If we really wanted to simplify the
convoluted mucking fess that is our US Tax Code we should look at a tax system
based, with modifications, on the Pennsylvania state income tax.
The Pennsylvania state income tax is
truly unique. The state tax returns of
most states with a state income tax follow the federal return and, for the most
part, federal tax law – starting with federal AGI or taxable income and making state
adjustments to this number. PA had to be
different. It’s state tax system was
created from scratch, with very little similarity to federal tax law.
PA taxes gross income at a flat
rate. There are no exemptions for dependents and no filing status differences.
The only deductions allowed
are unreimbursed employee business expenses, deducted directly against wages, and
contributions to a Medical Savings Account, Health Savings Account, Section 529
qualified Tuition Program account, and Pennsylvania ABLE account. Retirement income – distributions from IRAs,
401(k)s, 403(b)s, Social Security and Railroad Retirement, and other pension or
retirement plans – is not taxed, and
contributions to retirement accounts are not
deductible or considered “pre-tax”. Net
gambling winnings, after directly deducting losses to the extent of winnings,
are taxed.
Losses in one category are not allowed to reduce income in other
categories. Capital losses can reduce
capital gains, but a net capital loss or a rental loss cannot be deducted from
wages or interest and dividend income, as can be done, within some limitations,
on the federal return.
The only credits allowed that are not
related to a business activity are a special refundable “Tax Forgiveness” credit,
sort of like the Earned Income Credit (unlike the EIC, based on earned income,
eligibility for Tax Forgiveness is based on eligibility income, which differs from
state taxable income, that includes a variety of sources) and a credit for
taxes paid to another jurisdiction (like the federal Foreign Tax Credit).
I would make three modifications to
the PA system for the federal return –
(1) Add a standard deduction – greater
than the current increased amounts – such as perhaps $17,500 for an unmarried
taxpayer and $35,000 for a married taxpayer. Or more.
(2) Allow losses in one or more categories
to be deducted against income from other categories to create a “net” total
income.
(3) Not allow any “Tax Forgiveness”,
or the current Earned Income Credit credit, refundable or otherwise.
Like the PA state return the new
federal return would allow a deduction for unreimbursed business expenses of
employees directly against wages. And,
also like PA, all pension and retirement account distributions would be exempt
from tax (except for a transitional amount – see below) and net gambling
winnings, after a direct deduction of losses, would be the amount included in
total income. Gross wages would
be taxed, with nothing treated as “pre-tax”.
There would be no “adjustments to income” other than the deduction for
self-employment tax (self-employed health insurance premiums would be deducted
on Schedule C or E), no itemized
deductions, and no tax credits,
except maybe the Foreign Tax Credit. The
tax rate, currently 3.07% on the PA state return, would be perhaps 12% of the
net total federal taxable income, after deducting the applicable Standard
Deduction.
The “transitional” amount of pension
and retirement account distributions that would be taxed would be the remaining
amount of applicable employee contributions that were treated as “pre-tax” or
deductible on a prior Form 1040. Going
forward all pension and retirement accounts would be “ROTH-like” – no deduction or pre-tax treatment going
in and no tax coming out.
It would be an almost pure “flat tax”
system.
On the business front, I would make
the changes that I discussed for corporations, Schedule Cs, Schedule Es, and
pass-through income from sub-S corporations and partnerships in my book THE TAX CODE MUST BE DESTROYED.
Of course, this will never happen -
thanks to lobbyists and the greed, and need for campaign contributions, of
Congresscritters.
So, what do you think?
TTFN
No comments:
Post a Comment