[Update: This proposal was originally posted on January 7th of 2013. Due to the recent discussion in the Federal Open Market Committee (FOMC) statement (*2013) regarding the need for fiscal policy to not inhibit growth, this proposal seems more relevant and important than ever to discuss.
I have linked to some articles next to (or within) certain line items about which I’ve written since I first posted the proposal, as well as having included the relevant articles from the site under the blueprint menu on the side of the page]
This brief set of hypothetical tax rates is merely food for thought in assessing the opportunity to craft investment, income, and perhaps a consumption tax that will help raise a reasonable amount of revenue to pay for expenditures, while still allowing for optimal productivity and efficiency to promote growth.
Please note that this is merely a hypothetical proposal on a partial set of issues and is not comprehensive in any way (e.g. the discussion at the end about some taxes not included in this piece). I look forward to hearing folks’ thoughts on optimal rates and other related issues in order to help ensure healthy finances in the context of a prosperous economy. I hope to include more intricate discussions of specific line items in the proposal and related issues in future posts.
Some General Goals: (See also: In Summation)
- Minimize distortions (e.g. corporate, capital gain (CG), dividend rates orchestrated to minimize incentive for managers to act differently for tax purposes)
- Help fix deficit and debt issues in least painful way (e.g. burden is spread)
- Maintain equity and promote exceptional performance (e.g. lower highest marginal income rate)
- Provide some progressivity for pragmatism (e.g. low effective tax rate for least fortunate, 2 brackets for CG and dividend tax rates)
- Deal with philosophical issues with taxes in a way that is equitable but deals with current realities (Lowest rates one could possibly hope for during this deficit/debt period; focus, relative to current system, on consumption moreso than income to prevent taxing value creation)
- Politically realistic because fiscally stimulative in short run while eliminating current inefficiencies, and also pleases those who support supply-side tax cuts (e.g. lower marginal income tax rates)
Corporate: 10-15% (Read more specs here: Line Item Analysis: Corporate Tax Rate)
- This tax is part of a two-layer system. It is not necessary to eliminate the tax fully, as some companies may inefficiently stash excess cash in the company if not taxed.
- However, the lower rate makes the US more competitive, loophole elimination more feasible, and incents repatriation of excess cash overseas by US multinationals.
Capital Gains: Bracket 1: 10-15%, Bracket 2 15-25% (preferably 10/20, see comment re bracket 2 below)
- Exemption (i.e. 0% bracket – I have not come to a final conclusion for the optimal exemption amount here)
- 2 Brackets: I have not come to a final conclusion on bracket numbers for capital gains/dividend rates
- This provides some progressivity, and bracket 2 rate should hopefully be similar to highest marginal income rate (though, because it is part of the 2 layer system along with corporate tax, it is not unreasonable for it be 20%, while having a 25% rate on highest marginal income bracket)
Dividends: Bracket 1: 10-15%, 2: 15-25% (Read more specs here: Line Item Analysis: The Dividend Tax Rate)
- Similar to analysis for CG, not same but would prefer brackets and rates to be similar for investor simplicity efficiency
Income: Bracket 1: 10-15%, 2: 20-25% (prefer 10/20 like CG/Div, want to harmonize brackets as much as possible) Read more specs here: Income Tax Analysis: A Few Important Issues
Consumption: 9% total at end of phase in-period (phased-in 3% per period, period length 1-2 yrs)
- Potentially a Federal Sales Tax, rather than VAT
- Sub-10% Fed Sales Tax will allow for administrative feasibility not requiring a VAT; some inelastic goods potentially exempt (e.g. NJ)
Important inclusion of Payroll Tax Rates, Social Security and other Entitlement Reform, Estate Tax Rates, etc., also would be included in addressing the holistic solution to deficit and debt (some deductions should also be considered for phasing-out)