OneTax
Encyclopedia
The OneTax is a tax reform
plan and proposed amendment
to the United States Constitution that eliminates the federal income tax
for all individuals earning less than $215,870. The OneTax is described as revenue-neutral, which means that it compensates for lost revenue from the income tax by closing loopholes and eliminating tax expenditures in the current income tax system.
system imposes higher costs of tax compliance than any other country, with direct costs exceeding $460 billion, and indirect deadweight loss
costs of over $1.2 trillion. As this figure was calculated in 2004, it is likely that the actual current deadweight loss caused by the income tax is more than $1.4 trillion. As a national sales would create comparable deadweight loss, tax reform plans like OneTax aim to reduce or eliminate income tax compliance costs without instituting a national sales tax.
and flat tax
, both of which are regressive with regards to income. The first recorded mention of this reform by a political candidate for national office was at a "Town Hall" campaign event held in Smithfield, Rhode Island in 2002. In 2011, the Republican Presidential Primary race brought tax reform proposals to the fore. In addition, discussion of the plan as a way to eliminate the income tax for "the 99%" has become a topic of the Occupy Movement
.
, but carves out taxes on income to remain in place for two specifically defined ways:
1. The United States federal government may tax income on those individuals earning more than ten times the per capita
income
as determined by the most recent census
.
2. The United States federal government may continue to collect a payroll tax
on all workers, the proceeds of which are earmarked for exclusive transfer to, or provision of health care benefits for, those persons aged 65 or older.
. These two items alone should create an immediate boost of more than $2.1 trillion to the lagging U.S. economy.
Others argue that the current low rate of tax on capital gains encourages investment and is necessary for the long-term stability and growth of the United States and world economy. Meanwhile still others, such as Warren Buffett
claim that higher tax rates on the rich do not discourage investment and growth.
) was $867 billion dollars. The total taxable income for those making $200,000 or greater was $1.663 trillion dollars. Therefore, to remain revenue neutral, shifting the income tax to those earning more than $200,000 would require an effective rate of 52%. The total taxable income for those making $200,000 or less is $3.46 trillion dollars.
OneTax supporters claim that the proposal addresses these concerns not by raising the top marginal rate, but by eliminating other loopholes created for high income earners. Fewer than 30% of Americans realize that the payroll tax generates almost as much federal revenue as the income tax. Currently, all earnings above $106,000 are exempt from the payroll tax, meaning that the majority of federal taxes collected on the middle class are collected through a regressive tax
. Eliminating this exemption raises the highest effective marginal tax rate to about 48% - similar to the effective tax rate currently paid by small business owners with incomes below $150,000. This change, combined with the elimination of other exemptions, it is argued, allows the OneTax to remain revenue neutral despite eliminating income tax filing for more than 98% of American households.
Tax reform
Tax reform is the process of changing the way taxes are collected or managed by the government.Tax reformers have different goals. Some seek to reduce the level of taxation of all people by the government. Some seek to make the tax system more progressive or less progressive. Some seek to simplify...
plan and proposed amendment
Amendment
Amendment may refer to:*A change made to a pending motion or bill by a motion to amend*An improved change made to a previously adopted law or motion*A change made to a contract*Constitutional amendment, a change made to a written constitution...
to the United States Constitution that eliminates the federal income tax
Income tax in the United States
In the United States, a tax is imposed on income by the Federal, most states, and many local governments. The income tax is determined by applying a tax rate, which may increase as income increases, to taxable income as defined. Individuals and corporations are directly taxable, and estates and...
for all individuals earning less than $215,870. The OneTax is described as revenue-neutral, which means that it compensates for lost revenue from the income tax by closing loopholes and eliminating tax expenditures in the current income tax system.
Background
The current United States income taxIncome tax in the United States
In the United States, a tax is imposed on income by the Federal, most states, and many local governments. The income tax is determined by applying a tax rate, which may increase as income increases, to taxable income as defined. Individuals and corporations are directly taxable, and estates and...
system imposes higher costs of tax compliance than any other country, with direct costs exceeding $460 billion, and indirect deadweight loss
Deadweight loss
In economics, a deadweight loss is a loss of economic efficiency that can occur when equilibrium for a good or service is not Pareto optimal...
costs of over $1.2 trillion. As this figure was calculated in 2004, it is likely that the actual current deadweight loss caused by the income tax is more than $1.4 trillion. As a national sales would create comparable deadweight loss, tax reform plans like OneTax aim to reduce or eliminate income tax compliance costs without instituting a national sales tax.
History
The OneTax and plans like it was first created in the 1990s by policy wonks outside the beltway, seeking to put forward a tax simplification plan that wasn't regressive. At the time, the major tax reform proposals were the FairTaxFairTax
The FairTax is a tax reform proposal for the federal government of the United States that would replace all federal taxes on personal and corporate income with a single broad national consumption tax on retail sales. The Fair Tax Act would apply a tax once at the point of purchase on all new goods...
and flat tax
Flat tax
A flat tax is a tax system with a constant marginal tax rate. Typically the term flat tax is applied in the context of an individual or corporate income that will be taxed at one marginal rate...
, both of which are regressive with regards to income. The first recorded mention of this reform by a political candidate for national office was at a "Town Hall" campaign event held in Smithfield, Rhode Island in 2002. In 2011, the Republican Presidential Primary race brought tax reform proposals to the fore. In addition, discussion of the plan as a way to eliminate the income tax for "the 99%" has become a topic of the Occupy Movement
Occupy movement
The Occupy movement is an international protest movement which is primarily directed against economic and social inequality. The first Occupy protest to be widely covered was Occupy Wall Street in New York City, taking place on September 17, 2011...
.
Implementation
The core piece of the reform is a proposed Constitutional Amendment which repeals the Sixteenth Amendment to the United States ConstitutionSixteenth Amendment to the United States Constitution
The Sixteenth Amendment to the United States Constitution allows the Congress to levy an income tax without apportioning it among the states or basing it on Census results...
, but carves out taxes on income to remain in place for two specifically defined ways:
1. The United States federal government may tax income on those individuals earning more than ten times the per capita
Per capita
Per capita is a Latin prepositional phrase: per and capita . The phrase thus means "by heads" or "for each head", i.e. per individual or per person...
income
Income
Income is the consumption and savings opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings...
as determined by the most recent census
Census
A census is the procedure of systematically acquiring and recording information about the members of a given population. It is a regularly occurring and official count of a particular population. The term is used mostly in connection with national population and housing censuses; other common...
.
2. The United States federal government may continue to collect a payroll tax
Payroll tax
Payroll tax generally refers to two different kinds of similar taxes. The first kind is a tax that employers are required to withhold from employees' wages, also known as withholding tax, pay-as-you-earn tax , or pay-as-you-go tax...
on all workers, the proceeds of which are earmarked for exclusive transfer to, or provision of health care benefits for, those persons aged 65 or older.
Effects
The primary effect is the elimination of the present personal income tax system and the elimination of 97.6% of all personal income tax compliance costs, and the elimination of more than 96% of the current deadweight lossDeadweight loss
In economics, a deadweight loss is a loss of economic efficiency that can occur when equilibrium for a good or service is not Pareto optimal...
. These two items alone should create an immediate boost of more than $2.1 trillion to the lagging U.S. economy.
Controversy
It is not in dispute that the OneTax will lead to higher effective tax rates for higher-income individuals (or it will lead to significantly lower federal spending). Many opponents of such tax changes argue that the country's highest income earners are the economy's "job creators". These opponents claim that taxing wealthy individuals at a higher rates will discourage job creation.Others argue that the current low rate of tax on capital gains encourages investment and is necessary for the long-term stability and growth of the United States and world economy. Meanwhile still others, such as Warren Buffett
Warren Buffett
Warren Edward Buffett is an American business magnate, investor, and philanthropist. He is widely regarded as one of the most successful investors in the world. Often introduced as "legendary investor, Warren Buffett", he is the primary shareholder, chairman and CEO of Berkshire Hathaway. He is...
claim that higher tax rates on the rich do not discourage investment and growth.
Revenue neutrality and effective tax rate
Critics argue that the OneTax cannot be revenue neutral within raising the top marginal income tax rate above 39.6%. In 2009 (the most recent year for which the IRS publishes statistics), total income tax collected (not including payroll taxPayroll tax
Payroll tax generally refers to two different kinds of similar taxes. The first kind is a tax that employers are required to withhold from employees' wages, also known as withholding tax, pay-as-you-earn tax , or pay-as-you-go tax...
) was $867 billion dollars. The total taxable income for those making $200,000 or greater was $1.663 trillion dollars. Therefore, to remain revenue neutral, shifting the income tax to those earning more than $200,000 would require an effective rate of 52%. The total taxable income for those making $200,000 or less is $3.46 trillion dollars.
OneTax supporters claim that the proposal addresses these concerns not by raising the top marginal rate, but by eliminating other loopholes created for high income earners. Fewer than 30% of Americans realize that the payroll tax generates almost as much federal revenue as the income tax. Currently, all earnings above $106,000 are exempt from the payroll tax, meaning that the majority of federal taxes collected on the middle class are collected through a regressive tax
Regressive tax
A regressive tax is a tax imposed in such a manner that the tax rate decreases as the amount subject to taxation increases. "Regressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from high to low, where the average tax rate exceeds the...
. Eliminating this exemption raises the highest effective marginal tax rate to about 48% - similar to the effective tax rate currently paid by small business owners with incomes below $150,000. This change, combined with the elimination of other exemptions, it is argued, allows the OneTax to remain revenue neutral despite eliminating income tax filing for more than 98% of American households.