You’ve heard solutions from the right. You’ve heard solutions from the left. You’ve even heard President Obama’s bipartisan debt panel solution. Today’s show introduces the “Money-Guy” solution to the tax code, and how I think we could make significant strides to fix the debt problem in this country and get back on track!
We all agree that there is a problem. We can’t, however, seem to come together as a nation and openly discuss solutions to resolve these issues. Those on the right want to cut spending, but you better not raise their taxes. Those on the left want to spend freely while making the “evil rich” pay for it through tax collections.
The real answer is that the solution is not black and white. Both the far left and far right positions are flawed, but no one is willing to offer a solution that is somewhere in between. That is where the Money-Guy comes in…
Even though I anticipate criticism from listeners on both sides of the aisle, I had to use today’s show to communicate some of my thoughts. Rather than just tell you what I think is wrong about the current proposals, I wanted to share some alternative ideas that I haven’t really heard anyone get behind yet. My hope is, through this podcast, we can at least get the conversation started. I by NO MEANS have all the answers, but I am willing to have an open discussion. If I was given the shot to offer up a tax reform plan to Congress, it would have four key changes. I really do think these changes have the potential to vastly improve America’s financial condition.
- No more refundable credits. This doesn’t mean we have to eliminate credits altogether. It simply means that Americans would not be able to make a profit by filing a tax return. As it currently stands, many people qualify for enough credits that they end up with a refund check that is above and beyond the amount that they ever paid in. I think it is fine to have a progressive tax system in which people with lower income carry less weight. If those individuals can get back what they paid in and owe nothing, that is great. However, no one should be able to receive refunds exceeding what they paid into the system to begin with.
- Remove all itemized and standard deductions, with the exception of charitable contributions. Rather than charitable contributions being deductible on Schedule A, I suggest moving them to page 1 of the 1040 as an adjustment to income. This way anyone and everyone can make an adjustment to income for gifts to charity no matter how much money he or she makes. This removes the ability to manipulate the tax code and it simplifies the process. Now you are probably asking, “but won’t that raise everyone’s taxes?” Excellent segway…
- Lower everyone’s tax rate by at least 4%. Using Married Filing Jointly for my illustration, the tax rates will decrease as follows:
- For those with income up to $16,750, the rate will drop from 10% to 6%.
- Income of $16,751 to $68,000 – decrease from 15% to 10%
- Income of $68,001 to $137,300 – decrease from 25% to 19%.
- Income of $137,301 to $209,250 – decrease from 28% to 21%.
- Income of $209,251 to $373,650 – decrease from 33% to 25%.
- Income of $373,651 or more – decrease from 35% to 28%.
- Raise the tax on capital gains and dividends. Rather than paying from 0% to 15%, the rate would increase to either 10% or 20%, depending on income. Because most of his income is taxed at the capital gains and dividends tax rate, Warren Buffett famously stood up and said it’s not right that he pays less taxes as a percentage of income than his secretary does. The “Money-Guy” tax plan eliminates that problem. Under my plan, Warren Buffett would pay 20% on his capital gains and dividends and, unless his secretary makes more than $137,300 per year, she would pay 19% or less on her regular earned income.
We did a case study on some of our clients to test how the new tax code would affect those with low, middle, and high incomes. The clients with lower income could now use their credits to completely eliminate their tax obligation, but no longer receive excessive refunds (profit) by filing a return. The middle income clients saw about a 1% tax increase. Two of our higher income clients did save in taxes under the new plan. Keep in mind, however, that these clients are small business owners who employ many people and, as such, have wildly fluctuating incomes.
If you don’t like this plan (or if you completely hate it), I would love to hear your thoughts and reasoning. If you feel compelled, shoot me an email at [email protected]. If you love it, tell someone about it. Get the conversation started. Every year that we wait to take action, the problem is compounding. At some point we need to start making these difficult decisions, and waiting is only going to make it worse.