September 11, 2012

Average and the Marginal ~ the Case of Direct Lowering of Tax Rates

It’s a great idea to trade-in deductions for lower rates for ALL income groups. It should be given out in ALL income groups, not just the top bracket. Additionally, gains in stockmarket play are best treated on par with work income towards achieving a further cut in the rates. An illustration..
Consider an economy where there is only one tax rate = 50%, with most people having work income of about $100,000 but able to claim deductions of about $50,000.

Current Tax Bill for these people = 50% * $(100,000 – 50,000) = $ 25,000.

The marginal tax rate being 50%, any new dollar earned gets taxed at 50%.

EVENT: Deductions eliminated and tax rate directly lowered to 25%.

Tax Bill now = 25%* $ 100,000 = $ 25,000 (No Change)

However, the marginal tax rate is now 25%. Therefore, every new dollar earned by one’s hard work and ingenuity now results in only 25c in tax rather than 50c. THAT’s a great incentive to flex one’s muscles towards raising one’s income with hard work or starting a business that would employ people. Towards the latter though, the economy will also need to lose compliance paperwork requirements, simpler tax and regulatory codes, freedom to layoff and hire, and single window dealing with Gov agencies.

Additionally, bringing income from stockmarket play on par with work income (capital-in-formation) will enable further reduction in marginal rates.

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