U.S. Tax Reform: Focus on Simplification & Streamlining

National discussion on how to change our U.S. income tax rates, and every other tax rates, requires national understanding of all of the exceptions and exemptions. We will be at the mercy of elected officials and media for the details, and those matter so much to the reality as opposed to the appearance of tax structure. 

Therefore, I propose we simplify and streamline all federal revenue and expenditure categorizations in the budget, and we keep all categories in the budget as opposed to the now many "off-budget" items. 

If we have fewer categories and easy-to-understand categories, then we can more easily see and adjust the revenue and expenditure formulas in ways that all of us can readily understand and subject to comment.

I propose simplifying our federal tax structure by reducing the number of tax types and tax rate exceptions, at first, to zero. 

Let's start from scratch on the revenue side with just the now enacted tax agreement of January 1, 2013. 

Let's rebuild the tangled chart of taxes, exceptions, and fees together in real time national discussions over the next few weeks. Together, let's build a simple, streamlined tax structure that clearly communicates to everyone.

We have catchall revenue categories like personal income tax, business income tax, excise tax, and service & permit fees. Then we have national insurances of Medicare, Social Security, Medicaid, and flood & natural disaster. And finally, we have fiscal policy revenues that are intended to tap specific activities for specific reasons.

Within personal income tax structure, we have salary income, bonus income, rental income, sale of assets income, dividends, interest, inheritance, gift, and prize-lottery-gambling incomes. Each of these types or sources of income are taxed differently -- different basis, different rates, and different exemptions. Let's simplify this.

Let's establish maxims, or guidelines, to use in categorizing revenues. For example:

- Let's separate benefit income and earned income. Inheritance, gift, prize, and lottery income are given between people in our personal lives. 

   --- Salary, bonus, rental, asset sales, dividends, and interest income are all derived through our business interactions. 

   --- Social insurances revenues are premium payments targeted from and to specific policy accounts we all have for old-age health, old-age pension, disability health & pension, and flood & natural disaster relief.

Let's establish maxims for expenditure, as well. For example:

   - Separate consumption vs. investment vs. social insurance expenditures, for example:

      --- Defense, State, Justice, CIA, Capitol Police, Secret Service, Treasury, Census, and Homeland Security departments are clearly consumption expenditures. 

      --- Commerce, Education, Interior, Housing & Urban Development, Health & Human Services, and Energy departments spend on programs that are directly investment expenditures. 

      --- Social Security, Medicare, Medicaid, and flood & natural disaster relief would be considered social insurance expenditures.

      --- Expenditures form the General Services Administration, for example, should be allocated to the departments & agencies which benefit directly from each service expenditure (e.g. computers, pencils & pens according to who ordered them and real estate property according to who occupies them).

Let's adopt at least the first three of the often-cited 'invisible hand' 18th century Scottish economist Adam Smith's "Maxims for Taxation" in his famous book "Wealth of Nations": 

   - First, base amount of payment on ability to pay

   - Second, make payment(s) due at times reasonably convenient for people and businesses, with consideration to such influences like the seasonal cycle and online.

   - Third, make the payment process cost the least possible amount to both collector and payer. 

Let's decide first and foremost what should and shouldn't our federal government do for us, as in what we do as a nation rather than independently, and this should be based on both the Constitution (e.g. Census) and the popular preferences (provided they are not directly prohibited by the Constitution). 

Now, please note that I approached this topic in the reverse order from which the decisions likely should be made, but that's because the issue is discussed publicly as "tax reform" rather than government operations.

In reality, I recommend starting with what we must and want our government to do; then setting overarching guidelines; then dividing into categories; and, finally, how much it costs for us as a nation to do these and how we as a nation will pay for it.

By Steven J Reichenstein