Outline

1) All income – earned, interest, dividends, capital gains, business net income, etc. – will be taxed at the same income tax rate to be set by Congress, say 25%. Prior year(s) business losses would be carried over to the next year. Distributions paid to owners and stockholders of businesses will be deducted from net income of the businesses, and the owners and stockholders will declare these as income on their personal returns, thus avoiding double taxation.

2) Personal exemptions will be set by the government at the poverty line – $20.650 for a family of four as of January 2008. Each family unit will be permitted 2 exemptions for the first member, and one exemption for each additional member/dependent. Therefore the exemption amount for 2008 would be $4,130 each ($20,650/5). 

3) Personal deductions will be work-related expenses, medical expenses, medical and long-term care insurance, mortgage interest and property taxes or rent expense on primary residence, education and childcare expenses paid including interest, charitable contributions and casualty and theft losses. 

4) Tax credits will be given for all federal, state and local income taxes paid or deducted and all payroll taxes paid or deducted.

Reasoning

1) All net income and gains should pay tax by the individuals that benefit from them. Most flat tax proposals exempt investment income earned by individuals, and there is something very unseemly about an investor earning multimillions of dollars tax free while the blue collar worker pays his taxes on his earned income of much lesser value. By taxing all net income and gains to the individuals who benefit from them this inequity and political charge is removed.

2) Although there will be only one income tax rate for real persons and businesses, a system of personal exemptions, personal deductions and tax credits will make the actual income tax rate progressive, will protect the poor from paying any income tax, and will be fair to the middle class. 

3) The personal exemption recognizes that is costs something just to survive in this society. 

4) The personal deductions recognize some to the special costs of living. Work-related expenses have been allowed in the past, and should be, because businesses are allowed to deduct them. Medical expenses, medical insurance and long-term care insurance have been allowed in the past but with limitation; they should be allowed as deductions without limitation, especially since they can be a great burden and sometimes the cause of even bankruptcy. Mortgage interest has been permitted on up to 2 homes in the past. This proposal would limit it to one home, include the property taxes, and extend a deduction for the rent paid by renters in the name of fairness. Education and childcare expenses have become significant in recent years. These expenses and the interest paid on them should be deductible from income, because they contribute to building this society by making better citizens. Charitable contributions make for a better society as well. And finally losses by casualty and theft should be deductible, because we are a caring society, and these can have a terrible effect on one’s finances.

5) The tax credits could even be used like the earned income tax credit is now to provide more money to the working poor. The tax credit for state and local income taxes will even out the burden of these income taxes, and the tax credit for all other payroll taxes will more fairly lessen the burden of income based taxes on the poor and the middle class.

Summary

I am a small business accountant by profession. As I looked about to the existing proposals for the flat tax and the so-called fair tax, I did not see in them the elements of what I consider true fairness and those elements that conservative Republicans like me and Democrats could agree upon in the current politically-charged environment.

It seemed to make sense to me to combine a flat tax approach to the current income tax with concern for the poor and the middle class. Better minds than mine may need to rework the macro-economic numbers, especially the actual rate that would make it revenue neutral, but I think that this proposal would have a reasonable chance of acceptance by a wide variety of interested parties.