SensibleTaxReform Blog

6. Sensible Tax Reform–An Economically-Effective Tax

The two previous posts have focused upon the simplicity and justice aspects of Sensible Tax Reform–Simple, Just and Effective. This post will examine the third element: economic effectiveness.

Efficient or Effective?

Some analysts would describe our Internal Revenue Code as “efficient.” That is not always an adequate attribute. As Blog #1 noted, the tax historian, Charles Adams, has colorfully observed that “The income tax…can be likened to a dirty industrial smelter that does an efficient job, but pollutes the air, poisons the streams, and kills the forest.” As Adams’ observation notes, the existing tax code may be efficient—it collects a lot of taxes. However, in the process, it does a lot of harm. Efficiency alone is not sufficient. What we need is a wholly new tax system that is not only economically efficient but also, more importantly, effective.

Efficient and Effective!

Unlike our existing tax code, which has very many negative impacts upon the American economy, Sensible Tax Reform—Simple, Just and Effective has been carefully designed to be economically effective—for all sectors of the economy:

• For families, STR will raise income, increase both the ability and incentive to save and eliminate most of our current tax-compliance costs and burdens.
• For businesses, STR will eliminate most of their federal taxes, their tax-compliance costs and the distortions that tax incentives encourage.
• The overall economy will be very strong and millions of jobs will be created.
• For the federal government, under STR the collection of taxes will be much simpler and more predictable, with less avoidance and evasion.
• Interest rates will decline and a strong economy will likely yield a strong stock market.
• Despite the lower interest rates, both households and businesses will have less incentive to borrow as heavily as they do now. That lower debt will be safer for them and for our overall economy and society. That would greatly reduce the terrible cost of another Great Recession such as we had in 2007-2010.
• Internationally, American businesses will be much more competitive in both export and import markets, our trade and current-account deficits will shrink greatly and our government’s need to borrow abroad will decline massively.
• American companies will no longer have a tax incentive to use deceptive accounting techniques to move profits abroad. Much of the profits that are hidden abroad now will return home.
• The United States will become a veritable tax haven. American companies will stop moving their headquarters abroad for tax reasons. Foreign companies may even be attracted to moving here.

Simplicity, Justice and Effectiveness

Many tax proposals claim to be trying to simplify and improve the justice of our tax system. We have observed that not only do they almost all fail badly in those tasks but they also almost always harm the American economy. Sensible Tax Reform—Simple, Just and Effective is different.

• It is simple—very simple.
• It is just—very just.
• And it is economically effective—very effective.

The next few posts will examine the specifics of the STR proposal.

Tags: #tax reform

5. Sensible Tax Reform–A Just Tax

The simplicity of Sensible Tax Reform–Simple, Just and Effective was explored in the previous post. In this one, the justice element will be shown.

An Unjust Tax System

Will Rogers was not only a famous humorist but also an astute commentator on America and its problems. I think that he spoke for most Americans when he quipped that “people want just taxes more than they want lower taxes.”

Unfortunately, one of the greatest of the very numerous flaws of our existing Internal Revenue Code is its injustice. However when our federal tax code was first written a century ago, justice was one of its primary goals. The so-called “Gilded Age” of the late 1800s and early 1900s had brought great public scrutiny and disapproval of the excesses of the very rich. Even the Gilded Age’s most prominent financier, J. Pierpont Morgan, warned strongly about the dangers of an economic and social system that was perceived by many of the very rich (as well as by most of the rest of the country) to be a dangerous condition. Morgan warned against “the tyranny of mere wealth, the tyranny of plutocracy.”

There was a very different political environment 100 years ago from what we have now. The government passed aggressive legislation, including the creation of the Federal Reserve and the introduction of the federal income tax. That progressive government had a Republican president (Theodore Roosevelt, a member of the moneyed classes himself), a Republican Senate and a Republican House. There was broad bipartisan support from Democrats as well as Republicans. Political differences were put aside by the majority to do what was good for the country—not just politics as usual, which is clearly the norm in Washington today.

The new tax code, which first required a constitutional amendment (the 16^th Amendment) was progressive and very simple. Very few people, only those with high incomes, paid any personal income taxes at all. The tax rates ranged from 0-7%–less than what some states charge today. It had very few loopholes and did not impose a heavy burden on anyone. It was widely perceived to be just.

Unfortunately, in the intervening 100 years, that simple and just tax system deteriorated drastically into the 77,000-page disaster that we have today. Not only was simplicity sacrificed but so was justice–our current federal tax system is loaded with provisions that benefit some groups while harming others:

• Warren Buffett, America’s 2d-richest man, has publicly condemned a tax system that taxes his secretary at a much higher tax rate than someone like himself with tens of millions of dollars of income.
• Capital gains and dividends are taxed at a much lower rate for those wealthy enough to invest outside of an IRA or 401k retirement account.
• Salary earners may pay taxes at almost a 40% rate while speculators who qualify under special tax provisions called “carried interest” pay the same tax rate as for capital gains. That rate is 16% points less for their unearned and largely risk-free income (which in some cases amounts to billions of dollars) than that paid by most wage and salary earners.
• Companies like Apple and General Electric use financial tricks to pretend that their American earnings have been made abroad and avoid most or even all US taxation–indefinitely. Small and medium-sized businesses can seldom afford the same tricks.
• Many of the tax advantages that the lobbyists of big companies, the very wealthy and other very influential groups have been able to wrangle behind closed doors in Washington are not available to small companies and less-wealthy households.
• Wealthy people with expensive houses can obtain up to $500,000 of tax-free capital gains on the sales of their homes–and they can do it every two years if they have multiple homes.
• Although no estates smaller than $10.5 million are taxed by the federal government, huge estates often pay much less than mid-sized estates.

Almost everyone, wealthy as well as poor, can legitimately complain about the inequity of some parts or other of our existing Internal Revenue Code. That is not just. That is not even smart for the country as a whole.

Creation of a New Tax System that Focuses on Justice

When Sensible Tax Reform–Simple, Just and Effective is adopted, everyone will be treated exactly alike. That is how a just tax system must be designed.

• All businesses, whether large or small and whether corporation, partnership or proprietorship, will be treated exactly alike.
• All households, whether rich or poor and whatever the source of their income, will be subject to the same rules.
• All estates will be subject to the same rules.
• All purchases will be subject to the same rates.
• All retailers, whether in-store or online, will be treated exactly the same.
• Any special provision, such as the rebate to protect the poor, will be available to everyone.

This new tax system will be easy to understand. It will treat everyone alike. There will be no secret manipulations for the benefit of only a few. Sensible Tax Reform–Simple, Just and Effective will bring true tax justice.

 

The next post will detail the third key element of this new tax system: Its very dynamic impact upon the growth of the American economy.

Tags: #tax reform

3. Comparing Our Taxes with Other Countries

As was discussed in the previous blog, between the federal, state and local governments, we pay a bewildering array of taxes. As a result, it is very difficult for us individually to calculate how much we owe in total taxes each year.  It is much easier to calculate average taxes paid on a nationwide basis. This has averaged about 24% for the United States in recent years. Just how heavy is that burden? Most of us feel it is high–perhaps very high. But is it? What is high?

Average Tax Burdens Around the World

It is interesting to observe how heavily Americans are taxed compared with others. A very good measure of this can be found in the statistics of the Organization of Economic Cooperation and Development (OECD) whose 35 members include most of the largest economies in the world together with a number of rapidly growing developing countries. The OECD statistics measure “Total Tax Revenue as a percentage of Gross Domestic Product.” The following numbers are the latest averages for which the national statistics were available–2012 for most countries, 2011 for a few.

a) Three major European countries, including France, pay an average tax of more than 45.0%!

• Denmark 48.0%
• Belgium 45.3%
• France 45.3%

Residents of Denmark therefore pay twice as much in taxes as a share of their national income as do Americans.

b) Five other European countries, including most of Scandinavia and Italy, pay 40.0%-45.0%:

• Italy 44.4%
• Sweden 44.3%
• Finland 44.1%
• Austria 43.2%
• Norway 42.2%

c) Another eight European countries, including Germany and the United Kingdom, pay a national average tax rate between 35.0%-40.0%:

• Hungary 38.9%
• Netherlands 38.6%
• Luxembourg 37.8%
• Germany 37.6%
• Slovenia 37.4%
• Iceland 37.2%
• Czech Republic 35.5%
• United Kingdom 35.2%

d) Eight countries from around the world, including Canada, Spain and New Zealand, pay between 30.0%-35.0% in total taxes. The overall OECD average of all member countries is 34.1%:

• OECD-Total 34.1%
• Greece 33.8%
• Spain 32.9%
• New Zealand 32.9%
• Estonia 32.5%
• Portugal 32.5%
• Poland 32.3%
• Israel 31.6%
• Canada 30.7%

e) Residents of countries as diverse as Japan, Switzerland, Turkey and Australia pay 25.0%-30.0%:

• Japan 28.6%
• Slovak Republic 28.5%
• Ireland 28.3%
• Switzerland 28.2%
• Turkey 27.7%
• Korea 26.8%
• Australia 26.5%

f) The residents of only three OECD countries pay less than 25.0% of GDP in total taxes. Two of those are developing countries in Latin America. Only the United States of all of the industrialized countries pays less than 25%!

• United States 24.3%
• Chile 20.8%
• Mexico 19.7%

Thus, although we Americans may feel that our tax burden is high, it is actually one of the lowest in the world! It is almost 10% lower than the average for all OECD countries (34.1% versus 24.3%).

Why Do We Need Federal Tax Reform?

If our total tax burden is actually among the lowest in the world, the reader might reasonably ask why I have I gone to so much effort to design a sweeping fundamental change of our tax system. The problem is not that our total taxation is too high. The problem is our array of municipal and federal tax systems–especially the Internal Revenue Code, which is:

• Very long (more than 77,000 pages) and very poorly designed;
• Very complicated and contradictory;
• Very unfair to most groups of taxpayers; and
• Perhaps most importantly, harmful to the American economy and society.

Ours is a bad federal tax system!

A Solution Is at Hand

Sensible Tax Reform–Simple, Just and Effective is a proposal to bring our tax system into the 21st Century. It will be:

• Simple,
• Consistent,
• Easy to understand,
• Easy to comply with,
• Just to businesses and individuals alike,
• A dynamic boost to the overall American economy and
• The vehicle for making American companies much more competitive on the world stage.

STR will:

• Create millions of jobs;
• Help diversify our economy;
• Greatly strengthen American companies;
• Substantially reduce our international balance of trade deficit; and
• Substantially reduce the American government’s need to borrow abroad.

Some observers, especially some misinformed politicians, constantly denounce our “high” taxes. They demand even more tax cuts. We do indeed need tax reform, but not because our taxes are too high.  [As can be seen in the above data, Americans are among the lowest taxed citizens in the world.] Rather, it is that our Internal Revenue Code is simply a terrible mess.

I hate taxes. My wife and children all hate taxes as well. However, it is not the total of taxes that we detest but the senseless mess that is our Internal Revenue Code and the sense that the system is basically very unjust. It needs to be replaced. We need a much better tax system. We need Sensible Tax Reform–Simple, Just and Effective. We need it now!

People often say when they recognize a serious problem: “Someone should do something!” Well, each of us is someone. Each of us can make a contribution. Get involved. Join the tax revolution. It begins–here and now!

Tags: #tax reform

2. Do You Know How Much You Pay in Taxes?

Americans pay a bewildering array of taxes. We pay them at the local, the state and the federal levels. However, few taxpayers  know how much they actually pay in taxes overall.

Types of Taxes That We Pay

State and local taxes are collectively called municipal taxes. The primary municipal taxes that apply to individuals include:

• Income taxes,
• Sales taxes,
• Excise taxes,
• Property taxes and
• Inheritance or estate taxes.

Any of them can be collected at either the state or local levels.

Our federal taxes are even more diverse–and complicated: The most important federal taxes are:

• Income taxes,
• Social Security taxes,
• Medicare taxes,
• Estate taxes,
• Excise taxes and
• Import duties.

We do not, however, pay a federal sales or other form of consumption tax. Sales taxes  are only collected at the state or local level.

Difficulties of Calculating How Much We Pay Individually in Taxes

Most of our taxes (whether federal, state or local) are paid incrementally, rather than all at one time. That makes it much more difficult to calculate our total tax burden:

• Income taxes are collected from us every time that we receive our pay.
• The same is true of Social Security and Medicare taxes.
• Sales taxes are collected when we purchase taxable goods or services.
• Similarly, excise taxes are paid whenever we buy such goods as gasoline, alcohol or tobacco.
• We pay import duties every time that we purchase dutiable items, such as clothing  and some foods.
• Property taxes are generally due only once or twice a year, but people who have mortgages commonly have property taxes collected monthly and then escrowed until the actual payments are due.
• Estate and inheritance taxes are triggered at the death of the owner of an estate–a taxation on wealth transfer. However, they are paid later, often much later, than the time of death.

Only when we prepare our annual federal tax returns are any of us likely to give much consideration to the total amount of taxes that we pay. However, making even a rough estimate is a monumental task. Few of us make the effort. Do you know how much you pay in taxes? Have you ever estimated the total?

Calculating Total Taxes Paid in the Entire Economy

While it is very difficult for us to calculate our own total personal tax burden, it is much easier for the federal government to calculate it on a national basis. Each taxing entity, whether Uncle Sam or state and local municipalities, tabulates and reports its own annual tax receipts. The federal government also calculates our gross domestic product (GDP) annually. Once the total of taxes collected by all taxing authorities throughout the country (T) is tabulated, it can be divided by the GDP of that year to yield the national average tax rate (NATR):

(T ÷ GDP) * 100 = NATR

As will be shown in the next post, the American NATR has been about 24% in recent years. That means that on the average we pay about one fourth of our total income in taxes–a sobering statistic. However, just how burdensome is that relative to other major countries in the world? That will be discussed in the next post.

Tags: #tax reform