Tuesday, July 28, 2015

Healthcare Reform or Tax Reform

One of the greatest examples of political failing is, I believe, the Healthcare Reform Act. First, it's hard to imagine that a document so incredibly large actually did so very little. Second, it's hard to believe that no one has tackled the issue of tax reform yet. Third, everyone is now frustrated that their insurance premiums and out-of-pocket cost are going up so quickly.

Rather than beat a dead horse, however. I have a solution to both. Reform the outdated and over-complicated income tax system. Reduce the loopholes and smooth the graduated tax system. If we got rid of the Earned Income Tax Credit, then the "Penalty to work" would be greatly reduced. Here's my quick solution (obviously some actuaries somewhere would need to do some calculations to see how much money would be "saved", but I think it's a pretty good solution without going to a flat tax system).

First, get rid of all the "married" "head of household" and "individual" statuses for a tax return. That will solve the joint problem of people getting married or not getting married due to marriage benefits (or marriage penalty) for middle class 2 income families. Each adult person (21 and older) in the United States, regardless of income, will be required to file a tax return (but it will be so easy, they won't mind). There are no standard deductions or personal exemptions. There are very few loopholes, and almost everyone will pay something. There are very few questions - What is your total earned income from all sources? How many children (under age 22) live with you full-time ($5,000 deduction)? How much do you donate to tax deductible charities (deduction of up to 20% of initial income, limited to $100,000 annual deduction for high income earners)? Health insurance, retirement, home expenses, and education expenses will no longer be tax deductible.

If you are an adult, you must show at least 40 hours per year of community service or pay a minimum of $100 in Federal taxes, regardless of deductions (there will be an exemption for people who are totally disabled, but the definition of totally disabled will be difficult to meet).

The tax brackets would need a bit of adjusting, and I would add a 5% tax bracket and take the top two brackets.

I'm thinking something like this:

After deduction income of
$0-$10,000 = 5% tax bracket. $100 minimum applies, which will be waived with 40 hours per year of community service.
$10,000-$60,000 = $500 + 10% of amount over $10,000.
$60,000 - $100,000 = $5,500 + 20% of amount over $60,000
$100,000 and up = $8,000 + 30% of amount over $100,000

Here's the thing, since healthcare expenses, retirement, and home expenses are no longer deductible, there will be a few other changes and adjustments with this new system. First, I would expect that along with this bill, an actual healthcare reform system is put in place to provide free healthcare for all Americans (there should be significantly more tax revenue with this system). Second, I would propose increasing the minimum wage for everyone 21 and older to $10 an hour (teens and college kids can still keep the minimum wage at $7.50). Second, I would ensure that a national maternity insurance program be put in place and charged directly to all employers regardless of how many women they employ. This insurance would cover all women who have been working at any job during 10 our of the 12 months prior to giving birth. They would receive 50% of their income for 12 months or 75% of their income for 9 months. Third, I would reform the Social Security system, there would be a gradual transition to a combination self-directed (if desired) system and an increased pension based system. Fourth, the public education system would provide optional child care between 8am and 6 pm for all children 2 years and older. This program would be free for any parent with kids living with them full-time with income between $20,000-$40,000 per year before deductions.

So here are a couple of examples so you can see how it would work out for an "average" family.

Single person, no kids, $40,000 per year. Taxes paid, $3,500 unless they choose to donate to charity.

Single parent, low income family with 3 kids. $20,000 per year income ($10 per hour). After deductions for their children, they only have $5,000 of "taxable income". At 5% they would pay $250 in Federal taxes.

Two-income earner family with 2 kids. There are a few "choices" here to make (who to say the kids "live with" since each adult has to fill out their own tax form). Generally, the highest income earner will want to include both kids. So let's say Parent A makes $50,000 and claims both kids, Parent B makes $35,000. Parent A would pay $3,500 in Federal taxes, Parent B would pay $3,000 in Federal taxes. Total of $6,500 per year in Federal taxes.

High-income earner. $200,000 one-income (two parent) family with 2 kids. Parent A makes all the income and would pay $38,000 in Federal income tax. Parent B would also have to pay $100 despite not having any income, unless they choose to volunteer at least 40 hours per year.

Here's the thing, most people will probably pay more under this tax system because of the reduced deductions and loopholes. The extra money would go towards the reforms that are actually needed, paying for health care, supporting childcare, and providing national jobs for people who can't find private sector jobs (there should be plenty of child-care jobs, construction jobs, healthcare jobs, etc.).

Because employers are no longer paying so much for health insurance, retirement accounts, etcetera, they are likely to pay their employees significantly more, thereby lessening the tax burden, AND increasing the tax base without raising prices.

Also, because families are not paying so much for healthcare and childcare, even low income families would be better taken care of than when the government has been paying them.

I think it's a win, win, win situation. The real problem is that the only thing politicans hear is the speeches from the many lobbyists who want to add more loopholes or more spending to the Federal budget to meet their own needs. That makes it hard for them to think about the plight of the average American, the massive National Debt, or even how to fix the many broken systems currently in place (welfare, Social Security, employment, schools).

Again, I'm no actuary, but wouldn't it be great if someone in the government ran the numbers to see if something like this could actually work, instead of complaining about what they "can't" do because of partisan politics?
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