As I documented in my post Tax Code and Social Dysfunction = Bad News, in 2009, just about 47 million filers will not pay income tax. By "not pay", I do not mean "will be exempt from withholding". By "not pay", I mean that these tax filers will be due refunds from the Federal Government that will be paid out long after those taxes were paid. Which raises the question: if they won't owe the tax in the first place, why are we witholding it?
The withholding system in this nation is criminal.
The Federal Government forces employers to withhold estimated income tax from every single paycheck issued to every single W-2 employee. This "estimate" is based on what their tax rate would be if that single paycheck was their payrate across an entire year. So, if you are an hourly employee whose wages may vary from pay period to pay period, your witholding is never exact. Or if you were an employee subject to bonuses, your tax withholding for a bonus check could be truly whacky for just one week. I remember the first bonus check I ever got -- the bonus itself was about 15% of my total annual salary (hey, I had good year) -- and as a result, the tax rate was the highest possible on that one check.
Couple that with the fact that the Federal Government varies the tax withholding guidelines from year to year (withholding will be higher in an election year than a non-election year, to provide for greater refunds in an election year than a non-election year), and pretty soon, you can see how the IRS and Congress team up to really bend the taxpayer over the table. It's no coincidence that tax day is typically 198 days from Election Day in America. No politician would ever want to move it closer.
Meanwhile, the Federal Government is holding your payments AND NOT PAYING INTEREST. Here's the real evil: if you withold paying taxes due, even for one day, YOU pay INTEREST and PENALTIES. Got to like how that works, don't you. Understand why I have about as much respect for Congress and the IRS as I do pedophiles?
So, why don't we devise a tax plan that actually really does help tax filers in this country -- including ones that owe taxes and those that won't. Let's make it simple, easy to understand, and most of all -- beneficial to taxpayers and not the government. There is nothing more corrupt, more totalitarian, more confiscatory, and more criminal than a tax scheme that takes money not owed, pays no interest, and returns it months later without so much as a thank you.
So here is my proposal:
1) Establish a new baseline standard deduction per taxpayer of $25,000 per year. No income tax will be withheld on the first $25,000 of income per taxpayer, regardless of income level.
2) No income tax will be withheld until a taxpayer's salary exceeds $24,999. Note that this may complicate matters for taxpayers who work several jobs, all of which earn below that threshold. Taxpayers in this situation will probably have to adjust their withholding later in the year, or end up paying taxes later. But I feel that will be a phenomenally small number of people.
3) Remove the underpayment penalty. This penalty is assessed against taxpayers who fail to have enough money withheld. It's a stupid rule given the fact that employers control withholding, not employees.
4) The dependent child deduction would be raised to $10,000 per dependent child for a child to age 17. For a dependent child age 18-22 (ie, a college student), the deduction would drop to $7000, provided that the taxpayer is providing health insurance for the student.
5) Flatten the tax structure to two rates: 15% for taxpayers making between $25,000 and $99,999, and 30% for $100,000 and above.
7) Eliminate most other deductions, rebates, and credits. Yes, this will probably put a larger number of tax attorneys and CPAs on the street, but the simple fact of the matter is that deductions, rebates, and credits that are applied after effect and not paid until well AFTER the taxes are paid do not help anyone.
What do you think?