Let me start my remarks by saying I’m neither for nor against Donald Trump.
When Mr. Trump says he will have a zero income tax rate for the lowest earning individuals and couples, I mildly disagree with that notion.
Why, you ask?
For two reasons.
First, there is a disincentive to work if you’re $1 below that threshold because the moment you exceed it, your take-home pay is going to be dramatically lower.
Second, unless everyone has “skin in the game,” even if only a comparatively tiny amount, there are fewer people to keep the politicians from raising the rates.
What would I do differently? First, take the rates down from four different ones to a single one with a simple formula:
Take everything you earn, no matter how you earn it (wages, salary, dividends, interest, capital gains, gambling – in other words, however you wish), subtract $50,000 from it. If the result is zero or negative, you pay nothing. If result is positive, pay 10% of that.So, if you make $50,000 or below, you pay $0 in income taxes.
If you work hard and make an additional $5,000 the following year, making your earnings $55,000, you pay $500, calculated as: ($55,000 – $50,000) * 10% = $500 That makes your *EFFECTIVE* tax rate a mere 1%. A person making $1,000,000 would pay $95,000 in taxes, calculated as: ($1,000,000 – $55,000) * 10% = $95,000. That works out to an *EFFECTIVE* rate of 9.5%
Both the person making $55,000 and the millionaire have “skin in the game” *NO MATTER HOW SMALL* and will keep a watchful eye on any politician who dares to raise the rate from 10% to, say for example, 15%.
The person making $55,000 isn’t “punished” for getting a raise that takes him over the threshold like Mr. Trump’s plan does.
What’s the catch in my plan, you ask?
Several, as it turns out.
No more deductions. *FOR ANYTHING*. No more credits that allow people to get back more than they paid in (“earned income credit”, “child credit”, etc.). You decide how many kids you want based on what you think you can afford. You decide how big a home to buy, based on what you can afford, not what the government thinks you can afford. The government stays the hell out of that (and any other) decision.
No more “picking winners and losers with the tax code,” or worse, crony capitalism like Solyndra and Ener1 (versus true, free-market capitalism).
An interesting side note to my example: it seems to stand the notion of “The 1%” on its head with people at the bottom considered “The 1%” (effective tax rate).