Achieving a “2020” Vision

I wouldn’t be surprised if people on the internet have already used this play on words, but seriously – why isn’t this a major campaign slogan yet? Even if the vision is inarticulate and 2020 has nothing to do with the objectives, it’s still a catchy phrase.

But I take it one step further by integrating it into a neat little tax plan. Specifically: 20% flat rate. $20,000 standard deduction. By 2020.  It’s that easy.

Here’s how my dream plan would work:

  • Repeal the current income tax code.  Replace with a 20% flat rate applied to all taxable income (including capital income).  This provision contains a lot of benefits, with some amendable drawbacks.  A flat 20% rate would be fair and efficient.  Everyone could calculate it (exactly 1/5 of their taxable income), and its simplicity would destroy the artificial need for tax-preparation services.  This saves the economy billions in both dollars & hours.  It is reasonably fair – proportionally, everyone pays the same, but the rich still pay more in absolute amounts.  It would not change the tax owed by those with capital income too much (already, the top rate on capital gains is around 20%).  Additionally, its simplicity is pro-poor, who often lack the resources for tax consultation services.  Granted, it would represent, in some ways, a “tax hike” for many lower and middle-income people (who previously had lower rates applied to their incomes).  But this can be at least partially (if not fully) offset by a much higher personal exemption and preservation/improvement of a few antipoverty tax-credits (see below).
  • Introduce a $20,000 personal exemption for all households, indexed to inflation.  Starting in 2020, this generous exemption amount would be fully phased in.  It essentially means that not a penny of every dollar up to $20,000 per year will have the income tax applied to it.  In this way, people at or near poverty would not see their tax burdens increased (for many, potentially decreased compared to the current system).  Indeed, it’s at least five times larger than the current personal exemption ($4,000) and provides complete relief to people whose income is nearly twice the poverty line ($11,770/year in 2015).  The exemption amount would be adjusted for non-real increases in income (e.g. inflation) on an annual basis, chained to the index of the candidate’s choice.  Such a high exemption amount should help pave the way for elimination (or near-elimination) of any deductions (especially itemized deductions, such as the mortgage interest deduction, which primarily benefits wealthy taxpayers).  Among the biggest benefits in the vision’s exemption provision is that it allows for some continued progressivity in the tax code.  For example, a person with $20,000 in annual income would pay 0% in income taxes ($20,000 total income – $20,000 exemption = $0 in taxable income * 20% = $0 in taxes = 0% of total income); in contrast, someone with an income of $100,000 would pay about 16% in income taxes ($100,000 total income – $20,000 exemption = $80,000 in taxable income * 20% = $16,000 in taxes = 16% of total income).  So, the effective tax rate is progressive (increases by income), but it is proportionally the same for everyone above $20,000.

And there you have it.  Those two elements – the 20% rate with the $20,000 personal exemption – form the 2020 in the plan.  Benefits, already described somewhat above, include:

  • Simple calculation
  • Elements of fairness (combo of progressivity and equal proportionality)
  • Would likely boost growth & efficiency of tax collections
  • Could very well boost economic growth
    • simple calculation = less time & resources devoted to calculation = higher productivity, savings
    • lower rates boost economic demand and/or supply

Drawbacks include an uncertain impact on the federal budget and the tax burden of the poor/middle class.  For the former, there is reason to think that this plan could well boost tax revenues (thereby helping to close the annual deficit).  The simple calculation of the tax could boost compliance, and the higher growth it could produce would mean higher incomes = more revenues.  Additionally, the elimination of many deductions and credits would save a ton of money; currently, federal tax expenditures total around $1 trillion per year.  As for the burden on the poor/middle class, this plan could entail the loss of several tax credits or deductions that currently benefit them.  To mitigate the impact, some of these credits/deductions could be maintained, but at the threat of making the plan less fiscally sustainable.  Additionally, the impact on those whose incomes are not high but fairly above the poverty line (e.g. those above $20,000, but not too far above) is concerning; it’s unclear whether the proposed tax plan would represent a sizable increase in their tax burden relative to the current system (despite the $20,000 exemption).  People will also scream that this is a tax cut for the rich (who face marginal tax rates of up to almost 40% in the highest income quintiles).  However, it’s important to remember that even the effective income tax rate of the richest in America usually comes in around 20%.  With the 20% rate applied to all of the income of the super-rich (except the first $20,000), their effective rate will basically be 20%.  And with the elimination of some of their favorite deductions and loopholes, it could even represent a tax hike for them.

For too long, our political system has been paralyzed by short-term thinking and an unhealthy attachment to everyday opinion polls.  Now more than ever is the time for policymakers to start projecting clear, attainable visions for the future, with workable frameworks.  When it comes to the tax code, this plan isn’t anywhere near perfect; not by a long shot.  But it’s a place for them to start.