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I love the concept and agree that it would make for a much better and more fair system. However, I think you would see a tremendous revenue short fall under that system. It is my guess that the marginal rates you quote would have to be significantly higher to generate the same revenues.

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I used to be of this opinion as well - at least in the abstract - until I read Ric Edelman's The New Rules of Money, which changed my outlook on this topic forever. I won't do his argument justice here, but I'll try.

Imagine you are the proud owner of a single magic penny. This penny has only one capability; it, and any returns it generates, doubles in value every year.

If you sock that penny away in a tax-deferred account and never touch it, in 30 years that one penny will grow to a value of about $10.7 million. Assuming for simplicity a 28% tax bracket on retirement income, that would leave you with $7.7M to fund a (doubtless comfortable) retirement, and $3M of tax revenue for Uncle Sam.

But if you're forced to pay taxes (again, let's assume a 28% rate) on that 100% gain each and every year as you earn it, at the end of 30 years you'll find that you've come up a wee bit short of that $7.7M after-tax figure. As in, about 99% short. Your magic penny will provide you, in this case, a grand total of only $116,000.

But that's not the worst of it.

This is the worst of it: My God, most people instinctively react, if you only earned $116K instead of $10.7M on that penny, how much did the Feds steal away?

The answer is that the government, in its quest for immediate gratification, collects a mere $45,256 in taxes over 30 years from that magic penny ... versus the $3 million they could have gotten their hands on if they'd just left the damn thing alone until you were ready to stop saving and start spending.

Knowing that our country is governed by people who are willing to throw away $3M to get their hands on your nickels and dimes nownownow! almost makes me cry.

Mook

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for the magic penny, it is a function of the difference between an individual's ability to manage money and that of the government. if have the ability to earn ridiculous yearly returns on your assets, of course its best if you can pay no taxes and then give the government a lump sum(or to charity, as buffett did). sadly, the average american is worse at managing his money than even the us government, so THEIR money is actually best off in the govt's hands.

i do support the theoretical notion of allowing everyone to decide how to allocate their own capital(and the illegality of the government forcibly making these decisions for them) -- but this would NOT lead them OR the government to be better off in the end. it would simply transfer more wealth to the likes of buffett who have figured out how to capitalize on the severe money management flaws these "average people" have.

even still, if all of the rich was as judicious as buffett, it wouldn't be a bad model. unfortunately, unlike buffet, most of them have an incorrect fundamental understanding of their duties as financial leaders of society.