.
Option 2: check a box that allows my state government to decide where it goes in state services or to my home county/city.
Option 3: check a box that allows my county or city government to decide what to do with that $1,000.
Option 4: Specify a charity, or list of charities, and what percentage of my $1,000 I want to go to each.
As far as I’m concerned, given the extra amount of money we’d all be bringing home, Social Security could return to being optional, as it originally was. If you want to invest for your retirement, have at it. If you don’t make that choice, live with your decision. We’d be returning, to some extent, personal responsibility back to ourselves and removing the huge involvement of “big brother” (government) in so much of our day to day life.
The one challenge I have with my own proposal is that the U.S. Department of Defense budget would have to be cut severely. If the overall federal government budget is only $177 Billion each year, then a DoD budget of $708 Billion (like it was in 2011) is obviously unsustainable. I offset this concern with two potential solutions:
First potential solution: cut a lot of the science-fiction development programs that we dump countless billions of dollars into. Do we really need an unmanned fighter/bomber aircraft? No, not really. I don’t like risking the life of a pilot either, but having to weigh that life against the value of a given mission can serve to keep commanders on track and not ordering missions with an easy conscience simply because no human is involved.
Second potential solution: with all of the extra money states would have, the State National Guard units could certainly be beefed way up in manpower and equipment. Those NG troops could be used for federal service as they currently are during times of war. The controls would be that the NG units could only enter federal service for any action approved by majority vote of Congress – NOT just on the President’s order – and such assignment would also have to be approved by the majority of the given state’s legislature. In other words, before Nebraska’s National Guard troops could be deployed to Afghanistan, the U.S. Congress would have had to declare war AND the Nebraska State Legislature would have to agree to the deployment. It would, after all, be an expenditure of the state’s budget; not the federal government’s through the Department of Defense.
Think about this second solution. The State National Guard units provide local support services during times of natural disaster, weather emergencies, civil unrest, etc. To have them staffed, trained and equipped ten times better than they are now would be awesome. To have the states able to support, or not, war against another country would put an interesting control on the federal government. The improperly named “entitlement” spending of the federal government attached to military retirements and on-going medical care for veterans would be greatly reduced within one generation (20 years). That responsibility would fall to the states, since that’s where most of the manpower would reside, and they’d certainly have the budgets to handle it with ease.
Finally, let’s think about the impact such a low tax rate would have on our consumer based economy. If, in the 2014 calendar year, you had several thousand more dollars in your pocket to spend, would you spend it? Certainly, you may not spend it all, but you’d likely spend a good chunk.
If your household brings in $100,000 and pays out about $17,000 in taxes (based on 2012 tax rates as published) in 2012 and then you compare that to making the same amount but paying a fixed $10,000 in taxes for 2013, that leaves you with an extra $7,000 to spend. That’s $583 per month. I can think of enjoyable ways my family could use that $583 per month and I CERTAINLY know what I can do with all the time I’d save by not having to spend a whole day or two figuring out how much I have to pay in taxes. Additionally, it’d be real nice to file your income taxes knowing that you haven’t made any mistakes (because it’s so straight forward and easy) and the IRS isn’t going to come knock on your door because you didn’t update your tax software right before you filed or some such.
The bottom line (for me) is this: A flat tax rate at 10% TOTAL income tax should be more than enough for all levels of government to operate. Divided properly amongst the levels of government, such a tax rate can be accompanied by a strengthening of state governments and a reduction in the power of the federal government – a situation that was intended by our founding fathers but that has been deteriorating since the era of the Civil War.
What are your thoughts on a 10% flat tax rate?
Quotes & Reference:
“One thing is clear: The Founding Fathers never intended a nation where citizens would pay nearly half of everything they earn to the government.”
― Ron Paul
“We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.”
― Winston Churchill
“To compel a man to furnish funds for the propagation of ideas he disbelieves and abhors is sinful and tyrannical.”
― Thomas Jefferson
“A democracy cannot exist as a permanent form of government. It can only exist until the people discover they can vote themselves largess out of the public treasury. From that moment on, the majority always votes for the canidate promising the most benefits from the public treasury, with the result that democracy always collapses over a loose fiscal policy–to be followed by a dictatorship.”
― Alexander Fraser Tytler
“The power to tax is the power to destroy.”
― John Marshall
“The taxpayer is the new permanent underclass.”
― Andrew Wilkow
“The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities.”
― Adam Smith
“An unlimited power to tax involves, necessarily, a power to destroy; because there is a limit beyond which no institution and no property can bear taxation.”
― John Marshall
“By today’s standards King George III was a very mild tyrant indeed. He taxed his American colonists at a rate of only pennies per annum. His actual impact on their personal lives was trivial. He had arbitrary power over them in law and in principle but in fact it was seldom exercised. If you compare his rule with that of today’s U.S. Government you have to wonder why we celebrate our independence…”
― Joseph Sobran
Before 1763, Americans were the least taxed citizens in the western world. Colonial subjects were taxed, on average, a total of about one shilling per head per year. (Brief digression here: While these conversions are tenuous, and some might say meaningless, over the span of a couple centuries or so, I spent some time with some conversion, wage, exchange rate, and price index tables from the Census Bureau’s Historical Statistics of the US, and came up with a conversion of one pound sterling in 1770 = about $150 in 1998, with a shilling equal to 1/20 of a pound sterling, or twelve pence = $7.50 today; the average wage for an urban laborer was around 5 shillings, equivalent to about $40, per day.) In Britain, the tax amount worked out to about 26 shillings per year (say around 200 bucks). So the American colonists, for all their bitching and moaning, were actually taxed at a much lower rate than their cousins who’d stayed in the old country. Still, as I say, it was the principle of the thing.
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