Everyone seems to think that the Lee/Rubio tax plan is the greatest thing since sliced bread, and I think it’s all rather silly. No capital gains tax? Immediate expensing of capital purchases for businesses? Two brackets, with a big jump between them? A gimmicky rationale for a child tax credit? No thank you.
Here’s what I’d do instead:
Basic tax rates
Income to $10,000 0%
to $30,000 10%
to $50,000 15%
to $75,000 20%
to $100,000 25%
to $200,000 30%
beyond $200,000 35%
This is the rate for singles. For couples, brackets are simply doubled. Brackets are increased yearly based on Social Security national average wage increases. (Yes, everyone wants fewer rates — but if you’re staring down that jump from 15% to 35%, you’d be glad for intermediate rates to cushion the blow.)
A child benefit of $3,000 is provided for each child under age 18, offset by any other form of government support (food stamps, Section 8, SSI, etc.) received by the taxpayer/family. (Only citizen taxpayers are eligible, or legal residents from countries where Americans resident in the country are eligible for similar benefits.)
Other dependents (children over age 18, or a disabled relative receiving more than 50% support) receive an exemption of $5,000 each.
Capital gains are taxed as ordinary income, but are first indexed with inflation using a look-up table of inflation rates for prior years. Dividends are fully taxed, but are deductible to the issuer. Interest income is taxed only on that portion of the interest rate that exceeds inflation (e.g., if inflation for the year is 2%, and the account returned 1% – not taxable; if the return was 4%, then 50% is taxable).
U.S. citizens and permanent residents living abroad are not taxed on their overseas income, but if some family members are resident in the U.S., all income must be reported to ensure against fraud in means-tested programs.
Expenses associated with work are deductible — this includes commuting expenses, professional memberships, and child care expenses, up to the maximum of the lower earner’s salary.
Long-term savings of any kind are tax-deferred. This includes retirement and college savings, as well as “rainy day” savings.
To cushion the impact on the housing market, the mortgage interest deduction is eliminated via a gradual phase-out.
Employer in-kind benefits are taxable to the extent that the value of the benefit is quantifiable, the employee must take direct action to claim the benefit, and the employee is able to opt-out. An on-site health club membership accessed by keycard is non-taxable, but an employer-paid membership to a health club, that the employee needs to specifically claim, is. Free cafeteria food accessible by anyone in the building is non-taxable; as is automatic long-term disability coverage. And health insurance? Non-taxable if the benefit is automatically provided and, in some way, unavoidable. This isn’t the idea solution but my current thought — and in line with what I’d like to see from healthcare in the future, my pet “vouchercare” model in which the employer’s role would be pared down and include on-site healthcare clinics and wellness programs.
And charitable deductions? I’d like to remove them, though I know it’s another third rail in tax reform.
Is this structure enough to bring enough revenue in the door? Too much? Well, then we’d tweak the rates and brackets as needed, but the concepts stay the same.
Do you buy it? Your feedback welcome!
UPDATE September 10 2015: Spurred by a link from instapundit.com, I’ve now added some further comments, and a Corporate tax proposal, here.
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