The Schafer Tax Plan

Reading Fred Wilson’s post about tax rates made me want to share my (incomplete) thoughts on taxation.

I’d like to see a Flat Tax on income with only a few tweaks to remove some of the inherent unfairness in that approach. I’m not sure if this is a model already proposed by someone else so I’ll immodestly call it the Schafer Tax Plan until I’m (inevitably) told this is not an original idea.

My goal here is to increase transparency, simplicity, compliance and fairness. I’d love to hear thoughts on ways those goals are not met with these proposals as well as suggestions on increasing them beyond what I’m proposing here.

Of course this is a “Clean Slate” approach to taxation. Other than starting a new country and applying these concepts I have no idea how this would implemented without financial chaos ensuing during the transition. Would a “big bang” approach (“everything changes January 1 2015”) be possible?

The Schafer Tax Plan

1. No corporate taxes.

Corporations aren’t people. Tax the companies’ shareholders as they earn income from their investments.

2. No sales, consumption or usage taxes.

These are all mechanisms of double taxation that obscure the taxation rate by hiding it in purchases of goods and services. This process also adds massive complexity to commerce and tax collection.

3. No welfare, child tax credits or old age security.

Don’t worry, I’ll deal with this in point nine below.

4. You are an individual if you are alive during a year.

Yes I’m radically suggesting that babies and old people are individuals for tax purposes. I’m not sure how to deal with cross-border income or transnational individuals.

5. A flat income tax of x percent on all individual’s income without regard to source or amount.

This becomes the only tax the government can collect.

I have no idea what “x” might be. Ideally we’d equal current tax the government collects less the savings from shuttering almost all of the income tax collection function of the government.

6. Income tax is deducted at source.

Income seems to be the easiest thing to tax other than consumption which I feel is regressive, complex and has compliance issues.

7. There are huge financial penalties for incorrect source deductions.

Compliance could be a big issue once taxes are collected through a single channel so a “big stick” is needed.

8. Individuals are not required to file tax returns.

The government already has your money. There is no need to report anything.

9. Individuals with annual income below y dollars may apply for a Cost of Living Credit if they wish.

This becomes the only means of redistribution of income to the needy.

I have no ideas what “y” would be. It would be nice if we could bring every individual above the poverty line with this credit. Not sure that is a good or reasonable idea. I’m also not sure how to deal with the credit coming after people need it (assuming you’d apply for the credit annually you’d only start getting the credits after your year of hardship).

Babies and old people can apply for this too. That ideally gets rid of the need for child tax credits or social security.

One potential downside is that this might make having babies economically advantageous. I tried to avoid having any concept of “family” in this approach. Maybe individuals under 18 get a different type of cost of living credit. This also means the kids of rich parents would get the Cost of Living Credit which doesn’t seem quite right.