You’ve heard solutions from the right. You’ve heard solutions from the left. You’ve even heard President Obama’s bipartisan debt panel solution. Today’s show introduces the “Money-Guy” solution to the tax code, and how I think we could make significant strides to fix the debt problem in this country and get back on track!
We all agree that there is a problem. We can’t, however, seem to come together as a nation and openly discuss solutions to resolve these issues. Those on the right want to cut spending, but you better not raise their taxes. Those on the left want to spend freely while making the “evil rich” pay for it through tax collections.
The real answer is that the solution is not black and white. Both the far left and far right positions are flawed, but no one is willing to offer a solution that is somewhere in between. That is where the Money-Guy comes in…
Even though I anticipate criticism from listeners on both sides of the aisle, I had to use today’s show to communicate some of my thoughts. Rather than just tell you what I think is wrong about the current proposals, I wanted to share some alternative ideas that I haven’t really heard anyone get behind yet. My hope is, through this podcast, we can at least get the conversation started. I by NO MEANS have all the answers, but I am willing to have an open discussion. If I was given the shot to offer up a tax reform plan to Congress, it would have four key changes. I really do think these changes have the potential to vastly improve America’s financial condition.
- No more refundable credits. This doesn’t mean we have to eliminate credits altogether. It simply means that Americans would not be able to make a profit by filing a tax return. As it currently stands, many people qualify for enough credits that they end up with a refund check that is above and beyond the amount that they ever paid in. I think it is fine to have a progressive tax system in which people with lower income carry less weight. If those individuals can get back what they paid in and owe nothing, that is great. However, no one should be able to receive refunds exceeding what they paid into the system to begin with.
- Remove all itemized and standard deductions, with the exception of charitable contributions. Rather than charitable contributions being deductible on Schedule A, I suggest moving them to page 1 of the 1040 as an adjustment to income. This way anyone and everyone can make an adjustment to income for gifts to charity no matter how much money he or she makes. This removes the ability to manipulate the tax code and it simplifies the process. Now you are probably asking, “but won’t that raise everyone’s taxes?” Excellent segway…
- Lower everyone’s tax rate by at least 4%. Using Married Filing Jointly for my illustration, the tax rates will decrease as follows:
- For those with income up to $16,750, the rate will drop from 10% to 6%.
- Income of $16,751 to $68,000 – decrease from 15% to 10%
- Income of $68,001 to $137,300 – decrease from 25% to 19%.
- Income of $137,301 to $209,250 – decrease from 28% to 21%.
- Income of $209,251 to $373,650 – decrease from 33% to 25%.
- Income of $373,651 or more – decrease from 35% to 28%.
- Raise the tax on capital gains and dividends. Rather than paying from 0% to 15%, the rate would increase to either 10% or 20%, depending on income. Because most of his income is taxed at the capital gains and dividends tax rate, Warren Buffett famously stood up and said it’s not right that he pays less taxes as a percentage of income than his secretary does. The “Money-Guy” tax plan eliminates that problem. Under my plan, Warren Buffett would pay 20% on his capital gains and dividends and, unless his secretary makes more than $137,300 per year, she would pay 19% or less on her regular earned income.
We did a case study on some of our clients to test how the new tax code would affect those with low, middle, and high incomes. The clients with lower income could now use their credits to completely eliminate their tax obligation, but no longer receive excessive refunds (profit) by filing a return. The middle income clients saw about a 1% tax increase. Two of our higher income clients did save in taxes under the new plan. Keep in mind, however, that these clients are small business owners who employ many people and, as such, have wildly fluctuating incomes.
If you don’t like this plan (or if you completely hate it), I would love to hear your thoughts and reasoning. If you feel compelled, shoot me an email at Brian@Money-Guy.com. If you love it, tell someone about it. Get the conversation started. Every year that we wait to take action, the problem is compounding. At some point we need to start making these difficult decisions, and waiting is only going to make it worse.
Brian – I like your ideas about simplifying the tax code. I agree that politicians are always talking about balancing the budget, but never laying out a clear plan to do this. However, you framed the discussion as part of a plan to reduce the deficit. You never discussed or even took a guess at any estimates of how much this would reduce the deficit by. I would have liked to hear what impact these changes would have on the bigger picture.
I realize that taxes are only half the equation (with reducing spending being the other part). Maybe you could discuss some areas where spending could be reduced in a future podcast. Keep up the good work.
Brian,
I listened to your taxes podcast the other day. I agree that we (all Americans) need to do something to fix the tax code. I have a wife and small child and I think it’s wrong the mess that we’re leaving for him and future generations of Americans.
I was interested in your tax plan and did some calculations. In your plan I would end up owing $7500 more than I paid in 2010. I know this may sound crazy, but I would be willing to pay more (not sure about $7500 more, but more than currently), if I knew that: 1. everyone is paid their fair share, and was not avoiding their fair share with some creative accounting, 2. my additional payment would also be helped with a reduction in spending to not just make the problem worse or hide the severity of the problem.
I also freely admit the government has been good to me. I am an Active Duty Army Soldier, and most of my family’s income comes from the government. Being a Soldier also has some additional benefits (pension, great health insurance, thrift savings program (the government’s version of a 401k), and large amount of untaxed pay – housing allowance/meals allowance) that many Americans don’t have, so I am more than willing to pay my share… if I knew it wasn’t just going to be squandered.
Also, there are some pretty easy, in my opinion, places for the government reclaim revenue / cut spending. For example, one of the largest expenses for the Department of Defense outside pay and military hardware is Tricare, the health insurance program for members of the military. Tricare, for those that haven’t heard of it, is fantastic coverage for military members and their families. For example, when we had the son I mentioned above we paid a total of $27 to have my son… that’s right $27, which was the cost of the $3 monthly co-payment for prenatal vitamins. (All prescriptions are covered at $3 monthly for generics and $9 for brand name drugs). We used the same local hospital as others would with regular health insurance, and never even received a bill. Since I’m still on active duty, I don’t currently pay for coverage… it’s 100% free for me and my family. The coverage is so good, that my wife doesn’t even bother with her employer’s health insurance plan (she works for a large corporate employer that also has great benefits, but Tricare’s clearly the better deal). Additionally, the yearly premium for retirees is $460 per year. I know I won’t make many friends with my fellow Soldiers, etc. by saying this, but us Soldiers are not paying enough for the coverage we have. Only $27 to have a child… and $460 per year for full coverage when I retire… that’s insane. Military members could clearly pay more even while on active duty… or pay more on a graduated scale (higher ranking folks pay more etc.), but like other groups, active duty folks complain loudly when congress even talks about raising fees and retired military members have a strong lobby. Again, I’d gladly pay more, because it’s the right thing to do.
Thanks for the great podcasts. I look forward to them every two weeks and would be interested to hear where you think the government could reduce spending, like Joe asked above.
Best Regards,
Mark
Brian, Bo,
Another great podcast. Overall I like the general ideas put forth in your plan.
Simply put, everyone should pay into the federal income tax system if they want to live here. Period. Some progression in the rates would be acceptable, but I agree that the bottom rate cannot continue to be negative. Although no politician has the courage to say it, getting paid for breathing and filing a return is just as preposterous as GE not paying any taxes, if not more so. (At least GE actually hires people and manufactures something)
I would question making capital gains rates dependent on income. More progression in the system leaves room for confusion, fraud, and political debate. I like flat rates on capital gains. The moment you split them, they’ll be political pressure on both sides to split them even further.
Finally to Mark. Your humble comments and willingness to give even more are very respectable and not surprising to hear coming from an American Soldier, but I disagree with you. You and your family should have those health benefits and take full advantage of them. If we have to start cutting, we shouldn’t start there.
Listened to your tax pod cast and found it very interesting. I am all for a simpler tax system. When I did the calculation on my personal tax situation I would have paid more than 13% more in 2010. That was a surprise when I compared it to the examples you gave in the pod cast. But after thinking about it I would still vote for this plan for just the simplicity and fairness benefits.
One other thing that stuck out from your examples was that lower income people would be taking a large financial hit from this plan; due to the ending of refundable credits. In general, I agree you should not get back more than you pay in just completely taking the refundable credits away would really be a powerful financial blow for these families because, as you sighted, this is thousands of dollars in many cases. Unfortunately they have really come to depend on this “income”.
Hi Brian (Bo too)
This podcast really got me thinking. I don’t usually post on blogs, but I enjoyed this podcast and topic, so here’s my 2 cents.
Point 1 – you are right on. Paying a “negative” amount for income taxes just doesn’t sit well with me. We do have government programs for those who need help with food, rent, education, job retraining, on and on. The nice thing about these is that they are targeted for very specific and worthy uses. The tax code, however, allows for a cash transfer. It gives money no strings attached if you qualify. How wisely does this money get used? Who knows? When people complain of a goverment that is actively trying to transfer wealth from the rich to the poor, it’s hard to look at this portion of the tax code, and arrive at any other conclusion. I’m OK with a progressive tax code and making allowances for the needy (I’ll give another idea below), but taking some of my tax cash and flat out handing it to someone else doesn’t seem right.
Point 2 – I get it, taking away the loopholes and deductions simplifies the code, which is a good thing. I might make some allowances for the mortgage deduction. The reason is deeper than it’s just popular. A home is one of the biggest purchases most of us will make. It holds a special place in our financial lives. Plus, housing is a large driver (or anchor as happened recently) in our economy. Taking away this deduction could have a huge effect on our economy that needs to be fully explored before implimented.
Point 3 – This argument might sound ideological, but I’m going to try to keep it pragmatic. To help the needy, maybe we should pick a number, and just say if your income is below this, enter zero for your tax bill, and let’s forget about your 6% rate. I mean, let’s be honest, the lowest incomes don’t pay income taxes anyway as we identified in point 1, so let’s not dress it up with a bunch of calculations and save everyone some time. Maybe we set the limit something like a family of 4 that makes 40k or less, or a single making 25k or less, I don’t know what the limits would be or what the formula would be, but let’s pick a number and call a spade a spade and put a zero as the bottom line.
Now let me flip this argument and talk about the rich, and to follow my thinking, I’m going to make an assumption that you agree with 2 statements. First, to balance the budget, there will have to be a mix of spending cuts and tax increases. Being ideological and saying your not going to cut spending or raise taxes, in my opinion, is not possible. Second, just like the poor don’t pay taxes (as we’ve beat into the ground), the rich pay most of the taxes. Frankly, if we are going to raise tax revenues, it’s going to come out of the pockets of the rich. I know this sounds ideological, but to me it’s just the math of the situation. Like Dave Ramsey says, if you are in a big hole (and we are in a huge hole), you need a big shovel, and the rich are the only people that have a big enough shovel – again not ideological, just math. All of this is to say, I think dropping the top rates by 8% is way too much, even with the increase in capital gains and dividends rates. I just won’t raise any significant revenue.
Great podcast, and this one was a thinker. Keep it up.
Shawn
Interesting plan, a few comments:
1 – You want to get rid of all deductions because you say they are too politicized and the government shouldn’t be using taxes to dictate our behavior, but you want to continue charitable deductions (ostensibly because YOU like them). Isn’t that exactly what you were just saying we shouldn’t be doing? Charity is great, but if we are going to continue charitable deductions because YOU like them, why can’t we continue a deduction I like? If you are going to get rid of deductions, then you need to get rid of ALL of them, even the popular ones so no one can say certain groups or behaviors are receiving special tax treatment.
2 – Why tax capital gains differently from regular income? Again, isn’t that doing exactly what you don’t want to do (using tax rates to reward specific behaviors)? Capital gains should be taxed at the same rate as regular income (maybe even a higher rate). Why should it matter how you generate your income?
3 – You don’t specifically state this, but the numbers you throw out at the end suggest your plan is going to be basically revenue neutral (with a slight trend towards more revenue). Any new plan that isn’t going to bring in substantially more income is a waste because of the time and resources that will be needed to implement the new plan and educate people about it. It would be cheaper in the long run to just raise all tax rates 1 or 2% and leave everything else the same. That way nothing else in the whole tax infrastructure would need to change. If we are going to expend the effort to overhaul the existing tax system, we should get something out of it, revenue wise.
4 – I listened to the part at the end about how small business owners create jobs and I think you aren’t looking at the whole picture. Where I live, the cost of living (and therefore salaries) are relatively high. I know many, many families that have 2 working spouses and combined they make much more than $250K. None of these people are small business owners or have any influence over hiring people at the large corporations they work at. They are working stiffs like you and me, they just happen to get paid quite well for it. Lowering their tax rates would do nothing except put more money in their pockets. They are NOT going to use that money to create jobs. Saying all income above $250K (or whatever number you pick) shouldn’t be taxed any additional amount because it will stifle job growth is casting too wide a net. If you want to reduce the tax burden on small business owners then be much more direct about it and put in place deductions for job creation, building offices or shops and other things small businesses do. A business executive who makes $700K a year, or someone who is sitting on a pile of cash that generates $250K/year in income or a sports star who makes $15 million a year are not creating jobs and fueling growth. Those people should not benefit from tax breaks designed to help small business owners. The assumption that everyone who makes more than $250K is a small business owner is just not true. If we want to use taxes to help small business owners than let’s create incentives specifically for them.
5 – The idea that we can cut spending to balance the budget is great in theory, but unless you are willing to start cutting entitlements and defense, you aren’t going to make any difference. I don’t remember the exact numbers, but the discretionary, non-defense part of the budget that everyone is always arguing over is something like 15% of the budget and just under $1 trillion. The deficit THIS YEAR alone is more than $1 trillion. So you could cut all the avocado subsidies and bridges to nowhere that everyone loves to complain about to ZERO, not spend one dime on any of that stuff, and we would still be in the hole. I watched the I.O.U.S.A. documentary after you mentioned it, and the entitlement and defense parts of the budget are growing at an unsustainable rate. It’s like having a $3000/month mortgage, a job that pays $2000/month and thinking that switching to store brand paper towels to save 10 cents is going to make a difference. The only thing that is going to reduce the deficit is reducing entitlement spending, reducing defense spending and raising taxes. There just isn’t enough frivolous stuff to cut to make any difference.
6 – I fully understand the idea that we don’t want to overtax people because that will be a disincentive to work hard and succeed. However, no one, specifically the Republicans who throw this point around the most, has shown any evidence that we are on the downward side of the Laffer curve. If you believe on principle that tax rates are too high and they are stifling job growth and the economy, then why have taxes at all? Why not just drop the tax rate to zero, and let the economy take off? You would say “Of course that won’t work because we won’t have any money to pay for anything.” Right, kind of like the way we don’t now. You pointed out how much one of your tax clients paid in actual dollars. You know what? I would love to pay $1 million in taxes, because that would mean I had an income of more than $30 million. Even if we doubled that person’s tax rate to $2 million, do you really think their lifestyle would be dramatically affected if their take home pay was reduced from $29 million to $28 million? I can assure you it would not be affected as much as someone who saw their take home pay reduced from $29,000 to $28,000.
Tax rates used to be much higher in the past and the economy was growing and even showed some years with a positive cash flow. Reagan dramatically cut the top tax rate insisting that “trickle down” economics would take care of the poor. How long are we going to believe that lie? Time has shown that really rich people don’t voluntarily give their wealth to poorer people, if they did, THEY WOULDN’T BE REALLY RICH! Part of the purpose of government is to make people, corporations and groups do things they wouldn’t do on their own. To step in where the free market doesn’t or won’t work properly. The top 1% of earners have amassed so much wealth and power that it is no longer a free market system. The only way to correct this imbalance is to increase the top tax rates. Politicians need to do the hard job of reigning in the power wealthy individuals and corporations have over them and start looking out for the other 99% of the population.
Sorry for the long rant. Love the show. Keep up the good work.
Brian and Bo
I am glad to see that I am not the only one that would like to get rid of a lot of the refundable credits that we have. I work for a CPA firm and do a number of returns each year that people are getting the EIC, and honestly it makes me mad every time. I have worked hard, provided myself with an education, and yet I am the one penalized with a higher tax burden because of this being hard working and productive but with a lack of dependents. However we have the large portion of society that has chosen to earn modest means and has a number of kids and they always get more than what they have paid in. I also don’t want the argument of people having a lack of opportunity, my dad died when I was young and I have worked hard for all that I have accomplished, it is all what you want in life.
I would like to add a few additional points, and since it is always opinion and never about making friends I will throw a few things out there.
I would like to see social security taxed differently. I think that ALL social security should be taxed at 50%, and we should rid the system of the current calculation with the up to 85% possible taxable. My thought behind this is that everyone is paying on the half that the employer paid in and received a deduction for and never paid tax on.
My next is I think that we should expand the savers credit. We need to provide some kind of incentive to get people to save more and need to get people to understand that it is their responsibility to save for their future. We are not going to be able to rely on the government for that, they can’t even keep their own money straight.
Last is that we need to kill the social security system. I think that we should replace it with mandatory IRA type of accounts where everyone has their own individual account and is required to contribute as well as the employer is required to contribute. This would provide more suitable income during retirement than what we have currently. This would also be more efficient. The stipulations that I would have to go with this is that there would not be any loans, early distributions, etc. available from this account. It should also be employer maintained such as a 401(k) plan, but as a separate plan, and be subject to the same audit requirements as these plans are under the Department of Labor rules. This would also allow individuals to have more control of their future. Additionally we could cut a huge cost from the system and rid ourselves of the social security administration, while moving some of this work to the DOL but overall we would be better off. I myself would be willing to pay in 6.2% of my pay into my own individual account, and honestly I would be willing to pay in 4.2% into my own account and 2% to help maintain the payouts that we have just to be done with the B.S. of a system that we have.
Brian and Bo, great ideas but please don’t leave out Social Security! We get 40% of our tax revenue from Social Security Taxes vs. 42% from Individual returns. Maybe because there is nothing deductible against Social Security Taxes. My addition to your plan would simply be to lift the cap from Socail Security Taxes. It is not fair that someone who makes 36,000 pays S.S. Tax on 100% of their income and someone that makes 10 million pays it on just a sliver (the first 106,500). This would not only fix Social Security overnight but probably provide enough money to ensure Medicare’s solvency.
Finally I wouldn’t distinguish between ordinary income and capital gains. The incentive to invest is to make money. You don’t need a tax break for that. Think about it. What else are you going to do with your money? Keep it in checking?? I would keep current 401k/IRA/Roth rules however. The average person does need a push to invest for retirement.
I often hear people bash the the “trickle down” ecomonics of Reagan while providing absolutely no proof with numbers to back up their claims. Liberals often loath Reagan and love Clinton for his fiscal policies. How different were Clinton’s tax rates than Reagan’s? The answer is 11.6% higher at the lowest point during the end of Reagan’s term and Clinton’s term. Is a tax rate change of 11% the difference between certain doom and a blissful ecomony? If that is the case, Obama can simply fix our current economy by raising the top tax rate by 4.6%.
Chris I would label myself as a basher of trickle down economics. As a manager at a small business who works for a man who makes roughly 15 million per year, I can tell you that he has no bearing on hiring and firing. And when he does interject his opinion never once have I heard taxes mentioned. I make the decisions of when to hire and fire. We hire salespeople when we have poor coverage and each salesperson is juggling too many leads. We hire service advisors and technicians when we are more than two days out on appointments. We build when we need room. We add people when our business grows. We have never made a business decision because of taxes! It’s like plumbers – they’ve been in the news before. If you call a plumber and say, “hey my toilet is backed up.” And they say, “I can be there in two weeks.” Would you wait or call another plumber? Sounds like that plumber is missing business because he’s too busy. Time to hire someone. Time to “create a job.” Joe the plumber sitting around with his thumb up his butt waiting on taxes to be cemented is going to get run over by the go getter who is hiring people to take over his territory. Any business owner who makes business decisions because of taxes will be mowing my lawn in a few years. Everyone of them should complain and scream bloody murder however. They should threaten job losses and recession. If they want lower taxes.
I often hear people bash the the “trickle down” ecomonics of Reagan while providing absolutely no proof with numbers to back up their claims. Liberals often loath Reagan and love Clinton for his fiscal policies. How different were Clinton’s tax rates than Reagan’s? The answer is 11.6% higher at the lowest point during the end of Reagan’s term and Clinton’s term. Is a tax rate change of 11% the difference between certain doom and a blissful ecomony? If that is the case, Obama can simply fix our current economy by raising the top tax rate by 4.6%