Reforming the American Tax Code
With the American government farther in debt, and running a larger deficit than any time in history, congress has tasked a 12 person super committee to cut at least $1.3 trillion from the deficit, or both parties will take large hits in spending effecting the areas they care so much about–entitlement and defense. However, most of the nation, including at least 100 representatives, is pushing for a much larger cut; larger to the amount of $4 trillion. The debate has now become not if the committee can make the cuts, but will they make the cuts. All six republican members of the super committee have signed a pledge which guarantees they will not raise tax revenue. It is a general consensus among Americans that taxes need to be raised in order for congress to return our deficit to a manageable level; furthermore, it is widely believed that the super committee cannot reach a $4 trillion reduction without some additional offsetting revenue. Every day we hear the tax debate; how much is needed? Which system will work? How should the tax brackets be distributed? The questions are mounting by the day, and there is no definite answer for most of them. Everyone has a different idea. Michelle Bachmann even said (and hopefully we do not actually have a congressional representative who really believes this) that she does not believe the American people should be taxed at all. This would mean zero government spending; no Medicare, social security, or national defense. Enough said.
Clearly no taxes would be a terrible idea, so what about a simple tax plan? Herman Cain, the self-made restaurant mogul proposes turning the United States tax system on its head. As it currently stands, the tax system requires an advanced degree to understand; the IRS awards deductions, breaks, and has loopholes so complex that millionaires can pay no taxes and middle class can be hit very hard. Herman Cain proposed a simple and easy to understand tax code; nine percent corporate tax, nine percent income tax, and nine percent national sales tax. This tax plan is flat and simple; it includes no exemptions, loopholes, or deductions. Many Americans favor this tax code because of its simplicity. However, the 9-9-9 plan has gotten plenty of complaints from both the liberal left and many in mainstream America for being a regressive tax code. The largest reason Cain’s proposal is stirring controversy is that under the 9-9-9 tax plan, Americans living in poverty would still be required to pay the nine percent income tax. This brings up a touchy subject; 47% of Americans pay no income taxes, due to deductions and write offs. Is it fair to make these presumably struggling Americans pay taxes and take away more of the income with which they already are stretching to get by? Most Americans agree that those who are struggling should not pay taxes, at least not nearly as much as those living in comfort. The 9-9-9 plan would have required these less fortunate Americans to pay equal taxes on income to a millionaire. When this controversy gained enough momentum, Mr. Cain realized there was a need to tweak the plan, and include a 9-0-9 plan as it is being called. In this system the poorest Americans would pay no income tax; a much more fair system in most Americans eyes.
So what would the 9-9-9/9-0-9 plan look like? Well, the pages become much less attractive than the cover photo. For starters, a nine percent national sales tax would still be required from the poor, and in a state like my Kentucky home, this would be added on to the existing six percent state sales tax, resulting in a 15% tax on every purchase made in the state of Kentucky (this would be similar across the country). Asking the people to give the government 15 cents on every dollar we spend seems a bit too much for most Americans, particularly the ones where this would raise taxes when coupled with the nine percent income tax; the poor and middle class. An American family making an average American salary–$50,000 annually–with three or more dependents would no longer receive deductions on their income tax for dependents, mortgages, student loans, etc. These families would have to pay the nine percent income tax, and then be faced with 15 percent tax rates on all purchases. For millions of American families this would actually raise taxes, meaning their buying power would drop. Millions of households which now actively contribute to the economy would be stripped back to buying just the necessities. If this were the case the three industries which would take the largest hit would be the auto, entertainment, and technology industries. Millions of consumers would no longer be able to buy tickets to a movie or ball game, and a new car or flat screen TV also become out of the question. This would presumably mean a large drop in demand for many of the things Americans now cherish, resulting in an even slower economy than we have now. If this is the case it is understandable that we would see more layoffs, leading to less spending, and the downward spy roll would continue. However, it is also possible that nine percent would be just the right amount to keep America functioning and the tax reduction for the richer Americans would offset the tax increase for the poorer. The bottom line to Herman Cain’s tax plan is this: the rich pay less, the middle class pay more, the higher end of the poor pays more, and the poor, who qualify for the zero income tax, pay about the same. You will notice one glaring hole in the 9-9-9 plan: capital gains. The source of billions of dollars of tax revenue each year would be wiped away. This would infuriate the Occupy Wall Street protesters, as it would make the income gap between rich and poor even wider. The second oversight in the 9-9-9 plan is that it may not even raise as much tax revenue as the current system would. This means that for the foreseeable future government deficits would grow.
The growing popularity of the 9-9-9 plan among republicans has prompted Governor Rick Perry to introduce a new tax proposal for his campaign; an optional 20% flat tax rate. Optional meaning that everyone for whom this would lower taxes would take the deal. If you do not quite pay 20%, you would stick with the traditional tax code for that year. It is unclear how long you would be required to stay with the plan which you pick, but we do know that it will not be permanent. This means that the IRS would then be tasked with the burden of sorting through financial records in two different systems, as well as be required to keep track of who is using which system, and if they change their preferred system. Experts agree the size of the IRS would have to be far bigger than it is today. This means more tax dollars to pay salaries and to build resources for the bureaucracy; in lay man’s terms this spells out more government spending. This flies in the face of the man infuriated with government spending, who vowed to make government as irrelevant as possible if elected. The fact that every American would choose the tax plan which forfeited the least amount of money to the IRS by nature means less revenue. A larger IRS by default means more spending. Unless Governor Perry can cut spending by a level nobody in America sees as possible, his tax plan does not add up.
Another tax plan being suggested by economists, particularly by Robert Frank, professor of economics at Cornell University, is what is called a progressive consumption tax. In this tax plan, people would be taxed on what they consume, rather than what they make. Consumption is classified as your income minus your savings. All the money you do not save, and thereby invest in banks that can lend it and grow the economy, you will be taxed on. Tax rates would be low for the poor, and then progressively grow for those who make more money, and especially those who consume more, resulting in highest tax rates on the rich who spend money lavishly. This would encourage those with more money to save money, rather than buy a new lavish house, or put on a large addition. By saving the money they will put it into stocks, bonds, IRA accounts, annuities and so on. These accounts would not be taxed because they would become capital for banks to lend and earn interest on, and then lend again; hopefully not leveraging at rates too risky to bear. That investing and spending would then feed the economy. This seems like a good idea, but a closer look will show that a rich person who would want to add an addition on their home would be taxed for doing so. Spending money in the market is what fuels economic growth, if nobody is spending money, lending it to businesses does no good because there are no spenders to feed those businesses. Spending on an addition or a new car or boat directly inputs into an economy; the more that is spent, the more jobs are needed. However, if the rich are encouraged to save, this allows banks to lend this money for others to build and buy, which also directly feeds the economy. It is worth noting that Professor Frank has other tax ideas which are terrible ideas, such as taxing vehicles by weight. Work trucks, family vehicles, farm trucks and equipment, commercial trucks, and freight trucks would all have to pay higher taxes, in many cases, killing job opportunities.
The key to Professor Frank’s plan is to get the banks to lend; in fact, the key to any growth is to get the banks to lend. It is common knowledge among economists that the banks are sitting on billions, and not lending it out. Without bank loans citizens cannot purchase new homes or cars, two areas which affect the American economy the most. To fix this problem patriotslog proposes taxing banks 7% annually on all stagnant capital. This means that every year, if banks refuse to lend their capital to worthy applicants, seven percent of their capital will go to the government. Banks who move over 40% of their capital to feed the economy would be exempt from this tax. This pushes banks to feed consumers, but does not encourage dangerous leveraging which would happen if banks moved 80%+ of their capital too quickly. In order to keep leveraging from exceeding responsible levels, the government could also tax interest gained on all lending over 75% of capital. These are sure measures to accomplish needed tasks: put more buying power into the economy to speed recovery, gain more revenue by the purchases, or from the banks if they do not lend, and also discourages leveraging at dangerous levels.
The last tax proposal facing America is that by President Obama. His proposal would raise taxes on the rich, who are seeing lower tax rates now than any time in history. Republicans, who swear by the name of Ronald Reagan, refuse to raise taxes on the rich the way Reagan did. The current tax system works perfectly. Everyone is paying their fair share, except the rich. Capital gains taxes are so low that the rich end up paying lower rates than their secretaries. Warren Buffett has a point here when he said that he knows of no investor who would pass up a deal because taxes are too high. If someone invests $100 thousand dollars, and receives $1 million, but has to pay 50% taxes, they still earn a 400%– let me repeat, 400%–return on investment. I would never suggest that capital gains taxes be as high as 50%, but even if they were, who would pass up that deal to make $400 thousand? Nobody.
The current tax system works. Raising taxes on the rich would make the system perfect and perfectly fair for everyone. We need to cut spending, and we need more revenue. Patriotslog continues to advocate a 4.5-1 spending cut to revenue increase. If we raised rates on capital gains, and taxed banks as suggested above we could get the revenue needed, and feed the economic machine. Republicans in the super committee can compromise wisely, and make a difference in our country. They can cut spending as they adamantly demand needs to be done. Democrats can compromise and fix the tax system while fixing the spending amount. Both can do what is best for the country, if they will put special interests aside, and work together.
30 October, 2011
Posted on November 3, 2011, in Patriotslog Articles, Taxes and tagged 9-0-9, 9-9-9, 909, 999, Baraq Obama, Congress, flat tax, Herman Cain, Michelle Bachmann, revenue, Rick Perry, super committee, taxes. Bookmark the permalink. Leave a comment.