value-added tax Archives - the patient investor

Do Top Earners Pay Too Little?

Taxpayers earning more than $1 million a year pay an average U.S. income tax rate of nearly 19 percent, according to the Tax Policy Center. The top individual tax rate is 35 percent. Loopholes and other deductions help lower that rate so that most Americans pay a much lower effective rate. A middle-income earner making between $50,000 and $75,000 pays an average 5.7 percent effective rate, while a low-income worker making between $10,000 and $20,000 pays no income tax. Effective rates vary wildly within income groups, however, with some people paying far less than average and some far more.

Critics say this underscores the need for a minimum tax….

via Dems Lay Trap for GOP with Buffett Rule.

Comment:~ I would say this underscores the need to scrap the income tax model which ends up with “some people paying far less than average and some far more” and to impose a flat value-added tax (consumption tax) of around 15%. Impact on the poor could be reduced through subsidies — not tax exemptions which are an administrative nightmare — of basic foodstuffs and other necessities.

Interesting that the proposed “Buffett Tax” would only raise $47 billion if imposed on taxpayers earning more than $1 million. Less than 4 percent of the annual $1.2 trillion federal budget deficit that it is supposed to solve.

BRUCE BARTLETT: Prof. Michael Graetz of Columbia Law School has proposed what I believe is a MacArthur-like solution to tax reform. He would abolish the income tax for the vast bulk of Americans and replace the revenue with a 12.5 percent value-added tax. People would pay their taxes when they buy things and wouldn’t need to worry about keeping records or filing tax returns at all.

The brilliance of the Graetz plan is that no tax expenditures need to be repealed. He would simply give every family a tax exemption of $100,000, which would eliminate the income tax for 90 percent of those now filing returns.

via Bruce Bartlett: How to Really Simplify the Tax Code – NYTimes.com.

Comment:~ Why not abolish the income tax entirely? Retaining a partial system would leave taxpayers vulnerable to bracket creep as inflation pushes them into higher tax brackets. Income tax is a highly inefficient tax to administer and collect compared to broad-based taxes such as VAT. The argument that VAT increases the burden on the poor can be overcome by a subsidy (not an exemption) on basic foodstuffs and other essentials. Switching to a VAT-based system also makes the issues of income-splitting and use of tax havens redundant. One of the few negatives I can think of is that replacing income tax with a VAT may encourage offshore consumption — taking an overseas holiday for example rather than holidaying locally — in order to avoid consumption tax. I would welcome suggestions as to how this could be countered, as well as any further negatives you may think of.