Taxes are considered a hot button topic. Many people have very strong feelings about them. I know I do. Unlike most however, mine are more about using income tax breaks to push the public in certain directions. You want people to buy houses, and have kids? Gives them discounts on their tax bill for those things. I'm not exactly a fan of using people's paychecks fit such arbitrary lifestyle choices. Using sales taxes to help account for externalities of various products and consumption styles is a different matter. That's not unreasonable.
So looking at personal income tax alone, let's take for granted that deductions for various expenses or assets are all eliminated. That leaves us with 3 general ideas.
Virtually everyone in the world agrees that a progressive tax rate is the most fair. A regressive tax just feels wrong. The less your people are paid, the more of their money the government takes. I hope I don't have to explain how backward that is. A flat tax seems very fair on the face of it. But it fails to take into account that people who are paid less, depend on a higher percentage of their paycheck to cover the necessities of life. Any individual only needs to spend a certain amount on food, clothing & shelter. Anything above that is just icing. For that reason, most societies agree that a progressive tax rate is the most fair.
What method do we use to determine how progressive that rate should be? In effect, how steep should the slope be? That's a point of much debate. Most governments in the world implement a tiered or bracketed system. They occasionally tweak where the tax brackets are, and what the rate is at each.
This kind of system is easy make mistakes with. The rate at any tier could be set too high or low. The tiers could be too wide or too few. What I suggest is replacing the variable tiers that politicos get to argue about and debate, with a fixed algorithm. That algorithm should be based on the income distribution curve. Also known as income equality or income inequality curve. An individual rate could be calculated for each taxpayer. It would be tuned to their specific income. I know that sounds impossible, and complicated, but the math is surprisingly simple.
Each year, everyone tells the government how much they were paid. Adding up that total is simple. It's tedious for sure, but that's what computers are for. Your cellphone could add up the millions of records in a few min. Once you have that total, you can divide any individuals pay by that total. You'll get a very small decimal as a result. If you plot those very small decimals on a graph, you'll get the income distribution curve of the current taxpaying population.
These numbers are far too small to use as a tax rate directly. You can instead, apply a multiplier to that rate. That multiplier can be mathematically determined by choosing a top tax rate. This will be the tax rate of the highest paid person in the country. Whatever that number comes out to, you multiply everyones personal slice of that years income pie by the same multiplier. That gives you the personal tax rate, mathematically generated, specifically for every individual.
This system combines the on-the-face-of-it fairness of a flat rate, while taking into account relative differences in dependency on each dollar people of different incomes experience. People who take home very little, will pay very little. Those who take home a lot, will pay a correspondingly large amount.
Those who are at the bottom of the curve, will still have to pay something. The only way to bring the final tax rate to zero percent, is to be paid zero dollars. Far enough down the slope you'll get to a point where it won't be worth the time collecting the money, so maybe there should be a cut off. If someone's total tax bill is less than $20, it might not be even worth the time to collect it. I don't know how much it would cost to collect the money, so someone else will need to figure out that number should be.
To help you see what this would look like, I created a spreadsheet. It uses the average income for each percentile in the US, using 2011 numbers. This gives an idea of what the curve would look like, and where you fall on it.
Now It's easy to say, this system couldn't possibly work because nobody would be able to predict what their tax rate would be. While it's true nobody would be able to predict exactly what their rate would be, it's easy for 98% of taxpayers to estimate their rate within half a percentage point. The last 2% are paid enough to safely overestimate by a few percentage points without much worry about paying their bills.
The current deductions system makes people's taxes even less predictable. You can never be sure what deductions you'll be able to take advantage of, or how much they'll really save you. Simply eliminating deductions makes taxes vastly simpler.
This system makes taxes un-gameable. That is it's biggest barrier to being used. Politicians like the current tax system because they can promise deductions, credits and loopholes to large campaign donors. And the large campaign donors like it because of the big loopholes, deductions and credits they can get. With my system politicians only have one dial to adjust. They can pick the top tax rate. There is nothing else for them to play with. That's why I can't imagine they'll ever implement a system so straightforward.