I'm sick and tired of hearing about the fiscal cliff...

so since the Congress and the President can't solve the problem, I will.  They won't listen, and I've ranted about a lot of this before but they need to either defecate or get off of the crapper.

The problem with the federal budget is simple and complex.  We spend more than comes in.  To close the deficit, either more money must come in, or spending must be cut, or a combination of the two must work together to eliminate the deficit.  Once we're living within our means we need to adjust either spending or revenue a little more to start paying down the public debt.  Once we eliminate the annual interest on that, spending could actually go up.

How to accomplish this.  The Democrats want to raise tax rates on the wealthy.  That's not a horrible idea, but how much money would that really raise?  According to IRS data, those who earned more than $250,000 in pre-tax income in the year 2009 earned $1.67 trillion.  Also according to IRS data, those in the top 1% income wise in 2009 paid 36.73% of all income taxes collected, but their AGI was over $343,000.  Those who were in the top 5% income wise had AGIs of $154,000 and up and they paid 58.66% of all income taxes collected.  So those earning $250,000 and more paid somewhere between 36.73% and 58.66% of all income taxes collected.  Lets split the difference and estimate that those earning over $250,000 pay 47% of all income taxes collected.

So for FY2012, $1.165 trillion was collected in individual personal income taxes.  47% of that amount would be $547.5 billion.  That only leaves them income of $1.12 trillion without considering all of the other taxes, such as state income tax, excise taxes, Social Security and Medicare taxes and so on.  Now if we were to take 100% of whatever was left, that might bring us close to balancing the budget.  Right up to the point where everyone who is being taxed at 100% would be leaving for another country.  So we can't solve the budget deficit solely by raising taxes.

The Republicans want to reduce spending, keep tax rates where they are and lower deductions.  But there's no specific programs they are willing to cut, except entitlement programs that the Democrats won't budge on, like Social Security and Medicare, along with other social safety nets.

So how do we prevent falling off of the fiscal cliff?  The answer will cause almost everyone a little pain, but if I'm pissing everyone off, I must be doing something right.  Here are the present personal income tax rates, and remember, people pay these percentages in tax based on their income after deductions and personal exemptions for themselves and their dependents:

Single Filing Status

[Tax Rate Schedule X, Internal Revenue Code section 1(c)]

• 10% on taxable income from $0 to $8,700, plus
• 15% on taxable income over $8,700 to $35,350, plus
• 25% on taxable income over $35,350 to $85,650, plus
• 28% on taxable income over $85,650 to $178,650, plus
• 33% on taxable income over $178,650 to $388,350, plus
• 35% on taxable income over $388,350.

Married Filing Jointly or Qualifying Widow(er) Filing Status

[Tax Rate Schedule Y-1, Internal Revenue Code section 1(a)]

• 10% on taxable income from $0 to $17,400, plus
• 15% on taxable income over $17,400 to $70,700, plus
• 25% on taxable income over $70,700 to $142,700, plus
• 28% on taxable income over $142,700 to $217,450, plus
• 33% on taxable income over $217,450 to $388,350, plus
• 35% on taxable income over $388,350.

The first step is to not allow the Bush-era tax cuts to expire.  Then we alter the above rates as follows:

Single Filing Status

[Tax Rate Schedule X, Internal Revenue Code section 1(c)]

• 10% on taxable income from $0 to $8,700, plus
• 15% on taxable income over $8,700 to $35,350, plus
• 27% on taxable income over $35,350 to $85,650, plus
• 30% on taxable income over $85,650 to $178,650, plus
• 34% on taxable income over $178,650 to $388,350, plus
• 36% on taxable income over $388,350 to $500,000, plus
• 38% on taxable income over $500,001 to $1,000,000, plus
• 39.5% on taxable income over $1,000,001

Married Filing Jointly or Qualifying Widow(er) Filing Status

[Tax Rate Schedule Y-1, Internal Revenue Code section 1(a)]

• 10% on taxable income from $0 to $17,400, plus
• 15% on taxable income over $17,400 to $70,700, plus
• 27% on taxable income over $70,700 to $142,700, plus
• 30% on taxable income over $142,700 to $217,450, plus
• 34% on taxable income over $217,450 to $388,350, plus
• 36% on taxable income over $388,350 to $500,000, plus
• 38% on taxable income over $500,001 to $1,000,000, plus
• 39.5% on taxable income over $1,000,001

Step 2 is to reinstitute the rate of 6.2% for Social Security tax and raise the ceiling on that amount to $125,000.  Then we add an additional Social Security tax amount of 1% on wages in excess of $125,000 and it goes up another 1% on wages in excess of $125,001 through $250,000. 

Step 3 is to phase in an increase in Medicare Tax so that it will rise from 1.45% (total of 3.9% counting employee and employer portion) to 2.5% (total of 5%) over the next ten years by increasing it one tenth of one percent per year.

Step 4 is making changes to the income tax code as follows:

1.  The loophole that allows hedge fund and private equity fund managers to pay income tax on their income as though it was capital gains and not wages must be closed.
2.  The mortgage interest deduction is currently the interest paid on mortgage for the purpose of purchase up to $1 million worth of debt (interest on $100,000 for home equit debt).  This will be reduced immediately to $900,000 and continue to be reduced by $50,000 per year until it is lowered to $750,000 (home equity will not change).  All mortgages that are outstanding as of 12/31/2012 will be grandfathered in.
3.  There is currently a limit on how much of one's Adjusted Gross Income (AGI) that can be donated to charity in one year of 50%.  Charitable contributions in excess of that limit are carried over to future years.  That limit of 50% will still apply to the portion of a taxpayer's AGI up to $250,000.  The deduction limitation will be reduced to 30% for all income in excess of $250,001.  Deductions can be carried forward for an unlimited period of time, and can all be claimed in the year of a taxpayer's death.
4.  Currently there are a number of investment instruments sold by the federal, state and other levels of government that earn interest on a tax-free basis on the federal return.  While federal debt instruments that are currently earning interest on a tax-free basis will do so, all other such interest will only be 75% free of federal income tax.  In other words, if someone earns $100,000 in tax-free interest from their municipal bond investments, in future years, $25,000 of that amount will now be subject to federal income tax.

Step 5 is to alter entitlement spending as follows:

1.  People receiving Social Security Old Age Benefits who have no other source of income will continue to receive those benefits tax free.
2.  People receiving those benefits who have other income will continue to be taxed on their Social Security benefits as is done under the current system.
3.  In addition, those who have other income besides Social Security in excess of $75,000 will pay a 2% surtax on their Social Security benefits.  Those earning other income in excess of $150,000 will pay a 5% surtax on their Social Security benefits.  Those earning other income in excess of $250,000 will pay a 25% surtax on their Social Security benefits.  Those earning other income in excess of $500,000 will simply not receive Social Security benefits.
4.  Medicare Premiums for Part B currently run just under $1,200 per year.  They will be means tested so that those earning more than $75,000 per year will pay 200% of the annual premium.  Those earning more than $150,000 will pay 300% of the annual premium.  Those earning more than $250,000 will pay 400% of the annual premium.  Those earning more than $500,000 will pay 500% of the annual premium.

Will all of this impact the wealthy disproportionately?  Yes.  The system of taxation is progressive and it should be.  The more you earn, the more you can give back to make this nation run so that ultimately no one will ever be homeless, hungry or die from a lack of medical care.  Those should be our goals.