Codexon

People hate taxes, and everyone can agree to disagree on them. One thing most people agree on though is that it’s too complicated.

Here is a diagram of the US income tax in 2008.

US Income Tax 2008

What’s wrong with the current piecemeal tax rate?

• It’s complicated.
• People want to earn less if taking a raise barely puts them in the next tax bracket.
• The tax rate increases faster for people earning very little compared to people earning a lot.

What’s wrong with a flat tax?

• The tax rate increases more slowly as your ability to earn more money increases exponentially.
  • The more money you have, the easier it is to get bargains, higher interest rates on bank accounts, and investment opportunities that allow you to own controlling shares of the next big company.
• A 20% tax of someone earning $20,000 a year can cause starving and homelessness while 20% of $10 million doesn’t really make a dent.

How do we fix this?

Solution 1

Exponential Curve

T(i) = p e^(i/G)

min( max tax rate, T(i) )

p = minimum tax

e = Euler’s constant

G = growth rate = i_{high threshold} / ln (T_max / p)

This exponential curve is one such solution that eases the problem of people on the low end of the income scale getting taxed at a higher rate of change than people who are earning the most.

One potential problem with this tax curve is deciding where and how much the maximum cutoff peak is. This is something for experienced statisticians, economists, and psychologists to decide.

A possible idea would be to set the maximum cutoff at a certain percentage of the GDP and having the tax rate close to 100% at that level. It is of course considered communist to have a tax rate at around 100% somewhere, but we can probably agree that there would be revolts should anyone control 50% or more wealth in a single nation.

Solution 2

Smoothed sigmoid curve

T(i) = m / (1 + e^(-i/s+p))

m = Maximum tax rate

s = stretch factor

p = poverty offset

This smooth sigmoid curve is an improved version of the current tax curve. It is completely smooth instead of being piecemeal.

The one advantage this may have over the exponential curve is if you subscribe to the theory that it slowly becomes harder to get more money as you become richer. From anecdotal evidence, this is false, but could conceivably be true as you approach a large percentage of the GDP.

Potential Rebuttals

“But the Laffer Curve blah blah…”

The Laffer Curve is a psychological curve. It is even different in some countries than others, and may fluctuate over time. The supposed optimal maximum tax rate for the US is around 35-37% which we have thanks to Bush. But even Bush’s economic advisors have said that his tax breaks have not paid for themselves.

These formulas are highly adjustable, and experienced statisticians, economists, and psychologists should be the ones to tweak them.

“Higher tax rates will increase tax evasion”

While this may be true, this is avoiding the problem. It’s like putting a band-aid on the symptoms instead of curing the disease.

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