Tax Reform

2. Elimination of the Employer Side of Payroll Tax.

Employer side of payroll tax is a mirror of employee side of payroll tax. Companies are required to essentially match the employee side of payroll tax out of their own expenses. With the employer side, however there isn’t a wage base limit, the company matches the entire payroll, so revenue generated is generally a little higher. How companies pay this however is simply by lowering the salaries and wages of employees in order to make revenue available, it’s essentially an indirect tax on employees that the government makes out to look like a tax on employers. Another issue with employer side of payroll tax is that it is a business expense. Since companies have to match all the income they pay out with an extra 7.65% tax, this means they have to have enough income to do this. For many companies, this is not an issue as they can just lower the pay of their employees, but for some companies, especially smaller businesses, it can begin to be an issue as there is limited income earned per hour, and that extra income could potentially be just enough to stay in business. Employer side of payroll tax, just like the employee side of payroll tax, has risen since the 1950s and is currently 7.65%. The elimination of payroll taxes will be especially beneficial to self-employed workers, who currently pay both employee and employer side of payroll taxes. Eliminating the employer side of payroll tax will mean this revenue will be freed up, as companies no longer pay it directly to the government. This money will now pass through a company’s account and become either corporate profits or personal income. As it passes through and becomes personal income or corporate income it will get taxed, which means loss of tax revenue will not be as significant. If taxed at an average rate of 30% the amount of revenue from the employer side of payroll tax, which was around $700 billion in 2019 would create around $233 billion of tax revenue.

3. Elimination of all deductions on personal income.

Eliminating deductions on personal income will help increase equality as well as the efficiency of our tax system. Although the standard deduction decreases taxes on the lower and middle class, itemized deductions are used flagrantly to decrease taxes on the upper class. The elimination of the standard deduction will be replaced by having no taxes under a certain level of income. Currently, there is around $3.2 trillion worth of deductions according to the IRS,2 if this was taxed at around 30% this would lead to around $1 trillion of tax revenue. This by itself would offset losses from cutting employee side of payroll taxes, which currently brings in around $700 billion of revenue.3 Deductions also lead to inefficiency in the tax collection process due to the IRS having to verify the accuracy of the information.

4. Elimination of Property Tax

Property tax is an expense on businesses as it is a fixed payment and does not adjust depending on the profits. If the company has no profits, it still has to pay the tax. Property taxes’ effect on equality is interesting; it is probably a regressive tax, as the value of the property owned by high-income residents relative to their incomes is probably less than low-income residents. Property tax also continues to be collected even when people aren’t working. This can have benefits as it brings money back into the economy, but if the person doesn’t have a large amount of savings, it can be stressful to pay.

5. Elimination of Sales Tax

Sales tax is a tax that is placed on top of the price of a product, essentially increasing its price. A sales tax affects businesses in several ways. Assuming it is a general sales tax, it will increase the expenses of a business by that amount. Depending on what percent of the business’s revenue goes to expenses paid to other companies, it will affect a business’s expenses more or less. In order to cover those increased expenses, either personal income paid out will have to be lowered or prices will have to be raised, which can potentially lead to a decrease in products sold. A sales tax placed on a business’s own products will increase its prices, potentially leading to a decrease in products sold as well. Usually, sales taxes are compounded, as businesses raise prices due to their expenses increasing because of a sales tax. Then their prices further increase when the sales tax is placed on top of their prices. In this way, a 5% sales tax is more like a 10% sales tax. If the government is using a sales tax, it can be assumed that personal income tax is probably lower, as the government is just collecting taxes in a different way. The increased prices caused by a sales tax is probably offset by a decrease in income tax.

Sales tax also has an impact on economic equality. Sales tax is generally considered a regressive tax as it taxes lower incomes more than higher incomes. This occurs because lower-income residents spend a larger percentage of their income, whereas higher-income residents often only spend a small percentage of their income and save and invest the rest. This means as a percent of their income, they are being taxed a much smaller amount. All general sales taxes should be eliminated. Sales tax should only be used as a means of deterring the consumption of specific products, voted on one at a time.

6. Personal Income Tax

Personal income tax is taken out of an individual’s income only after a company has paid it out and it has been marked off as an expense. Because of this, changing personal income tax rates has no effect on a company’s expenses. Creating a tax floor where no income below a certain level is taxed similarly to the standard deduction would increase economic equality while not affecting a company’s expenses. Personal income tax is an easy tax to ensure economic equality, as it can be strictly focused on high income with the use of tax brackets, and different tax rates. Tax brackets are generally designed so that instead of the entire income of an individual being taxed at a certain rate, different portions of the income are taxed at different rates. For example, income between $0-40,000 may get taxed at 10%, and income between $40,000-80,000 at 20%. Someone earning $80,000 will get taxed 10% on the income they earn between $0- 40,000 they earn and 20% on the income they earn between $40,000-80,000, an overall average rate of 15%. Capital gains can be taxed with personal income tax, although gains should be adjusted for inflation, based on changes in the GDP per hour, so it reflects real gains.

Personal income tax is generally difficult for companies to evade. Evading the tax wouldn’t affect the company directly, but would affect their employees’ pay, possibly making it easier to attract employees if the tax rates are lower. The more widespread and uniform the tax system is geographically, the more difficult it is to evade. The more localized the system is the easier it becomes to evade. New companies may choose to set up headquarters where taxes are lower. Companies that are already established may attempt to move, but employees would have to be willing to move as well. When the tax rates are widespread and uniform, this becomes difficult. There are also other barriers to evading taxes. For example, companies setting up headquarters in different countries to evade personal income taxes are limited by language barriers, and whether the countries have a workforce with the skill level that the company is trying to employ.

7. Corporate Income Tax

Corporate taxes are generally a tax on a company’s profits, although sometimes they are placed on the revenue of a company. The tax is generally based on the profits or revenue earned within a territory or jurisdiction. If a company is based outside of the territory, its profits or revenue earned within the territory are taxed the same as a company based within the territory. Sometimes companies that are based within the territory are taxed on their profits or revenues earned within and outside of the territory. When companies are taxed strictly based on their profits or revenue earned within the territory, it is known as a territorial corporate tax system. When locally based companies are taxed based on their profits or revenue earned outside of the territory as well it is known as a global corporate tax system.

Corporate taxes should never be placed on revenue, as profit margins differ for each company. If revenue is taxed, this means some companies will be taxed higher than others when it comes to what percent of profits are actually being taxed. For example, if one company’s profit margins are 10% and another company’s margins are 20%, and tax on revenue is 5%, this means the first company is getting taxed 50% of their profits and the second is getting taxed 25% of theirs. This is unjust and could potentially put a company out of business if the revenue tax is greater than the profit margin.

Corporate taxes on profits are based on the surplus revenue a company produces; only after all expenses are paid does the tax get assessed. A corporate tax on profits is not an expense because of this. Depending on how much a company profits, the tax increases and decreases as it is a percentage of the profit. If the company makes no profit, there is no tax. Corporate profits are often saved and reinvested into the company, and often invested in other companies while being saved. Higher taxes on profits can impact reinvestment, whether it is into the company that produced the profit or into others.

There are loopholes to paying corporate tax, which makes its effect on re-investment limited. Loopholes mainly consist of taking out loans, or selling bonds and commercial paper to finance investment. When loans are taken out, savings don’t have to be used to finance investments. When loans are repaid, the repayment is marked off as an expense, except for interest payments, which means they don’t have to pay taxes on those earning. Essentially a company is trading paying corporate tax for paying interest, interest payments generally being much lower than corporate tax. For example, if a company has $100 of profit, and a corporate tax of 20% they end up with $80. If they then make a $50 investment, they end up with a $30 profit. On the other hand, if a company takes out a $50 loan in order to make an investment, and then makes a $100 profit, they can then mark the repayment of the $50 loan off as an expense leaving them with $50 profit. After the 20% corporate tax they would then have 40$. If there was an interest rate of 3% and the repayment of the loan was within a year they would owe $1.5 in interest, subtract that from the $40 and they would be left with $38.5 of profit. In this situation because of using loans, the company has increased its profits by $8.5. Using loans to finance investment is an important part of business, however it also used to evade taxes. Because of this, the effect of corporate taxes is limited. Possibly the biggest effect corporate taxes have on business may be indirect investment, where companies invest their savings in other companies. Companies most likely invest almost all of their savings, compared to individuals who don’t necessarily invest at the same rate. Higher corporate taxes could affect this type of investment as companies have less savings. Smaller businesses may be more affected by corporate taxes if they don’t have connections in the financial community or knowledge of finance, which allows them to evade corporate taxes.

Another way companies can evade corporate taxes internally is by paying out salaries to owners instead of having them draw on the corporate bank account, this way they can avoid being double-taxed by corporate tax and personal income tax. Some governments allow companies to have pass-through incomes, often referred to as S corporations, such as in the United States. This allows a company to not pay corporate taxes and just have the profits pass through and become personal income. The main benefits of not having income pass through are that corporate taxes may be lower than personal income taxes, so if you plan on reinvesting in your company it may be more beneficial. There may be other benefits as well, such as greater financing options.

Besides internal ways of evading corporate tax, they are generally difficult to evade. Companies would have to completely stop selling products in order to evade. If a government is using a global corporate tax system, it may cause corporations to choose to base their company in territories that have a lower global corporate tax rate or no global corporate tax. In a territorial corporate tax system, companies based in the territory pay the same amount as companies that are not based there, so there is no way to evade. As far as equality goes, corporate taxes on profits can be used similarly to high tax rates on higher personal incomes, but should be done more cautiously as their effect on investment is greater. Territorial corporate taxes is an effective tax at the local level since it is impossible to evade. Corporate taxes at higher levels of government could be kept lower in order to better enable local governments to potentially use corporate taxes.

8. U.S. Tax Data

Table H: Tax base 2019

         The tax base refers to the value of what is being taxed. This could be total personal income, corporate income, property, revenue, etc. This table records the tax base for total income, including personal income and corporate income. The reason dividends are not included in corporate profits is to avoid double-counting them. Dividends that are paid out to individuals are included in adjusted gross income, and dividends that are paid out to other companies are included in their corporate profits or personal incomes.

Table I: Distribution of Personal Income 2019

This table goes over average real tax rates of various income ranges in 2019. All tax rates are calculated after deductions have been taken out, based on how much individuals are actually paying as a percent of their income. This table is strictly based on revenue collected from personal income tax and does not include employee side of payroll tax, which would increase all tax rates by 7.65% except on those earning over the wage base limit.

9. Federal Tax Rates

This section will go over tax rates at the federal level that will cover all revenue currently created by personal income taxes, corporate taxes, sales taxes and payroll taxes at the federal level. These income brackets are based on 2019 data, but would be adjusted for changes in the average personal income if implemented, and then indexed to the GDP per capita, average personal income. Estimates for total tax revenue needed per capita could be based on the changes in the GDP per hour. This is the best measure to use, as the revenue needed doesn’t necessarily change at the same rate as total income, since over time, people work more or less, which increases and decreases income relative to income per hour. If revenue needed in real terms (labor) remains the same over time, overall tax rates may have to increase or decrease to create the same amount of tax revenue, depending on how much people are working and how much income there is. In an economy with no inflation, this will be much simpler to measure, as income per hour will be steady, and incomes will directly increase and decrease based on how much they work.

10. Federal Tax Rates

This section will go over tax rates at the federal level that will cover all revenue currently created by personal income taxes, corporate taxes, sales taxes and payroll taxes at the federal level. These income brackets are based on 2019 data, but would be adjusted for changes in the average personal income if implemented, and then indexed to the GDP per capita, average personal income. Estimates for total tax revenue needed per capita could be based on the changes in the GDP per hour. This is the best measure to use, as the revenue needed doesn’t necessarily change at the same rate as total income, since over time, people work more or less, which increases and decreases income relative to income per hour. If revenue needed in real terms (labor) remains the same over time, overall tax rates may have to increase or decrease to create the same amount of tax revenue, depending on how much people are working and how much income there is. In an economy with no inflation, this will be much simpler to measure, as income per hour will be steady, and incomes will directly increase and decrease based on how much they work.

Table J: Version 1: Federal Tax Rates

This first tax system creates theoretical personal income and corporate tax rates that cover the revenue currently created by personal income tax, corporate income tax, and employee side of payroll tax at the federal level. This proposed tax system uses adjusted gross income ($11,882,850 million) as a tax base for personal income tax, and corporate profits ($875,000 million) as a tax base for corporate tax. Proposed tax rates are based on the amount of revenue currently created by personal income tax, corporate tax, and employee side of payroll tax ($2.528 trillion) at the federal level. Corporate tax is left low in this system, as the use of corporate tax has many advantages at the local level due to it being un-evadible if it is strictly a territorial system. Total corporate profits is unclear. The U.S. Bureau of Economic Analysis reports that there was $2.35 trillion in profits in 2019,4 however the amount of tax collected at the federal level was only $175 billion.5 At the 2019 corporate tax rate of 20% this would mean there was only $875 billion of taxable profits. The difference between $2.35 trillion and $875 billion is substantial, around $1.475 trillion. The reason for this isn’t clear but possibly dividends which were $1.41 trillion6 in 2019 were deducted. Dividends are generally paid out to individuals or other companies which means they would be included in personal income or another company’s profits and double counted. Due to the lack of clarity $875 billion will be used for the tax base of corporate profits in this table.

Table K: Version 2: Federal Tax Rates

         This second version creates theoretical tax rates after eliminating the employer side of payroll tax. This version will use the adjusted gross income, and revenue from employer side of payroll tax (11,882,850,000 + 644,000,000 = $12,526,850 billion) as a tax base for personal income tax, and corporate profits ($875,000 billion) as a tax base for corporate tax. Proposed tax rates will be based on the amount of revenue currently created by personal income, corporate tax, employee and employer side of payroll tax, at the federal level ($3.172 trillion). Currently employer side of payroll tax is taken out of a company’s revenue before it becomes personal income, or corporate profits, and is marked off as an expense. Because we are eliminating employer side of payroll tax this means the money collected will now pass through and become personal income or profits. In the data below, you may notice income in each tax bracket is higher, reflecting the revenue from the employer side of payroll tax passing through and becoming personal income or corporate income. In reality, we don’t know how that income will be distributed throughout the economy, but for this theoretical example, we will add the revenue from employer side of payroll tax to the adjusted gross income and distribute the revenue into each personal income bracket in proportion to the current distribution of income. The difference between the current adjusted gross income and what the adjusted gross income will be, including employer side of payroll tax is 1.054. Essentially, we will increase the income in each bracket by this amount.

Savings

Below are several examples of the estimated savings from the tax reforms for the year 2019. Savings for someone earning $75,000: In the new system, for someone earning $75,000, they would be taxed 12.5% on income between $44,300-75,000, and 0% on income under $44,300. This creates a total tax of $3,837. In the current system, someone earning $75,000 after the standard deduction of $12,200, is taxed 10% on income between $12,200 - $21,900, 12% on income between $21,900 - $51,674, and 22% on income between $51,674 - $75,000. All income is taxed 7.65% for payroll tax. This creates a total tax of $15,410. The new tax rates, as proposed, would save $11,573 for someone earning $75,000.

Savings for Someone earning $40,000: In the new system, for someone earning $40,000, they would be taxed 0% on all income, and pay no taxes. In the current tax system someone earning $40,000 after the standard deduction of 12,200, is taxed 10% on income between $12,200 - $21,900, 12% on income between $21,900 - $40,000. All income is taxed 7.65% for payroll tax. This creates a total tax of $6,202 for someone earning $40,000. The new tax rates as proposed, would save $6,202 for someone earning $40,000.

11. Combined Federal, State, and Local Tax Rates

This section will go over combined tax rates for the federal, state, and local level that will cover all revenue currently created by personal income taxes, payroll taxes, corporate taxes, sales taxes and property taxes at all levels of government. The end goal of these reforms is to eliminate all payroll taxes, sales taxes, property taxes and strictly use personal income taxes and corporate taxes to collect the same amount of revenue. It is important to note that in order to have the same tax systems in every state, the federal government would need jurisdiction. Different states currently use different tax systems, and have higher and lower taxes overall, so the federal government would have to be able to regulate the systems to make the systems all aligned by type and income level, while still allowing for higher and lower tax rates overall, depending on the state’s liking. Essentially, the federal government would create guidelines that state tax systems would have to follow.

Table L: Version 1: Combined Federal, State, and Local Tax Rates

Version 1 creates theoretical personal income and corporate tax rates that cover the revenue currently created by personal income tax, corporate income tax, and employee side of payroll tax at the federal, state, and local level combined. This first version will strictly use the adjusted gross income ($11,882,850 million) as a tax base for personal income tax, and corporate profits ($875,000 million) as a tax base for corporate tax. Proposed tax rates are based on the amount of tax revenue currently created by personal income tax, corporate tax, and employee side of payroll tax at the Federal, State, and Local level combined ($3.217 trillion). This version is slightly bias because some states don’t use personal income tax but instead use sales tax.

Table M: Version 2: Combined Federal, State, and Local Tax Rates

Version 2 creates theoretical tax rates after eliminating sales tax. The second version will use adjusted gross income, sales tax revenue and tariff revenue as a tax base (11,882,000+ 952,000,000 = 12,834,000 million) as a tax base for personal income tax, and corporate profits (875,000 million) as a tax base for corporate tax. Proposed tax rates are based on the amount of tax revenue currently created by personal income tax, corporate tax, employee side of payroll tax, sales tax, and tariffs at the Federal, State, and Local level combined (4.169 trillion). How sales tax affects this tax system is interesting. A sales tax is part of the price of a product for a consumer, but the revenue created from it is transferred to the government before it is ever included in a company’s revenue. Eliminating sales tax will affect prices and necessary tax revenue in several ways. If you eliminate sales taxes, prices will be lower, which means the necessary tax revenue needed will be slightly lower as well, since the money has more purchasing power. In this theoretical example, for simplicity, we’re going to pretend that companies just raise their prices to what they currently are with the sales tax. So if the price was $100 and sales tax was 5% the price is $105. This means the revenue that was being transferred to the government through sales tax will now just become part of a company’s revenue and income. We will assume the revenue from sales taxes that is now part of a company’s revenue becomes personal income and is distributed equally across all income brackets in proportion to the current distribution of income. The difference between the current adjusted gross income and what the adjusted gross income will be, including sales tax is 1.08. Essentially, we will increase the income in each bracket by this amount. Since we are not collecting revenue through sales tax, rates on income will have to be higher to make up for the loss of sales tax revenue. But as we see, the income after tax is about the same.

Table N: Version 3: Combined Federal, State, and Local Tax Rates

Version 3 creates theoretical tax rates after eliminating the employer side of payroll tax. This third version will use the adjusted gross income, revenue from employer side of payroll tax, revenue from sales tax and tariffs (11,882,850,000 + 644,000,000 + 952,000,000 = $13,478,850 billion) as a tax base for personal income tax, and corporate profits ($875,000 billion) as a tax base for corporate tax. Proposed rates will be based on the amount of revenue currently created by personal income, corporate tax, employee and employer side of payroll tax, sales tax and tariffs ($4.736 trillion). Essentially, it’s a hypothetical tax system where sales tax and employer side of payroll tax are eliminated. Because of the increased tax base when including employer side of payroll tax and sales tax, we will include that income in the adjusted gross income. In reality, we don’t know how that income will pass through and increase the income in each bracket, but for this theoretical example, we will distribute the income into each bracket in proportion to the current distribution of income. The difference between the current adjusted gross income and what the adjusted gross income will be, including sales tax and employer side of payroll tax is 1.134. Essentially, we will increase the income in each bracket by this amount. Since we are not collecting revenue through these taxes, rates on income will have to be higher to make up for the loss. But as we see, the income after tax is about the same.

Table O: Version 4: Combined Federal, State, and Local Tax Rates

Version 4 creates theoretical tax rates after eliminating property tax rates. Version 4 will use the adjusted gross income, revenue from employer side of payroll tax, revenue from sales tax and tariffs (11,882,850,000 + 644,000,000 + 952,000,000 = $13,478,850 billion) as a tax base for personal income tax, and corporate profits ($875,000 billion) as a tax base for corporate tax. Proposed tax rates will be based on the amount of revenue currently created by personal income, corporate tax, employee and employer side of payroll tax, sales tax and tariffs, and property tax ($5.372 trillion). Since we are not collecting revenue through property tax, tax rates on income will have to be higher to make up for it. Property tax revenue in 2019 was $636 billion and will be added to the total revenue collected. The difference between tax revenue collected with property tax ($5.372 trillion) and tax revenue collected without property tax ($4.736) is 1.134.

Savings

Below are several examples of the estimated savings from the tax reforms for the year 2019. These estimates do not include the savings from eliminating property tax, so those savings can just be added on. Savings for Someone earning 75,000: In the new system incomes of 75,000 would get taxed 48% on the income between 50,000-75,000, and 0% on income under 50,000. A total tax of 12,000. In the current system in 2019 for someone earning 75,000 after the standard deduction of 12,200, their income between 12,200 and 21,900 was taxed 10%, income between 21,900 and 51,674 was taxed 12%, and the income between 51,674 -75,000 was taxed 22%. All income was taxed 7.65% for payroll tax. At the state level between sales tax and income tax most incomes were taxed around 10%. This creates a total tax of 22,910 for someone earning 75,000. The new tax rates as proposed would save 10,910 for someone earning 75,000.

Savings for Someone earning 40,000: In the new system, someone earning 40,000 would pay no taxes on all income. In the current system in 2019 someone earning 40,000 after the standard deduction of 12,200, had their income between 12,200 and 21,900 taxed at 10%, income between 21,900 and 40,000 taxed at 12%. All income was taxed 7.65% for payroll tax. At the state level between sales tax and income tax most incomes were taxed around 10%. This creates a total tax of 10,142 for some earning 40,000. The new tax rates as proposed would save 10,142 for someone earning 40,000.

12. Adjusted Tax Brackets by State

Different states have different average personal incomes and price levels. States with higher average personal incomes have higher price levels, due to more money being in the state per person and the demand from it causing prices to rise. Because of differences in the average personal income and price levels in each state, it is proper to adjust tax brackets in each state in proportion to these differences. If tax brackets are the same in each state, high-income states get taxed more since their residents move into higher brackets quicker and prices are higher so the income after taxes is worth less. The goal of this reform is that the income brackets of each state are adjusted based on the difference in average personal income and price levels, this way everyone is taxed at the same rate in relative terms. For example, if one state’s prices are twice as high as another’s, the income brackets should be twice as high, as 200 dollars in the first state is equivalent to 100 in the second when comparing to the different state’s respective price levels. More research could be done on personal income levels and price levels to calculate the fairest system.

Table P: Price Levels by State

Table Q: Adjusted Tax Brackets by State 

         This is an example of a tax system with adjusted brackets, using differences in the income per capita7 as a reference point.

13. Other tax Reforms

A Savings Tax

A savings tax is a tax that is placed on people’s savings, essentially a tax on money itself. Several economists, including Charles Eisenstein, Silvio Gesell, and Irving Fisher have promoted its use. A savings tax has been used sparingly throughout history. The brakteaten tax system, also known as renovatio monetae or "coin renewal," was a form of savings tax used in medieval Europe between the 12th and 14th centuries. The system involved the minting authority, typically a local sovereign or bishop, periodically recalling all old coins and forcing the population to exchange them for newly struck currency. In the early 1900s, a savings tax was used by local governments in Europe and the United States during the great depression. Due to mass bank failures and a shortage of currency, local governments began printing out their own paper currency; however, they designed the currency so it would lose a certain percentage of its value weekly or monthly. They called this currency stamp script because they required people to stamp it weekly or monthly in order to help keep track of its current value. The governments would then print new currency weekly or monthly to replace the loss of currency due to the devaluation. Inflation also works similarly to a savings tax. Inflation is caused by governments running budget deficits and then printing money to cover the deficit. The increase in the money supply then pushes up prices while devaluing savings, essentially working as a savings tax. Inflation, however, is more of a regressive tax as companies are able to raise prices while holding wages and salaries down, slowly increasing inequality.

In a modern economy, a more advanced form of a savings tax could be collected through banks, where essentially a negative interest rate would be applied to accounts with savings over a certain amount. Savings could be taxed at a very low rate constantly, instead of quarterly. There are several benefits to this tax for business and the economy in general. The first benefit is that it encourages investment and spending. If people invest their money or spend it there won’t be any money in their bank account, enabling them to essentially dodge the tax, but stimulating economic activity while doing it. A second benefit is that it enables money to circulate with greater ease. How savings tax does this is by enabling governments to lower income taxes. Income tax takes money out of people’s income before they receive it, essentially lowering their income, while savings tax takes money out after people have received their money and only if they haven’t used it. This gives people the option to use their money, and taxes money that is not in use, bringing it back into the economy.

Another benefit of a savings tax is that its tax base is essentially unlimited, as the money supply can be continually turned over. Income tax on the other hand is limited to how much money people earn. This is especially important in an economy that is growing in efficiency, where people are working less and less. As people work less, their incomes begin to decrease which means a smaller tax base. This often goes unnoticed because inflation is constantly pushing incomes up, but in real terms, incomes are often actually decreasing. This can be measured by comparing average personal income to average personal income per hour. If there wasn’t any inflation, incomes would generally stay flat and only increase or decrease depending on how much people work. This decreasing tax base can be problematic, as the amount of tax revenue per person needed to fund the government may not necessarily decrease at the same rate. This means if personal income is decreasing, tax rates would have to increase in order to create the same amount of tax revenue per person. For example, to collect $50 of revenue from an income of $200 would require a tax rate of 25%. Whereas if the income was, $100 the tax rate would have to be 50%. The same principles apply to the total income of the economy, relative to the tax revenue needed. This situation is already becoming a problem in Western Europe where incomes and workload have decreased significantly over the past 50 years and tax rates have increased and are much higher than in other countries because of this.

The negative aspect of a savings tax is the ability to evade it. Savers could potentially move their money to off-shore bank accounts where it isn’t taxed. There are several ways to possibly prevent this, including taxing money that is transferred to foreign bank accounts, although some might potentially move their money in the form of a payment. Having a savings tax in every country that is at the same rate would be the best way to prevent evasion.

Eliminating Tax Returns

The IRS budget is currently around $14 billion.8 Including the budgets of state and local tax collection agencies, total budgets are probably up to $50 billion. There are several ways to increase efficiency in the tax collection process. The first way is to eliminate deductions. Deductions are a complicated process for the payers and the government, both who will save money and time from its elimination. Deductions require significant amounts of paper work and calculations, and lead to tax returns if the person has overpaid or underpaid. A second way to eliminate tax returns is to have personal income tax rates on hourly income instead of yearly income. When taxes are based on yearly income, people often underpay or overpay taxes throughout the year, since their tax rates are based on their predicted income. If their actual income differs from their predicted income when they file taxes at the years end, they will have to recalculate what they owe, which leads to paying more or receiving a return. With hourly rates they will pay as they go along strictly based off the rate they are earning per hour and can therefore never overpay or underpay. Another way to increase efficiency is to have less types of taxes and fees, streamlining the process and having fewer sources of revenue as much as possible will lead to decreased paperwork. Another way to increase efficiency and eliminate returns is to have a nationalized banking system with a single computer program that all transactions are made on, this could potentially lead to an automated tax system where a computer collects all taxes.

Eliminating Tax Evasion

There are various ways tax evasion can be eliminated. The best solution is to have a nationalized banking system, where all transactions occur on one computer program. This would give the government the most oversight of financial transactions. International corporations operating in the country could be required to have accounts at the banks, as well as residents. Using a different country’s banking system would be the only way to evade direct oversight, although transactions going through the national banking system into other banks would still be recorded.

Paper currency is often used to evade taxes, as there isn’t a digital transaction that is recorded in a bank’s records. The government could require companies to accept cards, and make prices equal for all types of payments, so there is no incentive to use cash. Barcodes could potentially be added to paper currency to help keep track of it. Paper currency probably shouldn’t be completely eliminated, as it can be used in the case of emergencies such as power outages.

14. Impact on Investment

        These tax reforms will have a significant impact on the distribution of income, redistributing trillions of dollars. This can potentially have a significant impact on investment. In order to determine the potential impacts these reforms have on investment, the amount of investment that occurs annually must first be calculated. There are two primary forms of investment, stocks and bonds. In order to calculate investment in stocks, strictly the value of the sale of new stocks should be counted, as this is the money that companies actually invest. To calculate bonds sold, the increase in M2 money supply can be subtracted from the increase in total debt. An increase in M2 money supply represents loans that are made from creating new money and are never sold into the market as a bond. Some bonds are purchased from recycled loans, meaning the money that is used to pay back an old loan is then used to make a new loan. These loans do not increase the total debt load as they essentially just replace old debt. So these loans will not be counted in total bonds sold, strictly, the increase in the total value of bonds.

         The total value of new stocks sold is not currently recorded. The total value of bonds is recorded in the table below. A portion of these bonds are sold abroad, usually an amount equivalent to the trade deficit.

How the redistribution of income from tax reforms will impact investment is unknown. In the past there was more equality and investment seemed to do fine although the redistribution due to these reforms may be greater. Below are some tables that record historical inequality.

Table S: Income Inequality

Table S records inequality levels in the United States between the years 1970 and 2020. Two measures are used. The first measure compares median income to the mean income; the further the median income gets from the mean income, the more inequality there is, while the closer they are together, the less inequality there is. The GINI coefficient is another measure of inequality that is used internationally; the closer the number is to 0, the less inequality there is in a country, while the closer it is to 100, the more inequality there is. Both of these measures of inequality are pre-tax, so it doesn’t take into account tax rates increasing or decreasing at different income levels, or welfare redistributing income.

Table T: Distribution of Wealth in the United States

Distribution of wealth is a decent measure of after-tax inequality, as wealth is purchased with income left after taxes, therefore, it reflects differences in post-tax income to a certain extent. 

There are various ways to ensure investment occurs. One way is to eliminate unnecessary forms of investment. Government bonds to fund the federal budget deficit make up a large portion of investment. Prior to the 1980s, it made up a much smaller portion when there was a balanced budget. Eliminating the budget deficit could decrease the amount of total investment needed. Other forms of investment could possibly be eliminated as well.

Making investment easier could help ensure the lower-class and middle-class invest. CDs can be regulated in order to make them easier for customers to use and encourage investment. CDs can be regulated so they have settings that customers can adjust online. Customers will be able to set whether they want the CD to automatically renew or automatically be deposited in a bank account. Customers will be able to adjust the term length which they want the CD to be renewed at. CDs will always be renewed at the highest rate offered for that term length. Customers will be able to adjust these settings as much as they want until the time of maturity. Commercial banks could offer other direct investment opportunities as well, such as selling bonds, stocks etc.