HOW I WOULD FIX THE IRS TAX SYSTEM

First off, I am not political.  I am purely a business person that thinks running a business and living in America should be more streamlined.  The following ideas are only ideas, and if you are a client or prospective client and disagree, I sincerely apologize.  These are only ideas, and my thought was that someone smarter than me, that could actually do something about our tax system in the US, might be inspired to come up with something better than our current system.


hOW I WOULD FIX THE IRS TAX SYSTEM:

1.  I would have a gross income tax.  Something small like 1-5%.

There would be no deductions.  No sliding scales.  No brackets.  You would know exactly what you owe the IRS every week and every year.  You would not have to worry if your CPA or tax preparer figured out every last deduction correctly.  You wouldn’t have to worry if you paid too much or committed tax fraud. You wouldn’t have to pay someone to prepare your taxes.  You wouldn’t have to worry about your expenses being correctly documented.  You wouldn’t have to have an entire section of accounting people working for you making sure everything is documented correctly.  The IRS could lay off thousands of workers.  You wouldn’t have to worry about audits.  You would know that everyone paid their fair share.

2.  No tax would be taken out of your paycheck.

Think of how amazing this would be.  As an employer, you wouldn’t have to hire people specialized in payroll.  If you were paying someone 20.00 an hour and they worked 40 hours a week, you would multiply 40 by 20 and write a check for 800 bucks in about 3 minutes.  As an employee, you wouldn’t have to worry about your boss or the IRS taking too much out.  Businesses would save SO much money and time.  One of the stresses of having employees is correctly withholding income tax, having the resources and knowledge to do so, and correctly paying it to the IRS and State.  This would eliminate all of these stresses and save businesses a TON of money.

3.  Everyone would have to pay the IRS on the IRS website every month, or every paycheck if it was higher than a certain dollar amount.

So, you set up an online account with the IRS.  Let’s say everyone’s income tax rate is 1%.  You got paid 1600 for the month of April, 2011.  You log into your IRS account, tell them you got paid 1600.00.  The IRS website calculates 1%, and you submit payment for 16.00 from your checking account.  You would have a spot where you could enter additional income from stocks or investments.  Heck maybe this would be so efficient, you wouldn’t even have to pay income tax on investments anymore!  You have it set up to electronically deduct from your checking account.  The only way you could pay would be online.  No IRS paper forms would be accepted.  If you had to, you could go to a local IRS location and pay on their computers, if there would still be a need for local IRS offices.

This would eliminate the need to file a tax return every April 15th.  You would always know what you owe.  The IRS would save insane amounts of money, and literally wouldn’t need to manually process individual tax returns.  And we’d all be a little more environmentally friendly.

4.  Once a year, you could have a “Reconciliation process.”

You could enter at the end of the year, your entire wages, and income from investments.  I don’t think you’d really have to worry about entering income from sold assets because there would be no deduction for buying assets.  Because if would already be in your online account, you could see all the previous payments you’ve made.  The IRS website could then immediately calculate if you over paid or under paid.  If you overpaid, you could keep a credit in there, if you under paid, it would show you what you owed, maybe calculate some late fees and interest.

Other benefits of having an online account with the IRS:

  • Once an online account would be established with the IRS, you could in theory, have Social Security linked to this as well.  You could see your payments received online.  You could even have your income tax show up or taken out immediately.
  • You could start to integrate this with Medicare and Medicaid as well.  Heck link it up with the State governments as well, if you really wanted to.  Start showing unemployment benefits.

Why a low gross income tax with NO deductions or loop holes makes the most sense:

Our company pays taxes to just about every State and the IRS.  It costs thousands to have our taxes prepared, and then it’s a complete mess to even just pay them.  In States that charge a gross income tax, you could file your taxes yourself, without paying someone to figure them out.  You know you didn’t miss out on some deduction.  Now, most those States still have some odd ball deductions that huge companies have probably lobbied their way into existence.  I am talking about a simple web page, where you enter your sales, your tax is calculated, and you pay it.

NO options.  NO deductions.  NO LOOPHOLES.   I mean, you would know that huge companies like GE that reportedly paid no income tax to the IRS paid their fair share.  They would pay the exact same percent that a small business pulling in 24,000 a year paid.  You would know that the same person using up our government resources and living below the poverty line would be paying exactly the same as you.

I don’t really think someone making a lot of money should get less of a tax break on having children than someone that has 1 kid and works 15 hours a week.  I don’t mind that person getting help from our government… It just seems fair that if someone decides to not work very much and make 8,000 a year or get 8,000 dollars a year in food stamps and government help that they pay the same percentage of tax on that 8,000 as someone making 80,000.  In that scenario, the person making 8,000 would pay 80.00 to the IRS, and the person making 80,000 would pay 800.00 to the IRS if the income tax rate was 1%.  That way we’re not rewarding laziness or forcing people that work like crazy to pay the bill for the less fortunate that need government assistance.

How to deal with Corporate Income taxes, S corps, LLCs, and pass through income taxes:

I think all corporations would pay the same exact percentage for corporate income tax as the personal income tax.  That way there’s no real games to play.  There would also be no deductions or loop holes.All business entities would have to pay the gross income tax.

There would still be two types of classifications.  Let’s start with the C Corporation or let’s make up a new distinction.  A company with more than 10 owners:

C Corporation

Big public corporations have to pay gross income tax that is the same percentage as personal income tax.  If the corporation pays dividends to investors, the investors have to pay personal income tax.  It’s just that simple.  Now what if big corporations decide to not pay dividends to save the investors from income tax?  I think that would self-regulate, because the investors are going to want to make money.  And shareholders vote on directors, and directors decide how much of a dividend to give out.  If investors make money off of the corporation, they should pay income tax right?  All pretty simple for the big corporations.  It’s time these guys paid something into our system right?  You would have to have some type of rules so that the corporation couldn’t pay for personal expenses of the investors though… That part could be annoying to regulate.

The S Corporation (small businesses, closely help corporations, LLCs)

So obviously the small business person wouldn’t want to get double taxed.  I would guarantee that the small business person would love to not keep track of expenses and what is legally deductible though…

On single person owned companies, you only have the benefit of one investor.  There’s only one person’s pool of assets and money to use to start and maintain the company.  In this case, the single person owned company, would still pay the corporate gross income tax the same as the bigger companies.  Would we really need to regulate if the company paid for all the single owners expenses??  I think if you still wanted to get money out of the company to you personally, you wouldn’t mind paying the same personal income tax rate.  So you would get double taxed.  But think about the simplicity of it.  Right now, if I go on a business trip and bring my family, I have to carefully document which part of the trip was business, and which part was family.  I have to then worry about getting audited and proving my case.  It would be much simpler to just pay for the whole thing out of the business, because the business had already paid the taxes.  If I was to be able to afford to pay for the trip personally, I would now have to pay myself to then pay for it personally.  So that would be a big benefit and tax savings to the single owner to not worry about keeping track of all that, and to avoid some taxes by paying for it out of the company.  Single owned companies should have some benefits right???  You could pay for everything personally from the business to save taxes.  Let’s say you don’t want your accounting staff to see what kind of dinners you did or where you went over the weekend.  Well then you pay yourself something, and you pay the same gross personal income tax rate for that.  Yes, double taxed, but no chance of getting in trouble.  NO worrying about what was a legitimate expense or legitimately deductible.  It’s just a lot easier.  The amount of time and money you would save by not keeping track of everything would be cheaper than having to elaborately try to avoid the taxes and deal with some type of grey area deduction.

This basically works with a company owned by multiple owners.  Owner A is not going to want the company to pay for Owner B’s big screen TV at home.  There are two people pooling their money, and that is a benefit to the company.  The company pays its tax, and the company pays each owner and each owner pays tax.  It’s very simple.  If each owner is ok with paying a certain amount of the personal expenses of the other owner, then there would be tax savings.  I think this would or could self-regulate, because each owner is not going to want the company to waste money on the other owners’ personal expenses.

So in summary what would my plan accomplish?

  • You would always know how much tax a business or a person would owe.
  • You would never have to worry about over paying or under paying.
  • Everyone and every business entity would pay the exact same amount of tax.
  • The IRS would be completely streamlined, and save an insane amount of money.
  • Businesses could easily pay their employees and not have to stress out about withholding and transferring income tax.
  • Every person would know exactly what they should be paid on a paycheck.
  • In theory, no one would have to pay someone to prepare their taxes… (Very sorry to all my CPA and accounting clients!!  You could still offer your services.  It would just be a different type of service.)

 


This page is not meant to be political.  We are NOT economists, and this could very well be a horrible idea.  We HAVE NOT studied what this would do at all.  Maybe someday, this page will get passed along to some lawmaker or maybe even the President, and it will inspire them to make our tax system simpler and fairer.  If even one idea on this page made things easier for business owners and individuals, this page would be a success.