The Johnson Tax Code

- HJ - Nov 27, 2000 - Rev Jan 25, 2006 -

I have long thought about new ways to simplify our tax codes and provide a comprehensive welfare program at the same time. I believe the greatest difficulty facing any new or revised tax system proponents would be simply getting it passed onto law. Our current tax codes are so complex and full of corporate and individual welfare programs in the various specific deductions, abatements, rebates, exemptions and other complicated falderal that an army of attorneys, accountants and other tax consultants has grown just to interpret these laws for the public. I would really like to know just how much it costs the people to support this monster and the corresponding counter organization in our governments. I will wager it is in the billions!

The IRS code is an effective welfare program for attorneys, accountants and other tax professionals. For that single reason it will be difficult to simplify. Like so many of our increasingly complicated laws, it is written specifically so attorneys are required to interpret it. I see a great reluctance in our overwhelmingly attorney-based congress to pull this financial rug out from under so many of their professional colleagues. How many ex-IRS people are among those tax professionals? I know of several so there must be tens if not hundreds of thousands of them making their living on the backs of working people because of the IRS code. That army against simplification would be galvanized against any revision and especially against the plan outlined in these pages which could completely do away with the need for their services.

In looking for a workable plan, I set down the following criteria:

A) It should not be used for benefit of certain organizations, groups, industries, individuals or pet causes of members of Congress. NO EXEMPTIONS! Let Government grants do that job so recipients of handouts would all be identified with those who did the handing out.

B) It would not be “fair” as that is such a relative term, so abused by politicians as to be totally meaningless. It should be designed to treat all people equally, not “fairly” as that still has some objective value and meaning.

C) It must have simplicity in all facets so most people can understand it and know where they stand, how to figure out their taxes and know the other guy hasn’t gained an advantage by hiring a tax professional.

D) It should make cheating extremely difficult and quite obvious, even for the most expert cheat. Policing should then become easy and enforcement costs relative to collections should drop dramatically.

E) No loopholes of any kind should be left open and provisions should be made to immediately close any kind of loophole which may appear at any time in the future.

F) The “Negative Tax” concept should be used to provide welfare in such a way that it encourages people to work to make a better living while providing a base income for those who can’t work either temporarily or permanently.

G) As optional components, provisions could be made for healthcare and Social Security that would provide superior results for less money.

H) The individual states should administer and collect the tax and be charged with reporting all tax receipts and passing the Federal portions on to the Federal Government.

I) Extreme income and wealth of individuals should have special status and be subject to higher tax rates than the average American. These rates should not be so high as to inhibit individual enterprise or creativity. These should also consider those who receive high incomes over short periods in their lives by averaging out that income over the individual’s lifetime.

J) It should address trade with other nations for a possible application of special taxation applied to benefit those nations where we have special interests or needs.

K) Properly designed, it could replace all the myriad taxing systems: federal, state, county and city. As outlined here it would replace only the federal and state systems.

I came up with a three pronged system of taxation as follows:

I - A Transfer Tax on all things of value

A) The individual states responsibility: The individual states would administer the tax and set the amount of the tax which must be at least 8%. The states would then be responsible for collecting the tax and paying the Federal Government their share of the tax revenue. This tax would be applied equally to all transfers of property between individuals and/or organizations.

B) The Added Value Tax: For the benefit of commerce, the tax would apply at the time of the transfer and exempt the item or items from any additional tax on the original value for a period of one year from the originating transfer. If the item is transferred again during that year, a tax at the same rate would be applied to any increase of value over the amount original taxed. Reporting and payment of the tax would be handled by the party who originally owned the item. This is precisely the system used to collect sales taxes in our current state systems except there would be no tax-free sales.

C) All property transfers would be included: This would cover exchanges of all kinds of property, including even trades without any money being involved. Included would be real property of any kind including all personal items, real estate, stocks, bonds, cash, and any other item that has value. Also included would be things like patents, copyrights, legal judgements, fees for any kind of service, and all intangibles exchanged for money, goods, or services. The same rules and relatively low tax rate would apply to gifts, inheritances, money transfers of any kind where ownership passed from one person and/or organization and another. The only transactions exempt from this tax are wages and amounts paid directly to an individual for labor. Fees for services paid to corporations, businesses and recognized professionals would not be exempt.

D) Not-for-profit entities: The only possible exception would be the transfer to any legitimate not-for-profit enterprise. The structure for determining and identifying those enterprises are already in place. Any transfer from those not-for-profit enterprises to another person or entity would be taxed at the normal rates except for true charity donations. Should that charitable gift be turned into cash for any reason, the tax would then be applied.

E) The very few exceptions: Since most personal gifts would be given during the year following purchase they would not be taxed as gifts. Large gifts of considerable value like real estate, stocks and businesses with values more than thirty thousand dollars, may not have been transferred or taxed during the preceding year and are special cases. Gifts of property to members of the immediate family would be exempt from the tax on the established basis currently in use.

F) Possible abuses by low transfer value: There must be provision to prevent abuses such as a sale of property for an amount far less than the current value for the purpose of establishing a low tax basis. In such instances where sales or transfer values are deemed to be lowered for the sole purpose of lowering the tax, the tax paying entity who originated the transfer becomes responsible for justifying the value. Means to determine actual market value of property are well established and should be used in these cases. Should the appraised value be more than that used as the tax basis, the standard tax rules and rates will apply to the appraised value. A penalty equal to the total amount of the additional tax will also be applied. Should the difference be small, the additional tax and penalty will be small, thus protecting honest errors. If the appraised value is less than the tax basis used there will be no tax or penalty.

There is another effective way to block these kinds of abuses, bidding. All sales or transfers over a certain amount ($5,000 for instance) could be made subject to a bidding procedure similar to that used by Ebay. Example: An individual sells a piece of property of any kind for $10,000. This is then listed on a bidding entity (like Ebay) with the minimum bid placed at $11,000 or 10% above the stated value or sale price. Anyone, including the original seller could then bid on the property. The highest bidder would then pay the transfer tax on the amount of the bid. Once the bidding was over and closed, the original seller could either accept the high bidder and sell the property to them or place a larger bid and pay the transfer tax on that amount. This procedure would make the system completely self policing and leave little room for mischief.

G) Transfers in and out of the country: All transfers in and out of the country would be recorded and taxed in the exact same manner with a few exceptions. Since it may not be easy to collect taxes from foreign entities, taxes on all incoming as well as outgoing transfers are to be reported and paid by the American entity receiving or sending the transfer. The amount is exactly the same. Only the payment method is different. In addition, there is no one year exemption period for these incoming transfers. The second transfer, or the very first one after the incoming transfer, will be reported and taxed as an original transfer. The only difference is those taxes on the second transfer will be paid to the state receiving the second transfer. All following transfers will be treated in the normal fashion.

II - Federal/State Income tax - low income protection

A) A grossly simplified Federal Income Tax system is in addition to the transfer tax. It is a four-step, graduated plan which funds and replaces all welfare programs, State and Federal. It is a negative income tax for low income people and its simplicity is its value. Equal application to all citizens and an incentive to work for those who can work. It would replace the minimum wage laws which have sent so many jobs out of the country.

Click on http://hjminwage.blogspot.com/ to learn why the minimum wage is a miserable failure.

B) A base level of individual income: The first step is to establish a base level of individual income, an amount sufficient to support a single individual at a subsistence level. This level would be established by the individual states to reflect that state’s living costs. We will use $15,000 as an example. An individual citizen of the US would start receiving that amount in monthly payments from their state once they reached their eighteenth birthday, registered to vote and began living on their own. Non-citizens would not be eligible to receive any of this income. We will call this Negative Tax or NT income.

C) How this program encourages people to work: Whatever amount in income an individual receives in any fashion or from any source will reduce his NT income by half of that amount. Employers will deduct half of any NT employee’s pay as a withholding tax to be paid directly to the state. Once this withholding amount reaches $1,250 in any single month or a total of $15,000 in a year, additional amounts are not withheld for that period. NT users are required to file monthly reports of income from all sources, cash or items of value including gifts of more than $100 in value. The 50% reduction rule will be applied to all this income. Any amount paid for by others, including such things as insurance, rent, debt repayments, fines and tuition, is to be included in this reported income. The following month’s check will reflect the effect of all income. Once the aggregate value of all sources of income as listed above reaches $30,000, the individual will no longer be an NT recipient. This means a married couple who have together income of $60,000 will receive no money from the state and will pay no income taxes. I t will also mean that a welfare recipient will receive a net gain equal to half of every dollar he earns, a real incentive to work.

D) Penalties for breaking the rules: These can be applied easily by imposing a fine and reducing subsequent payments by the amount of error or deception plus the fine. The fine for any error is half the amount of the error if it is deemed an actual error and is not contested. It is double the amount of the error if it is contested or if it is due to deception of any kind. Monthly errors of $100 or less or annual errors of $1,000 or less will bear no fine if the error is corrected and repaid.

E) Households and deductions: A household has been defined quite well by existing law. Basically it is a group of related people, sharing a dwelling of some type. There may be several wage earners in a household, all contributing to the members as a group. For tax purposes, a household will be counted as having one to five members according to how many dependent members live there. If there are more than five members, the count will remain as five for tax purposes no matter how many are there. This sets the maximum deduction for the household at five. As a member of a household, an individual may apply for the NT income, but the maximum is reduced by $6,000 annually, an amount representing housing costs. This amount is also set by the individual states. Individuals receiving NT income may not be considered as dependents for tax purposes even if they live in the household. Individuals living in households with aggregate income in excess of $150,000 will be ineligible for NT income unless they are dependent and over 65, or so physically or mentally handicapped as to be unable to work. The usual rules for disabilities will apply.

F) Tax rates and exemptions: Once an annual income of $30,000 is reached by an individual, the basic tax rate of 10% begins. In a household that plateau is raised $18.000 for each dependent up to the maximum of five including the head of the household. This puts the maximum untaxed income at $102,000 for households with five or more members. There are no deductions of any kind so the tax is applied to gross income. Once gross income for any individual or household reaches $1,000,000, all further income is taxed at 50%.

G) Taxable income: This includes all income of any kind from all sources including, but not limited to wages, fees, rent, interest, dividends and capital gains. Deferred income, IRA’s, pensions and the like would be taxed in the same manner as they are under present law, but at the new rates. All current tax free municipal bonds and other tax exempt income vehicles would remain tax free. True gifts of any kind would not be included as taxable income as they are covered by the transfer tax. To keep a possible gift loophole from being abused, true gifts are defined as gifts that can in no way be considered as taxable income as listed above. This will prevent avoiding tax payments by simply calling or renaming any kind of taxable income as a “gift” or “gifts.”

H) The plan would replace the current Social Security payment program with more income for those who really need it. Medicare as it is now operated would be replaced by a multi-tiered system for seniors providing for private insurance and prescription drugs. While the details would have to be addressed by addition to the system or by a completely separate system, a basic program could be funded by raising the NT or negative tax on an age related basis. The NT income basis could be raised to $20,000 at age sixty, $22,000 at age sixty-five, $24,000 at age seventy, $26,000 at age seventy-five, and $30,000 at age eighty. The amounts could easily be adjusted to satisfy actual needs. Health care premiums for all who use the NT income would be automatically deducted from the recipient’s monthly checks. This would, in effect, provide health care benefits to all Americans and solve the current healthcare problems. See the section on health care.

III - How the States and the Federal Government decide on tax rates and divide the money between them.

A) Of the base 8% transfer tax, states would pay half to the Federal Treasury. The remaining 4%, or more if the state raised the rate above 8%, would be used for state income. It should roughly equal the combined state income and sales taxes currently in effect in most of the country. Together with the property tax, this currently averages 10% of GNP going to taxes at the state and local level. States could make weekly or monthly payments into the Federal Treasury. In order to maintain the current level of taxation, effort would have to be made to determine the actual income from such a rate and adjust it if required.

B) The negative Income Tax or NT: This could be set by state legislatures to fit the needs of their state. The Federal Government could set minimums, but the states will decide on the actual amount in the same way they decide the amount of the Transfer Tax. The numbers used in this essay may not be realistic and a serious effort to find a realistic base amount would have to be done. The statistics should all be there. All we need to do is to find and use them.

C) Corporation taxes could be eliminated, but the resulting screams and emotional diatribe from the left and their hate campaign against the source of nearly all of America’s wealth, corporations and profits, would drown out all reason. Either the current system or a more reasonable, flat tax on gross profits of say, 8% would work. The transfer tax like any sales tax, falls equally on business expenses as well as non-business and that seems to work OK. By removing all expenses from exempt status, the tax rate could be lowered substantially and tax considerations would be removed from business decisions. Business could then concentrate on good business practices to make a profit and not be so involved in the complicated tax codes for so many business decisions. The screams of agony from Wall Street would be heard coast to coast, but in the end they would benefit from lowered overall taxes. Many abusive practices would disappear and the tax connivers would literally be put out of business.

IV - Why Congress doesn’t want a simple Tax System.

A) I repeat from the beginning of this essay: “The IRS code is an effective welfare program for attorneys, accountants and other tax professionals. Huge amounts of money are syphoned out of business’ and individuals’ pockets and into those of people and organizations in this artificial profession. For that single reason it will be difficult to simplify. Like so many of our increasingly complex laws, it is written in such a manner as to require attorneys to interpret it. I see a great reluctance in our attorney-based congress to pull this financial rug from under so many of their professional colleagues.” Any simplification of the IRS Code faces this high hurdle.

B) Once a system is put in place that so benefits a powerful group with an insider connection to legislators, it is extremely difficult to dislodge. This difficulty is completely out of proportion to the relatively small number who will oppose any changes that don’t improve their position. It is so unfortunate that small groups of “insiders” can wield such power, but they do. Washington is full of these small groups seeking to feather their own nests at the expense of the average working American. Such is the price one pays for constantly growing and intrusive government. Systems like the IRS code grow constantly in size and complexity, sometimes maliciously and always in the direction of serving the few at the expense of the many. It takes a catastrophe or a miracle to stop this juggernaut and replace it with a simple, reasonable, less costly and more effective alternative.

D) The wealthy would object strenuously since the transfer tax would hit them proportionally. Unlike the sales tax which disproportionally taxes lower income people, the transfer tax would hit the wealthy when they transferred property of any kind. Since sales of real estate, stocks, bonds, businesses and the like are now exempt from almost any kind of taxation, this would increase taxes on wealthy investors and speculators. Taxes on sales by speculators would only be on the financial gain when the property was resold in less than a year. It would certainly replace the capital gains tax and would level the tax field between rich and poor. Since it would not be a punitive tax like inheritance taxes, it would be a much fairer distribution of the tax burden. Everyone would be in nearly the same boat and with zero loopholes (that could be done), there would be very few wealthy people who could avoid taxes altogether.

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