My radical tax reform proposal

Forbes offers good explanations of why the tax codes and financial programs of various kinds actually penalize work and making more money ("When Work Doesn't Pay For The Middle Class"):

Eighteen months after being laid off, Judith Lederman, a 50-year-old divorcee who lives in Scarsdale, N.Y., is ready to consider jobs paying half the $120,000 she earned as a publicity manager at Lord & Taylor. That's mostly because she's desperate, but it also makes sense when you consider how this country punishes work effort. While the first $60,000 of her income would be lightly taxed, the next $60,000 would be hit with what is in effect a 79% tax rate. Given a choice between a part-time or easy job paying $60,000 and a demanding, stress-ridden job paying $120,000, Lederman would be wise to take the former

That's only one example of many. Tax rates are not the only issue, of course. Almost anyone who has had a child apply for college financial aid knows that the more money you have on hand, the less aid you will be awarded. At first, this makes sense because it apparently saves aid money for those who most need it. But what it has done is completely disincentivize saving money for college by rewarding applicants who have the least money on hand. So after foregoing a car and an active social life in high school to save for college, a student discovers that the hot rodders and social animals get more aid awarded than he does.

I don't really know what can be done about that. Perhaps financial aid could be dollar-matched to personal savings available for college costs, or fractional matched, anyway. But I dunno.

However, the taxation rate problem can be attacked and should be. It's been exhaustively reported in recent months that almost half of American adults actually pay no income tax at all. Instead, they receive refunds equal to their withholdings or even greater, based on which Congressionally-favored class of American they happen to be.

For a long time I favored a flat tax for several reasons. One is that unreported American income is so much that it's greater than the defense budget. "Progressive" tax rates incentivize hiding income from the IRS, that is, cheating. Another reason for the flat tax is that it is inherently egalitarian while at the same time being inherently progressive.

So here is a thought experiment to answer this question: "How do we remove the tax code's disincentives to make more money and reward thrift and creating wealth?"

Get ready, this will peel your eyelids:

We tax all income at a flat rate (say between 5-10 percent) from $10K-$25K, and then exclude from income tax every dollar from $25,001-$45,000. Income above that would be taxed at a never-increasing flat rate. In various flat-tax proposals that have floated around over the years, a 17 percent rate seems about the average proposed.

Now, some low-income earners are actually claimed as dependents on someone else's return, such as a college student (this is the case in my family). In that case, their income below $10k would be subject to the ~7.5 percent tax rate. Only actual "breadwinners" would have the first $10K excluded.

Right now we have a tax code that perversely rewards making less money and punishes making more. Why not flip it? Make it so that the way to pay less taxes (up to a point) is to make more money.

Like I said, a thought experiment.