Taxes

In my previous blog post titled “Government” I addressed the idea of fairness and taxes.

I have a solution for federal taxes that Congress is welcome to consider/use free of charge.

My plan relies on changing how we tax the very rich but It also helps businesses become more competitive and I think it is a solution even billionaire investor Warren Buffett or the world’s richest men, my Seattle area neighbors Bill Gates and Jeff Bezos would approve.

I call it Jim’s Tax Plan.  Here are the highlights/benefits:

  • Fully funds National Defense separately from all other programs-Providing financial support and stability for the Federal government’s most important role: Providing for the Common Defense.
  • Eliminates all corporate and business taxes– Makes US businesses the most competitive in the world.
  • Eliminates inheritance taxes– no death taxes – family businesses can continue to the next generation.
  • Keeps Personal Income Taxes Revenue Neutral: No overall additional taxes on personal income. Substitute a Flat tax for rich and poor alike that will be simple to compute and easy to understand.
  • Rewards high income (high productivity) individuals & redistributes wealth, not from the rich to the poor, but from the less productive rich to the more productive rich.
  • Balances the Budget

“OK Jim, you’ve got my attention, what’s your idea?” 

If you are middle income, please read on.

If you run a business and are in the middle class, I think you will like it.

If you are reading this and are both very rich and have very high income based on your skills and hard work like Warren Buffet, Jeff Bezos and Bill Gates, I think you might be surprised that Jim’s Tax Plan works OK for persons like yourself.

Rich People who work hard, generate lots of income every year, and who are real “job creators” will do fine under Jim’s Tax Plan.

If you are very rich but don’t produce much income; spend your money frivolously; accumulate wealth by basically taking it from others (legally or illegally) without delivering value; or basically just live off of inherited wealth, you are welcome to read on, but you will probably not like Jim’s Tax Plan.

Under Jim’s Tax Planthe Federal Government would replace the current income focused tax system with a two-part system:

  1. The very wealthiest Americans will pay for Providing for the Common Defense. This includes the budgets for DOD, Veterans Administration, and Homeland Security) For 2018 this totals $869.7 Billion.   This will be paid for via a Net Worth Taxon all household net worth in excess of $1 million.  Consider it a “National Defense” tax on multi-millionaires.
  2. All individuals with any income will pay for all other non-defense spending just as they do now but using a Flat Tax of 15%to generate the same amount of revenue.For 2018 non-defense spending totals $1.9 Trillion.  This is basically the same personal tax burden placed on personal income today.

“What the heck are you talking about Jim?”

What I am suggesting is that the basic premise of our current federal tax system is flawed, relying almost solely on taxing income.  We tax income twice, once when it is received by companies and then again as personal income.

We do this using a system that is so complex not even tax accountants can fully understand it.  Jim’s Tax Plan is a better way to generate the revenue needed to operate our government.

Jim’s Tax Plan shifts a large portion of the tax burden from high-income persons to those with high wealth.  Although sometimes these are the same people, often they are not. Currently we penalize those who are the most productive (as measured by income) while favoring those who have lots of wealth but who may not actually produce much (as measured by reported income and/or losses).

Jim’s Tax Plan redistributes income, not from the rich to the poor, but from the non-productive to the most productive.   It also aligns taxation more closely with the benefits received, at least at the macro level.

Jim’s Tax Plan realigns the system to obtain a large portion of the revenue needed from a tax on the net worth of the very wealthy. The top 1% of the population currently possess  32% of the $94,800,000,000 Billion (AKA $94.8 Trillion) in total Net Worth of U.S. Households. (Source: Federal Reserve, Survey of Consumer Finances and Household Total Net Worth Report – First Quarter 2017).

There are 146,713,385 Households in the US (US Census Bureau).

1,467,134 of these households (1%) hold assets of approximately $30,336,000,000,000, AKA $30.3 Trillion, or 32% of the Total of $94.8 Trillion. (Source: Federal Reserve Survey of Consumer Finances)

If we tax that $30.3 Trillion held by the very wealth at 3% annually we can generate $909 Billion annually and completely pay for DOD, VA, & Homeland Security (Source:  2018 Budgets for DOD ($639.1 Billion), VA  ($186.5 Billion) & Homeland Security( $44.1 Billion) as published by DOD, VA and the Congressional Budget Office).

If we keep personal income taxes and other sources of revenue the same (i.e. revenue neutral) we can balance the budget.

“Why should the wealthy people pay for the defense of us all?”  

Because they benefit the most from the protection our military and homeland security provide.   The top 1% have by far the most to lose if the Federal Government does not protect their assets.  Without a military and homeland security, foreign forces would be able to take and/or destroy their wealth.  Look at this protection as a form of insurance – the more you have to lose, the more you need insurance. Like with home insurance, the more you have to protect, the more you pay.  These very few people are getting the most protection, they need to pay for it. Currently the super rich are not paying their fair share for National Defense.

It is also the case that the burden of actually providing this defense falls almost exclusively on the rest of us.  It is our sons, daughters, nephews and nieces who serve in the military.  With extremely rare exceptions, these are not from the families of the super wealthy.

It is also the case that under the current system the wealthy are paying a large portion of overall taxes anyway.  While it may seem radical, what I am proposing merely shifts the system to favor those very wealthy people who are the most productive and charges others fairly for the benefit they receive from National Defense.

WARNING – The rest of this post is for policy nerds only: 

This Blog post is long and very wonky.  The basic idea is that the current tax system based on income should be partially replaced/augmented by a net worth tax on the very rich. This net worth tax would pay for National Defense.

 What follows is a detailed explanation of how Jim’s Tax Plan could work and I have tried to supply the background information to support my assumptions and arguments.  

 I will not be responsible for any headaches caused by reading beyond this point.  However, the devil is in the details and if you are really interested in this idea, I would love for you to continue reading and to provide me with feedback. 

 I fully understand, however, if you want to bail out right now.  

You’re still here so, OK, I will try to anticipate your questions, here goes:

“Remind me Jim, what is net worth?”  

A brief recap on how to compute your net worth:

  • Add the total value of everything you own. This would include houses, cars, boats, RVs, vacation properties, investments, a small business or farm, cash and anything else that that has value.  Another way to describe this is anything of value that you would want covered by insurance or which would be held by a financial institution.
  • Subtract all outstanding debt such as mortgages, credit card balances, other loans.
  • The remainder is your Net Worth.
  • 85% of us should be able to do this by ourselves on a single sheet of paper.Rich dudes and business owners will need to hire accountants to keep track of it all, which they want to do anyway as it is kind of nice to know where you stand and what you actually own and owe.
  • For point of reference the average household net worth in 2016 was $97,225 (Source: Survey of Consumer Finances, US Federal Reserve).

“But Jim, won’t a net worth tax stymie growth?  I have heard that these really rich people are the “job creators” and that they provide the “capital investments” that benefit the rest of us.”

 Yes, many of these very rich people do innovate and create jobs and wealth for the rest of us (e.g. Bill Gates & Jeff Bezos) and others wisely apply capital to grow our economy (e.g. Warren Buffet).

Under Jim’s tax plan these “high producers” will thrive, because…

By raising $869 Billion in tax revenue via a net worth tax we can totally:

Eliminate Corporate Taxeswhich currently produce revenue of $310,000,000,000 (Source USA FACTS)

Eliminate Estate & Gift Taxeswhich currently produce revenue of  $19,300,000,000 (Source USA FACTS)

Balance the Budget

Deficit for 2018 is $484,200,000,000

What this means is that under Jim’s Tax Plan US businesses and investments will be the most competitive in the world – no taxes on corporate income. The very wealth folks who would be paying for National Defense under Jim’s Tax Plan can therefore, if the are truly wealth creatures, reap significant benefits from their investments to fully offset the new tax on their net worth.

Without having to worry about “corporate tax implications,” entrepreneurs at all levels can make business decisions based on market needs and their own individual expertise or innovations.  The Federal Government will no longer be picking winners and losers as it has been doing for ages via our focus on corporate income and loopholes.

By paying for National Defense via a Net Worth tax on the very wealth, the remaining budget needs can be made without increasing the overall need for personal income taxes.  Personal income taxes and employment taxes under Jim’s Tax Plan are revenue neutral and generate the same revenue as they do now.

With the super rich paying for National Defense via the Net Worth Tax enough revenue will be created to totally eliminate the annual budget deficit. The result would be a significant contribution to the long-term stability of the US Economy which will greatly benefit our grandchildren and their grandchildren.

“The rich are not really bad people, so why declare war on them?”

I hear you, but please bear with me, and I am not declaring “war” on the rich, just asking them to pay for the defense of their assets that they are receiving from the United States.

“But Jim, how can these rich people survive having to pay almost 3% of their net worth each year? Won’t they run out of money? Wouldn’t this just cause more homelessness down the road?”

The rich will be fine, no need to worry.  If, and this is a key to Jim’s Tax Plan, they produce and/or invest wisely.

Here is how it can work for the really rich:

  • The stock market long-term average return is in excess of 11%.
  • That means that if these very wealthy people merely buy a stock index fund and sit on it, their wealth should grow 11% a year over time. Even with a 3% Net Worth Tax, their wealth would still be growing at 7+% a year by doing no more than just basic safe investing.  But without any Corporate Income Taxes investment it is reasonable to assume even greater annual investment gains than 11%.
  • Jim’s Tax Plan is even better yet in terms of benefits for the really productive group of the super rich.  These are the innovators and the doers and shakers who have really benefited society as a whole by introducing new products and services that people want or need.  They have become rich in the process which is fine by me.
  • By freeing these high producers from corporate income taxes we will in effect be giving them even an incentive to continue to make even more money. The net worth tax the very wealthy have to pay on their accumulated wealth is easily offset by the higher return on their investments that will result from the elimination of the corporate taxes.

At this point, especially if you are very rich, you might be saying:

“Wait a minute Jim, I already paid taxes on this wealth that I have and now you want to take it away?  It is my money dammit!!!” 

If you have more than $1 Million in net worth and this sounds like you, please hear me out and I will explain why it is fair, why it would be good for the national economy, as well as why it would be good for most individual tax payers likely including you.

“How is this fair Jim?”

Life is not always fair.  People are rich for a number of reasons.  Many are “rich” because they worked for it, some inherited exceptional talents, and yet some are rich because they were born into it, were lucky, or got the money illegally.  Jim’s Tax Plan favors those wealthy people who use their God-given talents and work hard for their money.

It is also “fair” that the super rich should pay for our national defense since those who serve in the military come from the families of the other 99% who often have to pay with their blood.  Note: I would exempt anyone from having to pay a net worth tax during those years that they serve on active duty in the military.

“How would Jim’s Tax Plan work?”  

Under Jim’s Tax Plan If you have less than $1,000,000 in net worth you would only pay income tax just like you are now.  If you have a small business you would pay no business taxes, only a flat 15% on what you personally take in from the business.

For point of reference the median (half above/half below) net worth of US households is $ 97,225.55.   The net worth of the poorest group of people in the in the top 10%  (i.e. those in the 90th percentile) is $1,182,390.36 (Source:  Federal Reserve)

The above example of someone with $1.18 million in net worth would have to pay Net Worth Tax on the $182,390.36 above $1 million.  At 3%,  that would amount to an annual net worth tax of $547.

The super rich will of course pay much more, but not more than they can afford.  Under Jim’s Tax Plan it doesn’t matter where your wealth came from – they have it, so they owe their fair share to help pay for the National Defense that protects their assets.

At current levels of Government Spending on Defense, the tax bite of a Net Worth Tax on the very rich would be about 3 % per year.  (See explanation in “Big Picture Table” below.)

So, if you have $10 Million in net worth at the beginning of the year, do absolutely nothing with your wealth to generate new income/revenue for the next year, you will have a tax bill for $287,000.  This represents 3% of the $10 Million.   If you don’t produce anything with your wealth, your net worth will drop by the amount of the Net Worth Tax and whatever money you spend to live on.

If, on the other hand, you continue to work, manage a business and/or make reasonable investments, you could have significantly more wealth a year from now.

Smart, hard working rich people will do very well under Jim’s Tax Plan. Lazy and stupid rich people will see their wealth disappear over time.

Remember that there are NO corporate taxes under Jim’s Tax plan.

The net worth tax on any new income you make would effectively be taxed the following  year at the flat 15% personal income tax rate, a pretty low tax rate for a high earner. Actually it is a pretty decent rate for any earner.

If you don’t work and only have income from current wealth via investments, and just put your wealth into an index fund you should earn at the very least 6-7% long term.  This would more than cover your National Defense Net Worth tax bill while allowing you to retain most of your fortune and most likely grow it a little.

Wise investors can earn much more than 7% per year on their assets and their fortunes would continue grow.  Stupid investors would not do well, but hey, that is a consequence of being stupid.

“Why should people work hard if they know that if they are successful some of their accumulated wealth will be taxed?”

There will still be plenty of incentive for people to work hard to become rich.  The elimination of corporate and business income taxes opens the door wide for entrepreneurs.

The elimination of inheritance taxes should encourage those who want to leave a legacy (e.g. A family business or farm) to their offspring.

And, if you are already rich and also have a really good salary, say you are a starting NFL quarterback, great! Your new income from that Super Bowl Bonus check is only going to be taxed at the same low rate as the rest of your fortune.

Same goes if you win the lottery or inherit a fortune.  This is much better than a super high income tax based on your income.

As noted before, under Jim’s Tax Plan it does not matter where your wealth comes from, you still pay the same 3% rate per year.  Whether you remain wealthy is totally up to you.

“What about non-defense spending, who pays for that?

Under Jim’s Tax Plan all non-defense spending would be paid for the way it is now by a combination of personal income taxes, payroll taxes and the miscellaneous other sources of income like fees etc. We have been collecting taxes this way for the last 100 years or so.   While we could just keep the current personal income tax system in place, I prefer instituting a Flat Tax of 15% on all income across the board. The 15% figure comes from dividing the amount of revenue currently received via personal income ($1.9 Trillion) by the total US personal income ($13 Trillion).   In other words if everyone paid 15% of their income we would raise the same amount of money in personal income tax as we do under the current very complicated system.

We can’t expect the rich to pay for everything and it makes sense to me that we all owe something to live in this great country.

15% of income seems reasonable.  Across the board, no loophopes.

“What about Medicare taxes?”

 Payroll taxes that fund our Medicare system would remain the same under Jim’s Tax Plan, not because they are particularly well crafted, or even make sense, but primarily because fixing them is too difficult for me to figure out.  As long as any changes raise enough revenue to cover the costs, the budget would still balance. Note that the issue here is not really how the revenue is collected but rather the underlying costs of healthcare which are not being controlled.

The bitter truth is that unless we get costs under control we are all going to have to pay more.

This is a case where it does not make sense for us to “tax the rich” as they are not really getting any more benefit than the rest of us. This is quite different from National Defense which primarily benefits those with the most wealth.

We all need to pay for health care, one way or another.

“How is Jim’s Tax Plan good for the economy?”

Eliminating Corporate and Business taxes altogether would make our businesses much more competitive in the world market.

Businesses would also be much more efficient at home. There would be no more complicated figuring out and finagling to code expenses as “tax deductible”.  Expenses would just be expenses.  Expense decisions could be made much more logically and totally without government interference.

Despite what the Supreme Court says in Citizens United, corporations are not really people. But, all companies and corporations are owned by people.  Corporations have multiple owners who, like the owners of private businesses, would still be paying the taxes, but only when they receive the money personally and add it to their net worth.  Currently we are taxing this income twice, once on corporations and businesses, then again on personal income of the people who own them.

With Jim’s Tax Plan the tax on income would be collected one time: at the point it is received by an individual.  The rate would be the same for all Americans – at a flat 15%. Based on a number of analyses of past proposals for a Flat Tax, this approach will produce the about the same amount of revenue as our current much more complicated multiple tiered income tax.

Relieved of federal taxes, businesses and corporations would become not only more competitive internationally, but they could make wise market-driven decisions without having to consider tax policies forced on them by the Federal Government.  They would have more freedom to make more money for their shareholders and owners.

“What’s the Big Picture Jim?”

Here is what Jim’s Tax Plan would look like at the macro level:

Number of US Households                                                                 124.6 Million

Net Worth of all US Households                                                        $94.8 Trillion

Net worth of the top 1% (32% of total)                                            $30.33 Trillion

Money Needed

A – National Defense Budget (DOD/VA/HS) 2018                           $869.7 Billion                                                                                                                         (or .869 Trillion)

Plus

B – Budget for Everything else                                                          $3.22 Trillion

(2018 Fed Budget minus Defense)

Equals

C – FY 2018 Federal Budget                                                               $4.094 Trillion

(Whitehouse.gov/omb/budget)

Revenue Under Jim’s Tax Plan

D – 2018 Total Projected Revenue from Current Tax System           $3.65 Trillion

(Whitehouse.gov/omb/budget)

Minus

E – Corp Tax Revenue (Not Collected under Jim’s System)              $401 Billion

(Source: USAFacts.org)

Minus

F -2015 Estate & Gift Tax Revenue (Not Collected)                         $24.1 Billion

(Source: USA Facts.org)

Plus

E –Jim’s Tax Plan Net Worth Tax Revenue                                       $909 Billion

(3% of 30.336 Trillion)

F – Total Revenue under Jim’s Tax Plan

(Revenue Minus Corp & Estate Taxes)                                             $4.13 Trillion

 

G- Surplus                                                                                              $40 Billion

THIS IS A BALANCED BUDGET!!!

So to recap so far, under Jim’s Tax Plan we are having the multi-millionairs (as defined by net worth, not income) pay for the cost of National Defense (This includes the budgets for DOD/Veterans Administration/& Homeland Security) via a tax of their Net Worth in excess of $1 Million.   This will allow us to completely eliminate the Corporate Taxes and Estate and Gift Taxes and to balance the budget without increasing the tax burden on personal income (Revenue Neutral).

“What would this tax look like for someone who is in the top 1%?”

99 Percentile Net Worth Threshold                                                                $10,374,030

(This is the lowest net worth you can have and still be in

the top 1% – Federal Reserve Data)

Deduction                                                                                                            $1,000,000

(Everyone would get this deduction)

 

Taxable Net Worth                                                                                            $9,374,030

Projected Income/ Return on Net Worth of $ 10.374 M @11%                $1,141,143

(Long term stock market average return is 11%)

Other Income                                                                                                    $59,039

(Natl Ave. – for most high net worth individuals this would be much greater)

Total Income                                                                                                    $1,200,18

Income Tax at Flat 15%                                                                                  $180,027

Net Worth Tax Liability under Jim’s Tax Plan @ 3%                                $281,221

Total Tax Liability                                                                                           $461,248

(Net Worth Tax of 3% plus Income Tax of 15%)

Net Income (after taxes)                                                                                 $738,934

Overall tax Rate on $279,000 in income                                                         38.43%

(Total Tax Liability Divided by Total Income)

Net Worth One Year Later (After Taxes Paid)                                           $11,112,964

(Minus spending)

Growth in Net Worth                                                                                     $738,934

Percentage Growth in Net worth                                                                    7.12%

This example is for a person in the 99ththpercentile who starts the year with $10.374M in net worth.  Note that for this illustration I have only included the national average for other income which should be way below what most people in this category make each year.  For the illustration I am trying to show that the capital itself (One’s Net Worth) should easily return enough each year to pay the National Defense net worth tax under Jim’s Tax Plan.  They also should be able to modestly grow their total net worth without being overly productive.  The overall tax rate is very close to the current income tax rate for persons with this level of income, but without the loopholes and deductions that seem to permeate our current tax code.

This example is for the poorest person in the top 1%.  The formula will work at any level above this. You may not know anyone in this category, but you may know someone in the category below.

“What would this tax look like for someone who has $2 Million in net worth?”

Net Worth                                                                                                       $2,000,000

(This would put you in about the 95thPercentile)

Deduction                                                                                                       $1,000,000

(Everyone would get this deduction)

Taxable Net Worth                                                                                         $1,000,000

Projected Income/ Return on Net Worth of $ 1 M @11%                        $220,000

(Long term stock market average return is 11%)

Other Income                                                                                                  $59,039

(Natl Ave. – for most high net worth individuals this would be greater)

Total Income                                                                                                   $279,039

Income Tax at Flat 15%                                                                                  $41,856

 

Net Worth Tax Liability under Jim’s Tax Plan @ 3%                               $30,000

Total Tax Liability                                                                                          $71,856

(Net Worth Tax of 3% plus Income Tax of 15%)

Net Income (after taxes)                                                                                 $207,183

Overall tax Rate on $279,000 in income                                                         25.75%

(Total Tax Liability Divided by Total Income)

Net Worth One Year Later (After Taxes)                                                    $2, 207,183

(Minus spending)

Growth in Net Worth                                                                                     $207,183

Percentage Growth in Net worth                                                                    10%

This example is for a person in the 95thpercentile who starts the year with $2 M in Net worth.  Note here also that I have used a very conservative (i.e. low) “other income” estimate. The overall tax rate is a very reasonable 25.75 % even at this low income level.  At higher levels of income the rate will actually drop because

“What about me Jim, I don’t have a million dollars?”

Most of you reading this probably don’t have a net worth of $1,000,000.  For you what I am offering is a simplified income tax code (Flat Tax) and the opportunity to become very wealthy and still pay that same flat rate.

Under the simplest version of a Flat Tax to compute your taxes your personal income tax liability would be 15% of your income. One size fits all.  On average this is what Americans are paying right now.

Work hard, invest wisely, and you have a really affordable tax liability.  Once you reach $1,000,000 in net worth, you will have to pay more, but hey, worse things could happen to you than having $1,000,000 in net worth, which, btw you can leave to your family.  I am confident that Jim’s Tax Plan will actually be an incentive to highly productive go-getters.

“I Am Totally Confused Jim, How Can These Rich People Pay Huge Tax Bills and Still Come Out Ahead at the End of the Year?”

Try and stay with me on this.

The net worth tax and personal income taxes paid by the very wealthy are offset by a projected annual 11% gain in net worth.  I have made the assumption that this person will invest in the stock market as a simple Index Fund investor. The stock market over many years has averaged 11% return.  With the elimination of Corporate Taxes it is reasonable to assume that stocks could easily increase their return to 12-14% long term.  So a person with $10,000,000 in assets who did nothing more than sit on assets conservatively invested in the stock market index fund would increase his/her net worth annually by 10% after taxes.

Obviously most super rich persons are not that lazy and are savvy enough to get much higher returns on their assets, not to mention capital gains profits and or salaries that they earn.  This additional income is now taxed at a much lower overall marginal tax rate of 18% (15% in a flat income tax plus the additional 3% in Net worth tax that will hit the following year).  This is much lower than the current 37% marginal tax bracket for people earning over $460K.

My point being that rich people will have a really good incentive to keep producing more – they get to keep much more of it.  Additionally, they will be released from the current corporate/business taxes that bog down businesses and which put the Government in the position of picking winners and losers.  Now the winners will be able to make money the way they want to.

“Are you not telling me something Jim?”                                                                                                                                                  

Well yes, sort of.   My assumption about how this tax plan works OK for the very rich is based on the holder of these assets being smart, hard working, and wise in his/her use of their assets.   Silver spoon-in-the-mouth trust babies who merely inherit a fortune and then live a life of luxury without producing anything of value will, over time, see their fortunes dwindle as they pay their fare share for National Defense.  This will happen gradually (3% a year) so they have plenty of time to change their ways and start actually producing something of value.

The other rich folks who will not like this plan are those who are just not that smart.  Bad investments and poorly run companies will no longer be subsidized by the government. I say this because under current tax law companies can “write off” losses and thus reduce their taxes.  We are inadvertently benefiting the losers at the expense of the rest of us.  Many of these people have significant assets that we are all paying to protect with our Defense Spending but they are not paying any taxes because the did not run the company at a profit.  Essentially they are getting something (Protection) for nothing.  Jim’s Tax Plan will end these subsidies for the non-productive rich.

Criminals won’t like it either for the obvious reason that their assets will be exposed.

“What Else Have You Not Told Me Jim?”

Another consideration is that a Flat Tax would create some “winners” and some “losers.” Some of us would lose our “loopholes” like mortgage interest, but then, so would the fat cats who now have many more loopholes.  15% on all income is easy to understand and it does seem to me to be a good way to keep taxes simple and at least reasonably fair.

Overall the personal tax bite for most Americans would be about the same under a flat tax.

“Jim, I have earned every penny I have and now that I have a net worth well over $1 Million you want to take it away.   What gives?”

I have three things to say those of you who do have a net worth of over $1,000,000:

  1. You have worked hard and hopefully are enjoying the fruits of your labor.  Under Jim’s Tax Plan you could leave your entire estate to your children tax-free.
  2. I would like to remind you that you are only going to pay Jim’s Net Worth tax on the amount over $1 million and, if you are in business or have sound investments, that you should benefit significantly from the elimination of all corporate income taxes.
  3. I would also submit that you would be paying a fair share for the protection of your assets which our military provides you.

This Seems Too Good to Be True, Where Are You Getting These Numbers?”

Much/most of the Data used in developing Jim’s Tax Plan is from Steve Balmer’s USA FACTS Web site which draws exclusively from public record sources.  It is a really interesting site based on and organized along the four fundamental functions of Government described in the Constitution of the US.  Balmer created the site when he got into an argument with his wife and realized that there was not a good reliable source of data upon which to have meaningful dialog.  All of the data is from official government sources.  Balmer has just had his technical staff make it easily accessible and relatively understandable.  Here is the link: USAFacts.org  Other numbers were pulled from the Federal Budget documents.

As noted before, you are invited to challenge me on any of my facts or assumptions in my plan!

“Why not tax everyone’s net worth instead of picking on the 1%?” 

Part of the answer is, “because that is where the money is.”  A more important reason, however, is that for the really wealthy 1% they have the most to gain from a strong national defense, and likewise, the most to lose.

As I see the plan being implemented, the Net Worth tax would kick in at $1M in net worth.  Essentially we would all be liable for the tax, we would all just get a $1M deduction. The rich would also get a $1 Million deduction, however as a practical matter this tax would not impact anyone below about the 90thpercentile.  I am not enough of a mathematician to compute out the exact tables that would be needed, I just know that there is plenty of net worth available to pay for this tax just in the top 1% alone by applying a 3% per annum net worth tax.

Yet another reason not to tax the non-rich is that a net worth tax does not work for the middle class.  It would be extremely difficult to earn the high rates of return that the rich can expect with smaller net worth assets.  Most do not have enough assets to really “invest.”  If your “net worth” is tied up in a mini-van you can’t really expect a “return” like you can with larger investments.

“Is there a catch? What if the rich have a really bad year?”

As they say, “Stuff Happens.”  People like my son Jamie who is in Real Estate often have lean years followed by really good years.  Farmers are probably the most obvious in this category where annual income varies greatly and they could have high net worth if they inherited the farm.  Under Jim’s Tax Plan these people would incur a tax liability based on their net worth but would be allowed to defer payment in those years where their actual income was not sufficient to pay their liability. They would need an accountant/tax preparers to help in this case, but no more so than they do now.

Over time the farmer who inherited the farm would have to make the farm productive (as his ancestors did) or he/she will lose it.

“What about really old people Jim?” 

Well, I thought of that too.  Let’s take an elderly widow who lives in a really big mansion but whose income is now limited since her sugar daddy died.  She could defer her net worth taxes until her death.  Her sole heir, a greedy nephew, would have to pay off these unpaid taxes when he takes ownership of the Mansion, but then again he would not have any inheritance tax so will still be able to vacation in Maui with is own trophy wife.

“Jim, why does the greedy nephew of a billionaire not have to pay inheritance taxes, after all, he is pretty much a slime ball?”

 Jim’s Tax Plan eliminates inheritance taxes because once the nephew inherits the mansion and fortune his own net worth goes up.  If he is productive and wise he will take this new-found wealth and create even more wealth.  If not, well, after about 20 years of doing nothing he will have lost it all – faster if he spends foolishly.

“What about offshore wealth?” 

Same deal, same rate.  If you own property abroad you will have to pay US taxes on it because you are getting the protection of the US Government indirectly via our foreign policy and military strength.   This will encourage the rich to keep their assets in the US – currently there are incentives to take their money offshore.

“What if assets are hidden?”

Under Jim’s Tax Plan the US Government would take the position that the assets do not belong to the person hiding the asset.  If you don’t claim the asset, you don’t own it. Unclaimed assets become Government assets. 

“What about foreigners?”

Foreigners would also pay the same rate on all assets they have in the US.  This should encourage foreign investment because they can earn lots of money here and only have to pay on what they have in net worth.  Special rules would have to be written to prevent foreigners from “taking the money and running”, but I figure Congress can figure that part out.

“What if we need more money to run the government?”

If the National Defense Costs go up, the Net Worth Tax rate would also have to rise.

The exact rate of the net worth tax would be determined using a formula using the total net worth of all US households and the upcoming Fiscal Year Budgets for DOD, VA and Homeland Security.  3% of assets over $1 Million would produce enough revenue at current budget levels, but if the cost goes up faster than net worth grows, so would the net worth tax rate.

This will encourage the very wealthy to push for and support a defense budget that is realistic.   They have the most influence in Congress already.

The Flat Tax would also have to be adjusted if the non-defense spending increased.  Nothing revolutionary here – just applying the principal that Revenue must equal Expenses. That’s how states, counties, and cities manage their budgets.  That’s how I try to manage my budget and I assume most of you do as well.

“How would the government get the money?

Taxes would still be collected the same way as they are now with most people having them withheld from their paychecks or via quarterly estimated payments.  The 1040 could be simplified since you really just have to compute 15% of income.

For wealthy individuals with over $1M net worth the big difference is that on April 15 when you file, the amount you owe would be based on of your taxable income ($15%) plus a percentage (3%) of your Net Worth in excess of $1,000,000 of Dec. 31 of the previous year.  There would have to be a Net Worth Form(s) where assets and liabilities could be listed. Again, they will need accountants, but they already should have them.

Corporations would still have to do tax reporting to account for revenue and expenses and to identify who owns their stock, but they would not have to pay taxes on the revenue.   

 “Can This Plan Possibly Work?”

Yes, it could, but it would be hard to implement.  Many rich people really don’t want to pay their fair share and the current income system is so complicated that they can avoid paying anywhere near what they should.  Under the new tax law the marginal tax rate for high income persons is 37% (Over $600K Married, Filing Jointly) but few of the super rich really pay that much.  Wealthy persons with good accountants can leverage loopholes that are not available to lower income taxpayers. And the current system makes no allowance for the great benefit our very wealthy are receiving in terms of National Defense – they are not paying relative to the benefit they are receiving. Why should people who have rigged the system in their favor institute a fairer system?

“It’ll never happen Jim!”

In summary, I have floated this rough idea verbally several times but have not yet found anyone who thinks this plan is feasible “it’ll never happen Jim” is the common response.

I’m not an economist, but I challenge readers to debunk my assumptions and explain why the Jim’s Tax Plan can’t work economically and why it would not be good for the country.

My challenge:  Tell me why it can’t work, post a response to this blog.

4 thoughts on “Taxes”

  1. Comment from Chip Forwood,

    I enjoyed your thoughts on taxes.  My one question to you is about net worth.  I think the idea works in concept but arriving at a net worth every year seems to me would be difficult.  Furthermore if you are relying on the honesty of individuals to estimate the value of their assets – good luck.  For example are you relying on rich people to set a value on their real estate holdings?  How do they do that every year when prices are rising and falling?  How about business owners who have good years and bad years?  How do they arrive at the value of their business every year? 

    Great questions Chip, Here are how I think these issues could be addressed.

    Difficulty, It would no doubt be difficult for the very wealthy to “count their gold” every year especially with fluctuating values on many assets. However, it is undoubtedly very difficult for people with complicated sources of income to determine that figure, but they do it with the help of accountants. Accountants would still be needed, but their focus would be different.

    As to the honesty of tax payers regarding the asset valuation I have several answers:

    Many assets already have a value computed by financial institutions (e.g. stocks, bonds, and bank accounts). For tax purposes I would use their value as of Midnight December 31.

    For other assets there is at least a document of some kind denoting “who” owns the property (e.g. atitle). If you own something of value you must have some legal document that shows you are the owner (or partial owner) of that asset. In simple terms, you either own something or you don’t and somebody owns everything of financial value that is not owned by the government.

    For the assets which don’t have an annual assessment already, the tax payer would be responsible for obtaining one. Most likely they would need to use an appraiser or an accountant. Although this at one level seems like an extra burden on the very rich, remember that their income taxes have been simplified and they undoubtedly do have professionals managing their estates anyway.

    As a control measure I would include in the system an option for the government to purchase any asset claimed at say 125% of value (exempting personal homes) on the return. This would provide an incentive for filers to have their accountants provide accurate estimates. If they low ball the value they risk the government buying their asset at a bargain basement price. This would likely not happen very often, but the IRS could do it just enough to keep people (and their accountants reasonably honest.

    Widely varying asset values like the examples you give could be addressed similarly to how income was once addressed, via multi-year averaging. Taxation of net-worth could be based on a 3 or 5 year average, thus keeping the tax bite in any given year more predictable.

    Again, figuring out net worth would require work, but who does not want to know periodically how much wealth they have?

    It would be even more difficult to determine net worth for privately owned companies however this computation is already being done when principle owners die and their heirs start looking for their fair share.

    1. No way Jose! Coming up with ideas and words is one thing, actually manuevering the political system is quite another. Also, we need younger leaders to step forward. It is time for the baby boomers to step aside, especially those of us on the upper end of the baby boom scale. My ideal candidate would be a 50- 55 year-old woman veteran who was a former governor or mayor of a large city. They could be either a Republican or a Democrate but would be a “moderate”, open to compromise and balancing ideals with reality. Anyone come to mind? Love ya son, but don’t wish political office on me.

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