The following is the result of a prompt given to ChatGPT for an improved tax structure to reduce inequity and improve middle class and lower class living standards. I was listening to people talk about different economic policies and that it would be interesting to see what some of the AI platforms come up with. I also followed up with a prompt to critique the results as well.
Simulated Equitable Tax Structure for the U.S.
Goal:
To strengthen the middle class while reducing economic inequality.
Key Features:
✅ Progressive Taxation → Higher earners contribute more, while lower-income earners receive relief.
✅ Middle-Class Growth Incentives → Tax credits for homeownership, retirement, and investments.
✅ Corporate Responsibility → Discourages stock buybacks, outsourcing, and extreme executive pay.
✅ Sustainability & Fairness → Taxes wealth, capital gains, and pollution without stifling economic growth.
1. Individual Income Tax (Progressive Brackets)
Definition: Progressive Taxation – A tax system where the tax rate increases as income increases. Higher earners pay a higher percentage of their income in taxes.
| Income Range | Tax Rate | Notes |
|---|---|---|
| $0 – $20,000 | 0% | Tax-free to help low-income households. |
| $20,001 – $50,000 | 10% | Encourages upward mobility. |
| $50,001 – $100,000 | 15% | Moderate tax for the working middle class. |
| $100,001 – $250,000 | 20% | Still competitive but fairer for higher earners. |
| $250,001 – $500,000 | 30% | Begins steepening for wealthier individuals. |
| $500,001 – $1,000,000 | 35% | Higher contributions from top earners. |
| $1,000,001 – $5,000,000 | 40% | Ensuring fairness in high-income taxation. |
| $5,000,001+ | 45% | Top-tier earners pay the highest rate. |
✅ Middle-Class Credit → Earners between $50K – $150K receive a $2,000 refundable tax credit per year.
✅ Wealth Cap Surtax → Individuals earning over $10M per year pay an additional 2% surtax.
2. Capital Gains & Investment Taxation
Definition: Capital Gains – The profit made from selling an asset, such as stocks, bonds, or real estate.
Definition: Long-Term vs. Short-Term Gains – Long-term gains are from assets held for over one year, while short-term gains are from assets sold within one year.
| Capital Gains Type | Income Bracket | Tax Rate |
|---|---|---|
| Long-term (over 1 year) | <$50K | 0% |
| $50K – $250K | 10% | |
| $250K – $1M | 20% | |
| $1M+ | 30% | |
| Short-term (under 1 year) | All incomes | Taxed as regular income |
✅ Middle-Class Investment Incentive → Tax-free investment gains (up to $5,000/year) for those earning under $100K.
✅ Stock Buyback Tax → 2% tax on corporate stock buybacks to encourage reinvestment.
3. Corporate Taxation
Definition: Corporate Tax – A tax imposed on the profits of businesses.
| Corporate Profits | Tax Rate |
|---|---|
| $0 – $5M | 15% |
| $5M – $50M | 20% |
| $50M+ | 25% |
✅ Living Wage Credit → Businesses paying workers a $60K+ median salary get a 5% tax credit.
✅ Small Business Deduction → Companies earning under $2M in revenue get a 50% tax reduction.
✅ Outsourcing Penalty → 10% surtax on profits from companies shifting jobs overseas.
✅ Automation Tax → Companies replacing human workers with AI/robots pay a 1% wage-equivalent tax per displaced worker.
📊 Corporate Tax Rate vs. Current System
(Current U.S. corporate tax rate: 21% flat rate for all companies)
| Company Type | Current Tax | New Tax |
|---|---|---|
| Small Businesses (<$5M) | 21% | 15% |
| Mid-size ($5M-$50M) | 21% | 20% |
| Large Corporations ($50M+) | 21% | 25% |
4. Wealth & Estate Tax
Definition: Wealth Tax – A tax on the net worth of an individual, including cash, real estate, stocks, and other assets.
| Net Worth | Annual Wealth Tax |
|---|---|
| $10M – $50M | 1% |
| $50M – $1B | 2% |
| $1B+ | 3% |
✅ Middle-Class Wealth Builder → First $500,000 of home equity is tax-exempt in estate calculations.
📊 Estate Tax Comparison
| Estate Value | Current U.S. Rate | New Proposal |
|---|---|---|
| <$5M | 0% | 0% |
| $5M – $10M | 40% | 10% |
| $10M – $50M | 40% | 20% |
| $50M+ | 40% | 30% |
5. Payroll & Social Security Taxes
Definition: Payroll Tax – A tax employers and employees pay on wages to fund Social Security and Medicare.
✅ Social Security Tax Cap Increase → Current cap ($160K) → New cap: $500K to strengthen Social Security.
✅ Universal Basic Retirement (UBR) Credit → Workers earning under $50K get $1,500/year in refundable retirement contributions.
✅ Employer 401(k) Matching Requirement → Businesses with 50+ employees must match at least 3% of contributions.
6. Consumption & Environmental Taxes
Definition: Consumption Tax – A tax imposed on goods and services purchased by consumers.
| Tax Type | Rate | Purpose |
|---|---|---|
| Luxury Goods Tax | 10% | On items over $50K (yachts, jets, etc.) |
| Carbon Tax | $40/ton CO₂ | To drive clean energy adoption |
| Financial Transaction Tax | 0.1% (stocks), 0.5% (derivatives) | To curb speculation |
✅ No Sales Tax Increase on Essentials → Groceries, medicine, and utilities remain tax-free.
7. Housing & Rent Relief
Definition: Rent Burden – A situation where 30%+ of income is spent on rent.
| Policy | Benefit |
|---|---|
| Renters’ Credit | Up to $2,500/year for renters spending 30%+ of income on rent. |
| Homeownership Tax Credit | $10,000 credit for first-time buyers earning under $150K. |
| Vacant Property Tax | 2% annual tax on unoccupied investment properties. |
Expected Outcomes
📊 Who Benefits?
| Income Group | Net Tax Impact | Key Benefits |
|---|---|---|
| Lower Class (<$50K) | ↓ Tax Burden | 0% tax, rent relief, retirement credit |
| Middle Class ($50K – $150K) | ↓ Tax Burden | Lower rates, homebuyer credit, investment growth |
| Upper Middle ($150K – $500K) | Slight ↑ | Higher tax rates but benefits from deductions |
| Wealthy ($500K – $5M) | ↑ Tax Burden | Progressive taxation, capital gains tax |
| Ultra-Wealthy ($5M+) | ↑↑ Tax Burden | Wealth tax, estate tax, corporate taxation |
And now for the results of prompting it for a critique:
1. Potential Issues with the Income Tax Structure
Historical Context: The U.S. has experimented with high marginal tax rates before. In the 1950s-1960s, the top income tax rate was 91%, but loopholes and deductions meant the effective rate was much lower.
Possible Consequences:
✅ Pros:
- Protects low-income workers while keeping middle-class taxes reasonable.
- Avoids excessive taxation of middle-class earners, unlike past high-tax models.
❌ Cons:
- Tax Avoidance & Evasion: Historically, high earners find ways to legally avoid taxes (e.g., offshore accounts, complex deductions).
- Brain Drain Risk: If top earners feel overtaxed, they may move assets or businesses abroad.
- Work Disincentives at High Incomes: Some professionals (doctors, entrepreneurs) may scale back work once they hit high brackets.
🔍 Mitigation Strategy:
- Close loopholes and offshore tax havens with stricter enforcement.
- Consider gradual bracket increases instead of large jumps (e.g., 30% → 32% → 35%, rather than 30% → 40%).
2. Issues with Capital Gains & Investment Taxation
Historical Context: The 1986 Tax Reform Act equalized capital gains and income tax rates. This led to reduced investment activity, slowing economic growth.
Possible Consequences:
✅ Pros:
- Encourages long-term investment by lowering capital gains taxes on middle-class investors.
- Prevents excessive tax avoidance by ultra-wealthy stockholders.
❌ Cons:
- Reduced Investment at Higher Tax Rates: High capital gains taxes (30% for the wealthy) could discourage venture capital, real estate, and stock market investments.
- Stock Market Volatility: Higher transaction taxes might reduce liquidity, making markets less stable.
- Middle-Class Retirement Accounts Could Be Affected: Higher capital gains taxes might impact 401(k) and IRA growth indirectly.
🔍 Mitigation Strategy:
- Keep capital gains taxes lower than income taxes to encourage investment.
- Exempt retirement accounts (401k, IRAs) from capital gains tax increases.
3. Corporate Taxation: Balancing Fairness & Economic Growth
Historical Context:
- The 2017 Tax Cuts and Jobs Act reduced the corporate tax rate from 35% to 21%, which encouraged corporate investment but also led to stock buybacks instead of wage increases.
- In the 1980s, corporate tax rates were much higher (around 40%) but had many loopholes, reducing actual payments.
Possible Consequences:
✅ Pros:
- Higher taxes for large corporations ensure they contribute fairly.
- Small businesses benefit from tax reductions, spurring entrepreneurship.
❌ Cons:
- Large Corporations May Relocate Abroad: A 25% tax rate might lead multinational companies to shift headquarters overseas (as seen in the 2010s with “tax inversions”).
- Stock Buyback Tax Could Be Evaded: Companies could increase dividends or use indirect buyback methods.
- Automation Tax Might Slow Innovation: AI and automation are crucial for growth—over-taxing them may discourage progress.
🔍 Mitigation Strategy:
- Keep corporate taxes competitive (possibly 22-23% instead of 25%).
- Tighten loopholes instead of outright banning buybacks.
- Gradually phase in automation taxes only where jobs are fully eliminated.
4. Wealth & Estate Tax Issues
Historical Context:
- The 2001 Bush Tax Cuts reduced the estate tax, benefiting wealthy families.
- The 1930s-40s saw aggressive wealth taxes, which many rich families avoided through trusts and offshore holdings.
Possible Consequences:
✅ Pros:
- Taxes extreme wealth accumulation, reducing economic inequality.
- Helps fund social programs without overburdening wages.
❌ Cons:
- Evasion Risk: Wealthy individuals use foundations, offshore trusts, and family funds to shield assets.
- Unintended Impact on Illiquid Assets: Family farms or small businesses may struggle to pay estate taxes without selling assets.
- Lower Charitable Giving: If ultra-wealthy individuals are taxed heavily, donations to philanthropy may decline.
🔍 Mitigation Strategy:
- Create stronger estate tax enforcement to prevent evasion.
- Exempt family farms/small businesses from immediate taxation if heirs continue operations.
- Offer tax deductions for charitable giving to preserve philanthropy.
5. Payroll & Social Security Taxes: Long-Term Stability Issues
Historical Context:
- Social Security has faced funding issues since the 1980s due to an aging population and longer life expectancy.
- Past payroll tax increases (e.g., 1983 reform) helped stabilize Social Security but were politically difficult.
Possible Consequences:
✅ Pros:
- Raising the payroll tax cap to $500K strengthens Social Security.
- UBR Credit boosts retirement savings for low-income workers.
❌ Cons:
- Payroll Taxes Still Hit the Middle Class Hardest: Payroll taxes are regressive—a higher cap helps, but middle-income workers still pay a lot.
- Potential Backlash from High Earners: High-income individuals may shift to alternative income structures (LLCs, dividends, capital gains) to avoid payroll taxes.
🔍 Mitigation Strategy:
- Phase in payroll tax changes gradually to reduce shock.
- Encourage alternative funding for Social Security, such as financial transaction taxes.
6. Environmental & Consumption Taxes: Risk of Regressiveness
Historical Context:
- Carbon taxes in Europe have worked, but often hurt low-income households the most (fuel, electricity prices rise).
- The luxury tax in 1990 backfired, leading to job losses in the yacht-building industry.
Possible Consequences:
✅ Pros:
- A carbon tax encourages cleaner energy use.
- Luxury tax targets the ultra-rich, not necessities.
❌ Cons:
- Higher energy costs for middle-class households (heating, transportation).
- Luxury taxes may hurt domestic industries (e.g., yacht, jewelry, or high-end car manufacturing).
🔍 Mitigation Strategy:
- Use carbon tax revenue to subsidize clean energy for low-income households.
- Apply luxury taxes to imported goods to avoid harming domestic manufacturers.
Final Evaluation: Strengths & Weaknesses
✅ Strengths:
✔️ Focuses on middle-class growth with tax credits & investment incentives.
✔️ Encourages corporate responsibility without crushing businesses.
✔️ Targets ultra-wealthy loopholes while keeping entrepreneurship viable.
❌ Weaknesses & Fixes:
❌ Risk of tax evasion (offshoring, loopholes).
🔍 Fix: Stronger IRS enforcement, closing loopholes, and international tax cooperation.
❌ Possible investment slowdown from high capital gains taxes.
🔍 Fix: Keep capital gains tax below income tax rates, exempt retirement funds.
❌ Corporate tax hikes may push businesses abroad.
🔍 Fix: Keep tax rates globally competitive (~22%) while closing loopholes.
Bottom Line:
This plan is economically sound with the right balance of fairness & growth, but it needs refinements to prevent evasion, economic slowdowns, and unintended burdens on the middle class.