Sensible Tax Reform: Fair, Simple, and Effective
FAQ: Essentials of Sensible Tax Reform
What are the key parts of Sensible Tax Reform?
STR will bring very major fundamental, even radical, changes to our federal tax system:
- Almost all federal taxes for American businesses will be eliminated.
- Social-Security and Medicare taxes will disappear.
- Estate taxes will end.
- Only individuals with very high incomes will pay any income taxes.
- The alternative minimum tax will be eliminated.
- A new federal consumption tax on retail purchases will be introduced.
Since the new STR tax will be retail tax, it will not be imposed upon businesses. Sensible Tax Reform will effectively “un-tax” American businesses. For individuals, the myriad of current taxes will be replaced primarily by the federal consumption tax alone.
Back to TopHow would Sensible Tax Reform change business taxes?
Businesses in this country currently pay three federal taxes: Social Security, Medicare and income taxes (and possibly alternative minimum taxes as well). Businesses are required to match the Social Security and Medicare taxes of all of their employees: 7.65% of wages, salaries, commissions, bonuses, etc. up to $106,000 of pay (2009) and 1.45% above that amount (which is the Medicare tax only). That exactly equals what employees pay.
In 2007, businesses paid $435 billion in Social Security and Medicare taxes plus $370 billion of federal income taxes. [For many years, businesses have paid more in payroll taxes than in federal income taxes.] Under Sensible Tax Reform:
- Businesses will pay no income taxes.
- Nor will they pay Social Security or Medicare taxes.
- And, most of their tax-compliance burden will end.
- Retail enterprises will collect the federal consumption tax from their customers and will remit those taxes to the government, but will owe no taxes of their own.
Businesses will effectively be “un-taxed” at the federal level.
Back to TopHow would Sensible Tax Reform affect Social Security and Medicare taxes for individuals?
Social Security and Medicare taxes are the most regressive taxes which most Americans pay. Even kids working in a fast-food restaurant must pay 6.20% of their earnings for Social Security (and another 1.45% for Medicare for a total of 7.65%)--from the very first dollar they earn. Those taxes are not only nonrefundable but they are not even tax deductible. Someone earning $100,000 pays $6200 in Social Security taxes and $1450 in Medicare taxes. Employees (as well as their employers) pay the full 7.65% up to a maximum income of $102,000 (2008). However, the Social Security tax (6.20%) ends at that level, leaving only the 1.45% of Medicare taxes for higher wages. Thus, someone earning $1 million or even $50 million pays only $6324 in Social Security taxes--just $124 more than does the worker earning $100,000. For someone with $1 million of earned income, the average combined tax rate is only 2.08%--versus 7.65% for the kid flipping hamburgers or the family at the poverty level. That is very regressive.
The elimination of the Social Security and Medicare taxes will be a significant gain for most Americans. A family of four at the poverty level of $20,000 would receive an increase in income (resulting from a decrease of the taxes) of $1530. The family with $100,000 of earnings would receive an increase in their take-home income of $7650. Both families would enjoy an 8.3% increase in their take-home income from the abolishment of those two payroll taxes.
Back to TopHow would Sensible Tax Reform affect Social Security and Medicare benefits?
Social Security and Medicare benefits would not be affected by the introduction of Sensible Tax Reform. Only the manner of funding the programs would change. Instead of the current regressive taxes upon employees, the two programs would be funded out of the general budget of the federal government.
Social Security is underfunded. Medicare is drastically underfunded. The Medicare prescription-drug program is totally unfunded. These programs require major changes either under Sensible Tax Reform or under our current tax system. However, that is a different crisis for the federal government, which will need to be addressed separately. It is not part of this tax-reform proposal.
Back to TopHow would Sensible Tax Reform change personal income taxes?
- All sources of personal income will be treated alike.
- There will be no tax credits, only one exclusion and only one deduction (charity).
- All legitimate charitable donations will be deductible.
- After all income has been totaled, a $1,000,000 exclusion will be subtracted.
- There will only be three tax rates: 15%, 25% and 35%.
- The taxable income levels will be much higher and the tax brackets will be much broader than under our current system.
Under STR, salaries and wages, bonuses and commissions, interest and dividends, capital gains and winnings, alimony and inheritances will all be treated alike. The net taxable income will be taxed on a simple schedule:
- 15% for the first $10 million of net taxable income;
- 25% for the next $15 million and
- The maximum of 35% only on net taxable income above $25 million.
In contrast, under our current federal income-tax system (2008), those three tax rates kick in at $16,050, $65,100 and $357,700 respectively. STR federal income-tax rates will generally be much lower than under our current system.
Back to TopHow exactly would Sensible Tax Reform affect estate taxes?
The estate tax is another one of the federal taxes on individuals which will be fundamentally changed by Sensible Tax Reform. Estate taxes are the most progressive taxes imposed by the federal government. However, very few estates actually pay any estate taxes even under the current system. Less than ¾ of 1% of American estates pay any estate tax at all and the average effective tax rate is less than 18%. Yet, a very aggressive, well-funded and deceitful attack on the estate tax by a very small group of very wealthy families has most Americans believing that it is an oppressive “death tax” which affects much of the population. These deceivers claim that the estate tax imposes horrible burdens on the heirs, who often must sell the family farm or business to pay the taxes. That is a total and deliberate distortion--a complete fabrication.
Without such distortions, the real shortcomings of the estate tax can be recognized:
- The rules for estate taxes are so complicated that few people can really understand them.
- Planning to design estates and wills to minimize taxes can be very difficult and expensive.
- Families with similarly-sized estates might pay very different levels of taxes because of different approaches to estate planning.
- In addition, the marginal tax rate on estates is an oppressive 45%.
It is not fair that the rules are not clear and that everyone is not treated alike. [The rules are so complicated that several law firms have actually tried to patent convoluted schemes that only their clients could use.] The estate tax needs reform for real flaws of the current system--not the dishonest flaws that some allege.
Under Sensible Tax Reform--Fair, Simple and Effective, the rules of wealth transfer in estates will be very simple. The estate will not be taxed. The heirs will be taxed. That is much more than a simple change of process. It will very greatly simplify and reduce taxes on the transfer of estates. [See the following questions for details.]
Back to TopWill there still be an estate-tax deduction for charitable donations under Sensible Tax Reform?
Yes, an unlimited deduction for legitimate charities will be part of the STR tax reform.
Back to TopIs there an estate-tax exclusion under Sensible Tax Reform?
There will be a $5 million exclusion from the estate.
Back to TopWhat will the estate-tax rate be under Sensible Tax Reform?
0%. There will be no estate tax. After the estate is calculated, the total will be reduced by the $5 million exclusion plus the deduction for unlimited charitable contributions. The entire estate will then pass directly to the heirs. No estate tax will be assessed at all.
Back to TopHow will heirs be affected by the change of tax rules on estates under Sensible Tax Reform?
All heirs will receive their entire share of the estate, without reduction for estate taxes. They will receive not only their share of the estate’s $5 million exclusion (which will not be taxed at all) but also their share of the remaining estate, which may be subject to income taxes.
For example, consider a $35 million estate with $10 million of charitable donations, a spouse receiving half of the estate and two children each receiving one fourth:
= $35,000,000 - $10,000,000 - $5,000,000 = $20,000,000
None of the estate will be taxed under Sensible Tax Reform. In this example, the surviving spouse will receive half of the net estate ($10 million) plus his/her share of the exclusion ($2.5 million). $12,500,000 will thus be inherited but only $10 million will be subject to income taxes by the spouse.
Similarly, each of the children will receive $5 million plus one fourth of the exclusion ($1,250,000) for a total of $6,250,000--but only the $5 million will be subject to income taxes. The latter amount will be added to all other sources of income for each individual inheritor. From that, their own individual annual exclusion ($1 million) plus charitable donations will be deducted. The remainder will be taxed at the appropriate federal income-tax rate, which would begin at only 15%. This contrasts with our current estate-tax rate of 45%!
Back to TopWill Sensible Tax Reform really reduce estate taxes?
Under STR:
- There will be a $5 million exclusion (versus $3.5 million now).
- There will be an unlimited deduction for charitable donations.
- Bequests will pass to heirs free of any estate tax (versus 45% now).
- The bequests will be combined with the heirs’ other income to determine whether they owe any tax at all.
There will be no separate inheritance tax. Rather, inheritance income will be treated along with all of the other income of each heir and be subject to income tax only if the heir actually has very high income. Thus, even there, Sensible Tax Reform will benefit heirs. Each will have their own annual $1 million income-tax exclusion plus their own charitable deductions. And then the tax rate will begin at only 15%--instead of 45%.
Under the current estate-tax system, whether someone has inherited $5 million or $500 thousand, they will bear the same 45% marginal tax rate. Under STR, different heirs would be treated differently according to their inheritance, which will be much more fair. The $5 million heir would likely pay income taxes on his/her share--but only at a 15% rate. The $500 thousand heir, on the other hand, would probably not pay any taxes at all.
Back to TopWhat new taxes will Sensible Tax Reform introduce?
STR will introduce only one tax--a federal consumption tax (FCT). There is currently no FCT in the United States. 45 states, as well as many cities, charge sales taxes, but the federal government does not. The new consumption tax would be the primary source of revenue for the federal government.
