When the facts change, I change my mind. What do you do? -- John Maynard Keynes

Tuesday, November 22, 2011

Why the U.S. desperately needs tax reform

Buffett-Ducking Billionaires Avoid Reporting Cash Gains to IRS - Business - MiamiHerald.com: "The rate at which the 400 U.S. taxpayers with the highest adjusted gross income actually paid federal income taxes --their so-called effective tax rate -- fell to about 18 percent in 2008 from almost 30 percent in 1995, IRS data show. That’s the tip of the iceberg, since much of their wealth never converts into income on a tax return, McCaffery said."

Our current tax system is unfair and highly regressive. As Mort Zuckerman has said, "Our current tax system is an abomination." Unfortunately there is no leadership from the White House nor Congress on this issue. What we need is comprehensive tax and entitlement reform.  Herman Cain, for all his faults, is the sole candidate running who has been willing to propose something (albeit imperfect) along the lines of comprehensive tax reform. In addition, the current system works hardships on the real "job creators"--self-employed persons making up to $100,000 a year who must pay income tax plus a regressive 15.3% "self-employment" tax rate on ALL of their income.

My proposal--it's simple:
a) Set the tax rate--this is the rate of tax on net income (wages, interest, dividends, capital gains, etc.) an individual or corporation ("taxpayer") earns annually above one million dollars (in other words, the rate of tax Warren Buffett would pay on all his income over the first one million annually)--my suggestion is 30% (note that the current highest marginal rate is 35%).

b) 50% of the first $100,000 in income of every taxpayer would be exempt from taxation (lowering the effective rate to 15% on the first $100,000 earned annually by every American taxpayer--individual or corporation).

c) 25% of income over $100,000 up to $1,000,000 would be exempt from taxation (resulting in an effective tax rate of 22.5% on all income over $100,000 up to $1,000,000).

d) Eliminate ALL payroll taxes (including "self-employment" taxes). Everyone would be covered by Social Security (including public employees currently exempt)--this would eliminate (eventually) the need for all public employee pensions (which are bankrupting the states, local governments, and agencies such as the Post Office). Institute "means testing" and the other reforms to entitlements recommended by Simpson Bowles. Allow everyone to have a "tax-exempt" retirement account (merging the 401k and IRAs) into retirement accounts which would be insured by the federal government and could only be held at a federally regulated institution (such as a FDIC bank or federally regulated broker).

e) Eliminate ALL loopholes and personal deductions except allow: 1) charitable donations (capped at 20% of taxable income); 2) interest payment deductions (capped at 20% of income--this gives relief to homeowners and debtors); and 3) deductions for expenses incurred as a result of business or employment.  Losses could be "carried-forward" for up to five years. Set personal and dependent exemptions of $4000 per each individual/dependent with a cap of $20,000 per household. Federal taxes would be "territorial"--only on income earned in the U.S.--but schemes to unfairly shift income overseas would be disallowed and subject to penalty.

Historically (post-war average) taxes have raised about 18.5% of GDP (federal revenues divided by gross domestic product). With our aging population and need to re-invest in infrastructure, education, etc., federal revenues probably need to be closer to 20% of GDP going forward. I do not have the access to data to "crunch" the numbers above and determine what per cent of GDP this proposal would generate. However, the "result" from that analysis could be adjusted by merely increasing or decreasing the tax rate in a) above. One problem has been that the current tax system (unfair as it is) only produced revenues of 14.9% of GDP in both 2009 and 2010 which increased our ongoing federal deficit.

Should federal spending be cut and federal entitlements reformed? Yes. But federal revenues at only 14.9% of GDP are too low, and the evidence suggests that the high income corporations and individuals are not (generally speaking), paying their "fair share" (again Warren Buffett is right.)  General Electric not paying taxes is not right.  Warren Buffett paying a smaller percentage of his income in taxes than his secretary is not right. In addition, as a long-range goal, our annual federal deficit should not exceed 3% of GDP.

Something has got to give, and we really don't have the time to continue to delay.


The Big Picture

Financial Crisis - The Telegraph

JohnTheCrowd.com | The Sailing Website

Craig Newmark - craigconnects