Let's combine the income and payroll taxes into a rational tax system.

• Author: Forman, Jonathan Barry

Many of the problems of the current tax system are attributable to there being two major taxes imposed on individuals: income taxes and Social Security payroll taxes. Under current law, Social Security taxes are collected on every dollar of earned income, and the income tax system uses the earned income tax credit and a portion of the child tax credit to refund at least part of those taxes to millions of low-income workers. It would be a lot simpler if the federal tax system did not collect Social Security taxes from low-income individuals in the first place, and one approach would be to add a $10,000 per worker exemption to the Social Security system. Another approach would be to use universal earned income tax credits to offset those payroll taxes. For example, a $1,530 per worker earned income tax credit could exactly offset both the employer and employee portions of the Social Security payroll taxes on the first $10,000 of wages.

A more comprehensive approach would be to combine the individual income and Social Security taxes into a single, comprehensive tax system. That comprehensive tax system could be based on income, earnings, consumption, wealth, or some combination of these.

A Comprehensive Income Tax

For example, consider how the individual income tax and the Social Security payroll tax could be combined into a comprehensive income tax system. Individuals with incomes below some poverty threshold would be exempt from tax, and tax rates could be increased in order to raise the same amount of revenue as the current system. In effect, there would be a single, higher-yield income tax instead of the current bifurcated tax system. Such an integrated system would be simpler to administer than the current system. Literally millions of low-income individuals would no longer have to file tax returns simply to recover over-withheld taxes.

Moreover, such an integrated tax system could have a logical tax rate structure, as opposed to the roller-coaster rate structure of the current tax system. Now, an individual's effective marginal tax rate depends upon an almost random combination of income tax rates, Social Security tax rates, and phase-outs (of the earned income credit, the child tax credit, the dependent care credit, personal exemptions, and many other tax benefits). On the other hand, an integrated tax system could be designed to impose, say, no tax on income below some poverty threshold, a 20-percent tax rate on income from that...