When I say "Income Tax" I mean any and all Payroll taxes. Including federal income tax, state income tax, social security (both employer and employee portions), medicare, etc. I am 100% for abolishing this sort of tax, complete with a constitutional amendment to make sure it stays gone.
I get a little bit ticked off each year while I am entering all of my tax info into Turbo Tax each year, not uncomfortable enough to go get my tin-foil hat and put it on, I mean I am trusting enough to go ahead and give them direct deposit info to my bank. But honestly, what an invasion of privacy. Asking for my W2 statements, and how many kids I have... Ok, I'm still on board. But, in order to get the best possible return, we are asked to share as much information as possible about every aspect of our lives. Medical, financial, educational, ... ... ... honestly, eliminate the loopholes and just tell me what I owe.
The other problem with Income tax is that it is prone to loopholes. In order to make it "progressive" there are all of these deductions and credits and stuff. but the rich are just as capable of using the deductions and credits, in fact more so because in their case its worth it to pay a specialist to find and exploit every possible loophole. The tax code ends up being ridiculous. If you had 10 different tax specialists prepare your taxes, I bet you would end up with 10 different numbers. Worse than that, you have to save all of that info for 7 years in order to make your case if the IRS comes to hunt you down for being wrong (And, yes, you are guilty until proven innocent when the IRS is involved). I am honest on my tax returns, but I am still scared to death that the IRS might knock on my door and demand that I show them receipts for all of the medications that I claimed as medical expenses on my 2009 tax return. Sure, I have them in my little 2009 folder, but what if stuff is missing or doesn't count like I figured it would? I just get uncomfortable knowing that even doing my best, I might still be targeted. What ever happened to innocent until proven guilty, and whatever happened to probable cause?
Paradigm Shift
Anyway, suppose you abolish all of the payroll taxes (and also swap the Captial Gains tax for an Investment Exchange tax) . This would be a game changer. A total paradigm shift. It fixes so many problems. It eliminates so much red tape. It makes things simple again.
There is no difference between a traditional IRA, a wroth IRA, a 401K, or any other sort of investment account. There is no "hit" for early withdrawal of your "retirement" account. If the company you work for is not cool enough to have a 401K program, you can go set up a perfectly normal bank account and make deposits into it, you can even set up automatic transfers like the 401K thing does. And, in the end, you have exactly the same kind of account as what the cool kids have.
There is no maximum you can put away for retirement each year. No need to hire a financial planner just to successfully retire. If you have enough savings, you can retire whenever you want to rather than having to wait until you reach the ripe old age of .... whatever the government considers retirement age to be once you get there.
There is no need for Flexible Medical Spending Accounts, because all money is "pre-tax" money. If you want a special account for paying your medical expenses, then you don't have to wait for your employer to set everything up, you just walk down to a credit union or bank, and tell them to open a savings account for you. You can make contributions to it each month, your employer can even give you extra money to put in there if they are feeling generous. And, as an added bonus, if you don't spend all of it at the end of the year, you get to keep your money. Now, that is what I call a FLEXIBLE medical spending account.
Waitresses no longer need to care about reporting tips as income because ... no one cares what their actual income was, its all tax free. Spend it wisely.
The more I think about all of the annoying financial stuff that gets fixed by eliminating the payroll taxes, the more I think to myself ... why hasn't anyone seriously considered this before? It fixes so many things.
Some would argue that if the government doesn't know exactly how much everyone makes, then how can we make sure that the rich pay their fair share? Simple. The value of a person's property is almost always directly related to how rich they are. You don't see poor people in mansions, and you don't see rich people in the projects. Most people buy as much house as they can afford. Property value is directly correlated to purchasing power. The value of a person's property also is a good indicator of how much they can afford to pay in taxes.
So, a case could be made that property tax is roughly the same thing as income tax, except without the privacy concerns, and without the IRS needing to exist, and without complicating paychecks.
You'll still be taxed
Now, understand that if we used property tax to replace income tax and sales tax, and ... everything else, you can expect that you wont have any extra money at the end. if you pay $300 per month in payroll taxes, as well as $200 in sales tax, you better expect that at the end of the day your property tax is going to increase by something in the ballpark of $500 per month. I'm not talking about eliminating taxes so much as I am talking about changing how they are paid.
In a property tax system, the local government is responsible for tracking property values. And for making sure the rates they tax on those properties is enough to pay all of the bills. One of those bills is to pay the State what they need in order to pay all of their bills. The state would tax the local governments using a formula based on population, land value, ... whatever they come up with. County governments would have to come up with rates to bring in that much revenue. The states would have to turn around and fund the federal government too, so the same sort of formula would be used to decide what is a fair amount for each state to pay.
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