This is my demand. I demand that taxes be cut on 97% of households while revenue from income taxes is increased by 43%. I want a simple tax that I can send in on a postcard-size piece of paper. One with simple deductions, and one formula that does away with all of the IRS forms and schedules.
The flat tax that Rick Perry proposed is a formula: tax rate = .2 (Income). But I think that is kind of dumb. For one thing, it would raise taxes on everyone with income below $80,000, while lowering taxes on everyone making more than that. I think instead that it is the households making less than $80,000 who can use the money most right now and that it is their consumer power and savings rate that drives the economy forward.
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Instead of a flat tax, I propose the following formula be substituted for the current income tax system for a period of two years in order to provide an extreme stimulus to the economy, and that the provision sunset after those two years, reverting back to the current system:
tax rate = ((0.75*((income/100000)-1.5))/SQRT(25+(income/100000)^2))+0.2
No one has to do the math themselves of course. The IRS will have an online calculator that will do it for them (and anyone can copy and paste it into Excel if they want to). That's pretty simple.
For those who are interested in the amount of revenue that the Smooth Curve tax will generate, I've done a calculation based on the number of households at each income bracket. It turns out that the Smooth Curve tax actually increases the revenue that the government collects from income taxes by 43%, netting about $2.3 trillion each year. That makes sense! Now we can start to be fiscally responsible and provide excellent services that create a healthy society and a powerful economy.
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This is a closer view of how this tax change will impact the 99%. Existing is in blue, proposed is in red. See what your tax rate would be (based on after-deduction* taxable income). Here's a cheat sheet:
Less than $17,500: 0.0% (keep everything)
Up to $20,000: 0.52%
Up to $25,000: 1.27%
Up to $45,000: 4.31%
Up to $65,000: 7.36%
Up to $85,000: 10.39%
Up to $105,000: 13.39%
Up to $210,000: 28.30%
Those households with income of $500,000 and up: 57.12%+
The curve maxes out at 95% which only applies to very large incomes in the multiple tens of millions and affects only about 12,000 households. The after tax income (take home pay) of these 12,000 high income households remains over a million dollars a year.
You may be surprised that you can give the bottom 97% of households a tax cut and still maintain or even exceed current revenue. So I've zoomed out on the smooth curve a couple of times in order to show you how this is possible. The graph is at a consistent scale.
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Now you can see the median income for those 12,000 households. You can still make out the 99% way back there to the left.
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When you zoom out to include the top 400 households median income it is nearly impossible to even see the tiny dot that the 99% makes at the very left edge of the image.
The top 400 households will provide $139 billion in revenue to the IRS through their income tax for two years ($348 million per household). After two years the system will revert back to the current rates. For each of those two years, their after tax income (take home) will remain about $20 million dollars.
* about deductions...they should be simplified to eight line items as follows:
1. Local Taxes
2. State Taxes
3. Primary Mortgage Interest Paid
4. Educational Expenses
5. Healthcare Expenses
6. Charitable Donations
7. Capital Gains up to $50,000
8. Dependents (per current values)
Who's with me? Does anyone have a better formula? I saw another one here that is more closely aligned with the current rate structure (less progressive). It also uses a log function which I think may seem too complicated to most people. My proposal is simple algebra, the most complex functions being squares and square roots.
You may also notice that below $17,500, the equation produces a negative rate. If fully enacted, that would mean that those households would receive a check from the IRS for about $100 each year in addition to the EITC which will remain in effect.