Federal taxes are higher on wages and earned income than on investments. This means that when the wealthy invest their money for the lowest risk / highest return. So, they are not starting new companies to provide goods and services because that is much riskier than conservative investment in on-going concerns and financial instruments. Hedge funds are popular because many have 30+ % annual return and the risk is perceived to still be lower than starting up a new business.

Here's a taxation system that would stimulate the economy by putting money in the pockets of those who would spend it rather than those who would simply invest it for maximum gain.

So, here's my plan:

It all works on indexing to an annualized multiple of the minimum wage. (In round numbers, if the minimum wage is $8.00 per hour, than the annualized minimum wage would be $8.00 x 40 hours per week x 52 week = $16,640 per year.) All rates would be progressive based on total income. The rate for earned income and investment income would be the same.

Earned income

Employment tax - First $16,640 is exempt from employee and employer tax. Remove the income cap on employment tax and adjust rate as appropriate.

Income tax - First multiple free from taxation ($16,640 per year per taxpayer.) Can be pooled If one taxpayer in household earns $25,000 and the other earns $11,000 - they would pay no taxes. 50% of annualized minimum wage ($8,320 per year) deduction per dependent. available above the standard deduction for each worker.

If minor children or retired persons dependent lives in the household, one working age adult receives a $16,640 deduction if they do not work - encourages having a stay at home adult (instead of the $8,320 standard deduction).

Example:

Household consists of two working age adults, two children, and a retired parent, the total deductions would be: 2 standard deductions of $16,640 + 3 $8,320 deductions for a total deduction of $58,240.

If household consists of 1 working adult, one stay at home adult, and 4 children, the total deductions would be: 2 standard deductions of $16,640 + 4 $8,320 deductions for a total deduction of $66,560.

Investment Income

Each taxpayer gets 2 x minimum wage deduction ($33,280) deduction on investment income. Investment income above this amount is taxed at same rates as wage / earned income.

So, a single taxpayer who earns $20,000 and has $40,000 per year investment income would pay taxes on $20,000 - 16,640 = $3,360 earned income + $40,000 - $33,280 = $6,220 investment income for a total of $3,360 + $6,220 = $9,580 taxable income.

Other

All other deductions will be phased out. Therefore, current tax deductions will be frozen at current amounts. Taxpayer can choose to take their deductions under the old system or the new system – which ever is more.