That's interesting. In essence (assuming no tax law changes), you claim 20% of your income for the current year over each of the next 5 years for tax purposes. Has very nice properties for initial wage earners as you say.
Downsides: results in a 3x income tax charge if an income earner dies suddenly (assuming you want to settle their estate in less than 5+ years). Acts as a loan from the feds to the taxpayer, resulting in income taxes due after you stop working (perhaps you became disabled or got fired [or die, as above]), and results in deferral of income tax receipts to the government during the transition.
Very interesting. This feels like one small baby step away from a negative income tax scheme where you'd receive that difference immediately, rather than having to wait until you make more income in a later year.
That can work well, depending on the amount of income you need every year, due to the progressive tax system.
e.g. you earn $3M one year, but only need $170k a year for the rest of your life.
If you pay taxes now, you are hit at nearly 35% rate. If you defer the money to your future non-earning years, you'll only pay a ~25% rate on the income.
We do this in Australia (($18,200). It largely works well. The downside is people can use others tax free threshold. E.g. If someone is working and is married to housewife plus has a couple kids at uni, if they have a business or assets in trust they can distribute $20k to each person so now they have $80k effectively tax free.
I'm not sure the scale of this being taken advantage off though but it's well know benifit if you situation allows.
This is become a popular way to avoid paying income taxes. This year it moved from being able to offset 30% of income to 50% of income. It can be 100% of income if you are a farmer.
When I move into the 25% band after I hit $1.3m in lifetime earnings, do I have to pay back taxes on the rest of my income that I've been paying 10% on the whole time? If so, then I'm going to owe about 200,000 that year, which is more than my income. "smoothing" not the word I would use here.
Or, do I just start to pay 25% going forward? If so, your plan amounts to a massive tax cut for young people and a massive tax increase for retirees. As a young person, I can live with that, but it's absolutely terrible public policy.
When you introduce the system, of course, you have to give people credit for all their past income tax paid. Most people of working age will have overpaid and will get a windfall in the form of a huge one-off tax credit, which will compensate them for the higher tax they will pay later in their lives.
If letting people hold onto their money early in life and give it to the government later is considered to be undesirable public policy, it would be possible to even out the tax by including tax deductions based on age. For example, when computing your lifetime taxable income, subtract a "lifetime personal exemption" of $4k times your age. This causes no problems other than that your annual tax bill could potentially be negative (if you earned less than $4k that year).
This isn't actually too far from what we have now and is a terrible idea.
Below a certain income level in the Australia and parts of Europe (in all probability) you not only pay no taxes but you get low income credits. This is a negative income tax as you describe it.
The problem? Let me give you an example (and this is purely fictional):
Joe earns $5,000 a year in part-time work. He pays no tax. He gets $2,000 a year in government assistance.
Marginal rate of tax: -40%.
Net income: $7,000
Total tax rate: -40%
Joe finds a better paying job and now earns $15,000 a year. Now he's paying $3,000 a year in tax and his low income tax credit is gone.
Marginal rate of tax: 30%
Net income: $12,000
Total tax rate: 20%
Seems reasonable right? Now consider the difference:
Extra gross income: $10,000
Extra net income: $5,000
Marginal rate of tax: 50%
You see this with government benefits (that taper off and then cut out at certain income levels). The marginal tax rate low income earners end up paying can be well beyond 50%. Add in child support and this can go over 90%.
> Income over these amounts reduces your rate of pension by 50 cents in the dollar (single), or 25 cents in the dollar each (for couples). For transitional or saved cases, income over these amounts reduces your rate of pension by 40 cents in the dollar (single), or 20 cents in the dollar each (for couples).
Bear in mind that you're losing 50 cents of tax free income for every $1 of taxable income that you gain.
Just a note that it's not actually progressive brackets - e.g. if you earn $90,000, you pay 7% of the $90,000, not just the portion over $85,719. It's not like the rest of the tax brackets which actually are progressive.
But yes, I really like the Australian system. The fact that's its integrated with the tax system means there's no other monthly payments to worry about, it sorts itself out at the end of the financial year.
Ah, yes, double taxed: once at 0%, due to Ireland, and once at 15%, due to the special capital gains rate. I wish my income was double taxed like that! Where do I sign up?
it's more or less negative tax; part of your income is already tax-free, BI is just stretching the idea the other way than it usually happens. also don't forget to cut the cost of most welfare - BI should handle most of it. it might actually cost less if welfare administration is expensive enough!
So we get to pay 40%+ tax on our income on a yearly basis while they get to pay a mystery amount that may or may not be factored into debt costs that can also be deferred for a while? Yeah that sounds fair.
* If you have a net worth of $250k and they calculate you can pay $70k for the first year, estimating full payment as $70k * 4 ($280k) isn't right. Your net worth will be lower next year, and they'll consider that.
* Their goal is to charge you the most you are able to pay, and someone with $250k in savings is able to pay $70k.
I think this is all a bad system, for the same reason that a 100% marginal tax rate is a bad idea, but it's not quite as nuts as you're suggesting.
Forms of that happens in Canada. My effective tax rate was 11% last year because I maxed out my tax shelter retirement savings plan from all the years I made no money.
Right. Yeah, with ours you do hit the top bracket (45%) at $180K but the actual percentage of tax across all income (the marginal rate) means that you're still only paying just over 30% at that point ($18,200 free, 19% of $18,200 to $37K, 32.5% of $37K to $87K, and 37% of $87K up to $180K = $54,232, which is about 30.1%). Even by the point you're making a million dollars a year you're still only paying 42% marginal rate, even though you're well into the 45% tax bracket.
I'm generally not super opposed to having a rate as high as 60%, but the point that kicks in with Sweeden's system does seem very low...
Downsides: results in a 3x income tax charge if an income earner dies suddenly (assuming you want to settle their estate in less than 5+ years). Acts as a loan from the feds to the taxpayer, resulting in income taxes due after you stop working (perhaps you became disabled or got fired [or die, as above]), and results in deferral of income tax receipts to the government during the transition.
Overall, I really like it.
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