This is a battle that economic conservatives can easily win within the realm of ideas, even within the confines of a "progressive" tax system.  Let the liberals defend government handouts and dependency while we shift the paradigm and argue for solutions to promote an ownership society along with a path for healthcare financing reform.  

Here are the fundamental guiding principles that I would propose in transforming the tax code with the objective of building an ownership society through supply-side mechanisms:

Individuals

1. Simplify the 1040 tax form to no more than a postcard by eliminating the complexity of the calculations

2. Allow for all income earners, regardless of citizenship, to file a tax return

There are clearly national security considerations in this approach, e.g., tracking, as well as building a broader tax base that is inclusionary of all members of the economy.  A broad tax base also helps lower overall tax rates by including an additional 20-million illegal aliens in the tax calculations -- we can accomplish this by modifying the tax form to allow non-citizens to be active economic participants in the tax regime.  We are a nation of immigrants and we can have an effective economic policy that allows for immigrants to work here temporarily or on a path to citizenship with the effect of significantly curtailing the black market for labor.  Eliminating the underground economy can be accomplished with a carrot or a stick, and I would advocate for the carrot as it keeps economic activity flowing and it does not create hostility and animosity across significant voting blocks that are essential to any future political success.

We have open borders for capital, goods, and services, but when we are hostile to open borders for labor we are truly contradictory in our free-trade approach.  We are moving significantly in the direction of a knowledge worker economy with a dramatic shift from a manual labor and agrarian economy.  To meet the new challenges of the 21st century, we should be driving competition in our labor force to adapt to the technical challenges of that economy which increases the barrier to entry for foreign human capital that wants to come to the United States -- they must be educated or accept jobs at the extremely low-end of knowledge, skills, and abilities.  These knowledge barriers are what protect jobs and incomes, not arbitrarily enforced border security policies. 

3. Exclude dividends, capital gains, or estate distributions as a component of taxable income 

• Dividends are already after-tax distributions from corporations and should not be taxed at the individual level.
   
• Capital gains, especially gains unindexed for inflation, represents a tax on the free movement of capital within the economy which reduces economic efficiency.  Additionally, it is unclear why government should share in the gain since it was the investor who took the risk to generate the gain.  We should be in favor of more capital and more capital movements, but a tax clearly restricts the free movement of capital (a fundamental and necessary ingredient for a capitalist economic system).
  
  
• Short-term trading gains do not promote long-term stable capital so this might require a distinction in the tax treatment between short- and long-term capital gains (e.g., include short-term gains in after-tax investments in gross income).
  
  
• The estate tax is an affront to a political system of taxation with representation, but it also fails because it does not distinguish between after-tax and before-tax income used to produce the estate.  There are clearly better methods to produce revenues other than taxing the dead.
  
  
• We should advocate for a system that drives investment on a pre-tax and after-tax basis without being proscriptive on the size of any after-tax investments.  Nonetheless, allowing citizens to keep the rewards of deploying their capital effectively and for taking the risk to invest that capital promotes, surprise, capitalism and expanded economic activity.  That is clearly not the system that we have today which actually acts as a brake on economic activity, investments, and capital distributions from corporations.

4. Create a new methodology for calculating Adjusted Gross Income (after excluding dividends and capital gains)

• Apply a regressive deduction for pre-tax investment contributions based upon gross income using a marginal rate approach (e.g., 16% applied to the first $75,000 of gross income for all earners, then 14% for the next $75,000 of gross income, etc.).
  
  

  Gross Income Tier	% of Current Tax Returns	Gross Income Floor	Gross Income Ceiling	Effective Savings Rate
  Tier 1	76%	$0	$75,000	16%
  Tier 2	14%	$75,00	$150,000	14%
  Tier 3	7%	$150,000	$225,000	12%
  Tier 4	1%	$225,000	$300,000	10%
  Tier 5	2%	$300,000+	--	8%

  
  By moving the contributions from a fixed amount to a variable amount, this solution does not penalize lower income workers.  It is also a substantial source of market liquidity as well as ownership capital that can work to drive individual savings and consumer confidence.  Money would be invested and directed by the tax payer within long-term investment vehicles like 401(k), 403(b), or IRAs.  Suitable investments would include those offered by institutions including money market accounts, government bond funds, stock funds, annuities, inflation protection securities, and guaranteed interest contracts.  For risk-averse investors, the government could create a government bond investment fund or even a sovereign wealth fund to compete with private sector money management solutions.
  
  Investments withdrawn after the retirement age would be subject to ordinary income as the initial investments were made with pre-tax dollars.  The overall structure provides a path to an ownership society and reduces the potential future demand on government resources to exception cases rather than comprehensive pension plans across the universe of all retirees.  Taxable income will be higher by not leveraging this deduction, thus the supply-side incentive to invest in suitable assets.  This would not preclude corporate or other pension plans that would supplement individual pension plans.

• Provide for a pre-tax Health Savings Account deduction of $3,500 per individual up to $7,000 for a family of two or more individuals.

This solution would fundamentally transform healthcare financing for first dollar claims up to an annual deductible (80% of the volume, but 20% of the cost).  Corporate funding of HSAs would provide an incentive for broad-based participation including young, healthy, and wealthy members that help improve the overall risk pool characteristics of group plans.  A broad risk pool with first dollar coverage would allow plan sponsors to reduce coverage scope and cost by securing catastrophic rather than comprehensive coverage, or differentiate the company to employees through a more comprehensive plan.  The key is that a structure that truly allows for first dollar coverage and a rolling portable account allows companies to reduce costs without impacting coverage. 

HSAs allow the patient to determine the appropriate allocation of preventative medicine dollars and provides a mechanism for real-time adjudication when combined with a debit card.  Portability is a key feature of an HSA in that it also provides an infrastructure that reflects the mobile nature of the workforce across employers and geographies -- their healthcare dollars move with the individual. 

For individuals not receiving the HSA benefit from an employer (amount included in gross income), individuals would be able to contribute to their own HSA to retain the tax benefit of the solution.  Taxable income will be higher by not leveraging this deduction.  As a tax deduction, the maximum deduction is the lesser of income after pre-tax investment contributions and the limit of the deduction.

• Provide for a $7,500 personal deduction for each individual and dependent associated with the tax return

This solution is decidedly pro-family and serves to eliminate tax liability at the lower end of the economic scale (after providing incentives for savings / investment, as well as healthcare financing). For higher income earners the deduction is a benefit, but not to the same extent as lower and lower middle-class income earners.

• Eliminate all other tax shelters including the mortgage interest deduction which allows for a lower marginal tax rate. 

The definition of ownership would expand to financial assets and the use of after-tax income which may include home acquisition, but the tax code would not explicitly pick winners and losers nor would it discriminate against non-home owners.  The key is that the standard deduction is sufficiently large and it does not encourage risk-taking behavior of borrowers to over-extend on credit in order to maximize tax savings through a mortgage interest deduction.  Maximizing financial asset investment allows the investor to benefit from interest-on-interest compounding and is thus generally better for generating long-term wealth.

• Eliminate all other tax credits, especially refundable tax credits, that create bureaucracy and wasteful spending for income redistribution.

By eliminating Medicare and Social Security Taxes and funding those operations from the general fund, there should be no need for tax credits to reimburse payroll taxes contributed by low income earners.  All tax filers would receive credit for gross income by filing a tax return which will can then serve as the basis for eligibility in government programs, not necessarily the tax paid (and refunded) under programs like the Earned Income Tax Credit (EITC). 

We should strongly advocate for a long-term (e.g., 30-year) drive to an exception-based Medicare and Social Security system.  We must recognize the over $80 trillion in unfunded liabilities for both of the programs would make those programs immediately insolvent if the government used accrual instead of cash accounting.  With a long time horizon, there is a way to drive to solvency in the system, but it is dependent upon individuals taking control of their own pension plans.  

Social Security: for the next 20-years, all current and future retirees who retire during this period will continue to receive currently defined benefits with cost of living adjustments.  For the following 10-years, all new retirees would receive benefits on a declining scale of 10% reductions against the schedule of benefits adjusted for cost of living (e.g., year 1 retirees would receive 90% of the schedule throughout their retirement, year 2 retirees would receive 80% of the schedule throughout their retirement, etc.).  By the end of 30-years, by leveraging the private investment accounts of individuals, the program could shift to an extreme exception basis for any new retirees entering the system. 

Medicare: this is more complicated due to the structure of Medicare as a program for all senior citizens instead of one offered on an exception basis to those who cannot afford healthcare.  Thus, senior citizens who work and receive healthcare benefits from their employer are automatically termed from their commercial healthcare plan at age 65 because they are eligible for universal coverage under Medicare.  Besides removing the universal access to Medicare (over a long-time horizon like Social Security), a supply-side model would leverage an unrestricted HSA model while also driving incentives for long-term care insurance.  As it stands today Medicare is not a sustainable model and we need new ideas to drive reform which may include eligibility standards, reduced benefits, and supply-side tools that ensure future access to healthcare without bankrupting the United States in the process.

One additional method to secure the future of Medicare and Social Security is to direct royalties from new hydrocarbon production as well as nuclear electricity generation into either debt reduction or a true program trust fund. 

5. Remaining income after deductions equals taxable income

6. Calculate progressive tax liabilities for both a consumption tax and income tax (after investments)

• Calculate a flat 10.0% consumption tax on taxable income.

By calculating the tax on consumption income after incentives / deductions , the consumption tax is easy to calculate and administer relative to other proposals for a consumption tax.  Other proposals such as the Fair Tax require a substantial compliance effort and collections across the range of participants in the economy.  By focusing on the taxpayer, the risk of non-compliance is reduced.  A consumption tax when calculated outside of the purchase of normal goods and services does not adversely impact low income earners in the same manner as a Fair Tax and does not require complicated "prebates".  The tax rate is also substantially lower than proposed under a system that relies exclusively on a consumption tax to drive revenue collections.  This tax can be combined with the progressive marginal tax to produce a workable withholding table for employers.

For a family of four (4) maximizing the pre-tax incentive savings plans, the consumption tax would be as follows:

Gross Income Ceiling	Consumption Tax Liability	Effective Tax Rate on Gross Income
$44,047	$0	0.0%
$55,952	$1,000	1.8%
$102,907	$5,000	4.9%
$160,795	$10,000	6.2%
$273,333	$20,000	7.3%

• Apply a progressive marginal tax rate based upon taxable income after deductions and the consumption tax
  

Gross Income Tier	% of Current Tax Burden	Net Taxable Income Floor	Net Taxable Income Ceiling	Marginal Income Tax Rate
Tier 1	22%	$0	$75,000	12.5%
Tier 2	~19%	$75,000	$150,000	15.0%
Tier 3	~11%	$150,000	$225,000	17.5%
Tier 4	~4%	$225,000	$300,000	20.0%
Tier 5	~44%	$300,000+	--	22.5%

As the marginal tax rates apply to lower taxable income levels through targeted incentives, the overall effective tax rate is substantially lower.  The tax rates are marginal in that the Tier 1 rate applies up to the Tier 1 threshold and then the Tier 2 rate applies to the next dollar up to the Tier 2 threshold and all income above the Tier 5 floor is taxed at one marginal rate.

The top combined average tax rate for an individual tax filer would be under 27.83%. 

• For an individual with AGI of $200,000, the average rate would be 17.92%
• For an individual with AGI of $75,000, the average rate would be 14.73%
• For an individual with AGI of $12,000 or less, the average rate would be 0.00%
  

Earners at the low-end are essentially shielded from paying the tax due to the pro-growth deductions.   

For a family of four (4) maximizing the pre-tax incentive savings plans, the income tax would yield the following:

Gross Income Ceiling	Income Tax Liability	Effective Tax Rate on Gross Income
$44,047	$0	0.0%
$54,630	$1,000	1.8%
$96,447	$5,000	5.2%
$147,050	$10,000	6.8%
$231,152	$20,000	8.7%

As the income tax rates are progressively higher than the consumption tax rates, the income thresholds are lower.

• Total tax liability for consumption and income tax at the gross income ceiling of the first four income tiers is presented below:
  

Gross Income Tier	Gross Income Ceiling	Aggregate Tax Liability	Effective Tax Rate
Tier 1	$75,000	$5,525	7.4%
Tier 2	$150,000	$19,393	12.9%
Tier 3	$225,000	$34,903	15.5%
Tier 4	$300,000	$52,055	17.4%

• These tax rates are possible due to the high savings rate in pre-tax investment vehicles for retirement (a penalty should apply for early withdrawal) and health savings accounts along with the higher individual deductions:
  
  For a family of four (4) maximizing the pre-tax savings incentive plans, the average savings rate and amount for gross income ceiling of the first four tiers is presented below:
  
  

  Gross Income Tier	Gross Income Ceiling	Gross Investment Savings	Gross Savings Rate	Savings / Tax Ratio
  Tier 1	$75,000	$19,000	25.3%	3.44
  Tier 2	$150,000	$29,500	19.7%	1.52
  Tier 3	$225,000	$38,500	17.1%	1.10
  Tier 4	$300,000	$46,000	15.3%	0.88

  
  The key takeaway from this chart is the implications of a declining ratio of savings / tax.  Although nominal savings increases with gross income, the benefits are regressive in nature as the savings rate decreases as a percentage of gross income while the income tax rate increases with income.
  

7. Index all future calculations to inflation (1-year in arrears) for effective tax withholding table automation in accounting / payroll systems.

Corporations

1. Eliminate the repatriation tax on foreign capital
2. Reduce the corporate income tax to 25%
3. Eliminate the match on FICA tax
4. Allow for full expensing of capital equipment purchases
5. Encourage dividend distributions and stock repurchases by eliminating individual income taxes and allowing for capital to be unlocked from corporate balance sheets
6. Provide a path for corporations to purchase catastrophic healthcare coverage instead of full health plans by changing the individual income tax incentives

The corporate alternatives outlined above require as much, if not more, analysis than what I have provided for the revised personal income tax structure outlined above.

CONCLUSION

There are enough economic interests here including financial services firms, physicians, seniors, and health insurers to combat the opposition from the left and accountants who would surely lose through tax simplification.  Ultimately, this is a path to shore up Social Security and Medicare by removing the future demand for those services by building an ownership, savings, and investment culture, but that does not even have to be the main selling point of the proposition to move down this path.  Opposition to these proposals from the left is entirely predictable which actually makes pursuit of this idea so appealing -- to combat the canards that they will throw up as an obstacle, namely the same objections out of the same failed liberal playbook that conservatives are able to defeat whenever they actually try to deliver a principled message.

At the end of the day, although this is effectively a progressive tax system, it will yield a revenue neutral if not revenue surplus position while also generating significant knock-on effects to the economy by driving substantial liquidity into the market that can be used to shore up the US savings rate and help move this nation back to a position of strength as a creditor rather than debtor nation.  Notably, dynamic scoring is not used by the government to determine the effectiveness of a change in fiscal policy, but would anyone rightfully argue against the economic impact of building a savings culture (see Singapore) in driving current and future economic activity?

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