TheNorthlandNews.com publishes communications from your elected representatives in our Opinion section of the site. It’s our belief that a government and society requires active and informed citizens.
We recently published one from Representative Sam Graves. Graves represents the majority of the Northland in the US House. In it, he requested citizen input on tax reform. It’s an issue that affects it all, and since I’m an average guy who lives out there in Real World, USA, I thought I’d get out the editorial keyboard and publish some thoughts on the topic.
Few things make me more angry than tax policy in the United States of America. Our tax code is an absolute mess. Legal exemptions here, loopholes there, deductions of all shapes and sizes, and your left with the worst possible outcome.
The current tax code supports complete inequality of enforcement and is overly complex. Our tax code picks winners and losers, often benefiting those with the best accountants or lobbyists.
If we’re even lucky to have tax reform, any solution has to focus on simplicity and fairness as a foundational value. It ought to be simple to understand, and it ought to acknowledge that Joe Average doesn’t have a lobbyist to create a loophole or a high priced accountant to spot the one that already existed.
One of my favorite topics to study in my free time is economics. And one of my favorite sources of information is an investment analyst by the name of John Mauldin. The guy is brilliant and connected to some of the best financial minds in the world. He recently shared some suggestions for reform post-election that I thought were interesting. They’re related to our topic at hand, and I think they present a framework for the beginning of a discussion about reform.
Some of them are great, and some of them, for a minarchist Libertarian like me, are incredibly hard to swallow. But if we want this nation to move forward and solve some of our massive financial problems, then we’re all going to have to hold our noses a little bit and find common ground. This is going to require us to step away from our philosophical expectations and focus on mathematic outcomes that work.
Here is the reality: We have got to generate revenue, and we have got to start acting our collective wage. This needs to start yesterday. I’ve included some thoughts below each suggestion from Mauldin:
1. Cut the corporate tax rate to 15% on all income over $100,000. No deductions for anything. Period. A 10% tax rate on all net foreign income (with allowances for taxes paid against total income.) That will make us the most tax-friendly business nation in the world, competitive with Ireland, and stops all the financial shenanigans that try to avoid taxes. International companies will not only move their headquarters here, they will bring their manufacturing and jobs with them. Ask Ireland how that worked out for them. I can imagine a horde of global companies moving from Europe and elsewhere to take advantage of the competitive taxes. Frankly, it will put them at a disadvantage if they don’t.
The simple fact is we will collect more total corporate taxes under this plan than we do under the current system with all its deductions and loopholes. This tax plan will have the side benefit of putting out of work an army of lobbyists whose sole role is to try to get tax benefits for their clients.
Our corporate taxes are terrible in this country. I’m so sick of Americans that view companies as money cows that can be milked because they are successful. Business and entrepreneurs are not evil. Businesses are the source of your jobs and government funding. There’s no greater way to make the world a better place than to create a company and solve a problem for a customer.
Our corporate tax should be the lowest in the world. So low, that we have every major business in the world waiting in line to figure out how to open up shop here. I don’t care about the rest of the world. This is not to say I want other countries to fail, I just like the United States of America more. I want us to succeed and be the greatest nation on the planet.
Anything less is unacceptable. You’re welcome to leave the country if you don’t agree.
2. Cut the individual tax rate to 20% (and later I’m going to demonstrate how it could even be 15%) for all income over $100,000. No deductions for anything. Period. No mortgage deduction, no charitable deductions. No nothing. Anybody who makes less than $100,000 will not pay income taxes and will not file. This will dramatically promote entrepreneurial activity and help small businesses.
I’m not sure I like the concept of those making less than $100,000 not paying any income tax. To me, everyone is at least responsible for the nations defense. And yes, my family would stand to gain from this. The modern American populist mantra of “soak the rich they owe us” is the epitome of ignorance. There is no fixed pie.
I’m willing to go along with this, but I think everyone down to the poverty line ought to pay something even if it’s minuscule (say 1% or so).
There is no doubt that you’d see entrepreneurial activity skyrocket under this plan. Job growth depends on entrepreneurial activity. One positive of the last decade has seen the public begin to value entrepreneurial activity. When I left public education, there was a movement to embrace more entrepreneurial thinking. It was comically bad at times, but at least there was movement.
I get what Mauldin is doing and think simplicity in income tax is desperately needed. Again, this is about compromise, so until we can better educate the American public on economics. let’s roll with it.
I’d be remiss if I didn’t touch on deductions. I know, you’re all in a tizzy about the mortgage deduction because you bought the gospel of the value of buying a house just so you could deduct the interest.
I’m absolutely okay with getting rid of every deduction on the books including those for churches and charities.
I know, I just offended a bunch of you, but this deduction thing is silly. You shouldn’t make financial and charitable decisions because of tax benefits. You should make them because you believe in the rightness or wrongness of the action. You donate to a charity because you believe in its cause. Either you want to buy the house because it’s right or wrong for your family. You go to church because you’re a believer or your not. Stop doing things because the government create a loophole for you.
We’re from the middle class and we can loophole, too! Whatever…
Again simplicity and fairness in application.
So far, the above is standard Republican doctrine. Now we’re going to venture into left field.
3. I’m working under the assumption that we must make a serious effort to have a balanced budget and to fund healthcare and Social Security. That requires money, which is another way of saying that we will need to find taxes from another source. I would propose some form of a value-added tax (VAT) that would specifically pay for Social Security and healthcare. All the other parts of government are paid for from income and corporate taxes. Given the monster size of the healthcare budget, we would need somewhere close to a 15% VAT. That could change somewhat depending on various workarounds. For instance, if you drop the income tax to 15% but keep the 3.9% Medicare tax, that would leave the total tax rate under 20% but would offer a portion of payment for healthcare, which might mean a lower VAT.
I personally presented this plan to Senators Rand Paul and Ted Cruz, who later adopted a version of it that they characterize as a business tax; but I don’t care what you call it. There are multiple variations on the theme, and I only mention Paul and Cruz to point out that you can actually get serious conservatives to consider such a tax. Now, to be fair, they were against increasing the total amount of taxes taken. And that is not what I am advocating here. To pay for healthcare and balance the budget, we are going to need to generate more revenue. Not a whole lot in terms of percentage of GDP, but some.
Let me reiterate that whatever you call the VAT-like tax, it would be specifically targeted at paying for healthcare and Social Security. If you want to hold down the amount of the VAT, then Congress needs to aggressively figure out how to hold down the cost of Social Security and healthcare. This does not eliminate the need for aggressive restructuring of both of them. In fact, it would require it.
So, I about broke out in a cold sweat when I first read this, but the reality is we two have massively out of control budget items with Social Security and Medicare/Medicaid. America is $20 trillion dollars in debt, and when you add in the outstanding liabilities like Social Security/Medicare/Medicaid, you find me breaking out in cold sweat again because the number is over $100 trillion dollars.
This is financial insanity and entitled irresponsibility at its finest.
A VAT is collected incrementally, based on the value added, at each stage of production. Everyone pays this because it’s baked into the cost of production which is then passed to the consumer in the final product. I’m willing to accept a VAT as long as we see income tax reform. Implementation of a VAT without income tax reform would literally destroy the economy and set us on a course to financial insolvency.
Having said that, and compromised, you better start doing something tomorrow to fix Social Security and Medicare/Medicaid. This a more complex discussion for another time.
4. Policy wonks are going to note that you would not need a 15% VAT just for healthcare. I would propose that we eliminate Social Security funding from both the individual and business side of the equation and take those costs from the VAT.
Progressive and liberals will complain that a VAT is a “regressive” tax – it falls more heavily on lower-income people since they spend much of their income on items subject to such taxes. For the truly lower-income, you could offer a rebate to even out the load, but if you get rid of Social Security taxes you give everybody a 6.2% raise and a 6.2% reduction of employment costs to businesses.
Getting rid of individual and business Social Security payments is the opposite of regressive and so balances out the cost to the working poor rather well. Those with incomes between $40,000-100,000, who had been making Social Security payments, would not be paying income taxes, so a VAT would still be a cost reduction for them.
This would be a huge stimulus to the economy. Plus, VAT taxes can be deducted by businesses at the border when they export products. This would make us competitive with every other country in the world whose companies also deduct VATs at the border.
As a general rule, most economists (even guys from Harvard and Princeton) will tell you that a consumption tax such as a VAT is better than an income tax in terms of its overall impact on the economy.
I wish Mauldin had elaborated on that last point some more.
Personally, I think income taxes are morally reprehensible. We should try to target a tax towards something that best reflects the health of the economy and can be paid by literally everyone. Plus, what is comically misunderstood by some of the American public, is that many wealthy people, meaning they have a large net worth based upon assets, don’t actually pay income tax because they draw their income from the assets they own.
Any consumption tax like a VAT or a sales tax forces government to feel the same pain or success that you and I do. When the economy is up, revenue is up. When it’s down, the tax revenue falls. This is a good thing because it would force both government and people to evaluate what they really should expect out of the government, and what they can do themselves (which is far more than they falsely believe right now). If government really worked as well as some thing, we wouldn’t be massively in debt as a country.
It ain’t working folks!
You often hear right leaning tax reform proponents talk about the Fair Tax which proposes a national sales tax and the elimination of the income tax. While, I’m supportive of the concept, the thing I worry about the most is the amount of tax dodging you’d see under a national sales tax proposal. A VAT would have better compliance because of it’s implementation at the point of production.
For those interested in reading further, there are some other suggestions that Mauldin makes that are not tax related but worth looking at and thinking about. You can read his full note by clicking HERE.
Here’s the deal, we have to solve the coming financial crisis. This is not chicken little speak. America is in the beginnings of a massive financial crisis that could make 2008 look like a small bump in the road if we don’t start addressing our debt and overspending problems now. We’ve allowed our modern comfort and safety to convince that things are just fine.
Simple minded Republican solutions of only lowering taxes are not enough, and simple minded Democrat solutions of taxing the rich are not enough.
The thing I worry about the most is that the American people are actually going to be the one’s that prevent real reform from happening. I know, corporate lobbyists, blah, blah, blah.
Here’s the deal. It’s the American people that continue sending the representatives to Washington, DC that put us in this financial mess. With little exception, many of these people have been around since the debt binge began because you all sent them there. You all want your cake, and want to eat it to.
To quote John Mauldin:
“Up front we must face the fact that the American people want several incompatible things at once: They want lots of expensive healthcare provisions for everyone; they want tax cuts; and they want a balanced budget. As we will see below, we can have relatively universal healthcare (no matter how it’s funded and delivered), tax cuts, or a balanced budget; but we can have only two of the three. Most Americans want all three and don’t see why they shouldn’t have them. There are some exceptions – there are, for example, some economists who don’t care about tax cuts or a balanced budget. They are working from an economic theory that says deficits and debt don’t matter; but in practice, in the observable, empirical world, they do matter. Greatly. Maybe not this year, but sooner or later the piper has to be paid.”
So, I greatly applaud what Congressman Graves has done here. We desperately need have to a grown up conversation about this topic. And this topic has a philosophical and a mathematical component. It’s one that’s going to require us to compromise on the former, and acknowledge there are undeniable truths on the latter. Failure to solve this will result in something the overwhelming majority of people in this country have never seen in their lifetimes.