Thursday, June 18, 2015

Fair Tax Reform

Well, it’s about time! Rand Paul, a Republican from Kentucky and a candidate for the Presidential nomination has introduced a fresh and sensible alternative to our convoluted tax code. By adopting a broad based 14.5% flat tax and abolishing the payroll tax, the 70,000 pages in the current IRS tax code could and should go the way of the recycler.

No doubt, given the practicality of this plan is and its appeal to the average citizen, you can bet that the special-interest groups are already lining up to protect their sacred cows. I like about 90 percent of Mr. Paul’s plan, but there are some shortcomings that need to be addressed. Further his plan amounts to a $2 Trillion tax cut that bets on increased economic activity to make up the revenue difference. I’m not so sure that will happen.

Let’s face it.  The payroll tax has no chance of sustainably funding social security in its entirety.  It should be abolished in favor of a graduated flat tax with the recognition that social security must be paid from the general fund. Its time to get serious about throwing out loopholes and special interest deductions as well.  The only deductions that should be allowed without an income qualifier are charitable contributions, and state and local taxes.  All other deductions or exclusions from income, including mortgage interest, should be subject to an income qualification. So here is my plan.

I would propose a modified two tier flat tax plan.  Income would have two classes. Class 1 income would include traditional middle class items such as wages, salaries, dividends and interest, retirement income, social security benefits, etc.  Class 2 income would be business related, eg. Capital gains, rental income, etc.

As to deductions, with the exception of qualified charitable contributions and state and local taxes, all would be subject to an income exclusion of 5%.  For example, for someone earning $100,000 with $8,000 in mortgage interest, the allowable deduction would be limited to $3,000.

Next, there would be a $20,000 earned income credit for all income groups. For someone earning less than $20,000, their taxable income would be zero, and they would pay no tax.  For the taxpayer with $250,000 income, the taxable income would be $230,000.

Finally, there would be a two-tier tax rate.  Tier one would apply to the first $50,000 of taxable income and would be taxed at 15%. The second tier is that income over $50,000 which, after qualified deductions, would be taxed at 20%.  A detailed example of an actual filled-in tax form at various income levels can be viewed at

Can you imagine how much simpler all of our lives would be with this kind of system? Think of all the time, money, and resources that are spent on ways to circumvent taxes. Like it or not, taxes are necessary and we all need to pay our fair share. Fair – that’s the operative word here!