‘Tis the season, so I thought I would post an updated version of my little Reasonable Tax idea that I did back in February. I’ve made a couple of small changes based on the comments and some later thoughts I had.
So, here’s my idea for a Reasonable Tax.
- Only the states may levy taxes on citizens of that state or corporations based in that state, and ONLY on citizens of that state or corporations based in that state.
- Only income may be taxed. Income is defined as salary or wages for employment, interest and dividends from investments, earnings from rental property, or similar earned monies. Inheritances are not considered income. Sales tax, property taxes, and “inheritance” or “estate” taxes will be eliminated.
- The maximum tax rate allowable is 10% of total income, annually. Period. Local taxes are deducted from this 10% maximum (e.g., if your county tax amounts to 2% of your income, the state can only tax you up to 8% of your income). States may restrict the maximum percentage localities may set for taxes.
- States may tax businesses or their owners/stockholders, but not both (no “double-dipping” by taxing a business’s income 10% and then the owners’/stockholders’ incomes 10%).
- The federal government may levy taxes on each state, and only on the states, and no more than 10% of the total taxes received by that state.
- The 10% rate is a statutory/Constitutional maximum. Each state government may elect to tax less than that 10% maximum. The federal government may elect to tax the states less than the 10% maximum.
- Tax rates must be flat. If a state sets the rate at 8%, it is 8% for all citizens regardless of income level. However, states may set a “poverty level” below which all taxes are waived (all or nothing). There may be a small income range where the tax is progressive to avoid situations such as where someone earning $19,000 and paying no taxes gets a small raise to $20,000 and is penalized by suddenly taking home $1000 less than before. The same rules apply to the federal government in taxing states.
- Tax rates must be set by legislative act, which cannot be delegated, and are effective for a minimum of 3 years and a maximum of 5. The legislature may raise the tax rate inside of that 3 year period only with a 3/4 majority vote. Such override shall be effective for no longer than one year. At the end of that year, a new bill must be passed, again with a 3/4 majority vote of the legislature, or the tax rate automatically resets to the lower previous rate. The rate may be lowered at any time with a simple majority vote.
- Any bill changing the tax rate must specifically address the tax rate, and only the tax rate, in a form similar to “Effective [date], the state income tax shall be X% calculated annually. Those with an income of $Y per year or less shall be exempt from any income tax.” Any bill changing the tax rate can only take effect at the beginning of the following tax year.
- Members of Congress and the state legislatures are prohibited by law from having others do their taxes for them, and each state and federal legislator will be audited every year they are in office, and for 5 years after they leave office, without exception.
- State and federal expenditures cannot exceed the previous year’s income – no deficit spending – except in the case of a current war, with a specific Declaration of War by Congress. Any such wartime deficit spending must be approved by a 2/3 majority of each house of Congress.
These are, of course, only the “core” of the tax – some other details may need to be worked out.
My main reason for taxing income rather than a sales tax is that sales taxes effect the poor disproportionately – a greater percentage of their income goes towards non-discretionary spending (food, clothing, housing, etc.) than does for the rich. The only way to offset that is by making necessary goods tax-exempt, which leads to the complicated and somewhat subjective debate over what is and isn’t “necessary.” Additionally, if the people with higher incomes restrict themselves to only buying the items determined to be “necessary” and thus tax-exempt, they can easily end up paying a smaller percentage of their income than those with a significantly lower income. Taxing income is actually simpler – both to legislate and to calculate – and more fair.
By only allowing the federal government to tax states, it gives the states a tool to use to fight federal overreach – by the state lowering it’s taxes and thus federal income – while providing a check on that power by requiring the state to cut it’s own spending to keep a balanced budget.