1. 0 10 20 30 40 50 60 70
rank ordered percentile of earners
20 k
30 k
40 k
50 k
60 k
aftertaxincomeindollars
poverty line income
progressive: linear
flat: 0% deduction
proposed model
0 10 20 30 40 50 60 70 80 90 100
rank ordered percentile of earners
0
10
20
30
effectivetaxrate(percentage)
progressive: linear, 0% deduction
flat: 0% deduction
proposed model
Focusing on 2003 data as an illustrative example, market income across all
households was described using (A) lognormal and (B) K-function distributions [1],
where the latter function is accurate to within 5% error across all income brackets.
Inputting the tax revenue to be collected, the poverty line and limits on deductions:
The maximum and minimum tax burden is calculated for all income levels. Three free
parameters of the tax model were varied and the results compared to a flat tax
system (a special case of the proposed model) and a progressive tax system to
elucidate the effects of the tax.
ABSTRACT FACTS ABOUT TODAY’S TAX SYSTEM
A simple tax system that eliminates poverty while strengthening the economy without disproportionate tax burden
Yihuan Song1, and Donald J. Jacobs2
1 The Belk College of Business, University of North Carolina at Charlotte, Charlotte, NC, 28223 USA
2 Department of Physics and Optical Science, University of North Carolina at Charlotte, Charlotte, NC, 28223 USA
.MODELS FOR INCOME DISTRIBUTION
(B)
COMPARING TO FLAT AND PROGRESSIVE TAX MODELS
Due to the complicated and confusing US tax system, most taxpayers do not
understand the properties of the tax burden, such as which income bracket pays the
most tax in terms of an effective tax rate; how much tax revenue is redistributed to
counter poverty; and, how is the income gap between rich and poor modified.
From IRS and Census Bureau data, the Gini index of the United States is
moving toward 0.6, which marks a dangerous zone according to United Nations
standards. A recent report (June 2013 by US Government) stated that 26% of all
households in the US lives below the poverty line. To eliminate poverty while
strengthening the economy across all income levels, we propose a new individual
income tax system that has a single tax rate for all income levels, set minimum and
maximum deductions, and has government transfers that are taxable and non-
deductible.
(A)
15% of people lives in poverty in 2011
Warren Buffet's effective tax rate is only around 11% based on his adjusted
gross income, which is lower than his secretary’s tax rate.
According to a letter Buffett sent to the Congress, the billionaire had adjusted
gross income in 2010 of $62,855,038, taxable income of $39,814,784, and a federal
income tax bill of $6,923,494. That makes his effective tax rate, as a percentage of AGI,
just 11.06%
Taxation is the way a country obtains revenue, and
the tax system has significant impact on politics,
economics and the whole society. Last year, the United
States collected 1,132 billion dollars from individual
income tax, which contributed the largest portion (42%) of
government revenue (Jan 2012 by US government)
REFERENCES
Ref 1: F. Clementi, T. Di Matteo, M. Gallegati, G. Kaniadakis, The K-generalized distribution: A new
descriptive model for the size distribution of incomes (Physica A: Statistical Mechanics and its
Applications, 2008)
Figure 1: SOURCE: TPC, Table T12-0018 Effective Federal Tax Rates by Cash Income Percentile;
2011, February 2012.
Figure 2: Source: http://statchatva.org/2012/10/10/a-trend-is-your-friend-the-latest-unemployment-
and-poverty-numbers
Figure 3: Source: Census.gov, Table H.4
Why is the ETR for only the
top 0.1% NOT progressive?
The ETR can be much lower than
the nominal tax code rates due to
loopholes, but this difference is small
for the bottom 99% of the population
when ranked ordered by income.
Does the tax model currently
being used prevent poverty?
In 2011, the official poverty rate was
15%, meaning 46.2 million people
remained in poverty after government
transfers were distributed. The poverty
rate in 2011 for children under the age
of 18 was 21.9% and today it is 23%.
Does the current tax model
maintain a strong middle class
while reducing federal debt?
A Gini index less than 0.4 indicates an
economy with a strong middle class.
Disparity between rich and poor reaches
a dangerous level when the Gini index
hits 0.6 according to the United Nations.
Federal debt continues to increase every
year, and is now over 16 trillion dollars.
OUR PROPOSED TAX MODEL
SAMPLE TAX FORM
KEY BENEFITS
Only our proposed tax model provides
considerable incentive for a low income
household to reduce its dependency on
government assistance. The households
requiring the greatest assistance will pay
the greatest effective tax rate. Moving from
100% to 0% dependence on government
assistance, the after tax income of a low
income household will increase by about
$12,000 a year, which is a 50% increase!
Poor: Government assistance eliminates
poverty while the regressive nature of tax
deductions strongly discourages generational
dependence and encourages self-reliance.
Middle class: Low effective tax rates derive
from tax deductions that encourages investing
to own property and grow retirement funds that
fuel the economy. After retirement, return on
these investments will reduce the effective tax
rate a second time because the need for
supplemental government assistance is less.
Rich: Massive government subsidies in the
form of capital loss deductions encourages
investing in the economy. By eliminating the
notion of a progressive tax rate; tax burden is
not disproportionate by income. Consequently,
wealth saturation is not possible; eliminating
government limits on how rich a person can be.
Government subsidies are given to the
poor in the form of government transfers.
Government subsidies are given in the
form of itemized deductions that mainly
benefits the middle class.
Government subsidies are given in the
form of capital loss deductions that
mainly benefits the rich.
Government transfers are taxed
but cannot be deducted. Limited
deductions on market income is
available to reduce tax liability
while boosting the economy.
How well does the current tax
model work?
Effective tax rate = ETR
ETR = (Tax paid) ÷ (Total income)
Negative effective tax rates result
from government transfer, which
means tax refunds and credits are
greater than tax liabilities.
WHY THE V-SHAPE?
SUBSIDIES? YES, WE HAVE!
Figure 1 Effective tax rate on individual income alone
Figure 2 Official national poverty rates (1980-2011)
Figure 3 Gini Index for households, 1967-2010
ü Income of any level and any type is taxed at a single flat rate.
ü Each year the elastic tax rate is adjusted so that the tax revenue covers the
projected government spending budget, which eliminates runaway deficits.
ü Subsidies to the poor through government transfers eliminates poverty.
ü Deductions on market income are available, but not on government transfers.
ü Capital loss deductions are available, which mainly benefits the very wealthy.
ü Large standard deductions strongly discourages government dependency.
ü Additional itemized deductions fuels personal financial growth, which benefits
all self-reliant households, but is especially beneficial for the middle class.
SUMMARY
ELASTIC OUTPUT
SD = $35,879
Tax rate = 34.726%
Note: MD = $35,879 + $8,733
ECONOMIC INPUT VARIABLES
MTR = $1,952,929,045,000
Based on estimated deficit free budget
PL = $23,419 for a family of 4
MD = $44,612 median income
MPI = 100% ETR=0 is possible
EXAMPLE MODEL PARAMETERS
MTR = Minimum Tax Revenue
PL = Poverty Level
MD = Maximum Deduction
MPI = Maximum Percent of Income
Income distribution from previous year
Calculate the single tax rate
and standard deduction (SD)
WHAT ABOUT AFTER-TAX INCOME?
A simple approach that balances the needs of the poor, middle class, rich and government.
Government: Runaway deficits are eliminated
using a floating tax rate to obtain a minimum tax
revenue to cover the estimated spending budget.
The tax code is simple, transparent, and easy to
implement, including short term transitional code
that overlays this model on the existing tax code.
NOTE: For simplicity and to make direct comparisons
between different types of tax systems, we assume
individual income tax is the only source of tax revenue.
Observations show the current tax model FAILS the poor, middle class, rich and government.