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Comment by waqf | Hacker News Reader

This should be combined with my even more radical plan for fixing some irregularities in the year-by-year accounting system for income tax (notably, the fact that progressive taxation punishes you more for earning nothing for nine years and then $1m the tenth year, than for earning $100k steadily each year):

Annually, you calculate how much income you've earned over your entire life (and of course subtract any deductions you've become entitled to over your entire life). Then you look that up in a progressive (i.e. convex) tax function which tells you how much tax you owe for your entire life. Subtract the amount of tax you've already paid with all prior years' returns, and pay the difference.

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I think your suggestion is more "fair" for someone who earns a steady income every year of their life, but is horrible for people (like me) that drop in and out of earning money every few years.

Lets say I earn $100k for 5 years, and pay taxes on it during.. then take 5 years break, and only earn something like $10k a year to keep rent ticking over. So I would have to pay tax on $550k over 10 years... that effectively means my tax rate during the later 5 years was calculated on earnings of $55k a year, even though only $10k actually came in. So I have to pay more tax that I'm earning for those later 5 years. Lets hope I saved a bunch during the first 5.

Conversely, my brother is a ski bum and has not earned over $10k a year for the last 10 years. He's actually an Aerospace Engineer, so lets say he now goes and gets a big-wig job for $200k a year for just 3 years. During those three years, he'll only pay tax on an (average) income of $53k, even though he had $200k coming in those 3 years.

It's certainly more appealing to not go to work until the last few years and earn as much as you possibly can in those years... somewhat like the opposite of retirement I imagine.

You're imagining the tax rates as being much higher than they would actually have to be (and I think you also missed that the taxes you pay always end up being a tax-rate proportion applied to the amount you earned that year). Assume for simplicity that people typically have a 40-year working life.

Then when you earn your first $500k in five years, that will be taxed at a rate appropriate to someone who earns $500k over their working life (that is, $12.5k/year). What's the U.S. tax rate at that level, currently? 15%?

So I envision your annual taxes, in your example, as looking something like:

  Year  1     Earn $100k   Rate 10%   Tax  $10k
  Year  2     Earn $100k   Rate 10%   Tax  $10k
  Year  3     Earn $100k   Rate 10%   Tax  $10k
  Year  4     Earn $100k   Rate 15%   Tax  $15k
  Year  5     Earn $100k   Rate 15%   Tax  $15k
  Year  6     Earn  $10k   Rate 15%   Tax $1.5k
  Year  7     Earn  $10k   Rate 15%   Tax $1.5k
  Year  8     Earn  $10k   Rate 15%   Tax $1.5k
  Year  9     Earn  $10k   Rate 15%   Tax $1.5k
  Year 10     Earn  $10k   Rate 15%   Tax $1.5k

You won't move into the 25% band until you've earned something like $1.3m over your life.

Hmm. I see what you mean now.

Though it's still extremely unfavorable for people that work sporadically. If I work hard for years then retire early, that means I have to keep paying tax in retirement for the money I earned years ago.

In the example of my brother, lets say he doesn't earn any real money until he's 40.. so he pays very low taxes until then, then starts making the big bucks... at that point the average will never catch up to him before he dies, and he will have not paid enough tax for the money he earned.

It sure is an interesting idea, I just can't see how it would work out.

Let's say I earn 100K a year, steady.

When I move into the 25% band after I hit $1.3m in lifetime earnings, do I have to pay back taxes on the rest of my income that I've been paying 10% on the whole time? If so, then I'm going to owe about 200,000 that year, which is more than my income. "smoothing" not the word I would use here.

Or, do I just start to pay 25% going forward? If so, your plan amounts to a massive tax cut for young people and a massive tax increase for retirees. As a young person, I can live with that, but it's absolutely terrible public policy.

25% going forward.

When you introduce the system, of course, you have to give people credit for all their past income tax paid. Most people of working age will have overpaid and will get a windfall in the form of a huge one-off tax credit, which will compensate them for the higher tax they will pay later in their lives.

If letting people hold onto their money early in life and give it to the government later is considered to be undesirable public policy, it would be possible to even out the tax by including tax deductions based on age. For example, when computing your lifetime taxable income, subtract a "lifetime personal exemption" of $4k times your age. This causes no problems other than that your annual tax bill could potentially be negative (if you earned less than $4k that year).

It might be clearer if you just said the first lifetime $500k will cost you $60k in taxes and your next $500k would cost you $75k in taxes.

This plan does not smooth things out completely because the value of a dollar decreases over time.

This is absolutely true.

Capital gains tax also screws people over because the value of a dollar decreases over time. If that's the biggest objection anybody comes up with I say we start tomorrow (and I'll have an inflation-indexed version worked out by then anyway).

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