Ok, my liberal/progressive friends, I agree and acknowledge that President Bush was no friend of fiscal conservatism. But Bush was downright thrifty in comparison to the out of control spending of the Obama Administration. The Bush Administration’s spending was analogous to a person charging an amount equal to a year’s pay to credit cards – the interest alone is overwhelming. This type of debt is obviously irresponsible, but, with determination, hard work, and a commitment to fiscal responsibility, the person can pay off the debt over time and once again become solvent. But the Obama Administration’s non-stop printing and borrowing of money is like that same person accumulating credit card debts greater than the amount they will earn in 5 years – a staggering debt that probably cannot be satisfied in a lifetime.
That is exactly where we find ourselves today. Our national debt is approximately five times our federal income. If our national debt cannot be paid off in our lifetime, it must de-facto be paid by our children and grandchildren – an immoral, un-American, and unthinkable proposition for any responsible parent – if you care for your children, you cannot saddle them with mounds of debt.
Economists tell us that a certain amount of national debt is a good thing. I don’t really get that, but I guess I’m ok with it as long as the “certain amount” will be paid by the people who benefit from the proceeds of the debt, a condition that we have woefully failed to satisfy. Let me be very clear. Our generation has provided itself with social benefits and entitlements that we cannot afford. Our progressive government congratulates itself on its generosity, benevolence, and altruism, all of which will be paid for by the sacrifices and privation of our children and grandchildren. Our parents were the greatest generation. Our progeny will be the sacrificial generation. We are the selfish generation.
Economists also tell us that there are only a few ways to decrease national debt:
• decrease spending,
• increase tax revenue,
• increase the Gross Domestic Product (economic growth and productivity),
• inflation (the government can then pay off the debt with cheaper dollars),
• (gasp) devalue the currency, or
• (gasp, gasp) default on the debt.
Note that the last three of the six have devastating implications. We are therefore left with decreasing spending, increasing tax revenue, and increasing productivity.
During the past couple of decades, our increasing social programs (government spending) have been accompanied by increasing national productivity. The problem is that the increasing productivity was not permanent – it was based on two “booms” (the dot-com boom followed by the housing boom), both of which went “bust”. We now find ourselves with a great financial burden to pay for all our new social programs (medicare prescription drugs, no child left behind, bail-outs, government take-overs of corporations, heath care, financial sector regulation, possibly cap and trade), but a stagnant economy with little growth in productivity (GDP).
The Obama Administration promises that their spending programs (euphemistically called “investments”) will lead to increased productivity, but there is absolutely no evidence that this will work. Government spending creates government jobs which add little or nothing to national productivity. The Roosevelt administration unsuccessfully tried to spend its way out of the Great Depression for more than 7 years, but the depression continued in full force until WWII, when great sacrifice and effort by the entire American population resulted in a huge increase in productivity. It was WWII and the American work ethic that ended the depression, not government spending.
The Obama Administration also promises that increasing taxes on the rich will increase tax revenues. Once again there is no evidence that this will work. In fact, history shows exactly the opposite. You cannot create jobs and increase productivity by penalizing the very people and corporations that create jobs and wealth. Increasing taxes punishes success and thus decreases revenues. However counter-intuitive, President Kennedy was right when he said that decreasing taxes on the rich would increase tax revenues (a rising tide floats all ships).
So, how can we decrease the national debt?”
Every liberal/progressive politician will answer that government spending and stimulus programs combined with tax increases on the rich will increase the GDP. Those answers have never worked anywhere on earth, including here in the U.S. They are the same answers traditionally given by the socialist leaders of European countries that are currently failing. If you nonetheless believe that government spending and increasing taxes will work, then I pray you are correct, because that’s the way we’re headed.
If you haven’t been drinking the progressive kool-aid, what is left? Assuming that hyper-inflation, devaluation, and default are off the table, we are left with:
• Tax cuts (highly unlikely in an Obama Administration).
• True tax reform by abolishing all federal income taxes and implementing the Fair Tax (see the October 2009 essay on the Fair Tax).
• Increase the GDP by eliminating government interference with and regulatory burden on business, with a specific emphasis on small business.
• Decrease spending by decreasing the size of government – why, exactly, do we need the Departments of Education, Commerce, Agriculture, Labor, and heaven knows how many other federal monetary black holes?
I don’t have the expertise to quantify the effects of these reforms on our national debt. They may or may not be adequate. Here’s what I do know. Nothing short of enormous personal sacrifice by every American, a national commitment on the scale of WWII, will get us out of this financial quagmire.
It is my sad conclusion that America will face deprivation. We will suffer and sacrifice, either voluntarily by implementing fiscally conservative reforms, or, absent those reforms, involuntarily by the inevitability of hyper-inflation, devaluation, and/or default. The only question is who will make the sacrifices – us or our children and grandchildren?
Showing posts with label Taxes. Show all posts
Showing posts with label Taxes. Show all posts
20 June 2010
04 October 2009
Regarding The Fair Tax
I may have lost part of my mind, but, thank God I still have a wife. Ginny reminded me that, in The Fair Tax piece, I forgot to mention that the economists have calculated the 23% rate as exactly revenue neutral. In other words, the 23% Fair Tax would generate the same income as all those other federal taxes that will be eliminated combined. Naturally, the percentage would be revisited as part of the federal legislative process, just as all the other tax rates are now.
03 October 2009
The Fair Tax
I have read three books on The Fair Tax, two pro and one con. For the life of me, I cannot imagine why the entire nation doesn’t stand up and yell, “Switch us to the Fair Tax, NOW!” I’m pretty sure that nearly everyone (except some politicians, but more on that later) who has actually read the books and understands the Fair Tax will agree with me.
One of the things that makes the Fair Tax unique is that it was developed by economists, not politicians and lobbyists – what a concept! This is a truly bi-partisan issue. Everyone benefits. The pending legislation has many sponsors from both sides of the aisle. In fact, it is one of the few bi-partisan issues out there – it gives the politicians something to agree on for a change. The Fair Tax addresses how we collect the taxes necessary to run our government. Naturally, how those taxes are spent is and always will be a partisan issue.
This is not a Flat Tax which is simply another form of income tax. The Fair Tax replaces income tax.
The Fair Tax
Here’s how it works. First, abolish all federal individual and corporate income, payroll, capital gains, estate, alternative minimum, social security, medicare, interest, and dividend taxes, as well as any other taxes on income. While you’re at it, abolish the IRS. Those notions alone ought to have you cheering.
There would be no tax forms, filing, deductions, adjustments, or loopholes. No one files.
Now institute The Fair Tax (legislation is pending), a 23% national retail sales tax on everything - everything – goods and services, taxed once and only once, at the retail level. If you buy a new car, you pay the 23% national sales tax on the purchase amount. If, as the years go by, five other folks buy the same car down the line, they do not pay the national sales tax. The tax is only applied once, the first time the product is sold at the retail level – future sales are not taxed. The tax applies to services as well as goods. If a plumber comes to your house, a lawyer prepares your will, or a doctor stitches you up, his/her bill includes 23% on both materials and time. The States collect the taxes, just as most of them now collect sales taxes.
Since you no longer pay income or payroll taxes, the only deductions from your paycheck will be for insurance and 401k or any other voluntary deductions. You get an immediate raise equal to the amount of income and payroll (FICA) tax that is now deducted from your pay.
All federal government agencies and services (except the IRS) remain the same.
Remember that, at least at this point, the proposed legislation applies to federal taxes only. All state and local taxes would remain the same, although many economists feel that state and local governments might very well follow suit.
Sacred Cows
At this point, there are several issues that immediately come to mind.
Is the tax progressive? Of course it is. The more income people have, the more new stuff they buy, and the more services they use, so the more tax they will pay. Remember that the Fair Tax does not apply to used stuff, and you do not pay any Fair Tax on used stuff or work you are able to do for yourself.
What about poor people? The proposed Fair Tax legislation includes a rebate for every tax paying family or person. The size of the rebate will depend on the size of the family and would equal the amount of Fair Tax due on the poverty level income for that family size. For example, if the poverty level income for a family of two is $20,000, that family would receive 23% of $20,000, or $4,600. The rebate would go to all taxpayer families or individuals, regardless of their actual income. Since poverty level folks actually earn the poverty level income or less, they would get a 100% refund of all of the Fair Tax they pay. Therefore, they pay no tax. Currently, such folks do not pay income tax, but they do pay payroll (FICA) tax, so they clearly will be better off.
What about Charities? Will people stop giving to charities? People are glad to get a deduction for the money they give to churches and other charities, but they do not give the money because of the deduction. Want proof? Ok, try this. Currently, if you’re in the 25% income bracket and you make a charitable donation of $1,000, you will get a tax refund of 25% of $1,000, or $250. I can easily beat that deal. If you give me the $1,000 instead, I’ll give you $500 back, a 100% improvement. Naturally, none of you will give me the $1,000, because I don’t deserve it. Folks give money to charities because they deserve the money, not because of the deduction.
What about the cherished mortgage deduction? Under the Fair Tax, you pay no income tax, so there is nothing to deduct from. Besides, you get to keep your whole paycheck, so you have more money available anyway. Which would you rather have – all of the income and FICA tax you currently pay or 25% (or whatever bracket you’re in) of your mortgage payment.
Ancillary Benefits
Here are just a few of the other, somewhat delightful, benefits of the Fair Tax.
• Everybody pays. Tourists from other countries, illegal immigrants, diplomats, DRUG DEALERS, and even the greedy scion who somehow manages never to pay any income tax in spite of his massive wealth – everybody who buys anything new or hires any service providers pays to support our government.
• Corporations will return to America. Many corporations have established overseas headquarters in order to avoid paying the 41% corporate income tax rate in the U.S. (the second highest in the world - only Japan is higher). Surveys of executives of such companies indicate an overwhelming desire to return, if the corporate taxes were not so abusive. Check out The Irish Miracle on the internet.
• Each of us is in charge of how much tax we pay. If you wish to pay less tax, you can simply buy only used stuff and do things yourself instead of hiring someone.
• Since we will not charge Fair Tax on good sold overseas (those countries will charge their own taxes on our goods), American goods will be more competitive and sell better. However, we will charge Fair Tax on new foreign items sold here.
• Here’s one of the best benefits: many lobbyists will be out of a job, provided the Fair Tax legislation insists (as it currently does) that there are absolutely no exceptions to which goods or services are subject to the Fair Tax. Every new purchase and every service is subject the the Fair Tax, no exceptions. As soon as you allow one exception, the lobbyists will be back in business trying to get their clients’ goods or services excepted.
Opponents
Some of our less scrupulous politicians are the primary opponents of the Fair Tax because it replaces the income tax, and they use income tax issues to attract (bribe) potential voters and donors. For example, “If you vote for me, I’ll decrease your taxes and increase the other guy’s taxes”, or, “If you donate to my campaign, I’ll introduce loophole legislation that will decrease your taxes.” How many times have you heard that stuff? (The fact that these politicians are against it is proof enough for me that it is a good idea.)
The associations that represent service trades and professions are also sometimes initially opposed. Lawyers, plumbers, doctors, carpenters, engineers, electricians, accountants, – none of them want to be required to increase their fees by 23%. However, once they understand how the Fair Tax works, their opposition usually fades. The reality is that their current fees already include the income taxes paid by all the workers who produced the equipment and supplies they use, and their current fees also include the income tax they themselves pay. These are called “imbedded costs”, and, on average, they are equal to the 23%. So, trades-people and professionals will not be increasing their fees at all. They will simply be replacing the 23% imbedded costs with the 23% Fair Tax. The other complaint often voiced by service folks is that they do not want to be burdened by calculating, collecting, and paying the Fair Tax. Actually, this effort will be much easier for them than the current system. The service folks will simply add 23% to each invoice, and then send 23% of their total revenues to the government – way easier than figuring out corporate income tax, their personal income tax, and their employees’ withholding, FICA, etc. Again, details are available at fairtax.org or in the Fair Tax books.
Conclusion
Ok, that’s enough for now. The details can become complex and even tedious, but it's well worth the effort to learn and understand the Fair Tax. If you want more detail, go to www.fairtax.org. (note that it is .org, not .com.) Alternatively, you can read The Fair Tax Book, Linder and Boortz, and/or Fair Tax: The Truth, Linder and Boortz.
Someone out there must disagree with me, and we will all learn more if a debate ensues, so post your comments below.
One of the things that makes the Fair Tax unique is that it was developed by economists, not politicians and lobbyists – what a concept! This is a truly bi-partisan issue. Everyone benefits. The pending legislation has many sponsors from both sides of the aisle. In fact, it is one of the few bi-partisan issues out there – it gives the politicians something to agree on for a change. The Fair Tax addresses how we collect the taxes necessary to run our government. Naturally, how those taxes are spent is and always will be a partisan issue.
This is not a Flat Tax which is simply another form of income tax. The Fair Tax replaces income tax.
The Fair Tax
Here’s how it works. First, abolish all federal individual and corporate income, payroll, capital gains, estate, alternative minimum, social security, medicare, interest, and dividend taxes, as well as any other taxes on income. While you’re at it, abolish the IRS. Those notions alone ought to have you cheering.
There would be no tax forms, filing, deductions, adjustments, or loopholes. No one files.
Now institute The Fair Tax (legislation is pending), a 23% national retail sales tax on everything - everything – goods and services, taxed once and only once, at the retail level. If you buy a new car, you pay the 23% national sales tax on the purchase amount. If, as the years go by, five other folks buy the same car down the line, they do not pay the national sales tax. The tax is only applied once, the first time the product is sold at the retail level – future sales are not taxed. The tax applies to services as well as goods. If a plumber comes to your house, a lawyer prepares your will, or a doctor stitches you up, his/her bill includes 23% on both materials and time. The States collect the taxes, just as most of them now collect sales taxes.
Since you no longer pay income or payroll taxes, the only deductions from your paycheck will be for insurance and 401k or any other voluntary deductions. You get an immediate raise equal to the amount of income and payroll (FICA) tax that is now deducted from your pay.
All federal government agencies and services (except the IRS) remain the same.
Remember that, at least at this point, the proposed legislation applies to federal taxes only. All state and local taxes would remain the same, although many economists feel that state and local governments might very well follow suit.
Sacred Cows
At this point, there are several issues that immediately come to mind.
Is the tax progressive? Of course it is. The more income people have, the more new stuff they buy, and the more services they use, so the more tax they will pay. Remember that the Fair Tax does not apply to used stuff, and you do not pay any Fair Tax on used stuff or work you are able to do for yourself.
What about poor people? The proposed Fair Tax legislation includes a rebate for every tax paying family or person. The size of the rebate will depend on the size of the family and would equal the amount of Fair Tax due on the poverty level income for that family size. For example, if the poverty level income for a family of two is $20,000, that family would receive 23% of $20,000, or $4,600. The rebate would go to all taxpayer families or individuals, regardless of their actual income. Since poverty level folks actually earn the poverty level income or less, they would get a 100% refund of all of the Fair Tax they pay. Therefore, they pay no tax. Currently, such folks do not pay income tax, but they do pay payroll (FICA) tax, so they clearly will be better off.
What about Charities? Will people stop giving to charities? People are glad to get a deduction for the money they give to churches and other charities, but they do not give the money because of the deduction. Want proof? Ok, try this. Currently, if you’re in the 25% income bracket and you make a charitable donation of $1,000, you will get a tax refund of 25% of $1,000, or $250. I can easily beat that deal. If you give me the $1,000 instead, I’ll give you $500 back, a 100% improvement. Naturally, none of you will give me the $1,000, because I don’t deserve it. Folks give money to charities because they deserve the money, not because of the deduction.
What about the cherished mortgage deduction? Under the Fair Tax, you pay no income tax, so there is nothing to deduct from. Besides, you get to keep your whole paycheck, so you have more money available anyway. Which would you rather have – all of the income and FICA tax you currently pay or 25% (or whatever bracket you’re in) of your mortgage payment.
Ancillary Benefits
Here are just a few of the other, somewhat delightful, benefits of the Fair Tax.
• Everybody pays. Tourists from other countries, illegal immigrants, diplomats, DRUG DEALERS, and even the greedy scion who somehow manages never to pay any income tax in spite of his massive wealth – everybody who buys anything new or hires any service providers pays to support our government.
• Corporations will return to America. Many corporations have established overseas headquarters in order to avoid paying the 41% corporate income tax rate in the U.S. (the second highest in the world - only Japan is higher). Surveys of executives of such companies indicate an overwhelming desire to return, if the corporate taxes were not so abusive. Check out The Irish Miracle on the internet.
• Each of us is in charge of how much tax we pay. If you wish to pay less tax, you can simply buy only used stuff and do things yourself instead of hiring someone.
• Since we will not charge Fair Tax on good sold overseas (those countries will charge their own taxes on our goods), American goods will be more competitive and sell better. However, we will charge Fair Tax on new foreign items sold here.
• Here’s one of the best benefits: many lobbyists will be out of a job, provided the Fair Tax legislation insists (as it currently does) that there are absolutely no exceptions to which goods or services are subject to the Fair Tax. Every new purchase and every service is subject the the Fair Tax, no exceptions. As soon as you allow one exception, the lobbyists will be back in business trying to get their clients’ goods or services excepted.
Opponents
Some of our less scrupulous politicians are the primary opponents of the Fair Tax because it replaces the income tax, and they use income tax issues to attract (bribe) potential voters and donors. For example, “If you vote for me, I’ll decrease your taxes and increase the other guy’s taxes”, or, “If you donate to my campaign, I’ll introduce loophole legislation that will decrease your taxes.” How many times have you heard that stuff? (The fact that these politicians are against it is proof enough for me that it is a good idea.)
The associations that represent service trades and professions are also sometimes initially opposed. Lawyers, plumbers, doctors, carpenters, engineers, electricians, accountants, – none of them want to be required to increase their fees by 23%. However, once they understand how the Fair Tax works, their opposition usually fades. The reality is that their current fees already include the income taxes paid by all the workers who produced the equipment and supplies they use, and their current fees also include the income tax they themselves pay. These are called “imbedded costs”, and, on average, they are equal to the 23%. So, trades-people and professionals will not be increasing their fees at all. They will simply be replacing the 23% imbedded costs with the 23% Fair Tax. The other complaint often voiced by service folks is that they do not want to be burdened by calculating, collecting, and paying the Fair Tax. Actually, this effort will be much easier for them than the current system. The service folks will simply add 23% to each invoice, and then send 23% of their total revenues to the government – way easier than figuring out corporate income tax, their personal income tax, and their employees’ withholding, FICA, etc. Again, details are available at fairtax.org or in the Fair Tax books.
Conclusion
Ok, that’s enough for now. The details can become complex and even tedious, but it's well worth the effort to learn and understand the Fair Tax. If you want more detail, go to www.fairtax.org. (note that it is .org, not .com.) Alternatively, you can read The Fair Tax Book, Linder and Boortz, and/or Fair Tax: The Truth, Linder and Boortz.
Someone out there must disagree with me, and we will all learn more if a debate ensues, so post your comments below.
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