A Dynamic Tax code

A Dynamic Tax code that can prevent the rich-poor divide and is fair for more than 90% of Americans

Tax Code
-------------

The average salary of a country is the sum total of salary earned by all in the country divided by the number of people in the country.
The median salary means 50% of the population earns below that amount and the remaining 50% of the population earns above that amount.
At present (2009) the, say, median salary in America is about $45,000. This means out of the 300 Million people in America, 150 Million have income less than or equal to $45,000 a year (up to $45,000 a year) and the remaining , 150 Million earn more than $45,000 a year.

A good starting point to structure the tax code will be the median salary.

A New Tax Code
------------------

The proposed tax code is dynamic as it is based on the median salary and adjusts the tax bracket automatically based on the median salary of the country.

1. Anyone earning less than or equal to the Median salary need not pay any taxes.

2. Anyone earning more than the Median salary and up to 10 times Median salary can be taxed 10% of what they earn above the median salary.

3. Anyone earning more than 100 times the Median salary can be taxed 10% of what they earn above the median salary and up to 10 times Median salary and can be taxed 90% * of what they earn above 100 times the Median salary. (This two layers of taxes is to prevent anyone who earns more from ending up with a lesser overall income after taxes than anyone that earns lesser . Please see the e.g. for details)

Note: * - The ones that are taxed at 90% can be given a special tax credit. Normally individuals that earn more than 100 times the Median salary (for 2009 in USA is more than $500,000 per year) are movie stars, sports atheletes, CEOs and celebrities. These individuals may not earn this high amount through out their career. So for a person that earned this special tax credit (by paying 90% tax when he/she earned more than '100 times the Median salary' ), when every his /her earning goes below the '100 times the Median salary' range the individual can be paid from the special tax credit (they earned through the 90% tax payment) to bring the earning for the year to the '100 times the Median salary' value ($500,000 for 2009). This is like a insurence as well as saftey net for high earners that did not plan / manage their money. This also prevents inflation. Please see example for clarity and understanding this idea.

E.g.

1. So with the current median salary of $45,000 in America in 2009,
anyone earning less than or equal to $45,000 need not pay any taxes.

So the net income is $45,000

2. Someone than earns $95,000 will pay the following tax.
For $45,000 no tax.
For the remaining $50,000 at 10% ($95,000 - $45,000 = $50,000) = $5,000

So the net income is ($95,000 - $5000) = $90,000

3. Someone than earns $497,000 will pay the following tax.
For $45,000 no tax.
For the remaining $452,000 at 10% ($497,000 - $45,000 = $452,000) = $45,200

So the net income is ($497,000 - $45,200) = $451,800

4. Someone than earns $502,000 will pay the following tax.
For $45,000 no tax.
For $455,000 at 10% (the amount between $500,000 and $45,000 i.e. $500,000 - $45,000 = $455,000) = $45,500
For the remaining $2,000 at 90% (the amount above $500,000 i.e. $502,000 - $500,000 = $2,000) = $1,800 *

(Note: * This $1800 will also go as a Special Tax Credit for the person.)

So the net income is ($502,000 - ($45,500 + $1,800) ) = $454,700

5. Someone than earns $5,000,000 ($5Million a year) will pay the following tax.
For $45,000 no tax.
For $455,000 at 10% (the amount between $500,000 and $45,000 i.e. $500,000 - $45,000 = $455,000) = $45,500
For the remaining $4,500,000 at 90% (the amount above $500,000 i.e. $5,000,000 - $500,000 = $4,500,000) = $4,050,000 *

(Note: * This $4,050,000 will also go as a Special Tax Credit for the person.)

So the net income is ($5,000,000 - ($45,500 + $4,050,000) ) = $904,500

Note on Special Tax Credit:
----------------------------
Next year if the person's income is only $100,000, then from his/her special credit he/she can be paid $400,000 (to the 100 times median salary limit). At that time his/her special credit will become $4,050,000 - $400,000 = $3,650,000.

6. Someone than earns $75,000,000 ($75 Million a year) will pay the following tax.
For $45,000 no tax.
For $455,000 at 10% (the amount between $500,000 and $45,000 i.e. $500,000 - $45,000 = $455,000) = $45,500
For the remaining $74,500,000 at 90% (the amount above $500,000 i.e. $75,000,000 - $500,000 = $74,500,000) = $67,050,000 *

(Note: * This $67,050,000 will also go as a Special Tax Credit for the person.)

So the net income is ($75,000,000 - ($45,500 + $67,050,000) ) = $7,904,500 (~$7.9 Million a year)

Note on Special Tax Credit:
----------------------------
The Special Tax Credit can add over the years based on what is paid every year at the 90% rate as tax. Say 5 years from now the person's 'Special Tax Credit' has grown to $90 Million due to his/her 90% tax payment over the 5 year period. The next year if the person's income is only $100,000, then from his/her special credit he/she can be paid $400,000 (to the 100 times median salary limit). At that time his/her special credit will become $90 Million - $400,000 = $89,600,000 )


Note:
------
This can be the basic tax structure. Any incentive and tax breaks should be separately applied and obtained back later from the government

Distribution of Tax among various levels of Government

The tax revenue can be distributed among the various governments as follows:

1. 30% of Tax revenue to Federal Government
2. 30% of the Tax revenue to State Government depending on the population
3. 30% of the Tax revenue to Local Government (Municipal, County) depending on the population
4. Remaining 10% in Reserves for emergency funds and paying off debts.

Note: Someone may wonder what happens if everyone earns the same salary and if this tax code will work! Practically it is not going to happen - everyone with same salary will not happen; if that happens then a modification to this tax code is needed (Note: Every law needs to be examined every few years, say every 25 years, to make sure if the laws is valid for that current situation and environment!)


-Suresh