Subject: Proposal for Replacing the Federal Income Tax System (Corrected) Comment: Jeffrey Kupfer, Executive Director President's Advisory Panel on Federal Tax Reform (comments@taxreformpanel.gov) This is a proposal for replacing the federal income tax system. As you require, my proposal is consistent with a progressive tax, is revenue neutral, and recognizes the importance of home ownership and of charity in our society. It is at odds with all "dual-rate" plans, such as those of the Cato Institute and Citizens for Tax Justice. It is also at odds with all flat tax plans known to me, because of what they would tax and because of their ineliminable inequities. Finally, it is also at odds with all "sales" tax plans known to me, such as that of Rep. John Linder, Rep.-GA. All "sales" tax plans known to me involve purchase taxes, not sales taxes. I will be introducing a true sale tax plan. I believe that no equitable "sales" tax plan have ever been proposed. To tax all purchases at the same rate, so that the middle classes pays the same tax amount on a purchase as do the wealthy classes, is unavoidably inequitable. The belief that this system would be fair because the wealthy buy more is committed to the unreasonable belief that all who are wealthy buy more. Further, the wealthy class may buy more, but the "sales" tax plan permits them to accumulate capital untaxed, while making the poor poorer. Let us call my plan "the SALE tax plan" (or SALE). (The "sales" tax plans are "purchase tax plans".) SALE taxes sales, not purchases. With SALE, the seller pays the tax and is responsible for its transmission. Whatever is sold is taxed; both goods, rights, and services, etc. With SALE, nothing else is taxed. It is my estimate that there would be no need to tax sales beyond 1% of the sale price. SALE would produce more revenue than any other tax plan, without the pain and without the extraordinary crippling of economic activity/opportunity by the IRS tax code. (I will be using the 1% figure hereinafter.) Employers who pay their employees $5,000.00 a month would deduct $50.00 a month and transmit the tax (for the employee; the seller of services). The tax for an employee on an hourly wage of $8.00 (at 40 hours a week) would be $3.20 (on $320.00). There would be no exceptions for the poor or for the wealthy; nor need there be. The supermarket that gets $50.00 from a customer at checkout would owe $0.50 in tax on the transaction. The tax could not be added to the customer bill. An option to buy/sell something would be taxable to the seller of the option. The exercise of a call option would create a tax for the seller. The exercise of a put option would create a tax for the buyer of the option. A lease would be taxed to the lessor. A home ownership sale with a profit of $100,000.00 would not create a greater tax obligation than $1,000.00. Present tax considerations about profits and losses would be irrelevant. The sale of 100 shares of XYZ stock at $50.00 a share would not be taxed on the basis of profit or loss, but only on the amount of the proceeds of the sale. If one paid $10.00 a share for these shares, the tax would be $50.00. If one paid $100.00 a share for these shares, the tax would still be $50.00. (The broker would charge the seller for the tax and remit it for the seller.) There may be some transactions that would require some elementary interpretation as to buyer/seller. Like-kind tax-free exchanges under current tax law involve at least two sellers. Under SALE, both would pay. (The closing attorney(s), etc., would transmit.) In a forward merger, the non-surviving company (NSC) owners and the professional service providers are both sellers. If the NSC is/was worth $100,000,000.00 and the surviving company (SC) $500,000,000.00, before the merger, the tax for the NSC is $1,000,000.00. In a reverse merger, if the NSC was worth $0.00 (a common occurrence) and the SC is/was worth $2,500,000.00, before the merger, the SC tax is $0.00/$0.01. The owners of a reverse merger NSC will benefit in cash and/or shares as part of what would be paid by the SC for outside professional services; such as an investment bank managing the reverse merger to bring the SC public. If the SC pays out $250,000.00 here, the professional services providers would pay $2,500.00 tax at closing. To give is not to sell. Under SALE, if property is given to charity, the donor does not have to pay SALE tax. However, if the charity sells the non-cash property, it pays the SALE tax. All commercial tranactions would be taxed. This is not true now. The SALE tax plan would provide more money for all taxpayers to contribute more to charity. The present system of charity deductions is beneficial taxwise only to some of those taxpayers who itemize their deductions. Under SALE, non-profit organizations would treat proceeds (including tuition) as gifts. Their sale of non-cash proceeds would be taxed. A for-profit day care center would not be taxed on its profit but on its gross proceeds for services; normally before it provides the services. Taxes in our capitalist society would reflect the receipt of capital in all for-profit transactions; without regard to profits and losses. Under SALE, with the disadvantages of our present tax system substantially reduced for the aveage consumer of goods and services, both the poor and the rich can get richer. This may not seem fair to some. States that have a "sales" tax (always a purchase tax) could use the SALE idea locally and statewide to greatly lessen the burden on most taxpayers. It is certainly not necessary to charge the level of local or state "sales" taxes in effect now. The same is probably true for most of the proposed federal tax methods, aveaging about 15%. A good citizen could be just as proud to pay 1% as to pay 15%. Somewhere, there is a doctoral student in economics who is looking or a dissertation subject, etc. We need to know with precision the total for "all" sales transactions in the USA. Is a 1% SALE tax more than the government needs to fund its activities? With SALE, the taxpayer can actually look forward to the joy of paying taxes. (A garage sale gross of $250.00 would net $247.50, after taxes; even if the profit was greater than 90%.) Respectfully submitted, Marcus Brown 6021 N.W. 61st Avenue Bldg. 16 - Apt. 311 Tamarac, FL 33319-6275 (954-718-6901) (954-592-1551) (emailer@bellsouth.net) May 06, 2005 |