Vivek Ramaswamy, the candidate running for the Presidential nomination from the Republican Party, has suggested switching the current progressive federal income tax system, to a flat tax or single rate system. He says that he would tax all income at a single rate of 12%. His idea is great, but it needs to be tweaked.
There is little information available about Vivek’s plan. In order for a 12% tax rate to be even close to revenue neutral, he would have to tax all income starting with the first dollar earned, with very few, if any, deductions. While that may be a great plan to stimulate GDP growth, it will never be enacted.
The reason is simple: Right now, about 47% of income earners pay no federal income tax at all. These are lower-class and lower-middle-class households. By taxing all income, these households will now have to pay at least some federal income tax, meaning his policy would be a tax increase for the lowest-income Americans. That won’t work.
A better solution, that can pass Congress and be signed by the President, is to allow a livable minimum of income to be earned before the tax rate is applied. The livable minimum should be twice the poverty level.
Further, all income should be treated the same whether from wages, rent, interest, profit, dividends or capital gains. There would be no deductions for anything. The corporate tax rate should also be 15%.
Since all income is taxed the same, the problem of taxing Capital at a lower rate than labor’s wage is eliminated, since all income, regardless of how it is earned, is taxed at the same rate.
How would that work?
For a family of four, the poverty level is about $25,000, so twice that would be $50,000. The median household income in the US today is $70,000. Computing the tax liability would be relatively simple.
If a family of four earned the median $70,000 in total income from all sources, they would simply subtract the livable minimum of $50,000 to get taxable income of $20,000.
Then just multiply the $20,000 taxable income by 15% and the tax liability is $3,000. It is a very simple and easy calculation that would not need tax accounts, tax lawyers or even a software program.
That plan would add significantly to economic growth raising GDP growth to the 4% to 5% annual range. That’s especially true if the new tax plan is coupled with reduced regulations. There would be no market distortions created by tax policy. Total tax revenue would be approximately neutral in the first year or two and would accelerate significantly in future years.
If the government wanted to give “tax breaks” to certain groups, like single mothers who have trouble paying daycare expenses, the livable minimum could be adjusted for her. If the government wanted to stimulate the economy by cutting taxes, the livable minimum could temporarily be raised.
This plan meets all the goals of income tax policy. It is easy to administer, causes no market distortions, raises sufficient revenue and is (arguably) fair and equitable.
Ramaswamy is emerging as a clear alternative to former President Trump. While a majority, or at least a plurality of Republics strongly favor Trump, there may be some complications with him moving forward. Vivek is a very good alternative.
He is very intelligent, self-made and he discusses his diverse views with the opposition in a very intelligent and non-confrontational manner. He is also young, conservative and has fresh ideas. If the country is ever going to bridge the deep divide we are experiencing today, we need exactly what Ramaswamy brings to the table.
His revised tax plan could be summarized as follows:
A 15% single-rate tax on all income above a livable minimum (twice the poverty level) with absolutely no deductions for anything. All income, whether from wages, rent, interest, profit, dividends or capital gains is treated the same. The corporate tax rate is also 15%.
This plan works, is easy to understand, will raise more future tax revenue and is equitable. Ramaswamy and all Americans should embrace this plan.
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