Federal Taxes – Need for a New Perspective

The executive and legislative branches of the federal government take the view that they are first in line to tax the income of American citizens.  The government’s analysis of what is subject to tax begins with all income and then identifies “Tax Expenditures.”  The government defines a Tax Expenditure as “revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income…”  The problem is that there are certain expenditures over which individuals have no control.  I will call these expenditures “compulsory payments.”  These are payments to federal, state, and local governments that should not be part of income subject to federal income tax.  These compulsory payments include state and local income taxes, state and local property taxes, state and local sales taxes, and federal payroll taxes.

Income for federal tax purposes should only be a taxpayer’s discretionary income; thus, there should not be federal income tax on compulsory payments that must be paid to other governmental units.  At the present time, some deduction is allowed for state and local taxes, but no deduction is allowed for payroll taxes.  The consequence is that the amount paid out as payroll taxes is taxed at over 100%, while amounts paid as state and local taxes may or may not provide any tax relief.

I would propose tax reform that provides for the federal income tax calculation to begin with gross income after being reduced by any other taxes paid to federal, state, or local governments.