Simplify Taxes and Balance the Budget

This article provides potential means of doing so:  Eliminating the Income Tax While Balancing the Budget (PDF).

At the very end of the article, the possibility of eliminating the income tax altogether while increasing the FICA tax rate from 7.65 percent to 12 percent and adding a 12 percent VAT is discussed. The self-employment tax (SECA) rate would be 24 percent. The 12/24 percent rate is flexible, and it would be adjusted to balance the budget in non-recession (or worse) years. A 14 percent rate for each tax (28 percent for SECA tax) would roughly have been sufficient to balance the budget in 2013. (The rates are x and 2x.) Under this proposal, the corporate and individual income taxes are completely eliminated. 

However, the Social Security Wage Base cap is eliminated and passive income, including interest and other income from investments, other than long-term capital gain, would be taxable as self-employment income. Half of long-term capital gains would be treated as self-employment income, as would 60 percent of retirement distributions.

A poverty level credit would be applied so that the tax would not apply on household income up to the poverty level. Also, limited charitable, retirement, mortgage interest and health care 25 percent refundable credits would be permitted. (Deductions could exist in lieu of credits.) International business taxation is greatly simplified, and the incentive for “inversions” is eliminated, by completely eliminating the foreign tax credits system and annually taxing the U.S. portion of profits of any company or partnership (regardless of domicile, etc.) to the owners based on the U.S. percent of sales (using S corporation rules-i.e. flow through of profits to shareholders without taxation of the company-with affiliated businesses treated as one company.) To fairly discourage offshoring of jobs, labor costs would be nondeductible to the extent the U.S. sales percentage exceeds the U.S. labor percentage. (For example, if U.S. sales were 80 percent of total sales and U.S. labor costs were 20 percent of total labor costs, 60 percent of total labor costs could not be deducted.) This system is much better than the current system with respect to collections and burden on taxpayers.

The numbers work to balance the budget because basic algebra is used to make them work. Congress would be forced to do what state and local politicians must do: Balance the budget! The proposal is progressive because it grants poverty, housing, charitable, retirement and health care credits. Basically, everyone would pay the VAT, but the FICA/SECA tax would be paid only by the upper half of the middle class and above. 

Everyone would feel government spending and everyone would pitch in to help solve the nation’s financial problems. Note: Substantively, virtually all corporate income taxes are indirectly paid by individuals–either by shareholders, workers or consumers. We need to act very soon to avoid a debt crisis.  Feldstein WSJ Mar 21 2019 Debt Crisis Coming Soon (PDF)  For each non-recession (or worse) and non-emergency year after the U.S. largely recovers from the Coronavirus (but not doing what was done after the Great Recession–running large deficits threafter), in addition to balancing the budget, we should place $200 billion in reserve (i.e. run a surplus) to help deal with a future pandemic or other major problem without having to rely on the Fed to print money (QE) to produce relief.