Comment by waqf | Hacker News Reader

Comment by waqf | Hacker News Reader

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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.

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