[sokoloff]

Though I agree with the annoyance of high marginal rates for one-time windfalls of income, I think it's more practically workable to only allow forward averaging in the form of "pay all the taxes now and fill out this new form XYZ to allow you to perform the alternative averaging process over the next 4 tax years".

Otherwise, you end up effectively amending N returns (possibly opening them back up for examination), needing to calculate what taxes would have been due under the then-extant tax brackets and laws, possibly needing to make inflation adjustments for figures that are decades removed from the tax years in question, realistically needing to pay interest on the taxes that you didn't pay in 1972 but are now claiming are part of your 1972 income because you sold a company in 2019, and everyone would have incentive to file a tax return showing earned income from age 1. (Maybe I arrange for my child to have a job posing for photographs and being paid $20 just to get their income tax filing clock started and being able to income average all the way back to that year instead of only to age 17, 19, or 21.) Forward-only averaging avoids (or substantially avoids) those issues.

[hedora]

Computing tax rates against a moving average of the last 5 years income is a simple and elegant way to have the same effect.

Young people would have lower rates while they’re establishing themselves, people with windfalls would end up paying rates in line with their annual compensation (instead of just maxing out the brackets with a big percentage of their income).

Also, people with sustained high income would be taxed at a much higher rate than upwardly mobile members of the middle class.

Similarly, low income people with intermittent income would have a much better chance at building their savings.

Finally, it defeats all sorts of timing strategies, so people could make major financial decisions without first hiring a cpa.

[sokoloff]

That's interesting. In essence (assuming no tax law changes), you claim 20% of your income for the current year over each of the next 5 years for tax purposes. Has very nice properties for initial wage earners as you say.

Downsides: results in a 3x income tax charge if an income earner dies suddenly (assuming you want to settle their estate in less than 5+ years). Acts as a loan from the feds to the taxpayer, resulting in income taxes due after you stop working (perhaps you became disabled or got fired [or die, as above]), and results in deferral of income tax receipts to the government during the transition.

Overall, I really like it.