The 12% revenue solution

By Michael Busler

Last week the House of Representatives voted to avoid an economic showdown with President Obama over raising the debt limit. But the three-month extension does not address the disagreements on spending and taxes that remain. The arguments, and the potential for another downgrade in the country's credit rating, remain. Is there a way out of this?

One solution would be to change the tax code so that it would be more equitable, more efficient, and easier to administer, as well as raise more revenue and promote economic growth. If we could do that, everyone would win. And here's how we can do that:

Replace the tax code with a single-rate tax of 12 percent on all income earned above a livable minimum, with absolutely no deductions. All income would be treated the same, whether it came from wages and salaries, rent, interest, dividends, business profits, or capital gains.

The "livable minimum" would be debatable. For example, it could be $10,000 per adult and $5,000 per child so that a family of four could earn $30,000 before having to pay any tax. Each dollar earned above $30,000 would be taxed at 12 percent.

President Obama and the Democrats in the Senate want additional tax revenue over the next 10 years for public investments and to reduce the deficit. At one point the president called for raising an additional $1.2 trillion in revenue over the next decade. Taxing all income at 12 percent should make him happy, as it would raise about $2.5 trillion in additional revenue over 10 years.

The plan should also please House Speaker John Boehner and Republicans who want tax rates as low as possible. The 12 percent rate would apply to individuals and corporations, fulfilling GOP hopes of fueling business investment and encouraging the return of American companies that have relocated overseas to avoid high tax rates.

Most of all, this plan would please Americans who want to see the economy grow at a more rapid pace.

In the last five years, economic growth has barely exceeded population growth, leaving the unemployment rate stubbornly high and limiting opportunity, especially for millennials who graduate from college and high school with few good prospects. This proposal would add significantly to growth, likely doubling current rates and creating numerous entry-level positions for young people.

And, of course, anyone who has complained that the tax code, with deductions and favors tucked away for some, makes annual filings too complicated, would win. This proposal would eliminate all deductions and ensure that every taxpayer paid exactly the same share of his or her income (above the livable minimum).

Taxpayers currently spend 6.1 billion hours per year collecting data, filling out forms, and complying with the almost four million words in the tax code, according to Nina E. Olson, who leads the Taxpayer Advocate Service, an independent consumer agency within the Internal Revenue Service. Changing to a 12 percent rate would dramatically simplify tax time. To determine that year's tax liability, a taxpayer would simply add up her income from every source, subtract the livable minimum, and then multiply the balance by 12 percent.

Reforming the tax code to a single rate of 12 percent on all income above a livable minimum, with no deductions, would satisfy everyone involved. It would be fair, equitable, and efficient. It would cause no distortions in any market and would be extremely easy to administer. On a macro level, it would add significant growth to the economy, raise much more revenue, and, most importantly, provide a new sense of fairness for taxpayers. We would all be treated exactly the same, with no special treatment for anyone.

With all those benefits, who could possibly oppose such a plan?