TaxGNI Fair Income Tax

Income tax represents the most fair and honest tax systems. While VAT, sales, and excise taxes are regressive, hide tax rates, and aren’t paid by people who put their money in savings or financial investments, income taxes are taken up-front and apply to all income.

Traditional income tax systems require adjustments to tax brackets, rates, and standard deductions, along with multiple filing statuses and other complexities. This not only makes tax filing complex, but also hides effective tax rates and changes to the distribution of tax burden from taxpayers.

The TaxGNI system replaces this with adult equivalence factors and a simple effective tax rate computation. Tax rates are based on the per-capita income, and so adjust for an equitable society rather than for one with a growing poverty base: TaxGNI is designed for societies using a structural minimum wage.

Calculating Taxes

In practice, an online or smartphone application would compute the taxes owed with a simple form like below.

Persons age 14 or above:3
Persons younger than age 14:1
Highest individual’s income:$45,000
Total household income:$85,000
Your Taxes Computed Below
Equivalence Factor:3.1
Tax Rate:11.34%
Federal Taxes:$9,639

A taxpayer can work out their taxes with a pocket calculator, their income, and a few published numbers.

  1. Divide your household income by the income baseline to get your Income Share.
  2. Count your household members and add up the Equivalence Value.
  3. Compute the Equivalence Factor.
  4. Divide your Income Share by the Equivalence Factor to get your Modified Income Share.
  5. Compute the Effective Tax Rate.
  6. Multiply the Effective Tax Rate by your household income to find your income tax liability.

Income Share

TaxGNI computes tax rates based on a taxpayer’s income as a portion of the per-capita income or GNI/C.

\begin{aligned} I &= \frac{Income}{per-capita\ Income} \end{aligned}

The Equivalence Factor

Traditional systems give joint-filing households higher initial tax brackets, plus income exemptions for each dependent meeting a complex set of rules.

TaxGNI replaces filing statuses, brackets, and exemptions with an adult equivalence factor. Economists use equivalence values to adjust multi-person household incomes to reflect a single-adult household at the same standard of living.

Our equivalence factor phases out at higher incomes. Initial income has high marginal utility: when a person receives an additional dollar, that person values that dollar more if their income is lower, and less as their income increases. Initial income dollars go to food, rent, and other basic needs—to a person’s security; while later dollars go to luxury. Therefor the equivalence factor becomes worth less as income increases.

TaxGNI modifies the household income with this factor to determine effective tax rate. Any combination of taxpayers living in the same household may file as a unit—caregivers, roommates, cohabiting parents, and so forth—and their total income may phase out the benefits of doing so.

Calculating the Equivalence Factor

Under TaxGNI, each person in a household may file taxes with others in the same household. They can file in as many filing units as they like, but each person can be in only one unit. The values below apply to each person to compute the unit’s Equivalence Value.

Head EarnersAdults (age 14+)Children
10.70.5

The adult earning the highest income is the Head Earner. If the Head Earner represents ⅞ or less of the unit’s total income, one additional income-earning adult also becomes a Head Earner.

To phase out this advantage at higher incomes, TaxGNI modifies this value using the unit’s income (I) and the per-capita income or GNI/C (G) with the below formula, which a pocket calculator can compute.

\begin{aligned} E(q) &= 1 + \frac{q-1}{1+e^{2(I-3)}} \end{aligned}

If the GNI/C is $60,000, an $85,000 unit with two working adults, a 14-year-old child, and a 13-year-old child would have an equivalence factor as below.

\begin{aligned} I &= 1.42 \\ q &= 2 + 0.7 + 0.5 \\ &= 3.2 \\ \\ E(q) &= 1 + \frac{q-1}{1+e^{2(I-3)}} \\ &= 3.11 \end{aligned}

The unit’s modified income becomes their income divided by the equivalence factor.

\begin{aligned} I_{[m]} &= \frac{I}{E(q)} \\ &=0.457 \end{aligned}

The Effective Tax Rate

TaxGNI computes the effective tax rate using a continuous curve multiplied by the top tax rate (R). The formula must be published for transparency reasons.

Our proposed formula is the one below, with fixed values for (a) and (b). Altering these values can make the curve flatter or more-progressive.

\begin{aligned} T(I_{[m]}) &= (1 – \frac{1}{a \times I_{[m]}+b}) \times R \end{aligned}

The initial implementation should match up as best as possible to the effective tax rates of a traditional bracketed system.

The TaxGNI curve fitted to the 2016 effective tax rates.

Credits and Deferred Income

We prefer credits to deductions, or the use of a program like a universal citizen’s dividend to offset taxes. The mortgage deduction, for example, would either cease to exist or become a credit of some portion of mortgage interest modified by the equivalence factor.

Deferred income raises further questions. Research suggests 401(k) and IRA deductions favor higher-income earners, and stronger Social Security benefits would better support lower- and middle-income households.

Other deductions should be eliminated where appropriate. A universal healthcare system should simply cover more out-of-pocket expenses rather than providing a deduction. Universal college and vocational education obsoletes the incredibly-weak lifetime learning credit.

Deductions sound great to policymakers and constituents, but most working-class Americans don’t benefit. Our society should replace such clutter with better programs, credits, and fair taxes to begin with.