Hello, and welcome to the first installment of my blog, Fixing Stupidity.  In this blog, I’ll touch upon:

Why the Earned Income Credit is an evil plot to create generations of government dependent voting zombies, and can actually encourage people cheating on their taxes

Why the tax code encourages one of the most parasitic practices of all time – Refund Anticipation Loans

Why getting a huge tax refund isn’t some great financial windfall, but a huge rip off

The inherent unfairness of a lower tax rate on capital gains

Why do corporations get a break when individuals don’t

Okay, let’s start with the Earned Income Credit. Here’s what it is in a nutshell, people who make very little money get huge refunds because the government wipes out their tax liability and puts them into negative tax territory.  People see this in a big chunk, sometimes up to $5,750, and think, isn’t it great that the government is helping me.  Don’t get me wrong, here, I have nothing against helping low income people.  What I dislike here is how it’s being done, and I think it’s pretty dishonest.  Because, every single paycheck, the government is actually TAKING money away everybody including the poorest Americans and keeping it as an interest free loan until tax time.  They do this through mandatory FICA deductions, which are usually 7.65% of the paycheck.  Why is it done this way?  Wouldn’t it make more sense to let the poor people keep 100% of their paycheck and pay no FICA, but not get the Earned Income Credit?  What is going on here is nothing short of buying votes.

It also encourages tax cheating.  If you are self employed and poor, there’s actually a range of incomes where you might want to understate your expenses and overstate your income, because the extra amount you receive in Earned Income Credit is more than enough to offset the extra income tax and FICA you would have to spend.

Under the FixingStupidity tax code, you take the number of people the wage earner is supporting, multiply it by $10,000.  Every dollar up to that threshold would not be subject to either federal income tax or to FICA.  From $10,000 – $20,000 times the number of dependents, FICA would be capped at 5%, after that, it’s as high as it needs to be to cover the payments.  The 10% tax bracket would likely be a casualty of this system, but the higher exemptions would make it so that most people who currently pay taxes would pay less.  The folks with negative tax liability would be slightly worse off.

Now for Refund Anticipation Loans.  As I stated above, they are among the most parasitic practices around today.  Tax preparation firms contract banks to make loans on people’s anticipated refunds, and in the process the bank charges exorbitant interest rates just so people can get their “windfall” a week or so earlier.  I worked for Liberty Tax last year, and I always tried to steer people clear of this.  First of all, there was a $30 application fee.  Then the bank would charge interest.  It might appear to be a small amount, but only because it was a short term loan.  If they charge 5% of the refund on a loan that’s only for a month, it’s basically the equivalent of over 60% annual interest!  Using my tax plan above would virtually kill this practice.

Which brings me to my next point.  Getting a huge tax refund is NOT a good thing.  I’ll repeat so it sinks in: getting a huge tax refund is NOT a good thing.  If you earn $50,000 a year as a single taxpayer, the amount you’ll have to pay to the government just for federal taxes is $6,750.  If you happen to get a $1,000 refund, that means that during the year, you gave the government $7,750.  The $1,000 you got was an interest free loan to the government.  With better planning, you could have gotten nearly an extra $20 every week during the year instead of waiting until the next spring to get it in one lump sum.

What’s my solution here?  An option on the W-4 to simply withhold your taxes based upon last year’s tax liability.  Wouldn’t it be great to simply check a box, write in 14% and have the government take $7,000 throughout the year and give you a $250 refund?  Unemployment already does this – if you choose to have money withheld, it withholds a flat percentage.

Since I attacked a program designed for the poor at the beginning, it’s time to attack one designed for the rich.  The reduced rates on capital gains.  Income is income, so why not just tax it all the same way?  It would be nice if it were that simple, but it’s unfortunately not.  Much of the income reported by the elderly is capital gains on the sale of their homes and other assets, so they must be protected to some degree from raising capital gains tax rates to the same as normal tax rates.

I’m sure you’ve all read about how General Electric paid no federal tax for a recent year.  I’ve got a solution for that as well: A Corporate Alternative Minimum Tax.  Individuals have loopholes disappear at higher income levels, so why not corporations?  My idea would come with a twist.  The CAMT rate would be a sliding scale, and it would decrease for companies who increased their domestic payroll and increase for companies who decreased their domestic payroll.  In other words, it would incentivize hiring and decentivize downsizing.

Thank you for reading my somewhat ranting first blog, I’d appreciate any thoughts you might have.