Real Tax Reform

Why tax reform?

Our tax system has the ability to make us all poorer or wealthier and the present system is making us all poorer. Our tax code should not be revised based on political hyperbole or expediency but based on hard economic facts.

There is considerable debate as to whether we should have a progressive tax, a flat tax, a VAT, a sales tax, capital gains tax, inheritance tax etc. Two things are clear, if we are going to maintain and defend a civil society we must have some government and we must have a means of paying for it. It is equally clear that the more we are able to reduce government spending the less onerous and contentious any tax system will be. Priority should therefore be given to minimizing the size and cost of government.

Any tax system that taxes income - the result of work or investment and the risking of capital - is perverse and a disincentive to be productive. It is detracting from EVERY ONES prosperity.

Any tax system should be judged against the following criteria;

1. Taxes to support society should be paid approximately in proportion to what one obtains from society.
   
2. Everyone that has income should pay SOME tax even if small. If everyone pays some tax, everyone will be encouraged to restrain their politicians profligacy.
   
3. The tax system and code should be easily understood by the tax payers and not require tax lawyers and accountants to interpret it for them. The average tax payer should be able to prepare his own return without having to hire professional preparers. A tax return should preferably be one page or less.
   
4. The taxes should be applied in such a manner as to not increase prices and cost of living causing more people to fall below the poverty line and require more welfare assistance and income supplementation schemes.
   
5. Taxes should not be a disincentive to investment that is needed to increase our standard of living and employment opportunities.
   
6. It should not be hidden or so dispersed as to make it difficult to see how much government is costing us.

The existing tax code fails miserably on all of these criteria. It is a political monstrosity that needs to be slain.

A sales tax fails because it is terribly regressive and would place untold hardship on the poor and create new legions of people below the poverty line and on welfare by substantially increasing the cost of living. Because the sales tax would have to approach 20 to 25%, including state sales tax, it would require an army of enforcement personnel to prevent wholesale cheating and tax avoidance schemes.

A VAT tax is really a sales tax but is a concealed internality of commerce. It is equally as regressive as a sales tax and because it is so well hidden it makes it too easy for government to continue wasteful spending and increase taxes to fund the waste. For these reasons it is even worse than a direct sales tax.

The flat tax appears deceptively simple and fair. Some politicians are doing a hard sell on this tax and using deception in the process. They imply it is fair because everyone after a small exemption pays the same tax rate and that it would permit filing ones return on a post card. Whether the tax rate is flat, progressive or regressive has little to do with it's complexity. A flat tax, per say, will not simplify our tax system.

Our tax system is complicated because of all the special treatments given to various kinds of income and hundreds of special deductions, exemptions etc. This is the complexity - not the tax rate structure. The main reason our tax code is so complex is because of our politicians. Firstly, they love to talk about cutting taxes and simplifying tax preparation in election years because it wins votes. They also like to revise the tax code almost every year because it gives them an opportunity to provide special treatment for large voter groups and campaign contributors. They gain from changing the tax code and providing special exemptions - not simplifying it!

If we are going to truly improve and simplify our tax system we must consider the following;

• We must stop letting the politicians distort our thinking by stimulating class warfare or offering too many special treatments for favored voting blocks or campaign contributors.

• We must understand that any and all business taxes are effectively a hidden sales tax collected by business and passed on to their customers in their prices. In reality, businesses don't pay taxes. They are merely the tax collector for government. Politicians like business taxes because they are hidden and the average citizen thinks the tax load is being carried by those "wealthy businesses" and not themselves. This is political subterfuge pure and simple. When businesses send dollars to Washington it is no different than the dollars they send to a supplier for raw materials. It's just another business expense that must be recovered in the price of their product. When we increase business taxes we indirectly increase prices and reduce our standard of living. In actual effect, business taxes are very regressive taxes the same as an outright sales tax which increases prices and causes more poverty. If we eliminate business taxes we reduce prices, poverty and increase everyone's standard of living. Competition will see to it that any tax decrease results in lower prices and not higher profits. This does not mean we should eliminate taxes on dividends which should be treated the same as any other income.

• When business taxes are reduced or eliminated, competition will see to it that it results in lower prices. If for any reason it doesn't it can only go to two other places - dividends and/or investment. If it goes into increased dividends it will be taxed just like any other income. If it goes into increased investment it will add to employment opportunities and our prosperity. We can't lose - only gain.

• The money lost by eliminating business taxes can be more than regained by eliminating corporate welfare programs, increased employment opportunities and prosperity. If we want to help the poor and reduce poverty it is more effective per dollar involved to eliminate business and sales taxes which will reduce prices and encourage investment than to spend money on an inefficient bureaucracy to dispense wasteful and fraud afflicted welfare and income supplementation schemes.

• When we tax investment we discourage it and decrease it. Investment is what increases productivity which reduces costs and prices and creates employment opportunities and prosperity. Because not taxing business and investment reduces prices (the cost of living) and increases employment it also decreases poverty and the need for welfare and income supplementation schemes. For these reasons this money that is invested (in society) should not be taxed. Now if we do not tax business, savings and investment what can we tax?

• We can tax "consumption", the goods and services that are taken from society (not investment that is money put into society). A consumed income tax ( NOT a "sales" tax ) is equitable in that it taxes people approximately in proportion to what they get from society, need not be regressive, does not increase prices, and does not discourage or detract from investment in society.

• It can be a relatively simple tax. All income, regardless of it's source, would be considered gross income and all income would be treated the same. The "basis" for capital gains should be adjusted for inflation to arrive at true capital gains income which then should be treated the same as any other income. All money deposited for saving and investments, except land, should be deducted from gross income to arrive at the consumed income which would be the taxable consumed income. Note that this would automatically give everyone an unlimited IRA (Individual Retirement Account) and IMA (Individual Medical Account) with no complex regulations. This could also be a major first step to improving the unsound Social Security system.

• Charitable contributions should be considered an investment in society and be deductible the same as other investments. This will provide the funds so that private charity can take over from failed government welfare programs.

• The first fifteen thousand per tax payer should be taxed at a very low 2 or 3% to not impact too heavily on the poor and elderly. The balance can be a flat rate. A progressive rate is unnecessary as the wealthy spend substantially more and as a result will have higher taxable consumed income and pay a proportionately higher amount of taxes even with a flat rate. The relatively high rate of taxes on consumption will have the side benefit of discouraging wasteful and excessive consumption which contributes to resource depletion and pollution.

• Unfortunately, over time, this method of taxing would accelerate the over concentration of wealth and power (The tools of production) in a small aristocratic elite. There is evidence indicating that this is already happening. The top 1% of families have increased their share of the nation's total wealth from 22% in 1976 to 42% of total wealth by 1992. That's a lot of wealth and its attendant power in the hands of a small aristocracy.

• This trend cannot continue for too long without seriously destabilizing our society and changing our society from a democracy to a plutocracy.

• This presents a quandary. If we try to redistribute wealth and power by confiscatory accelerating tax rates on the high earners (mostly the high producers) we decrease the incentive to produce and lower the overall productivity and wealth of society. If we arbitrarily allocate wealth to those who are looking for a free ride we encourage indolence. Most of these income redistribution schemes can easily result in decreasing society's production of wealth thereby hurting many of the people we are trying to help. In addition, these redistribution schemes are the constructs of politicians with the usual catering to groups with the political power to influence the legislators.

• To keep the consumed income tax rate as low as possible and to prevent the excessive accumulation and concentration of wealth in a small aristocracy, the inheritance tax should be very high. All inherited wealth over a modest exemption should be taxed at a high rate and all tax dodges via special trust arrangements should be eliminated.

• This wealth accumulated during life was not just the result of that individual's efforts and talents but also the result of the society in which it was acquired. We should give back to society the excess over what we used while we were living. Some of this wealth most probably was aided and abetted by the large government deficits we have been running. Perhaps some of this tax can be used for paying down the national debt thereby reducing the financial burden on future generations.

• New generations should earn their wealth by their contributions to society and not by the chance of birth. This country should not be run by a powerful aristocratic elite. We want a democracy, not an aristocratic plutocracy. The advantage to a relatively high inheritance tax and low consumed income tax is we will not discourage the productivity of the high earners during their working lives yet they will be required to carry a share of society's cost more in proportion to what they have obtained from society. Also, the next generation will have to produce their wealth instead of coasting on their unearned inheritance.

All of the above changes should result in the following;

1. A substantial increase in savings and investment.
   
2. The increased investment will dramatically increase employment opportunities, reduce prices and increase every ones standard of living.
   
3. The lower prices and increased employment opportunities will reduce poverty and the welfare rolls.
   
4. Much time and expense will be saved in filling out tax returns and eliminating the need for legions of tax preparers and tax attorneys. It has been estimated that over to 200 billion dollars per year is wasted by business and individuals on tax records keeping, preparers, tax attorneys and tax avoidance schemes.

Our tax system can make us all much poorer or wealthier depending on how we structure it. Let's fight for greater prosperity for all.

E-mail: W. J. Mechlenburg -- mechlen@ix.netcom.com