TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Friday, February 17, 2012

Fair Share Tax Reform

The Angry Bear, The Fair Share Tax Reform Proposal, by Steve Roth:

1.  Federal Income Tax: All income and compensation is taxed at a 20% rate except:

  • Income under a realistic poverty line (eg $15,000 for single), which is taxed at 2% instead
  • Income used to pay for large medical expenses (>10% of income) is tax-free
  • Income placed into tax-free education-retirement savings account (with modest caps)
  • No other adjustments, deductions, or exemptions
  • Effective rates: 10% on $60,000; 15% on $160,000; 19% on $1,000,000.
  • Totals about 65% of federal revenue.

2.  Federal Net-Worth Tax:

  • All net worth (accumulated wealth), except the first ~$800,000, is taxed at a progressive 1-1.7% rate.
  • This tax replaces property, capital gains & estate taxes. Net-worth is the best measure of how much a household has profited from the economic infrastructure governments (all taxpayers) provide.
  • Effective rates: 0.2% on $1million; 1.0% on $3million; 1.7% on $27million and over
  • Totals about 20% of federal revenue.

3.  Federal War Tax:  Everyone contributes to any war effort: A 6% surcharge increases a federal taxes bill of $10,000 to $10,600 while the nation is at war.

4.  Eliminate all these taxes:

  • Social Security Taxes – Social Security & Medicare funded from general revenue instead
  • Estate Taxes & Capital Gain Taxes – Replaced by more efficient and fair Net-worth Tax
  • State Income Taxes in their current form – Replaced by more efficient and fair surcharge – See #5
  • Property (real estate) taxes – Replaced by more efficient and fair surcharge – See #5
  • Sales taxes, tolls, etc. – Replaced by more efficient and fair surcharge – See #5
  • Corporate Taxes – Profits distributed to corporate owners and taxed as income.

5.  All states and local governments eliminate all their current taxes and instead set and collect a surcharge on a household’s combined Federal Income and Net-worth Tax.

6.  Excise taxes only on products that have a cost to society that is not reflected in their price … e.g. cigarettes, gasoline. Totals only about 10% of federal revenue.

Update: The post should have stated that the proposal is by Peter Gloor (details here).

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Net worth taxes are offensive and problematic on so many levels, the most obvious being the fluidity of a measure such as net worth. There is a reason we do not tax income until there has been a realization event. If you have $10M in stock, and the next year the market crashes or the company goes bankrupt and you end up with nothing, where is that net worth that you were just taxed on but never actually possessed? Are you now eligible for a tax refund? How are we going to value stock options for these purposes?

What if you own appreciated collectibles, where the value of their market could crash ala Dutch tulips?

Do we really want the government assessing the worth of everything we own or even having those records? Intrustive does not even begin to describe the police state apparatus that would be required to enforce a net worth tax.

You want a surefire formula for capital flight OUT of the US? Impose a net worth tax.

Posted by: Todd | Feb 18, 2012 6:30:36 AM

When computing net worth, don't overlook the present value of defined benefit pensions. Top public safety employees who retire at 50 or 55 have millions of dollars in present value of a pension that pays more than $100,000 inflation indexed for life. Since the government pays these pensions, there is no problem obtaining the data on their value.

If voters are upset about pension abuse, an annual tax on the present value of all government-guaranteed defined benefit pensions might meet public approval.

Posted by: AMTbuff | Feb 18, 2012 9:20:01 AM

Todd brings up the Net Worth proposal's insult to practicality. He could go on about the insult to fairness, i.e. of punishing, after-the-fact no less, a virtuous and societaly useful activity like saving and the wise accumulation of resources, and rewarding (even if only by omission) spending and the unwise dissipation of resources. Finally, he could also point out that there is no response for which the US government does not already (let alone could) have very blunt tools to beat us into compliance. His feared solution -- capital flight and possibly expatriation -- is already being met with draconian expropriation such as the exit tax on net worth. The land of the free is being turned into one of the most rapacious exaction vehicles known to man. And to what end? And by and for those who won't ever thank you for your service.

Posted by: MG | Feb 18, 2012 9:28:22 AM

Still suffers from the flaw in presuming that $15k or $800k has the same value everywhere, even though the cost of living in Manhattan is probably ten times or more the cost of living in parts of North Dakota.

There are also problems in a net worth tax, primarily valuation but also liquidity. Like the estate tax and property taxes, it risks forcing low-liquidity taxpayers to sell property that is valuable on paper but has little cash flow - like a farm, a home, a ranch, etc. It also forces the Service to find the value of real and personal property, even though some items of property may have been held without sale for a very long time. If the Service doesn't undertake valuation efforts and uses the old price, that's a big incentive to hold property for a long time rather than buying a new property (see Prop 13) - you might see a dramatic tax value to pass property by inheritance or gift rather than in a market that will attach a price.

If the Service does undertake valuation, it's a mammoth undertaking requiring lots of knowledge and oversight of every taxpayer. And it will surely involve some process for taxpayers to contest valuation, pushing the Service into valuation fights with many thousands of taxpayers, rather than relying on an arm's length market price (which may be quite stale, but is more objective). It also gives a strong incentive to avoid purchases of real property or large personal property, and instead invest in smaller personal property (e.g. TVs, computers) that would be harder for the Service to track and value. The Service might be able to track the purchase of land, homes, boats and cars, but buying technology at the store or online would be far harder to track for several hundred million people. At that point, you might as well use a VAT and spread the enormous cost of enforcement onto retailers.

I should point out that eliminating the 'double tax' on corporate entities is going to put more pressure on the Service to enforce the accumulated earnings tax. But it seems to imply that all corporate taxes are eliminated, in which case everybody and their sister will start forming C corporations to shelter income, or checking the box on LLCs. Either way, it's such an easy way to hide income that, unless it's blocked by something like an aggressive accumulated earnings tax, it would almost be malpractice not to use an entity to hold income.

Also the elimination of deductions for trade or business or for production of income is a real bias against self-employed people. But the elimination of entity tax mitigates this, and basically means that people who conduct business in a pass-through (or as individuals) get crummy tax treatment. Further incentive for everybody to form an entity.

Posted by: NL_ | Feb 19, 2012 10:22:09 AM