As the debt-ceiling debate escalates, U.S President Barack Obama says federal tax increases are necessary to close the U.S. budget deficit.
Although Republicans then said that tax hikes were "off the table," this statement is reminiscent of a toddler who threatens to hold his breath until he turns blue if you make him eat spinach.
Given that our elected leaders in Congress just can't seem to curb their spending addiction, the unpleasant reality is that some types of tax hikes are essentially inevitable.
Truth be told, I can show you three tax increases that should be enacted.
As a taxpayer, that statement will probably make you wince in anticipated pain.
But once I've made my case, I'm betting that the investor in you will agree that these three federal tax increases could save the U.S. economic recovery.
Let's take a look ...
Federal Tax Increases We Don't Want to See
If we ignore the debt-ceiling debate (and the Aug. 2 deadline for increasing the ceiling) for a minute, and just consider the health and welfare of the U.S. economy, we can see that there are a number of federal tax increases that would be highly counterproductive.
One example: boosting the corporate tax rate above 35%.
Except for Japan, the United States already has the highest corporate tax rate in the Organisation for Economic Co-operation and Development (OECD). Corporations don't pay much tax because they are able to keep profits overseas in tax-free jurisdictions and employ leasing and other tax breaks. It would make much more sense to lower the corporate tax rate - perhaps to 30% - and close many of the loopholes so that the "yield" (what's actually collected) is the same or perhaps even a little higher.
Similarly, it makes no sense to increase the 15% tax on dividend income. Dividends are paid by corporations out of their after-tax income. The levy on dividends - paid by the company's shareholders - means those companies actually suffer from a "double-taxation" rate of about 47%.
This encourages companies to fool around with stock options, repurchase agreements and with overpriced acquisitions, thus ripping off ordinary shareholders and reducing the economy's efficiency.
The best system would be to make dividends fully tax-deductible at the corporate level - just like debt interest - and then tax them as ordinary income at the individual level. We would benefit as investors and shareholders, because it would put more money in our pocket. That would make us very hostile to tax shelters and other management gambits - which at the end of the day would very likely increase overall tax yields.
Increasing individual rates of income tax and capital gains tax is also economically inefficient, but less so.
Learning From the Laffer Curve
The Laffer Curve is a way of demonstrating the relationship between government tax revenue and tax rates. According to Arthur Laffer, tax-rate increases decrease the taxes' yield below what you would expect.
That's a very important truth. But there's a bit of a catch.
In the Laffer Curve's extreme form, where you actually get less money when you increase tax rates, it's only true at very high rates.
At lower tax rates, the Laffer Curve is much less effective. The Laffer Curve effect for increasing capital-gains tax from 15% to 20% would be modest, reducing the additional revenue only slightly below that expected by simple proportionality arithmetic.
The Laffer Curve bends at lower rates for capital gains than it does for income tax: That's why the 35% capital-gains-tax rate of the 1970s appears to have yielded less than the 28% rate that succeeded it.
We saw a similar effect in 2001, when the top income tax rate was reduced from 39.6% to 35%. The Laffer Curve offsetting revenue gain was modest.
Since 2001, however, Congress has added a Medicare surtax, and from 2014 onward there's an additional 3.8% surtax on top investment incomes.
When you include state taxes (which have also risen in many cases), high-income taxpayers are now subject to a top rate of more than 50%. At that point, the Laffer Curve effect substantially reduces the additional income from tax rate increases, though it probably does not eliminate it altogether.
That means that restoring the pre-Bush administration (II) rates on top incomes will produce much less revenue than is being predicted by the computer models that Congress is using.
And it will mess up the economy, too.
The Three Federal Tax Increases We Need to See
There is no Laffer Curve effect from closing loopholes. As an extreme case, the Republicans would like to end $6 billion in annual subsidies for ethanol producers. That will produce substantial additional revenue, including revenue from gasoline taxes as oil refiners change the mix they sell to gas stations. It will also make the economy more efficient, not less, effectively reducing a wasteful farm subsidy.
The same applies to several "tax preferences" in the tax code for individuals. The largest of these are the tax deductions for state and local taxes, home-mortgage interest, charitable contributions, health-insurance premiums and pension contributions.
Of that group, the following three deductions could be eliminated - thereby serving as three tax increases that could help save the U.S. economy:
- The tax deduction for home-mortgage interest cost $89 billion in the 12 months that end in September. It benefits mostly those living in high-cost areas: At today's interest rates the deduction on a 4.5%, $300,000 mortgage is only $13,500, barely enough to make it worth "itemizing" for those with no other major deductions. Eliminating the deduction would reduce house prices in high-cost areas, and push the wealthy into investing in productive industry - instead of in vulgar "McMansions." It should go.
- The tax deduction for state and local taxes costs the government $38 billion. And the tax exemption on municipal-bond interest costs an additional $31 billion. I'm of two minds here: Eliminating these deductions would push people to move to lower-tax states, increasing the out-migration from California and New York - and as a New York resident, I object to this! On the other hand, the tax exemption for municipal-bond interest pushes municipal bonds into their own little market, separate from the corporate bond market. It's thus very inefficient. The federal government would save money by abolishing the exemption and paying (preferably somewhat less) money directly to the states.
- The tax deduction for charitable contributions costs $50 billion. And various other tax privileges for charities cost the federal government an additional $50 billion or more. These are the tax preferences I would eliminate first. The idea that some Wall Street trader can tax-deduct his $1,000 charitable dinner that boosts his flashy social life is deeply offensive. Members of the super-rich set take huge advantage of this deduction, while normal people are much less able to do so. There are many charities that do great work. Unfortunately, there are just enough "charities" that are actually either scams, huge pointless bureaucracies or leftist political activism thinly disguised to conclude that the economy would hugely benefit by shrinkage of this sector. At the very least, this deduction should be limited to the 28% tax rate, so that the millionaire's charitable dinner is treated the same as the middle-class donation to his church.
The other two deductions, although even more expensive, are I think justified:
- The health-insurance contributions deduction cost $174 billion in 2011. Eliminating it would "level the playing field" between employer-provided and self-provided health insurance, which is a good thing. However, increasing the net cost of everyone's health insurance is highly unattractive - it's not as if people incur healthcare expenses for fun. I'd be in favor of a tax credit - as opposed to a tax deduction - that would "level the playing field" without impoverishing those with poor health.
- Last, but not least, are the pension, 401(K) and IRA deductions that cost the government $120 billion. No doubt here - I would keep these: They encourage saving, which God knows the U.S. economy needs.
So if you are frustrated by everything you're reading about the debt-ceiling debate, write your congressional representative, and tell him or her: If you must increase taxes, do it by cutting out the home-mortgage and charitable deductions, other "corporate welfare" loopholes and the tax exemption for municipal-bond interest.
These increases would actually help the economy, or at worst be neutral; other federal tax increases would be damaging to this feeble recovery - some of them hugely so.
News and Related Story Links:
- Contacting the Congress:
A Citizen's Congressional Directory: Official Website. - The San Jose Mercury News:
Obama: Nothing Can be Off Limits in Budget Debate. - Investopedia:
What is "Double Taxation" on Dividends? - Wikipedia:
McMansions. - Investopedia:
Repurchase Agreements. - Money Morning News Analysis:
Let's Make a Deal: How the Mergers-and-Acquisitions Boom Will Hurt the U.S. Economy. - Wikipedia:
Ordinary Income. - Money Morning:
Special Report: What is the Greek Debt Crisis, and What Does it Mean for Investors? - Wikipedia:
The Laffer Curve. - Organisation for Economic Co-operation and Development (OECD):
Official Website.
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It is clearly evident that you are using keynesian economics, which has never worked, in your thesIs. Whatever happened to good old common sense, when debt overtakes income either reduce expenses to repay debt or default & file for bankruptcy, a choice many small businesses are facing today due to past Keynesian nonsense.
We lack leadership from the President through most of our Congressional Representatives. As as result, there has been a failure by them to look within first and cut, runaway government spending and giveaways to countries around the world. You failed to mention the need, first and foremost by the Congress for some belt-tightening and reductions of costs of running the federal government. The federal payroll could be slashed by 20% with no loss of services. Inefficiency, duplication of efforts by numerous governmental agencies, runaway spending of rediculous and non-essential programs have been the norm. The time has come to look within and get back to living within our means and stop trying to balance the budget on the backs of industry and we taxpayers.
Good article. I would add one new tax. There is little need to toy with tax rates on the wealthy as many of these folks demonstrate great perseverence in sheltering their wealth fromtaxes. What might work however is a progressive consumtion tax. The rich will always want the things that money can buy and displays of status through material possessions will be part of that life. A consuption tax is inherently fair. It only taxes those who are prone to such displays while those who choose to save, invest, and live a less extravagant lifestyle can avoid the tax.
Fully agree ethanol subsidies to be gone, as a farmer I have no problem with that—-but not for the reasons you list.
1st of all Economist Urbanchuk details how the ethanol program actually pays back Treas 3-1 basis. And he does not even entertain how it has put a stop to LDP pymts to farmers for low grain prices.
2nd–what say if tinkering with ethanol causes price to rise 10 cents per gal ( ethanol as a whole drops gas 50 cents) based on 400k gal gas used per day……….. that will cost the USA economy 14+ billion………..all for a savings of single digit billions……..and then see Urbanchuks arguements .
This is like a farmer cutting off Fert. to his crops to save money……..end result is a loss.
……the other tax hikes you list will never happen because they effect 200 million voters….whereas the ethanol effects only 1% of american voters……….easy to crow about doing something that is actually negative.
……….also you couild add to your list Tax deductions for IRA/ 401k plans contributions—-this is something Indiv.'s should be doing on their own regardless, do not need to be subsidized.
…and add the college tuition deduction to your list. All it has done is drive the cost of tuition over the top. Stats show 85% of college grads finding no jobs, moving back in with parents, and a goodly number flunking out and left with large loans.
we dont need to incentivize going to college any longer——–cut the deduction.
Ethanol Subsidies – I never hear about the fact that the government pays farmers not to grow crops on a portion of their land because of our large surplus. And it is a big number. When I was on the farm it was like 20% of the farmer's land. That is why I think something could be worked out that instead of giving the farmers for growing nothing, let them raise the corn for ethanol on that land instead. This would not contribute to the farming surplus and then save the government the 20% cost. Somebody please research this!
Martin,
Your article was well thought out and well documented, I agree with some of the things you are proposing but I completely disagree with the premise of your article laid out in the second paragraph:
"Given that our elected leaders in Congress just can't seem to curb their spending addiction, the unpleasant reality is that some types of tax hikes are essentially inevitable"
I ask you, why can't elected leaders in Congress curb their spending addiction? Every other entity in America has had to cut back, why should we give Congress a free pass? I believe they can, should and will break their spending addiction or this country is headed for a cliff.
Our tax code needs to be reformed in a big way and cutting out some loopholes is a great start but at the end of the day more revenue is not going to solve this mess, there needs to be a gutting of many current programs and a complete rethink of many institutions in America.
Thanks for your great daily insights at Money Morning!
Best,
Chris Duggan
Chris,
I agree that congress can and should curb their spending habit, but I don't believe they will.
Why no Tobin Tax as part of the package?
A long-time citizen and resident of Canada, I have lived 40% of my life in the USA, 60% up here, and I am always struck by the fact that two adjacent countries with great cosmetic similarities have enormous cultural and economic differences. Some Canadian distinctions:
1) No deductions on interest from provincial (i.e. state) or municipal bonds;
2) A national retail sales tax ("GST ");
3) A much simpler and sounder national pension system (Canada Pension Plan vs. Social Security = NYYankees vs. Kansas City). For one thing, benefit levels determined by independent actuaries rather than by politicians.
I think #2 above, as a trade-off for MUCH lower corporate rates, would help do two things — A) Enable US companies to stay home rather than move overseas, and B) level the playing field between imported and domestically produced goods.
Critics often say that a national sales tax inhibits consumption. I would reply to this by noting that in doing so it encourages savings — a badly needed component of national economic health to which Bernanke and his freinds are sworn enemies.
You have written an excellent essay. It should be required reading for every member of congress.
With thanks — Bob C
Screw your tax ideas. I bought my house in 2000, and live in NJ.
Without the tax savings of home mortgage interest rates and the state taxes, I'm out of a home. I'm middle class and trying to raise a family.
I know, how about we get rid of all the Democrats and their wasted social programs?
Think of all the money we can save!
How about taxing more of all the ball players making millions a year?
How about taxing people like you 75% who milk other people?
Gov't. workers owe the country billions in back taxes, how about going after them?
How about going after Nancy Pelosi, Chuck Shumer, Harry Reid and the rest of those tax cheats?
"Given that our elected leaders in Congress just can't seem to curb their spending addiction, the unpleasant reality is that some types of tax hikes are essentially inevitable. "
Tripe. Taxpayers need to become taskmasters, and punish representatives (not leaders) that cannot curb their spending appetites. My God, this whole debt crisis is about asking the Congress to allow the country to borrow money to make its principal and interest payment next month! Borrowing money to pay for borrowed money!
And you want to give them more money, because you think they will act responsibly with even more money? People should read your financial advice and do the opposite, because you are completely out of your mind.
Here's what needs to happen:
Corporate taxes should be abolished.
Income taxes on wages should be abolished.
A constitutional amendment should be adopted that limits total government tax receipts to some percentage of a defined GDP… say 20%. Any excess collected should reduce the currency in circulation. Also, all borrowing should come with a payoff plan that does not exceed 20 years.
Then politicians in the future will know their limits, and they can fight over how to slice up their percentage.
Corporations should pay no taxes.
Corporations should be required to distribute 100% of gross profits to shareholders, and the shareholders should pay taxes on the dividends.
Corporations should not be allowed to buy back stock, buy sports teams, contribute to charities, or do anything else that the shareholders should be doing with their own money. Corporations should not be allowed to own their own or any other companies stock. Top pay for executives (CEO, Chairman, Board Members, etc.) should be limited by law to a reasonable percentage of the lowest paid employee in the company. If the janitor makes the minimum wage, the CEO cannot make more than ten or twenty times that amount.
It is time for the shareholder to receive the rewards for what he is risking his capital. Not the executives of the company. Not the employees of the company. Not the union. Not the politician. The Shareholder.
Then tax the shareholder's profit from his investment.
Crazy in the absence of other total reform. The psychological damage to the middle class would be more devastating than the financial. Eliminate ALL FEDERAL INCOME TAX for people grossing less than a million dollars. Progressive tax rate capped at 15% for all earners $1 million or more. NATIONAL SALES/CONSUMPTION TAX on all purchased items 5-7%. Constitutional balanced budget amendment and term limits. All elected Federal officials must have total wealth frozen for length of their term, their own 401 K instead of current retirement, COBRA health for 30 days following term, defeat or resignation.
"The following three deductions could be eliminated – thereby serving as three tax increases that could help save the U.S. economy:"
Increasing taxes could help save the U.S. economy? Right, that makes a whole lot of sense! What are you smoking?
Why not just just scrap the entire US Tax Code and replace it with the Fair Tax?
While I agree with some suggestions like
Rmoving corporate ubsiies like:
6 billlion for Ethanol producers, Send the senatorts a strong note to do that samme with Petroleum producers (which even more ~45 billions) – I DON'T UDERSATND WHY E HAVE TO PAY FOR CORPORATION TO MAKE MORE MONEY, WHY WE HAVE TO BAIL OUT FAILED BANKS INSURANCES AND OTHER INUSTRIES WHEN THEY CLEARLY RUNNING TO MAKE MONEY FOR THEM SELVES. tHEY DON'T COME BACK & PAY YOU (GOERMENT BACK)
CASE IN POINT- Subsidies for oil producers – They said "It cost us $40.00 a barrel whn oil was $20/barrel, Govt. (taxpayers) gave them subsidies. Now that the oil is >$100 for last 4+ years. WHY THE HELL WE STILL HAVE TO GIVE THEM SUBSIDIES. GOVERNMENT shcd Barrel for last 90-100. ENOUGH IS ENOUGH -NO MORE SUBSIDIES – THEY CAN EXTEND LOANS at LOWER INTEREST RATES TO EXPLORE AND KEEP ASSETTS FOR COLLATERAL. WHen buisness start making money they must pay back upto 25% of the EBIDA to pay loans back. This will avoid paying all BIG DOGS fisrt befor the government and employees.
Responce to your second point ( home mortguage, staet & local tax deductions) – It is the only deduction the middle class families get) you take that away they will be paying more. Riase the personal exeption by $2000 and take away everything. I am OK with that.
NO one and I MEAN "NO ONE HAS THE GUTS TO GO AFTR RICH BOYS CLUB- may that be Oil lobbies, Insurances (who are sucking our blood like Leaches) .
Peronal income & Caital gain tax -should be increase in increment on income level (NO LOOPHOLES)
Incomes based on # of dependents up to $250,000 – 15% FLAT TAX, 5% STATE +2% CITY
>250,000 to 500,000- 20% FLAT TAX, 5% STATE +2% CITY
>500,000 to 1000,000- 25% FLAT TAX, 5% STATE +2% CITY
>500,000 to 1000,000- 28% FLAT TAX, 5% STATE +2% CITY
>1000,000- 30% FLAT TAX, 5% STATE +2% CITY
We all overlook the experience of the 1950s, a time when the highest marginal tax rate was 91% and the economy was doing very well.
All the talk about the rich leaving if we raise taxes overlooks the truth: All US citizens are subject to US taxation on their world-wide income, even if they renounce their US citizenship, if the government concludes that they have done so for tax avoidance pruposes.
In the final analysis, I agree with eliminating the mortgage interest deduction and eliminating the state and local tax deduction. I think the charitable deduction elimination is a push, but probably should go.
Your take on the IRA, 401(k) etc is correct, but these plans must be simplified and expanded. There are still too many fees, too much paperwork, etc., involved with these.
We need to combine the existing IRA structure with a provision for private portable pensions, a system modeled after the Taft-Hartley multiemployer funds that craft unions have. If we combine private portable pensions with a simplification and cost0reduction of the whole process, we will ease the burden on Social Security and increase the retirement security of many, many Americans.
One tax source that no one has mentioned is the tax treatment of "carried interest" in hedge funds, the loophole that allows hedge fund manageers to be taxed at 15%. This has to go. If they want to make money from the fund, let them invest in it. As for the argument that the hedge fund managers will leave the US, see the discussion above about renunciation of citizenship. As for the argument that they would work less and possibly quit the game, my answer is "So what? There will always be someone looking to make a few million running a hedge fund. As far as I know, the major agressive investment finds, by and large, are not net positives for society, so if a few of them fold and the management turns over, we have lost nothing.
The estate tax has to be raised to punitative levels, otherwise we, as a nation, run the risk of becoming Europe Lite, with massive amounts of money tied up in multigenerational pools of money that just sit and generate income for peopole who won the birth lottery. Either we address it now and be done, or the next generation will do so with a vengeance, possibly combining it with a wealth tax.
A few thoughts. Some conservative, some bordering on socialism. If everyone is a little angry with this plan, then I've got it right.
If America wants a quick fix (not a perfect one, but a reasonable one) there are only two alternatives a National retail tax and a gasoline tax.
How about restoring the Estate Tax to traditional levels, or even upping to 90% on estates over $100,000 mil?
meant $100 mil
Corporations should only receive a zero tax bill IF we abolish corporate personhood and limited liability. The corporate tax is the cost of these two benefits.
I agree with Jesse Hurdle Keynesianism is a means to the end of the dollar now the end to the fiat dollar I can accept. Here is a link to an article on Keynesian economics delivering O in the last decade by Ron Paul
One other comment.
No one mentions the deleterious effect that constant changes in the tax code have on the economy.
In some respects, the tax rate matters less than the changes.
If businesses and people can look at the tax and regulatory environment and believe that what they are seeing will extend into the future, they can make long-range plans in confidence that they won't be blind-sided by "new, improved" regulations.
It's a start, but there are some flawed assumptions and unintended consequences.
The Laffer curve is more artistic than scientific as your colleagues like Bonner and Stansbery would point out. The only reason the Laffer curve makes sense is the irrational things people do to avoid taxes. Many folks don't even know what their effective rate is, but they buy munis and put off gains sales anyway!
The corn-based ethanol subsidy is a good place to start cutting. Corn is the worst choice for making ethanol and useful for little else. Farm subsidies benefit corporations more than individuals and have outlived their effectiveness. While we are cutting subsidies, most of the money Congress gives out (or doesn't take in) for energy flows to traditional petroleum producers. This is a mature industry that shouldn't need to nurse off taxpayers. While they're at it, the rates for harvesting resources from taxpayer-owned land (or sea) are not at market levels and aren't always collected.
Effective corporate tax rates for the 40% of corporations that actually pay any tax are much lower than 35% due to the generous deductions. Many were politically bought and do nothing to help the economy or even the companies that take advantage of them. Drop the published rate and clean up the loopholes. It happened to taxpayers in the 80s, deductions were taken away and rates were adjusted.
The mortgage interest deduction has been an indirect subsidy to lenders who were able to charge higher average rates for secured loans. The home equity business was built on marketing the tax-adjusted rate being offered. Recent history suggests that lower rates encourage speculation that creates a bubble. Perhaps eliminating any deductions for non-primary residences would be a better approach.
Perhaps you have forgotten that the municipal debt deduction is reciprocal. Federal debt is free from state and local income taxes. I would expect the states to retaliate by taxing Federal debt interest. This would require higher rates from bond investors. Not a bad thing, but clearly an externality. I do think there is much abuse in the muni market. Local real-estate developers, sports franchises and others use munis to raise cheaper funds for their pet projects. Eliminating or reducing the deductibility of municipal interest is reasonable.
We already have to pay income tax on money that isn't there because of Medicare and Social Security, paying Federal taxes on money that was already paid to the state would create hardship for many. Keep the local/state tax deduction.
It makes sense to do some social engineering with charitable contributions. This is a slippery slope, but Congress already ventured down that slope. Lower Government spending creates a gap that charities can fill. We saw this in the 80s when Federal spending on mental health care was cut. The explosion in homelessness that developed had to be addressed by charitable organizations (whose budgets were also under pressure). Though I have never considered the taxability of my charitable contributions, many folks do. If the Government can lever up 15-20% to a 100% contribution to a charity, that seems like a good investment. The idea that costs of the deduction exceed the value are pure opinion. I believe that the money the Government saves by letting charities do the heavy lifting exceeds the cost. That said, surely a limit on the individual deductions might address the pointless rich social events deductions.
I agree that the health insurance premium deduction is the wrong place to subsidize. Why if I spend $10,000 a year in premiums and out of pocket medical expenses can I only deduct the smaller portion that is premiums. Until the HSA and QHDHP, expenses that weren't premium had to exceed 7.5% and only the excess was deductible. The arrangement is pure social engineering. Congress decides that paying an insurance company to create bureaucratic healthcare coverage is more desirable than individuals paying for their own expenses. How about if we reverse that? Right now, the Government subsidizes Gucci plans as much as the bargain basement ones. If somebody isn't covered they have a mammoth hurdle to overcome, but the cost of their care is cheaper to society (no unnecessary insurance premiums). There is precious little competition in healthcare as it is, how about if we encourage money to flow where it is actually useful?
Good suggestions, but I see you stayed away from the large parts of the budget that could have a greater impact. Even something so simple as interest burden has been mishandled. In 1985, the last callable Treasury was issued. During the 1990s, they stopped issuing 30 year Treasuries. What kind of professional money manager takes tools out of the arsenal that may come in handy? The debt had twelve zeroes and no rational person thought it would be paid back in their lifetime. In the 80s, rates where coming down, but still at historic highs. You can pay off debt early, but never change the rate (obviously not including variable rate debt). Lack of foresight has caused the interest burden to be higher than it needs to be. Surely predicting rates isn't a science, but reversion to the mean is pretty reliable (only the timing is unsure).
Military expenditures, including the off-balance sheet and items hidden in other areas of the budget, are higher per capita (and in real terms) than any other nation. Sure, we took on the Empire role after WW2, but the Cold War is over and we can't afford to continue. Does anybody question that there is waste, redundancy, political boondoggles? There has to be low-hanging fruit to harvest that wouldn't gore anyone's Ox!
I have written too long to take up more of the reader's time, the twin nightmares will have to wait.
Eliminating charitable contributions would probably be castastrophic in many cities as even then soup kitchens and shelter for the homeless would come under a bind for capital. Is this what you are proposing?
What about a simple value added tax so that everyone then participates. What I think is absolutely absurd is that 47% of people in the US do not pay any taxes, therefore not offering any support for all of the infrastructure provided by the government, yet they all utilize them.
Finally, raise the retirement age for full retirement to 68 in fifteen years, 69 in thirty years, and 70 in 45 years, with early retirement then beginning at three years less for each term.
As a CPA, I continue to laugh at the tax revisions & tinkering that come and go with each administration, which promises to close unfair loopholes and level the playing field, but actually pushes more players out of the stadium and continues to provide full employment for all CPAs and tax attorneys. After decades of tax simplification/revision/etc the American income tax has gone from a simple post card which took about 2-3 minutes to complete to a FESTERING MORASS of laws and regulations that NO ONE – CPA's, attorneys, LEAST OF ALL THE IRS – understands completely. The tax code is nothing more than social engineering as our "Father Knows Best" Big Brother government determines what industries, sectors, political lobby, it thinks needs tax incentivizing. Almost 45 million Americans pay nothing. About 80% of the $ comes from < 20% of the population. Right now, the IRS is hopelessly behind at least 3 or more years in collection action on past due tax accounts of $300-400 BILLION or more which they can't find. This is lost tax revenue that will NEVER BE COLLECTED.
Here in Texas, we have no personal income tax. There is a corporate margin tax, but the majority of very small businesses are TAX EXEMPT. The state collects its share via a "top of the line" sales tax (which keeps everyone's bottom line income private) and a property tax (relatively high, but better than the alternative). Estimated time to complete individual tax returns in Texas – ZERO MINUTES. Also, Texas MUST BALANCE ITS BUDGET, which resulted in state education, the largest expenditure sector, receiving its FIRST BUDGET CUT IN 30 YEARS in the most recent legislative session. If Texas were carved out from the US it would be the 10th largest economy in the world – must be doing something right. Not surprisingly, a large # of California businesses have relocated to Texas in the last few years – leaving the CA administration wonks scratching their heads.
Suggest the 50 states (2/3 required, I believe) call a Constitutional Convention to add the following ammendments:
– AMMENDMENT TO ELIMINATE ALL INCOME TAX TAXES AND REPLACE WITH A NATIONAL SALES TAX This makes tax collection activity simple, collected on the spot, keeps the govt out of your personal life, could be sub-contracted out to the state tax agencies thus eliminating 95% of IRS. Think of the millions and millions of hours and dollars that could be redirected away from the tax prep industry (yes, this is my business), into something more productive. Yes, it would increase prices somewhat, but now companies could reduce prices from hundreds of billions of tax savings. It also dis-incentivizes consumption (Americans spend too much), incentivizes savings (Americans are the worst savers in the world), and would create the GREATEST PLACE IN THE WORLD TO DO BUSINESS – AN INCOME TAX FREE AMERICA. The Caymans, Bahamas, Swiss banking, would all close their doors overnight as trillions of dollars come back to the US and trillions more seek a new home. Think about all of the companies that would be BANGING DOWN THE DOOR trying to incorporate in the US – now the greatest "offshore" tax shelter in the world. The economy could double or triple in a very short time. More competion would come in. Lower prices would result. It would be the Laffer Curve effect on steriods.
– AMMENDMENT TO BALANCE THE BUDGET EVERY YEAR. Don't really care how the $$ is spent, let the Dems and the Reps waste their time arguing about it – but once the money is gone, they CANNOT SPEND A SINGLE PENNY MORE until next round. Perhaps index government spending as some % of GDP, whatever, but NO MORE DEFICITS.
Just my 2 cents.
I think we should eliminate the retirement system for the president, his cronies, the house and the senate. Let them participate in 401Ks. Eliminate their health care and get on medicare like the rest of us.
Sounds like the author is another big govt guy,who believes if we could just change govt,we could fix it.My suggestions.1)Honest ,flat income tax rate of 15% Federal and 3% state,for all incomes.Let those who believe these rates are too low and believe in govt, give more than the minimum,to allow lower tax rates for lowest incomes.Get rid of almost all deductions.No envy taxes that punish hard work,saving and risk taking,while rewarding bad behavior.2)No govt borrowing.No person abusing their credit card,like govt,would be allowed to borrow.This would imply a balanced budget.3)An honest currency,that is a store of value.It would have to be tied to real money,gold or a basket of currencies.
I think that there needs to have somee audit of the government. There hasn't been one that i know of. Departments, salaries, need of people. Contracts in defence. A tax on what people buy. Get rid of irs the federal bank, the two house mortgages. Teach health, wealth and happiness. anybody that promotes debt by the government should rresign and move out of the country. They don't belong here.
Dear Bob:
Great comment about the Tobin Tax … as most of our readers know, Martin's been a huge proponent of that …. we even published an open letter to Washington on the topic not too many months ago. Needless to say, we got a lot of mileage fron that story.
Since this is a topic you clearly know quite a bit about, and since you've let readers know that it's a topic that they, too, might want to learn about, I went into our archives and found the links to three columns that Martin penned on the Tobin Tax topic.
I've posted the links to those stories below. Hope you and other readers find them worthwhile.
Thanks for writing!
Respectfully yours;
William Patalon III
Executive Editor
Money Morning
http://moneymorning.com/2010/05/27/tobin-tax/
http://moneymorning.com/2010/08/25/tobin-tax-2/
http://moneymorning.com/2011/01/05/open-letter-washington-slash-federal-budget-deficit-save-us-economy/
Take away the mortgage interest deduction and you will force small to mid level investors like me to try to sell our properties at the lowest point of value, causing a further collapse in the housing market. We need to create conditions to improve the housing market, not take the already low bottom out of it.
as a CPA for 35 years, i think the idea on the mortgage interest and taxes and charity deductions are good but they will need to be done gradually start with a CAP on mortgage interest say of say 7-10k
Charity 2k Local taxes 5k
another good deduction to eliminate is gambling losses
then you could ratchet down over time, right now if you eliminated mortgage interest ,the housing losses and the related bank, FNMA FHLMC GNMA losses would cost the government billions not to mention the CMO holders .The housing market would be a total disarray, although it might already be their anyway
This is how they have eliminated medical and other deductions over the years i.e. Casualty losses business and other miscellaneous deductions
Medical insurance is a big problem which is not being addressed I think some" plan" which brings the uninsured in at a reasonable cost to them along with set up of a lot a basic care centers. Right now the insured and the taxpayer are paying the whole load I think it is delusional to think the medical insurance firms are going to do anything unless it is forced upon them
I don't understand the repeated mention of eliminating the charitable tax deduction. This hits the middle class hardest. And, except for the Christian community, it will hurt nonprofits as people hold back on their giving without the benefit of a tax break. This move will have adverse consequences beyond the added tax the federal government will keep.
I love the consumption tax idea, I believe Buryani brought that up.
How about an 80% tax for every dollar that exceeds $20,000,000 or more. Think about all those decamillionaires and Billionaires with 10 cars, 6 houses, and trustfunds set up for their kids while the majority of this country is living paycheck to paycheck.
Wall street titans, Pro athletes, lottery winners, famous Hollywood people, CEO's of fortune of 500 companies…etc…add all that wealth up and imagine the good that could happen. If that means those extremely LUCKY people have to give up a $450,000 Maybach or a pet Tiger or Bentley for their 16 year old daughter, that may not be such a bad thing…
Right just give them more money to waste.
I have always been in favor of a 20% tax on all income (God only asks for 10%) and work with that but it will never happen because the govt can't control with that method.
The charity deduction is one place that we can enable organizations that actually do deliver a hand up rather than a handout as from govt (to buy votes). (not good to pay people to sit around- not good for them or the payer. Humans were made to do something or they become slugs, have no self worth and take drugs/etoh. That's what i would have done if given the chance!)
I think you need to put all the members of the house and Congress on a living wage scale that is average in the U S not just the high dollar of goverment but an average off all tax payers and let them see how it feels to live like most of us have to do..Give them a SS monthly benfit and see if they can live on it.The tax code is set up for the rich not the average tax payer.We need to cut out all the freebes to other countries that crap on us after we give them our hard earned money.We need to be paid back all the money we spent on the war 's that freed Iraq etc. Iraq has oil money that it can repay us for what we spent there.Cut Corp taxes if they bring jobs home if not double it and force them to realize they are screwing their own people because off Greed. WW.
I would start "taxing" all government spending by our government leaders including the bureaucrats. The more they vote to spend on this or that, proportionally their salaries and their expenses will get cut. Each party used the middle class income to set up projects to get votes for their own agendas. The next big wave that is going to hit the USA and probably sink the American economy is the public health program. Soon they will be limiting how many kid you can have and how much candy we can give to them because the government has to pay. What is decided what is good and required by all citizens by the government leaders and their bureaucrats, these should be required to us and do also.
One tax availiable is to tax all earnings in the country of operation, Corporates use ofshore and non domiciled to evade taxable income, stop this, itsfraud.
@John Long
Because that would actually make sense. Our country is too stupid to do it.
I guess from my perspective, the fact that Congress is a bunch of whiny spendthrifts who have maxed out their credit cards does not fill me with a desire to run to their resuce and provide them an easy out by paying more taxes. I'd like to see deep deep cuts; ellimination of entire programs and departments and a massive scaleback on entitlements. Obvioulsy this would require significant rollbacks in federal law and is not just tinkering with the tax code and budget levels, and that's exactly what I want to see.
The entire income tax system should be thrown out. A passive investment tax could replace it, taxing only passive gains; interest, dividends, and inflation adjusted capital gains.
Why not have a flat tax for only individuals with no levies on businesses. Businesses (Corporations) would become more obscenely rich than they already are and then would rush to return the trillions they refuse to return now to avoid—gasp—paying taxes. This would also greatly enhance the U.S. treasury revenues because American taxpayers would no longer have to subsidize the labor force of underdeveloped countries, with the additional benefit of bringing back jobs to our shores so American labor can pay their fair share of taxes.
A flat tax for every individual makes the tax code extremely simple, but unemployment would quadruple as accountants and tax lawyers were thrown out of work. And how about all those hard-working people at the IRS? That would surely reduce the size of government! With the flat tax everybody would have to pay taxes, including the guys who have off-shore accounts. I don't know what the flat tax rate should be, but deep down I would feel warm and fuzzy inside knowing that everybody would be paying their fair share—especially the top 90%.
You are out of your frigging mind. Increasing taxes ONLY accomplishes ONE thing. Giving our free-spending out-of-control Gov't more money to burn thru. Which they will and then you'll want more new taxes again. Where does your madness end? Does doing the same thing over & over again while expecting different results make good logic to you? The only REAL answer is to flush out Congress and institute a FLAT TAX AND REDUCE SPENDING, you idiot.
Two ideas:
1. Canada moved the charitable contribution to a tax credit (30%) a few years ago: levels the playing field, as you mention.
2. A federal VAT – consumption tax, as you suggest – is apparently much better for the economy than income tax. It can be offset for low-income folks in a number of ways.
I think you are insane. If congress stops the tax deduction on charitable contributions,that would end the not-for-profit industry. And your comment that many charities are a scam is stupid. You obviously know very little about the important work that most of the big charities are able to accomplish, which is only possible due to the donations they receive only because of the tax deduction. If you want to change things so badly, move to russia. And good riddens to you and you dumb ideas.
All we need is a 25% tariff on everything coming into the country, including oil.
This would collect a significant amount to help balance the budget, encourage a rapid switch to fuel efficient cars, promote domestic oil production and greatly slow off-shoring of jobs. The only hit: everything in WalMart would be 25% more.
It is not reasonable to give the government any more money no matter what the source: Look at how they squander the huge amounts we already give them. Less taxes; less Government.
You seemed to have missed the whole point of no new taxes. Like an alcoholic who is trying to stop, you would provide him with more beer? By allowing the government to levy yet more taxes, you are making it easier for it to not shrink government and to continue to spend even more! The day of reckoning will be prolonged.
Sadly the US government is so badly corrupted in all level as well as most of the state and local governments including the court system that all of the politicians/judges should be replaced with the new blood and that will cut all the backroom deals from the past and the "owed favors" accumulated from the years of their service – just clean the house and start all over again and this time pay attention to what is being promised in campaigns and what is being delivered later in the office – there is no government in the world which creates the wealth – it only provides services but as a time goes it grows like a plague and wants more money for itself so it creates rules and more government services to make sure it is needed more and more – there is no end to it – no term limits will help since the one who knows that there is no future for him will not care what his decisions will cost later and only his pocket is in his mind – people have to pay more attention to their public servants. There are too many freeloaders living of the others hard work and creativity. It is time to get rid of all of this crap and the social net should be provided by implementing Fair Tax where everybody has equal rights to minimum income with no tax to cover his basic needs.
So eliminate charitable deductions say you? Why not go ahead and make public your atheistic beliefs public and push for an end to organized religion?
What on earth have you been smoking or drinking!!!!!!!!!!!!!! To take the health deductions, mortgage interest deductions, and charitable contributions would hit the middle class the most. I am barely making it now. Future tax increases are going to force me to choose between medications and food. Do you guys ever come down among the middle class earners that make around $40,000 a year and see how they are making it. I have not been to a show or any other entertainment for almost a year. I used to eat out 3x a week and have cut to 1X a week where I only have a bowl of soup which is all I can afford.
The oil companies are making more money than any corporations has ever made in the history of the US. YOu just keeping wanting the middle class to cut back so the richer can get richer. Will destroying the entire middle class make you happy. I doubt it because apparently no amount of riches is enough. How do you sleep at night. I fear my grandchildren will be in the poor class and work all their life just to subsist. There are a few congressman/congresswomen who are honest, but only a few. Most are interested in just getting reelected. They have the best health care and pensions in the US. but I do not see them being willing to give up one dime. I never thought I would ever live to see the day when I have lost faith in this wonderful country, but I am there. Greed is rampant. Why are they doing it, because they can and they just want more, more, more.
1) Cut corporate taxes to 26% to help for our international companies, better compete internationally, but do it on a quid Pro Quo basis …..to get the cut they each have to repatriate at least 6000 jobs back into the U.S. on a long term basis.
2) For all other companies cut their taxes to 30% if they hire at new employees equal to
2% of their workforce. With 100 employees you would need to hire 2 new workers,
with 1000 employees you would need to hire 20 new employees.
3) Stop the deficit spending within 4 years, cutting it in four equal amounts.
4) Cut Government by downsizing every department at least 6%.
5) Cut Foreign aid by 50% starting with Pakistan.
6) Bring our troops home from Europe, because it is expensive and they do not support us.
7) Cap credit card interest rates at 14% and tie rate increases to increases in the Federal funds interest rates. That alone would provide every home with an average of $600 monthly in more disposable income to pay bills and to spend.
8) Cut Federal regulations that apply to new start up companies for at least four years.
9) Cut at all subsidies (ethanol , sugar and others.)
10) Repeal and defund Obamacare and save well over $1.5 Trillion dollars over 10 years.
11) Privatize the U.S. Post Office and get Fred Smith to run it .