Analysis Of Income Tax Systems

With income tax filing day 2011 upon us I present the above graph showing the history of income tax rates for both individuals & corporations from 1913 to the present along with the table below for individuals presented by FairTax National (with note from me in red) comparing the current system to the flat tax to the FairTax.  Please do your own analysis for your exact situation if you are so inclined - something I have personally never done.

 

Please note on the graph how fast the top marginal rates rose from their inception which is the problem with any income tax based system - the top rate for individuals went from 7% in 1913 to over 75% by 1920.

 

With re to corporations paying (or not paying) income taxes I hope that everyone (starting with Bill O'Reilly & Stuart Varney) listened to my explanation of why GE paid no corporate income tax in 2010 in my March 31 WRNJ FairTax interview.  The entire WRNJ broadcast is on ReturnToExcellence.net.  For starters only people pay corporate income taxes - whether consumers, shareowners, or employees.  The FairTax eliminates the corporate income tax meaning that none of us will ever pay this embedded tax again.  Please be assured that we did pay the compliance cost of the lobbyists & tax attorneys who prepared GE's 24,000 page return - people who were paid to create (with the help of Congress) or find the loopholes that let GE not pay any corporate income tax in America.  It is just that GE found paying the lobbyists & tax attorneys more advantageous & less costly than paying the corporate income tax rate shown on the above graph.

 

The below comparison uses a family of four (two adults & two children) making $100,000 per year.  To keep things simple there are no itemized deductions & the total income does not include any interest, dividends, or capital gains.  Also, it is presumed that the amount of payroll tax withheld equals the amount of tax paid & that there is no state income tax & the family spent their entire gross income on new goods & services in the case of the FairTax.  (Note from Doug - Both the employees' & employers' share of FICA payroll taxes are paid as part of the FairTax so the current & flat income tax systems' FICA payroll tax line item below should be doubled to 15.3% to properly compare this portion of these two tax systems to the FairTax.  Currently employees really pay the employers' share of FICA payroll taxes through their productivity-output that is compensated for by employers' paying the tax on the employees' behalf as part of employee total compensation.  Employers' share of FICA payroll taxes continue to be paid under both the current tax system & the flat tax - these FICA payroll taxes are just another embedded tax that is eliminated under the FairTax.)  

 

family of four, married filed jointly	Current	flat income tax	Fair Tax
marginal tax bracket	25.00%	17.00%	23.00%
gross income with no adjustments (wages only)	$100,000	$100,000	$100,000
personal exemptions	$14,600	$30,000	$0
Standard deduction (no itemizing)	$11,400	$0	$0
total taxable income	$74,000	$70,000	$100,000
1040 tax paid	$10,875	$0	$0
Flat tax paid	$0	$11,900	$0
Fair Tax (23%)	$0	$0	$23,000
Fair Tax rebate (23% of federal poverty level ($24,800)	$0	$0	-$5,704
total net taxes	$10,875	$11,900	$17,296
FICA payroll tax (7.65% of gross income)	$7,650	$7,650	$0
total tax paid	$18,525	$19,550	$17,296
tax paid as a percentage of gross income	18.53%	19.55%	17.30%
file return for refund	yes	yes	no