Individual Taxes


Individual Income Taxes

 

Overview:

Individual income taxes were $1,132 billion in FY2012 and made up 46% of all tax receipts of the Federal Government in that year. For FY2013, they were $1,316 billion and were 47% of all tax receipts of the Federal Government in that year.

 

The source of these figures was from The Office of Management and Budget website, the historical figures page. The FY2013 figures from OMB are now finalized and the FY2014 are estimates and will not be finalized for some time. 

 

Considerations:

To raise additional receipts for the Federal government, we have divided the possibilities into 4 areas: rates, income types, credits, and deductions.

 

a). Rates

To produce more income, one method is to increase the current rates of taxation.

The following are some of the proposals with the income generated.

 

  1. Restore the higher individual income tax rates before the Bush tax cuts. The rates today are 10%, 15%, 25%, 28%, 33%, and 35%. The new rates would be 15%, 28%, 31% and 39.6%. This will generate $400 billion in new taxes per year.
  2. Restore the higher individual income tax rates before the Bush tax cuts on the highest 2 tax brackets. This will generate $44 billion in new taxes per year.  This has been done.  Wonderful!

 

b). Income types

To produce more income, another method is to remove special tax rates for specific types of income. The following are some of the proposals with the income generated. It should be noted that tax fairness would suggest all income should be treated in the same manner.

  1.  Subject capital gains to regular income tax rates. The current maximum capital gains tax rate is 15% (0% for those in the 10% and 15% tax bracket). In addition, move the capital gains holding period from 1 year to 5 years (a 1 year holding period is speculation, a 5 year holding period is an investment). This will generate $69 billion per year.
  2.  Alternatively, raise capital gains rates to 20%. This will generate $36 billion per year.   This has been done for higher income individuals. 
  3. Alternatively, move the cpaital gains holding period from 1 year to 5 years as a 1 year holding period is mere speculation rather than an investment. This will generate $59 Billion per year.
  4.  Subject dividends to regular tax rates. This change in rate came with the Bush Tax Cuts in 2000. This will generate $21 billion per year.
  5.  Subject all social security income to regular income tax rates. It now goes thru a complex calculation presently and is only partially taxed. This is unscored.
  6.  Subject employer paid commuting costs to regular income taxation. They are presently exempt. This will generate $10 billion per year.
  7.  Subject the gain from the sale of a personal residence to regular income tax rates. There is currently a $250,000 exemption ($500,000 for married, filing jointly). This will generate $19 billion per year.
  8. Subject all assets in an estate to capital gains at death. This will generate $38 billion per year.
  9.  Subject Flexible Spending Account withholdings to Individual Income Taxes. This is unscored.
  10.  Subject Cafeteria Plan Employer expenditures to Individual Income Taxes. This will generate $30 Billion per year.
  11.  Subject Health Insurance Employer expenditures to Individual Income Taxes. This will generate $107 Billion per year.
  12. Tax carried interest/profit interest of investment partnerships (either in hedge funds or private equity funds) as ordinary income.

 

c). Credits

To produce more income, another method is to remove certain credits.

  1. Remove the credit for low income housing. This will generate $10 billion per year.
  2. Remove the earned income credit. This is one of the most prevalent areas subject to fraud in the entire US Tax Code. This will generate $58 billion per year.

 

d). Deductions,

To produce more income, another method is to cap deductions or eliminate them.

  1. Cap itemized deductions at $50,000. This will generate $75 billion per year.
  2. Cap itemized deductions at $25,000. This will generate $118 billion per year.
  3. Cap itemized deductions at 28%. This will generate $71 billion per year.
  4. Reinstate limits on itemized deductions/phase out personal exemptions. This will generate $17 billion per year.
  5. Cap the interest on the principal residence to interest on  a $750,000 mortgage.
  6. Make second home mortgage interest non-deductible.
  7. Make home equity loan interest non-deductible.

 

The estimated increases in tax revenue are from several sources including the Joint Committee on Taxation, the Office of Management and Budget, the Congressional Budget Office, the US Treasury, and the Tax Policy Center.

 

Proposals:

  1. Simpson Bowles Plan
  2. Domenici Rivlin Plan
  3. Heritage Foundation Plan
  4. Cato Institute Plan
  5. United We Stand Plan as below

 

United We Stand Plan:

Rates:

1.  Restore the higher individual income tax rates before the Bush tax cuts on the highest 2 tax brackets. This will generate $44 billion in new taxes per year.  This has been done.  Wonderful!

 

Income Types:

2.  Change the capital gains holding period from 1 year to 5 years (a 1 year holding period is speculation, a 5 year holding period is an investment). This will generate $59 billion per year.

3.  Subject dividends to regular income tax rates. This change in rate came with the Bush Tax Cuts in 2000. This will generate $21 billion per year.

4.  Subject all social security income to regular income tax rates. It now goes thru a complex calculation presently and is only partially taxed. This is unscored.
5.  Subject employer paid commuting costs to income taxation. They are presently exempt. This will generate $10 billion per year.
6.  Subject Flexible Spending Account withholdings to Individual Income Taxes. This is unscored.
7.  Subject Cafeteria Plan Employer expenditures to Individual Income Taxes. This will generate $30 Billion per year.  

8.  Tax carried interest/profit interest of investment partnerships (either in hedge funds or private equity funds) as ordinary income.  This is unscored.

 

Credits:

9. Remove the earned income credit. This is one of the most prevalent areas subject to fraud in the entire US Tax Code. This will generate $58 billion per year.

 

Deductions:

10. Cap itemized deductions at $50,000. This will generate $75 billion per year.

11.  Cap the deductible interest on a principal residence to the interest on $750,000 mortgage. This is unscored.

12.  Make second home mortgage interest non-deductible. This is unscored.

13,  Make home equity loan interest non-deductible. This is unscored.

 

Overall this will generate $297 billion per year of additional taxes or 46% of our current deficit.