The simple and fair solution to having wealthy Americans pay their fair share

A recent report from Propublica, indicated that some of the wealthiest Americans paid little or no federal income taxes in certain years.  Earning billions of dollars and paying little or no income tax is certainly unfair.  And there may be an easy way to fix this.

According to ProPublica, “In 2007, Jeff Bezos, then a multibillionaire and now the world’s richest man, did not pay a penny in federal income taxes. He achieved the feat again in 2011. In 2018, Tesla founder Elon Musk, the second-richest person in the world, also paid no federal income taxes.”

And they say, “Michael Bloomberg managed to do the same in recent years. Billionaire investor Carl Icahn did it twice. George Soros paid no federal income tax three years in a row.”

It certainly seems like these billionaires are not paying their fair share.

Forbes noted, “ (the) 25 (richest) people saw their worth rise a collective $401 billion from 2014 to 2018. They paid a total of $13.6 billion in federal income taxes in those five years, the IRS data shows. That’s a staggering sum, but it amounts to a true tax rate of only 3.4%.”

That is somewhat of an inconsistent statement since the tax is a Federal Income Tax, not a wealth tax.  Indeed it is critical to future capital formation, that is sorely needed in a capital-intensive economy, that wealth never be taxed.

Taxing wealth could mean that if your home went up in value $15,000 last year, you would be taxed on that increase in wealth.

The Forbes statement is very interesting.  It says 25 people paid $13.6 billion from 2014-2018. I wonder if those people ask, “What exactly did we get for $13.6 billion?  Why do 25 of us have to pay so much?”

While the amount of taxes paid by high income earners is huge, as a percent of their income it is very small.  For that reason many conclude they are not paying their fair share.  Of course people don’t pay percentage points, they pay dollars.  And these 25 paid lots of dollars.

The reason this often tax-free environment occurs is that the tax code is very complex. The Federal Government tries to influence consumption and investment by offering special tax treatment.  Most of the high income, low tax rate individuals simply take full advantage of the special treatment.

The reaction to this will be that the tax rates should increase for the highest income individuals and for corporations.  This would be a big mistake for the economy. Raising the maximum tax rates will reduce capital formation.

In a capital-intensive economy, where government has pulled trillions of dollars out of capital markets by selling bonds, reducing capital formation will lead to slower growth.  The economy needs more capital not less.  Besides, there is a much better way to fix the problem.

What, exactly, is the problem?

Some people pay low tax rates and some people pay higher tax rates.  The difference depends on the level of income and the knowledge about how to earn and spend money to minimize the tax liability.  Maybe the answer is that we should all be treated the same. Maybe we shouldn’t have any special tax treatment at all.

Perhaps this would work:

A 15% single rate tax on all income above a livable minimum (twice the poverty level) with no deductions for anything.  All income is treated the same whether from wages, rent, interest, profits, dividends or capital gains. Corporate profits are also taxed at 15%.

This means, for a family of four, twice the poverty level would be about $50,000.  So if the household’s annual income was $80,000, the $50,000 would be subtracted leaving taxable income of $30,000.  Take 15% of that and the tax bill is $4,500. This is very simple and treats everyone the same.

This plan is very easy to administer as the tax form would be the size of a postcard for most people.  This plan will raise about the same amount of revenue as the current tax code.  It would add to long-term economic growth by raising the annual average growth rate by .5% to 1%. That means tax revenue will increase in future years.

This plan causes absolutely no market distortions since it doesn’t give favorable tax treatment for anything.  And it is (arguably) fair and equitable.

If we agree that some people shouldn’t pay higher or lower tax rates than others, then this single rate tax plan makes sense.

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Michael Busler

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