Tax Reform – Version III

Tax Reform V.3

I have previously published my Tax Reform, Version 1 and Version 2, which both rely on the same basic mathematical functions. In this article I would like to go through the derivation of these functions in detail, step-by-step, with graphical pictures to show the methodology and the effects. At the same time, I will make some additional revisions to the second version. My intent is to show that we can generate a smooth tax function which depends on a few basic constants, and which does not require any intervention from year-to-year, but instead automatically resets itself to correct for inflation and works to eliminate deficits, and specifically avoids violating the Flat Tax commitment.

First, we will start with a picture showing what raw gross income, GI, looks like in graph form with no exemptions, exceptions or loopholes:

Image

Graph 1

Please observe that I have labeled both axes, horizontal and vertical, as just “Income”. Since income increases uniformly in both directions, we have a straight line with a slope of 1. I have not defined any units of income, just arbitrary numbers from 1 to 4 at this point.

Next let’s introduce the concept of “Median Income”, that point along the Gross Income line such that an equal number of people (“taxpayers” or “households” if we use the IRS terminology) falls on either side of this Median Income (MI) point. Now we can give more meaning to the scales I have used above: an MI of 1 on this graph is the annual Median Income for any given year – “this year” in my Tax Reform text. All of the plots in this version are in Monetary Units which are multiples of Median Income, not dollars. I will use the term MU for these units and will abbreviate that to the closest symbol I can find as a replacement for the upper case Greek letter mu, M. Thus, M = GI / MI.

My objective is to develop a simple way to convert the income line, in a series of steps, into a reasonable tax structure which closely matches the taxes paid by most people with today’s tax code, but using a single function that can be applied uniformly to everyone, to replace our current 70,000+ pages of special-interest-ridden Tax Code.

To protect those with low incomes we must have some sort of “Living Cost Exemption”. For this I suggest a straight line starting at 1 (100%) at 0 income and declining to 0 at an income equivalent to M = 4 (blue dotted line). Then by multiplying GI by this exemption line, we can get another curve which is the M value of this Living Cost Exemption (the green dashed line):

Image

Graph 2

As before, GI is the straight black line, the blue dotted line represents the Living Cost Exemption percentage and the green dashed line is the Exemption Value. Subtracting this Exemption value from Gross Income gives us the purple line, our Taxable Income. This sequence gives us a basic structure for computing Personal Income Tax which works quite well for about 85% of all taxpayers, up to 2*MI, or M = 2. For those below an M of about 0.4 some additional refinements will be included for Poverty protection in the form of a Tax Credit Fund, and above an M of 3.0 we will shift to a different curve to blend our Taxable Income function back onto the GI line to create a true Flat Tax over all higher incomes.

From Census data published by the government we know that our current population is now about 320 million people. Just under half of these are “taxpayers”, so at least 155 million people (normally) have jobs and report their incomes on tax returns each year. Thus, in the above graph, half of all this working population falls into the small square between zero and one in the bottom left quadrant; the other half of all income earners falls between 1 and some large number, over 100! Since the Median Income over the past four years has been close to $50,000, a M of 100 would be equivalent to about $5 Million. With 50% of all these people in that bottom square, it should be obvious that the distribution of the “rich”, above M = 4, must get very sparse very quickly. However, we also know that at least 1% of all these people do have incomes above a M of 10 (about $500,000), and that approximately a tenth of a percent have incomes above an M of 20 ($1,000,000) – annually! I will use these numbers to justify some thoughts about tax distribution, poverty and welfare (see comments below Graph 4, below).

In the first version of my Tax Reform, I shifted to a straight line above M = 2, extending the Exemption Value at a constant value of MI for all incomes greater than M = 2. This changed the Taxable Income curve to a straight line parallel to GI for all higher incomes. This appears as the purple line in graphs 4 and 5 below. The effect of this model is to give low income taxpayers a cost of living exemption that starts at $0 (100% of zero income) and increases rapidly as income increases, then more slowly as income approaches M = 2, then remains constant at the dollar equivalent of MI over all higher incomes. This poses two problems: 1) this model does not provide a mechanism for paying the cost of a Tax Credit for those with incomes below a Poverty Threshold, and 2) those with very much higher incomes do not need any cost-of-living exemption; including such an exemption at increasingly higher incomes results effectively in a regressive tax.

To tackle the first problem, I estimated what fraction of MI would yield a minimal living standard for single taxpayers and for taxpayers with one, two, three and four dependents. In keeping with my observation in Tax Reform V.1 that family size is the result of choices that people make – and should not be a burden to other taxpayers – I put an upper limit cap of Poverty protection at four dependents. I then created five Tax Credit curves to provide this protection (see Graph 3).

Finally, to cover the cost of this Tax Credit Fund, I now continue the initial Taxable Income curve (the upward curving parabola) out to an income equivalent to M = 3, and then shift to an inverted parabola which is tangent to the first at M = 3 and tangent to the GI line at M = 6 (see Graph 4). Thus TI is a continuous smooth “S” curve between M = 0 and 6, then equals GI over all higher incomes. Assuming a Flat Tax of 15%, the actual effective tax rate is less than FT at incomes below M = 6 and is a true Flat Tax from that level upward. The difference at high incomes between this new tax model and the V.1 model is highlighted in gray in Graph 5. I have highlighted the maximum Poverty threshold Tax Credit zone in pink at the bottom left corner of this same graph, and the actual source of Tax Credit funds along the bottom edge in green. As noted in my Tax Reform V.2, those who need to make use of their available Tax Credit are expected to repay the Fund when they are able to do so. However, no tax or interest penalty will be charged for non-repayment. Not all poverty cases will be able to repay what they borrow – and some will choose not to do so – but the loss of credit worthiness that attaches to non-repayment is expected to minimize this deficiency.

Image

Graph 3

In graph 3 I have shown only the very lowest income range, out to M = 0.5, or the 2008 equivalent of about $25,000 Gross Income. The dark blue curve, starting at .2 MI (or $10,000), is below today’s minimum wage, but it applies only to single taxpayers with no dependents, so it should be adequate over the short term and is designed to provide the equivalent of minimum welfare or unemployment insurance. For married taxpayers with no children the next level of Threshold, light blue, is intended to provide adequate short term income for two people, and so on up to the dark green curve, at the top of the sequence, for four dependents. The orange curve along the lower edge of the graph represents the Taxable Income over this range, matching the purple curve in Graph 2, above. Each Threshold curve exactly parallels the Taxable Income curve for reasons I explain later and an alternative choice of intermediate thresholds will also be offered.

The zone below each of these Poverty Threshold curves but above the Gross Income line is the Tax Credit amount a taxpayer can access, depending on his/her personal Gross Income and number of dependents. Of course, only those who actually have income (or are recently unemployed and actively looking for work), and who are not claimed as a dependent on another person’s tax return, are eligible for this Credit amount. The reason I designed these Threshold curves to parallel TI is that my original Tax Reform (Version 1) specifically requires that everyone pay the Flat Tax on Taxable Income, and I also specified that every tax payer must put a portion of his/her gross income into a Tax-Deferred Savings Account, or PSA (for healthcare costs, education costs and ultimately for retirement pension). In that first version I defined the minimum contribution to this PSA at 5% of GI, but limited to no more than TI (TI = 5% of GI at GI = .2 MI, so the PSA contribution will always be less than 5% below that income level).

After reconsidering these rules I have concluded that a better choice would be to require that both the employer and employee contribution should be 10% (still with the TI upper limit on the employee portion) so that a large enough fund will accumulate in the PSA during an employee’s working life to cover any normal medical and educational costs, and still leave enough after retirement to live on comfortably. The implication of this change suggests that employers should judge the net worth of each employee, then deposit 10% of that value into the employee’s PSA, and pay the employee the remaining 90% as his Gross Income. The employee must then deposit 10% of this GI into his PSA on his own. This sequence serves several purposes: 1) the employer’s contribution to each PSA is greater than the amount currently mandated, but no further benefits, such as health or unemployment insurance, will be expected or needed; 2) it results in more than the employee’s 10% going into the PSA automatically (the employee’s contribution is 10% of his 90% reported gross income, or only 9% of his worth to the employer), and 3) it serves to impress on the employee the need to actively participate in the accumulation of savings for later needs, just as today’s “Payroll Tax” does.

As in Version 1, the employee may still deposit additional income (up to his TI) to increase the amount available later. However, the upper limit of total PSA contribution remains at 25% of MI, so those with incomes greater than MI cannot put the entire amount of their Taxable Income into their PSA; they must pay the appropriate amount of tax on the difference. Plus, as I noted in Version 1, all of the money deposited into a PSA, including the employer portion, will be taxed on withdrawal so there will no longer be a state of affairs such as we have today where 47% of taxpayers pay no tax at all.

The upward curving Thresholds are designed to assure that increasing one’s earnings will not result in loss of spendable income due to the increasing PSA contribution. Since anyone below the Poverty Line clearly does not have a Taxable Income reaching 10% of GI, all of the Taxable Income of these taxpayers must go into their PSA account, thus deferring all taxes until those Savings need to be used, with no diminution of their total spendable income from the Tax Credit plus actual Gross Income.

In Graph 4, below, the red line is the standard Gross Income, the blue curve is the upright parabola portion of TI which provides the low income Living Cost Exemption, the green curve is the inverted parabola which smoothly reconnects TI back onto the GI line, and the purple line is the GI – MI line described in Version 1.

Image

Graph 4

It is the tax on the portion of income in the gap between the TI and purple curves which I rely on to cover the cost of the Tax Credit fund. Since the per person Tax Credit is very small (less than .4 * MI) but the number of users likely to be quite large, the per person contribution by higher income taxpayers necessarily is significantly greater to offset the smaller number of such contributors. The comparison should become clearer in Graph 5 below which enlarges the view above out to only M = 12 and adds in the actual tax curves for both versions (V.1 and V.3) of my Tax Reform. Although Graph 5 shows this detail for a smaller range on incomes, it clearly shows the relatively greater area of contribution to the Tax Credit fund (extended green area at the bottom right) as compared with the Tax Credit user area at the bottom left corner (pink). This user area shows the credit accessible by those with two dependents, about the average family size expected for Tax Credit borrowers. A majority of the Credit fund users will have at most two dependents, and most of those will need only a small portion of the credit allowed because they will be employed and have some income of their own.

Image

Graph 5

The portion of the total spectrum of incomes that falls within the first piece of this graph (up to M = 3) covers almost 90% of all taxpayers, so it is within this area that most people will be interested in comparing what they pay the IRS under our current Tax Code with what they would pay under this proposed scheme. From those who have given me enough information to compare, I have found that most would pay the same or slightly less under my plan, while a very few would pay up to about 10% more than they do now. In other words, this plan does a surprisingly good job of matching the effect of the present Code, but does so with no Special Interest exemptions or constant yearly adjustments by Congress. The only values that change from year to year are MI and FT (Flat Tax rate), and both of these adjustments are designed to be automatic. MI is calculated annually by the GAO or IRS or the Census Bureau – or by all three – and made available to the public within a few months after the end of each fiscal year, certainly before the April 15 Tax Return date of the following year.

FT could be automated as described in my Tax Reform V.1, but I would like to suggest a better way in this version:

Rather than putting the full burden of an annual deficit on the back of the taxpayer, I suggest increasing FT by no more than 1% in any given year and at the same time cutting the salaries of ALL Federal employees by the same 1%. This most emphatically includes all elected officials and members of all Executive Departments. In addition, whenever there is a deficit, all such salaries should be capped at that new level for as many years as are required to eliminate the deficit. Each year a deficit continues, FT should again be increased by 1% and Federal salaries again reduced by 1%. At some point (I recommend at FT = 20% maximum), the FT increases should be waived, but the Federal salary cuts should continue until our government finds a way to eliminate their wasteful spending and correct the problems which actually cause the deficits. Note that implementation of the other parts of my Tax Reform V.1, in particular the privatization of Social Security (phased in over about 20 years) and replacement of it and healthcare costs with my PSA accounts, will cause Federal spending to automatically fall by about half as compared with today’s outlays, so current deficits ought to disappear naturally.

Two other assumptions made in Tax Reform V.1 are essential in order for this system to work properly. First, we must tax all real Capital Gains (see Capital Gains Revisited, below); second, we must avoid any form of double taxation and we must not tax business profits. Today we routinely tax “Corporate Profits” at an extremely high rate (as of the date of this revision the rates have gone up to almost 40% – in France I understand the business profit tax may go up to 75%!). Taxing business profits at all is so clearly counter-productive that I cannot comprehend why we do it. Taxing businesses at rates this high accomplishes only one thing: it guarantees that all businesses that can do so will move elsewhere and all of their profit taxes will be lost to any government stupid enough to consider it. The fact is that all businesses survive and attract investment by distributing as much of their profits as they reasonably can to their employees (higher incomes and more jobs), to their management and executive people (the best companies buy better managers), to their investors in the form of dividends and interest, and if they are truly profitable, in the form of Capital Gains, the ultimate source of the huge incomes of the exceptionally wealthy. What the wealthy will lose by paying tax on all of their investment Gains – at the same flat rate (15% envisioned here) as all of their ordinary income – they can expect to win back many times over from the increased value and growth of the businesses in which they invest. With almost every country in the world competing for job-creating business, but then turning around and taxing away a large portion of the resulting profits, any government wise enough to completely eliminate the Corporate Tax will soon realize the benefits in the form of more profitable and faster-growing businesses within their own borders, resulting in more jobs, higher incomes and far more income tax revenue.

It was my intent to add to this discussion a comparison between the simple tax method above with some form of display of our current tax system. After numerous attempts to create a meaningful picture, I have concluded that there simply is no way to show how today’s system works in graphic form. There is no correlation between Gross Income and Taxable Income because of the many thousands of Special Interest exemptions, deductions, exceptions and loopholes. With the current tax code, no two people in the country, with the same Gross Income, have the same Taxable Income or owe the same amount of tax.

Capital Gains Revisited

In both Versions V.1 and V.2 I recommended the same method for moderating the tax on Capital Gains by multiplying the Gain value by MI (previous year) / MI (current year). After careful review, I believe that there is a better, fairer, and simpler way to accomplish the desired results. My initial concern was to persuade investors to report and pay taxes on their unrealized gains annually rather than waiting until their investments were sold – sometimes many years later. All too often, tax considerations dictate holding stocks longer than is prudent; other times the effect of tax rules compels investors to sell before the optimum time. If inflation effects and tax regulations could be removed from this calculation, most investors could make more intelligent decisions as to when to buy and sell their holdings.

I believe I was on the right track in adjusting the gains using relative MI values from year-to-year but my original method was unnecessarily complicated and did not adequately offset the effects of GDP growth over longer holding periods. Clearly, if one invests X dollars today, holds that investment for more than a year, then sells it for the same dollar amount as was originally invested, one has lost money! GDP and MI both grow year-over-year by about the same amount. Over the past half century or more this annual growth rate has averaged over 4.5%, so for example an investment made 50 years ago would, today, have to be worth more than 9 times the cost basis in order to break even (1.045 raised to the 50th power = 9.033). Graph 6 below shows a smoothed average of the MI growth since 1948. Interestingly, if I had picked the price of a gallon of gasoline in 1948 and showed its growth over the 60 intervening years, that curve would track the MI growth curve quite closely. In the early 1950s, when I started driving, a gallon cost about 30 cents. In the mid-1970s, the price was around 60 cents. Today it is just above $3 per gallon. These prices fit almost perfectly along this same curve, so gas prices, in real terms, have not changed significantly in 60 years. This same observation applies, to a close approximation, for most basic goods, commodities and services.

Image
Graph 6

Using this knowledge we can use the growth in MI from “last year” to “this year” each full year an investment is held to determine the break-even selling price. If the stock value “this year” exceeds this break-even point, there is a real gain. This real gain times FT should be the tax owed. If the stock value is less than this break-even value but greater than the cost basis, there is neither a gain nor a loss; the gap between the two values is what I call the “risk zone” for any investment (see Graph 7, below).

If the value drops below the cost basis, there is a real loss and this loss may be used (if the stock is sold at this time) to offset an equal amount of real gain in other investments or to claim a tax refund on the current year’s loss against gain taxes paid in previous years on the same stock – or to offset a portion of normal income if other gains or previous tax payments are not adequate. Current tax rules limit the deduction of such losses to $3000 per year, an arbitrary and meaningless choice since MI has grown by a considerable amount since this rule was put in place. A more reasonable choice would be to limit the loss offset to 15% of the lesser of: a) the net loss (after offsetting other gains) or b) the available Gross Income. For losses below the dollar equivalent of MI, the offset should be limited to simply 15% of GI. Obviously, such an offset would be applied to GI before calculating TI for tax purposes.

As I recommended in both earlier versions, this growth adjustment would be available to the investor only if he chooses to declare gains annually and pay the accrued Flat Tax on all gains (realized and unrealized) every year. Stock prices vary enough over long holding periods that it would be expected that many holdings would vary from gain to null (risk zone) to loss and back fairly frequently. When any given stock is in a null or loss position but is expected to recover, using the rules above should make the choice to hold or sell at an optimal point much simpler and wiser. Selling while a stock is in the risk (null) zone would result in no gain and no tax (any tax paid at an earlier position of real gain would be refunded), while a real loss would result in the gain-loss offset options described above. If a stock is sold at a real gain which is less than the position a year earlier, then the tax paid the previous year would constitute an overpayment and the excess would be refunded. Since the MI growth can be calculated relative to the purchase date, (see Appendix, below) the original cost basis can be used, along with that total growth to calculate the correct tax owed each year and any final tax at the time of actual sale. In any case, the same Flat Tax rate applied to normal “earned” income will be applied to the net real gain realized at the time of sale and adjusted for gain taxes paid in prior years.

Here I have plotted the performance of a hypothetical investment:

Image

Graph 7

The red “+” symbols represent the annual stock values of an investment with a “basis” of 1 at year 0. The red line indicates this basis multiplied by an annual growth of 4.6% per year. In this example, the stock increases in value enough each year so that there is never a real loss condition, but in years 3 and 4 there was also no real gain. A tax would have been paid on the real gains in years 1 and 2, then all of that tax would have been refunded at the end of year 3. In years 5 and 6, additional tax would be owed, but a portion of that would be refunded in year 7. Years 8 and 9 would incur small amounts of additional tax. Note that at the end of year 6, the real gain is greater than in any later year. If the holding had been sold at that time, the investor would have realized his maximum real gain and would have paid the maximum amount of tax on that gain.

A Closer Look at Poverty Thresholds

Current law mandates a Minimum Wage for most workers of $7.25 per hour. This gives an annual income of $7.25 times 40 (hours / week) times 52 (weeks) = $15,080 per year. One of the disadvantages of this minimum wage is that many new hires fresh out of high school (or worse, high school dropouts) with no previous work record are viewed as poor risks by potential employers, with the result that they find it extremely hard to find jobs. The unemployment rate for would-be workers in the 19-24 age range right now is above 20%! One of the primary justifications for my Tax Credit Fund is that these young people can still get a job, at whatever wage an employer deems fair, and then apply for a Tax Credit equal to the difference between that annualized wage and the appropriate Threshold curve. Once this worker has a record that justifies a better wage, the need for continuing Tax Credit usage diminishes. Thus the Minimum Wage would no longer be needed and its disadvantages would disappear.

Although I have made no allowance for family size in my primary Taxable Income structure (above the Poverty Zone), it is clear that at these very low Poverty income ranges family size is a major consideration in how much Tax Credit is likely to be needed. In the simplistic set of curves shown in Graph 3 above, I have simply divided the zero-income Threshold range, from 20% of MI to 40% of MI, into four equally spaced values for one, two, three and four dependents. A more realistic spacing would allow for the fact that the first dependent is generally more expensive (to feed, clothe and shelter) than additional dependents. A better choice of spacing might be 20% (single), 28% (one dependent), 34% (two), 38% (three) and 40% (four or more dependents). Since our current Minimum Wage was predicated on preventing abject poverty for a worker with one or two dependents, this range of Tax Credits produces very similar results but is actually slightly more generous, and it caters to family size while the Minimum Wage is a one-size-fits-all choice that would be inadequate for a larger family and is overly generous for single workers. In addition, it automatically adjusts to Cost-of-Living growth as MI grows. With today’s roughly $50,000 MI, these modified percentages would equate to annual incomes of $10,000 (single), $14,000 (one), $17,000 (two), $19,000 (three) and $20,000 (four or more). I have seen various estimates of what constitutes a reasonable poverty line, ranging from $15,000 to as high as $25,000. These estimates vary with location because cost-of-living varies with location. It stands to reason then that the Federal Threshold should err on the low side to minimize cost, and any shortfall in areas with higher living costs should be dealt with by State or Local governments in those areas.

Appendix – Tax Computation Formulas

  1. Normal Tax calculation using this version of Tax Reform:

    a. Divide GI by MI to get M: M = GI / MI

    b. From M = 0 to 3: TI = M² / 4 (upright parabola)

    c. From M = 3 to 6: TI = 9 – (12 – M)² / 12 (inverted parabola)

    d. Above M = 6: TI = M

    e. Tax (in dollars) = (TI * FT) * MI at all levels of M.

    Note that this sequence can easily be formulated into a computer program or into an “APP” for any hand-held device. Such a program could download “this year’s” MI value from the internet and calculate the correct tax for whatever input value of GI is entered by the user.

  2. Capital Gain tax calculation (after first full year), assuming annual gain tax payment:

    Assume stock Value at purchase (cost basis), V0 = $1000

    a) Obtain MI for year 0 (purchase year) from internet: MI0

    b) Obtain MI for year 1 (end of next tax year): MI1

    c) “Zero Gain Level” = Original cost basis times (MI1 / MI0)

    For example, if MI0 was $51000 and MI1 is $53000, then the corrected basis for year 1 would be 1000*1.0392 = $1039.20. (53000 / 51000 = 1.0392 is the MI growth rate for year 1; as a percent this is the same as 3.92% growth)

    d) If the stock Value, V1 , is greater than $1039 at the end of the first full year after purchase, then the real gain will be (V1 – $1039). This value (combined with any other gains and losses and assuming a net positive value) will then be added to the taxpayer’s M in the tax calculation (section 1. above) to compute his tax.

  3. Capital Gain after first year: the same process should be followed except that MIn is used in place of MI1 for each year “n” in steps 2. b and 2. c to calculate a yearly “zero gain level”, and any prior tax on real gain for this stock holding must be deducted from the tax on the current year’s total real gain. Refer to the section above on Capital Gains Revisited for instructions on treating overall gains and losses.

    One final note: An assumption that stocks are bought and sold at the beginning or end of a year appears to be implied above since the MIn values above refer to annual values downloaded from the internet, but since purchase and sale dates seldom occur right at year-ends, it may be necessary to interpolate mid-year MI values between the annual values. For this purpose it is perfectly valid to use linear interpolation, rather than the more precise exponential interpolation, on either a monthly or daily basis. (The error either way is small enough that it is inconsequential.) As an example, if a purchase is made, say, on May 15, the (linearly) interpolated MI0 would be MIn + (MIm – MIn) * (135 / 365) where May 15 is the 135th day of a normal year and m and n represent the start and end of the purchase year. Since MI growth is quite slow, the analogous monthly interpolation would be fairly similar. For very large investments on any mid-year dates either interpolation method can make a difference in one’s tax bill. In the example above, the purchase date MI0 value would be 51000 + (53000 – 51000) * (135 / 365) = $51,740 using daily interpolation (or * (5 / 12) = $51,830 using monthly interpolation; the IRS would issue rules regarding how to implement this choice). Similar calculations would apply to the MI for mid-year sale dates. This degree of refinement probably will not be allowed for “short-term” holdings, less than a full year, but for very long-term holdings all of the above calculations are likely to make many thousands of dollars difference over time to the investor who agrees to pay his “unrealized” gain tax annually.

The calculations described above may seem complex to those not mathematically inclined, but please realize that when compared with the abstruse complexities of our current tax code, all of this is the ultimate in simplicity. Sadly, it will remove the need for employment of many tax lawyers, accountants and programmers (once the first “APPs” have been written), but the savings, both to taxpayers and to our government, will accumulate for centuries.

Advertisements

Government Refo…

Aside

Government Reform

 

Contents

Part I, An overview of sources and strategies for collecting tax revenue.

Part II, Gives a detailed formula for taxing ordinary personal income, with the following attributes:

  1. Set one time and run forever without Congressional adjusting,

  2. Adjusts automatically to inflation,

  3. Adjusts automatically to correct for deficit spending or surplus,

  4. Protects low-income people from over-taxation,

  5. Provides tax-deferred saving for retirement, healthcare and education.

  6. (Version 2 add-on) Provides a fail-safe protection against poverty and

  7. a means to cover the cost of this protection.

Part III, Provides a method for regular (annual or quarterly) collection of taxes on Investment Gains.

Part IV, Discusses taxation of businesses.

Part V, Shows how to keep Social Security from bankruptcy and provides a method for privatization of Social Security without incurring front-end deficits.

Part VI, Suggests a set of Constitutional rules for Congressional behavior.

Part VII, Lists the most obvious consequences expected from implementation of all of the above.

Part I – Taxation Overview

Let’s make a list of available tax source categories and strategies:

A. Personal Income – This is the simplest and fairest taxable category.

B. Business Income or Profits – This category is quite plainly self-destructive because it inhibits employment and reduces workers’ wages more than any other form of taxation. Moreover, any tax a business is forced to pay will always be passed directly on to the consumer, so it is not actually a tax on business profits, but rather a form of double taxation on the consumer and all business entrepreneurs and investors, along with sales taxes (on the consumer) and the many other forms of tax on investment gain and income. Finally there is the problem of defining what is “profit” in a business and what is necessary funding for current or future expansion, for research, for ongoing maintenance of offices, manufacturing plant, etc., and finally, for any unforeseen increases in costs due to government regulation or union demands. Some further considerations on Business Taxes will be discussed in Part IV – Taxation of Businesses.

C. Personal Consumption – This is also easy to tax, but it has the disadvantage that it is extremely regressive. Poor people spend all or most of their income on basic necessities and are therefore taxed on virtually every penny they earn. With increasing wealth, necessities become an ever smaller fraction of total consumption, and consumption gives way to investment as the major use of assets, so the wealthy pay a much smaller effective tax rate than the poor. Any form of tax protection for the poor would necessitate complicated and arbitrary rules for what constitutes “basic necessities” – with lower or no taxes applied – and what classifies as “non-essential” or “luxury” purchases for higher (how high?) tax rates. Adding to this would be the cost of essential services, with more of the same problems. By now we are all well aware of the 70,000 page abomination of current Tax Rules that have resulted from subjective responses to these types of problems.

D. Tax on Wealth or Net Worth – In a sense this seems to be an eminently fair way to tax, because it seems to take in proportion to ability to pay. To a Socialist this probably makes good sense; it provides the ultimate “Redistribution of Wealth”. Of the many problems that come to mind the most obvious is: how would the government go about measuring any person’s net worth. There is no way they could measure the value of “intellectual property”, for example, and it would be impossible to measure the relative value of different people’s real estate, cars, home furnishings, etc., especially when one considers that the exact same items would typically be valued differently in different locations. We see aspects of this problem in the application of Property Taxes as they vary from city-to-city and state-to-state across the country. At best it would result in another 70,000 pages of special interest rules and in never-ending complaints and lawsuits, just as with our current tax code.

E. Value-Added Tax – This is perhaps the worst form of tax ever conceived. It is used extensively in Europe, and is roundly hated by everyone who pays it. Its worst feature is that it is a multiple layer tax on already taxed goods. Like compound interest, the final consumer is paying the VAT rate raised to a power which is unlimited, depending solely on the number of steps from acquiring and processing raw materials through creation of many separate parts, through combining parts into a section of a final product, through the completion of the whole product, then finishing, inspections, wrapping and shipping to distribution centers and finally to the consumer. If the VAT rate is, say, 15% and a product goes through, say, 15 steps (typically both of these numbers are low estimates!), the materials gathered in the early steps of production will have been subjected to a final tax rate over 700%! This is the sort of tax paid by Europeans on almost everything they buy. Is it any wonder that the Euro-Zone is galloping into Socialism and bankruptcy?

Further discussion of what to tax seems unproductive to me. For purposes of this discussion I will assume that we can agree on the Personal Income Tax as the primary logical tax source for Federal revenue. My next topic is to build a set of rules that is simple and equitable, and that can be applied uniformly to everyone.

Rule 1 – The same tax rate will be applied to all taxable income.

Rule 2 – A simple exemption formula is needed to protect those at the low end of the income scale from abject poverty. At the same time, the exemption will not absolve anyone from paying some amount of tax. Since we all enjoy the benefits of living in this country, we should all accept some share of the costs of those benefits.

Rule 3 – All income must be taxed one time, but no income will be taxed more than once. This is perhaps the single most important rule. It requires that all accounts containing cash or cash-equivalents must be carefully labeled as “pre-tax” or “taxed” and all money added to or withdrawn from the two types of accounts must be kept carefully segregated and treated appropriately.

Rule 4 – There will be no special-case rules or exemptions for any group of people, regardless of wealth, health, time or place of birth, education, “connections” or any other of the thousands of situations which our current tax codes pander to. In this country our Constitution says plainly that we are all identical when it comes to opportunity. This implies that there will be no more special deals, subsidies or bailouts for any person or any group of people, even if they have the potential to improve our way of life. If the potential is there, every person or business will have to access funding through normal channels, not from taxpayers via the government.

Rule 5 – A tax deferred Savings Account will be available to allow everyone to set aside enough money to cover Medical Expenses, Education and Retirement. Deposits to this account must be limited to no more than a taxpayer’s Taxable Income or 25% of current Median Income, whichever is less. Normal income tax will be paid on any funds withdrawn from this account. More details on this will be given in Part II.

Rule 6 – The maximum tax rate, under normal conditions, should never exceed 15%. If our government undertakes to involve itself in areas not explicitly covered by the Constitution, and the costs of these activities force an ongoing tax rate over 15%, Congress has the responsibility to eliminate the offending activities and bring the spending back under control. Too many of the intrusive activities of our Federal government today involve things that should fall within the capabilities and responsibilities of the States or The People. Education, healthcare, welfare, minimum wage laws, industrial regulations, and hundreds of other areas into which the Federal government has intruded over the past 100 years or more, should all be returned to State or local control.

The only exception to this 15% rule would be a National Emergency, such as war or a natural disaster of major proportions. However, with the monstrous debt our government has amassed over the past half century, a slightly higher tax may have to be tolerated until the deficit is brought under control; but again Congress must take responsibility and correct this problem as quickly and painlessly as possible.

I would point out that the ancient tradition of tithing, used by many early tribal and “nation/state” groups for thousands of years (and still common among religious groups today), set the cost of “government” at just 10% of each member’s productivity. The same should be true today if we reject dependency and wean ourselves from expecting government to handle what ought to be our personal responsibilities.

What is Income?

One common definition has two types of income: earned and unearned. Earned income is simply the regular pay a person receives for services rendered. Unearned income generally applies to profits from various forms of investment. Since this would also include investment earnings such as interest or dividend payments, which tend to be quite regular, I would prefer to include these payments in the same group with wages and call this type of income “Ordinary Income”. Then “Non-Ordinary Income” would cover all forms of increase in asset value, such as Capital Gains, profits from gambling or from trading real property. The term “investment income” is similar to “Non-Ordinary Income” but the latter indicates this broader field of asset forms.

With these definitions we can now design an Ordinary Income tax code that honors Rules 1 and 2 very equitably (see Part II, next), and a Non-Ordinary Income code that also conforms to all of the above rules (see Part III).

 

Part II – Tax rules for Ordinary Income

  1. Personal taxes will be paid on ALL ordinary income; there will be no tax-exempt or tax-free status for any kind of income from any source, nor will there be any other form of deduction or exemption for anyone – in particular no special interest exceptions or loopholes for those in positions of power – with the sole exception of the cost-of-living exemption formula defined in section 2, next.

  2. A cost-of-living exemption which will apply to all ordinary income can be defined using two variables which must be reset annually: personal Ordinary Gross Income (GI) and national Median Income (MI). Then:

    Exemption = a percentage of GI that starts at 100% at GI = 0, and decreases linearly to 50% at an income of GI = 2 x MI; above an income of 2 x MI, the exemption will remain constant at the value MI. This results in:

    TI (Taxable Income) = GI² / (4 x MI) up to GI = 2 x MI, and

    TI = GI – MI for incomes above 2 x MI.

  3. A third variable, Flat Tax rate (FT), is needed to calculate the tax, so that:

    Income Tax owed equals TI x FT for all taxpayers and for all taxable income.

  4. Each year the value of FT will be updated to reflect Federal Spending (FS) and the Total Tax Revenue (TT) during the preceding year, as follows:

    FT(new) = FT(old) x FS / TT

    This process automatically eliminates any annual deficit. If Congress spends more than it collects, FT must increase; if it spends less, FT may decrease. A small surplus should be figured into each new FT value to gradually pay down the National Debt; however, in years of serious economic difficulty, Congress may, by 2/3 vote of both houses, waive all or part of a required increase. It might be reasonably expected that this feature will not only act as a brake on Congress’ spending habits, it may well prove to be more effective than Term Limits for replacing unrepentant spenders in Government. In keeping with Part I – Rule 6, above, Congress must begin ASAP eliminating unconstitutional departments and activities in order to bring FT down to 15%.

  5. Note that the above restrictions do NOT allow exemptions for dependents, regardless of family size or condition. Social Engineering is not a proper responsibility of the Federal Government. The maximum exemption under the above formula, MI, is more than double the “poverty level” that Congress has defined over past decades, so this exemption should be more than adequate for any normal household situation.

  6. (Version 2 add-on) Realizing that those with incomes below a defined Poverty Threshold may be unable to cover even the barest cost-of-living expenses, I am adding a Tax Credit provision, as follows:

    The Poverty Threshold must take into account the number of dependents in a taxpayer’s “family unit”. For a single person with no dependents, I will assume a Threshold at 20% of MI. For two or more adults, with one taxpayer and one or more “dependents” who all have incomes below the Threshold, I assume an increase of 5% of MI for each dependent, up to a maximum of 40% total. For normal family households, the Threshold will start at 30% for the married couple, and add 5% for each child, again up to the maximum of 40%. This correlates to the current Head of Household status for the primary earner. The same logic would apply to a single parent with dependent children: 25% for the single parent (head of household) plus 5% per child up to the 40% maximum.

    The Poverty Threshold thus defined for these various household types will be used to calculate an amount of money that will be made available to any taxpayer whose income is less than his/her Threshold, in the form of a Tax Credit equal to the difference between the relevant Threshold and the actual income. Thus everyone will be able to have access to a spendable income at least equal to his Threshold and corresponding household unit.

  7. To cover the cost of this Tax Credit, the Taxable Income function described in paragraph 2, above, will be extended until the slope of the TI function exceeds the slope of the GI line by between 15% and 20%. By definition, the slope of GI is 1.0 (GI increases by $1 for every $1 increase in income). So when the slope of TI, using the above formula, reaches, say, 1.20, then TI will become a straight line. With this difference in slope, TI will eventually grow to values greater than GI, and the “effective tax rate” for very high incomes will become greater than FT, by a small margin. The shift from curved line to straight line for the +15% slope occurs at GI = MI * 2.3, rather than MI * 2 (paragraph 2); the shift for a +20% slope occurs at GI = MI * 2.4. The crossover point, where TI will equal GI will occur at a GI value slightly less than MI * 9 (+15% slope) or just over MI * 7 (+20% slope). In 2010 terms (MI = approximately $50,000) these crossovers would be just under $450,000 or just over $350,000. Assuming an FT of 15%, the total effective tax rate paid by those with incomes above one of these limits would become greater than 15%, with a maximum effective rate of either 17.25% and 18% for someone with a BILLION dollar taxable income!

    Note that even this marginal increase in effective tax rate should more than compensate for the cost of the Tax Credit account available to relieve poverty. At the same time, I doubt that the very wealthy would quibble over an effective tax rate that is only fractionally greater than the official Flat Tax rate.

The following tables show how these rules would work out with the $50,000 MI in 2010 for the basic formula, paragraph 2 (Table 1) and the version 2 Tax Credit extension, paragraph 7 (Tables 2 [15%] and 3 [20%]).  The shift-to-linear positions are shaded in gray in Tables 2 and 3.

 

Tax Table Using Basic Tax Code with MI = $50,000
Gross Income Exemption Taxable Income Total Tax
      FT = 15% Eff. Rate FT = 20% Eff. Rate
$0 $0 $0 $0 0.00% $0.00 0.00%
$5,000 $4,875 $125 $19 0.38% $25.00 0.50%
$10,000 $9,500 $500 $75 0.75% $100.00 1.00%
$15,000 $13,875 $1,125 $169 1.13% $225.00 1.50%
$20,000 $18,000 $2,000 $300 1.50% $400.00 2.00%
$25,000 $21,875 $3,125 $469 1.88% $625.00 2.50%
$30,000 $25,500 $4,500 $675 2.25% $900.00 3.00%
$35,000 $28,875 $6,125 $919 2.63% $1,225.00 3.50%
$40,000 $32,000 $8,000 $1,200 3.00% $1,600.00 4.00%
$45,000 $34,875 $10,125 $1,519 3.38% $2,025.00 4.50%
$50,000 $37,500 $12,500 $1,875 3.75% $2,500.00 5.00%
$60,000 $42,000 $18,000 $2,700 4.50% $3,600.00 6.00%
$70,000 $45,500 $24,500 $3,675 5.25% $4,900.00 7.00%
$80,000 $48,000 $32,000 $4,800 6.00% $6,400.00 8.00%
$90,000 $49,500 $40,500 $6,075 6.75% $8,100.00 9.00%
$100,000 $50,000 $50,000 $7,500 7.50% $10,000.00 10.00%
$120,000 $50,000 $70,000 $10,500 8.75% $14,000.00 11.67%
$140,000 $50,000 $90,000 $13,500 9.64% $18,000.00 12.86%
$160,000 $50,000 $110,000 $16,500 10.31% $22,000.00 13.75%
$180,000 $50,000 $130,000 $19,500 10.83% $26,000.00 14.44%
$200,000 $50,000 $150,000 $22,500 11.25% $30,000.00 15.00%
$250,000 $50,000 $200,000 $30,000 12.00% $40,000.00 16.00%
$300,000 $50,000 $250,000 $37,500 12.50% $50,000.00 16.67%
$350,000 $50,000 $300,000 $45,000 12.86% $60,000.00 17.14%
$400,000 $50,000 $350,000 $52,500 13.13% $70,000.00 17.50%
$450,000 $50,000 $400,000 $60,000 13.33% $80,000.00 17.78%
$500,000 $50,000 $450,000 $67,500 13.50% $90,000.00 18.00%
$1,000,000 $50,000 $950,000 $142,500 14.25% $190,000.00 19.00%
$10,000,000 $50,000 $9,950,000 $1,492,500 14.93% $1,990,000.00 19.90%
$100,000,000 $50,000 $99,950,000 $14,992,500 14.99% $19,990,000.00 19.99%
$1,000,000,000 $50,000 $999,950,000 $149,992,500 15.00% $199,990,000.00 20.00%
             
      Table 1      
MI =     Gs = Slope = Ts = Family PT =
$50,000     $115,000 1.15 $66,125.00 40.00%
GI Exemption Percent Cost of Living Exemption TI TAX TAX CREDIT SUPER-TAX Effective Rate
$0 100.00% $0 $0.00 $0.00 -$20,000.00 0.00%
$5,000 97.50% $4,875 $125.00 $18.75 -$15,000.00 0.38%
$10,000 95.00% $9,500 $500.00 $75.00 -$10,000.00 0.75%
$15,000 92.50% $13,875 $1,125.00 $168.75 -$5,000.00 1.13%
$20,000 90.00% $18,000 $2,000.00 $300.00 0 1.50%
$25,000 87.50% $21,875 $3,125.00 $468.75 0 1.88%
$30,000 85.00% $25,500 $4,500.00 $675.00 0 2.25%
$35,000 82.50% $28,875 $6,125.00 $918.75 0 2.63%
$40,000 80.00% $32,000 $8,000.00 $1,200.00 0 3.00%
$45,000 77.50% $34,875 $10,125.00 $1,518.75 0 3.38%
$50,000 75.00% $37,500 $12,500.00 $1,875.00 0 3.75%
$60,000 70.00% $42,000 $18,000.00 $2,700.00 0 4.50%
$70,000 65.00% $45,500 $24,500.00 $3,675.00 0 5.25%
$80,000 60.00% $48,000 $32,000.00 $4,800.00 0 6.00%
$85,000 57.50% $48,875 $36,125.00 $5,418.75 0 6.38%
$90,000 55.00% $49,500 $40,500.00 $6,075.00 0 6.75%
$100,000 50.00% $50,000 $50,000.00 $7,500.00 0 7.50%
$110,000 45.00% $49,500 $60,500.00 $9,075.00 0 8.25%
$115,000 42.50% $48,875 $66,125.00 $9,918.75 0 8.63%
$120,000   $48,125 $71,875.00 $10,781.25 0 8.98%
$130,000   $46,625 $83,375.00 $12,506.25 0 9.62%
$140,000   $45,125 $94,875.00 $14,231.25 0 10.17%
$150,000   $43,625 $106,375.00 $15,956.25 0 10.64%
$200,000   $36,125 $163,875.00 $24,581.25 0 12.29%
$250,000   $28,625 $221,375.00 $33,206.25 0 13.28%
$300,000   $21,125 $278,875.00 $41,831.25 0 13.94%
$350,000   $13,625 $336,375.00 $50,456.25 0 14.42%
$400,000   $6,125 $393,875.00 $59,081.25 0 14.77%
$450,000   -$1,375 $451,375.00 $67,706.25 $206.25 15.05%
$500,000   -$8,875 $508,875.00 $76,331.25 $1,331.25 15.27%
$1,000,000   -$83,875 $1,083,875.00 $162,581.25 $12,581.25 16.26%
$10,000,000   -$1,433,875 $11,433,875.00 $1,715,081.25 $215,081.25 17.15%
$100,000,000   -$14,933,875 $114,933,875.00 $17,240,081.25 $2,240,081.25 17.24%
$1,000,000,000   -$149,933,875 $1,149,933,875.00 $172,490,081.25 $22,490,081.25 17.25%

 

 

Table 2

 

MI =     Gs = Slope = Ts = Family PT =
$50,000     $120,000 1.20 $72,000.00 40.00%
GI Exemption Percent Cost of Living Exemption TI TAX TAX CREDIT SUPER-TAX Effective Rate
$0 100.00% $0 $0.00 $0.00 -$20,000.00 0.00%
$5,000 97.50% $4,875 $125.00 $18.75 -$15,000.00 0.38%
$10,000 95.00% $9,500 $500.00 $75.00 -$10,000.00 0.75%
$15,000 92.50% $13,875 $1,125.00 $168.75 -$5,000.00 1.13%
$20,000 90.00% $18,000 $2,000.00 $300.00 0 1.50%
$25,000 87.50% $21,875 $3,125.00 $468.75 0 1.88%
$30,000 85.00% $25,500 $4,500.00 $675.00 0 2.25%
$35,000 82.50% $28,875 $6,125.00 $918.75 0 2.63%
$40,000 80.00% $32,000 $8,000.00 $1,200.00 0 3.00%
$45,000 77.50% $34,875 $10,125.00 $1,518.75 0 3.38%
$50,000 75.00% $37,500 $12,500.00 $1,875.00 0 3.75%
$60,000 70.00% $42,000 $18,000.00 $2,700.00 0 4.50%
$70,000 65.00% $45,500 $24,500.00 $3,675.00 0 5.25%
$80,000 60.00% $48,000 $32,000.00 $4,800.00 0 6.00%
$85,000 57.50% $48,875 $36,125.00 $5,418.75 0 6.38%
$90,000 55.00% $49,500 $40,500.00 $6,075.00 0 6.75%
$100,000 50.00% $50,000 $50,000.00 $7,500.00 0 7.50%
$110,000 45.00% $49,500 $60,500.00 $9,075.00 0 8.25%
$120,000 40.00% $48,000 $72,000.00 $10,800.00 0 9.00%
$130,000   $46,000 $84,000.00 $12,600.00 0 9.69%
$140,000   $44,000 $96,000.00 $14,400.00 0 10.29%
$150,000   $42,000 $108,000.00 $16,200.00 0 10.80%
$200,000   $32,000 $168,000.00 $25,200.00 0 12.60%
$250,000   $22,000 $228,000.00 $34,200.00 0 13.68%
$300,000   $12,000 $288,000.00 $43,200.00 0 14.40%
$350,000   $2,000 $348,000.00 $52,200.00 0 14.91%
$400,000   -$8,000 $408,000.00 $61,200.00 $1,200.00 15.30%
$450,000   -$18,000 $468,000.00 $70,200.00 $2,700.00 15.60%
$500,000   -$28,000 $528,000.00 $79,200.00 $4,200.00 15.84%
$1,000,000   -$128,000 $1,128,000.00 $169,200.00 $19,200.00 16.92%
$10,000,000   -$1,928,000 $11,928,000.00 $1,789,200.00 $289,200.00 17.89%
$100,000,000   -$19,928,000 $119,928,000.00 $17,989,200.00 $2,989,200.00 17.99%
$1,000,000,000   -$199,928,000 $1,199,928,000.00 $179,989,200.00 $29,989,200.00 18.00%

Table 3

 

Further Discussion

A.  Poverty Threshold Conditions

Anyone who considers using his share of available Tax Credit money should understand that this is borrowed money, and it comes with an obligation to repay it. Since the ability to repay is not enforceable, failure to repay will have only the minor penalty of reducing the credit rating of those who don’t repay for some extended period. It must be expected that some may never be able to repay their share of Tax Credit money borrowed. This scheme is designed to minimize the need for any more costly types of Federal Welfare, while at the same time eliminating most cases of homelessness. I have deliberately set the suggested Threshold levels high enough to alleviate outright deprivation, but low enough to encourage everyone to actively work toward improving their condition.

To those who enter and stay in the sub-poverty zone by choice (chronic under-achievers, the indolent, “Occupy” types) the amount of Tax Credit available may seem inadequate compared to what they have become accustomed to, at the expense of others. They most likely will accept defeat and the scorn of others rather than learn responsibility and self-respect. For those who enter poverty status through unaccustomed and unexpected hardship, this Tax Credit will be a God-send that will enable them to rediscover self-reliance without penalty. They will normally succeed and eventually repay the money borrowed.

B. Super Tax Considerations

Balancing the amount of “Super Tax” revenue collected against the amount of Tax Credit utilized by those below the Poverty Threshold may require adjusting the Slope parameter during the first few years. There will be far more poor people accessing their Credit than there will be wealthy people contributing to the Super Tax fund, but each high end contributor will, on average, contribute at least 50 times as much as each person borrowing from the fund. Depending on the overall economy, it may well turn out that most borrowers will repay most or all of the Credit they use.

C. More on Part I, Rule 5

There are three classes of deferred tax exceptions that will be allowed in addition to the standard Exemption Formula:

Personal Retirement Account (PRA) (see Part V – Retirement Reform Rules):

  1. As long as the current Social Security Administration continues to exist, each taxpayer may add a portion of his 25% limit toward a PRA account, in addition to what is required under the SSA law. Additionally, until SSA is fully privatized, the “Payroll Tax” percentage will be treated as part of the 25% limit.

  2. Once privatization is started, the mandatory PRA/SSA contribution will be 5% and the remaining 20% can be distributed between PRA and the other tax deferred accounts defined below. With this extension, even those toward the lower end of the income scale would be in a position to retire in reasonable comfort at a normal retirement age provided they manage their finances responsibly.

  3. Since all of the funds going into the PRA are tax deferred, it necessarily follows that all withdrawals from this extended PRA after retirement will be taxed as current ordinary income, with the standard exemption formula applied.

Health Savings Account (HSA)

  1. All taxpayers will be encouraged to contribute a portion of their Taxable Income to a Health Savings Account (HSA), also tax deferred. This account may be used as needed either to purchase a Health Insurance Policy, or to pay for medical services directly. The limits stated at the beginning of this section will apply.

  2. The HSA can be left to accumulate indefinitely (including investment growth) until needed. Like the PRA accounts, when a withdrawal is needed, it will be taxed as income.

  3. It is anticipated that by starting new young employees early in contributing to their future healthcare costs, the need for Medicare and/or Medicaid can be phased out over time, or at least greatly reduced in scope. Some employers may consider contributing to their employees’ HSA accounts in lieu of income, but in this case employer and employee must coordinate to assure that the 25% limit is not exceeded. Since input to the HSA is pre-tax, it makes no difference whether it is contributed by the employer or the employee.

Education Account

  1. Many families are all too familiar with the problems in our education system today, and many of them would welcome the opportunity to put their children in a private school if one is readily available. By starting as early as possible and contributing some of the tax deferred 25% to an education account, they should have no problem affording the best education they can find for their children.

  2. Families without children may also contribute to such an account on behalf of children of relatives or friends, at their discretion, for education only.

  3. The only restriction is that ordinary income tax must be paid on withdrawal.

The sum of these contributions may not exceed Taxable Income or 25% of MI, whichever is less. The current Payroll Tax, or the 5% PRA contribution (see Part V), must be treated as a portion of this 25% limitation. For those whose incomes are so small that the Payroll Tax or PRA contribution would exceed their Taxable Income under the formula given in Part II, the government will have to come up with some creative bending of these rules. My suggestion would be to simply limit the amount mandated for Social Security (or PRA) Tax to the lesser of TI or the current mandate.

With the formula for TI given here, TI reaches 25% of MI at an income, GI, equal to MI. In other words, exactly half of the tax paying population will have the option of putting all of their taxable income into this tax-deferred account. This is analogous to the situation today wherein nearly 50% of tax returns result in zero taxes. The difference, however, is abundantly clear: with the new tax structure, all of those who avoid taxes at the time income is earned, by putting the maximum into Tax Deferred Savings, will owe taxes on these savings as they are withdrawn. So the long-term result is still that all income will be taxed in due course.

For those below the Poverty Threshold, income tax must be waived on all taxable income. However, the amounts indicated as Tax in Tables 2 and 3 above have been retained to indicate the amount that can be contributed to the tax deferred accounts. This results in a narrow exception to the “all income must be taxed” rule, since we cannot tax those who have no money beyond the most basic needs. It is tempting to require that the taxes owed in such cases should be collected as the Credit borrowings are repaid. I suspect this would be quite impractical. In any case, the taxes lost from those below the Poverty Threshold are a vanishingly small percentage of total tax revenue.

Since MI tends to increase from year-to-year, and since each person’s GI also is expected to increase with time, normally a few percent faster than MI, the contributions put into these accounts are likely to be relatively small during the early working years but to increase toward the 25% of MI maximum in later years. I would anticipate that as more people learn how to manage their finances more responsibly, we will find that the slow slide into Socialism will begin to reverse direction fairly rapidly, to the benefit of all.

These options will be available to all taxpayers, regardless of income level. But note that care must be taken to assure that the sum of all contributions to these optional tax deferred accounts does not exceed the 25% of MI limit for any individual. I would suggest that all three of these accounts should be merged into a single tax deferred Savings Account. This way, the entire amount saved may be used as needed for any of the three purposes listed – but not for any other purpose. Since these accounts belong to the individual, not to the Government, there is no reason to restrict use of the funds to any post-retirement age. I would also propose that, if our citizens can exercise the self control and responsibility to accumulate enough to provide for themselves in this way, Congress should be willing to accept a permanent cap on the tax rate applied to withdrawals from these Savings Accounts at 15%, even if government spending (and repayment of debt) require that the FT for all other income taxes goes above that level, per Tax rules for Ordinary Income, Section 4.

Part III – Optional Tax Rules for Non-Ordinary Income (Asset Gains)

Although current Gain tax laws are generally acceptable there are three major flaws:

  1. Capital Gains are not adjusted for inflation. With investments often held for many years, inflation causes significant degradation in asset gain values.

  2. Current laws allow the exemption of most, or even all, of the Gains through the loophole of contributions to charities or to political agendas. Since this violates Part II, Section 1, this flaw needs to be eliminated. The ongoing controversy about a “Buffett Rule” is a distraction that is simply political posturing.

  3. The fact that good investment strategies promote long-term investment also means that gains are not taxed until they are “realized” – i.e., until assets are actually sold. The result is that the treasury is deprived of legitimate income for extended periods of time. A secondary result is that investors are tempted to hold onto investments beyond their point of viability simply to avoid paying the taxes. This works to the disadvantage of both government and investor.

    Current laws require that tax on ordinary income be withheld from every paycheck, or that a quarterly estimate and payment be made. Achieving the same effect with investment income would correct this flaw.

Each of these flaws is addressed in the following section:

All of the various types of Non-Ordinary Income are subject to a final outcome which may be either a Gain or a Loss, and it is impossible to predict when or how much Gain or Loss will be realized. It is for this reason that the current tax code imposes no tax on Gains, and provides no relief from losses, until the end of the year in which the Gain or Loss is “realized”. I believe, however, that it would be in the best interests of both the government and the investor to change this system so that taxes on gains may be estimated and imposed annually, or even quarterly. It is not feasible to recover losses until an asset is actually sold, but most investors will sell a losing asset quickly unless there is very good reason to believe that the asset will recover the loss in a reasonably short time.

The following set of rules accomplishes this goal and may provide enough incentive to persuade investors to adopt them. For the government, the obvious incentive will be that they would guarantee a steady stream of tax revenue that, with today’s code, is both irregular and uncertain. A secondary benefit to the government would be that the constant stream of tax receipts from Gains would provide a quick and accurate measure of the effectiveness of the numerous laws and regulations emanating from Congress and from the many Departments that have appeared in recent years. From the investor’s viewpoint, the inflation adjustment described below should be a strong enough incentive.

These rules depend on the same Flat Tax rate, FT, and the regularly updated value of Median Income, MI, as defined in Part II. To simplify definitions used in the following, I will use common stock market terms and refer to all assets as “stocks”, and all “non-ordinary income” as Capital Gains. The extension to less common forms of assets and “non-ordinary income” should be straightforward.

  1. When a stock is purchased on a given date, a “Cost Basis” is fixed (price times number of shares + fees or incidental charges). An MI value can be set as of either the end of the previous year (when the government typically determines a value for MI), or the date of purchase (by interpolation) if greater precision is preferred.

  2. At the end of the following tax period (quarter or year, to be established by Congress) the stock price will reflect a gain, a loss or no change. If the price has gone up the stock value will show a Gain equal to the new price times number of shares minus the original Cost Basis. If the price has not gone up, there is no action to be taken.

    For the following sections (3 – 7), we assume that the price has increased:

  3. For each tax period a Gain value can be figured from the end of the previous period and the tax obligation will be Gain x FT. This tax amount should be included as part of the regular assessment of estimated taxes in the same way that the government now mandates an estimated payment for ordinary income tax. This calculation will be repeated for each tax period until the end of the tax year.

  4. At each year-end, the price again will be compared to the purchase price and a Gain value computed for the annual tax return. At this point, the Gain value will be adjusted for inflation as follows:

    Taxable Gain (TG) = Gain x MI(old) / MI(new) where MI(old) is the Median Income at the date of purchase or end of the previous year and MI(new) is the MI at this year end.

  5. Then the final annual tax owed on the Gain for this stock will be TG x FT. Any estimated tax already paid will of course be taken into account. A new “Gain Basis” can now be set to the year-end value of this stock holding.

  6. For each year this stock continues to increase in value, a new Gain value can be calculated the same way, but always relative to the Gain Basis from the previous year rather than the original Cost Basis.

  7. When a stock is sold, the Gains Tax owed will be calculated on only the gain since the previous year-end or estimate payment. For an asset held for many years, this final tax will typically be a small fraction of the amount required with today’s rules. In addition, the final total tax on any investment gain will have been reduced to compensate for inflation during the holding period.

  8. Now let’s assume that the stock price went down during the past year, but is still above the original purchase price. In this case, the investor will have paid more in Gains tax through the end of the current year than he owes, so he will have a tax refund due. The overpayment amount will be simply the Gains taxes paid up to this year-end times the ratio of the Remaining Gain (this year-end) divided by the Maximum Gain (at the time when the last previous Gain taxes were paid). This tax refund may be offset by gains from other assets and simply subtracted from those other gain taxes, or it may be deducted from Ordinary income taxes owed, or it may require an actual tax refund.

  9. If the stock price drops to the original purchase price, or lower, then all of the taxes paid up to this year-end must be refunded and the Gain Basis reverts to the original Cost Basis, and the MI(old) reverts to the MI at the time the stock was purchased. If the investor, under these conditions, continues to hold the stock, no other tax consequences are incurred at this time. The stock will remain in the Loss column either until it is sold, or until the price goes back above the purchase price. A loss at time of sale will be treated exactly as it is now.

Annual (or quarterly) payment of Gains Taxes, with inflation adjustment included, should provide sufficient incentive to investors to follow this option. However, I recommend that this method should be made available as an option initially, because some investors may have good reasons to stick with the current Gains Tax method until the consequences are fully understood. As long as the total real Capital Gain is taxed before any exemptions or deductions, this choice is of little concern to the Treasury. This rule of tax first, other distributions later must be the primary consideration.

 

Part IV – Taxation of Businesses

The primary reason people form businesses is to make a living, that is, to make money for themselves. The only way this can work is for the business creators to develop an idea for a product or a service that their business can provide, and which they believe will be useful to other people, at a price that their consumers will be willing to pay. Therefore, the concept of a business “profit” is inherently meaningless; any money the business brings in must go either toward maintaining, expanding and improving the business, or as income to the business owners, managers and operators. It is people who realize any real profit, not the business itself.

As a general rule, any form of “Profit Tax” on a business operation has a net negative effect, directly on the business, its owners and employees, and indirectly on the national economy (lost jobs). It automatically diminishes the ability of businesses to hire more employees and it discourages higher wages. In addition, any tax imposed on a business will necessarily be passed on to those who would become consumers of the business’s products or services, increasing costs and further depressing the economy. No company could remain profitable if it did not add the cost of taxation to the cost of its output. Following this logic, I propose the following rules:

  1. Business income/profit which stays in the business, to be used for expenses and for growth and improvement of the business, will not be taxed.

  2. Any business income which is extracted from the business for the benefit of an individual in any form will be taxed as income to that individual. Payroll, employee benefits, employee insurance premiums, bonuses, dividends, interest payments, etc., all will be taxed as personal ordinary income to the recipient.

    Where it is simpler for the employer to pay both a benefit and its concomitant tax directly (as when an employer pays for a group policy, plus tax, for example for medical insurance for many employees), the total amount of the benefit plus tax must be used in calculating the correct total amount of the tax. My reasoning here is that the full insurance benefit is a part of each employee’s income, but payment derives from an untaxed account. If the cost of the insurance were added to employees’ paychecks, tax would be owed from them on the total amount, and the extra tax on the insurance benefit would come out of the employee’s take-home pay in addition to the cost of his individual insurance premium, which would likely be far greater than each worker’s share of the cost of the group policy.

    For example: a company purchases a group policy for all of its employees at a cost of X dollars. The net tax must be FT x (X + tax), so the tax paid by the employer should be calculated as:

    Tax = FT x X / (1 – FT)

    To demonstrate this, let’s say that a benefit paid by a company has a cost of $1000, and FT for this year = 20%. Then the tax paid by the employer will be $250, not just $200. If the $1000 were just added to the employee’s paycheck he would have to pay at least the $1000 to cover the premium, plus the $200 tax on the extra $1000 income, all out of after-tax-income. For those on low incomes this might be a deal-breaker for any insurance coverage.

  3. Non-commercial organizations, such as Unions, Churches, Charities, Social Groups, Homeowners Associations, etc., are all considered businesses under these rules, and they will pay no taxes on already taxed money that is contributed to them by individuals or households. When any organization pays wages to others who classify as Personal Taxpayers, those persons will pay the appropriate Ordinary Income Taxes, as above. A charity or church, however, may provide food, clothing, general welfare materials to those it deems to be in need, without incurring any tax obligation on the part of the recipient or the provider. That is the nature of the charity’s business rather than payment for goods or services; for example, a union might provide unemployment benefits or support in the form of food to members who are temporarily on strike, without being taxed. If a union pays a union employee for services, however, that is income to the worker and is subject to standard income tax, paid by the worker.

    Implicit in these rules is the requirement that unionized workers must pay the normal income tax on their total earnings before paying their union dues. The only alternative would be for the unions to pay the tax out of the dues they collect. In this latter case, the unions would have to pay the full FT tax rate on all the dues they collect because it would be impossible to determine an average cost-of-living exemption formula covering all of the union members contributing.

  4. If a business contributes to a charity and such support does not qualify as a part of the business’s normal activity, then there will be a Personal Income Tax obligation to be paid by that business (note the tax calculation under Rule 2, above) or by the receiving charity, a) because the end beneficiary of the donation is the welfare recipient, and b) because no prior taxes have been paid on the amount donated.

  5. When one business buys stock in another business, to increase its cash reserves or improve its product, or any other legitimate business purpose, any profits realized from such transactions which remain in the business will not be taxed.

  6. Any business which sends money overseas, to open a new plant or start a new branch operation for example, will post a “tax bond” in the amount of the current FT personal tax rate applied to the amount of money expatriated. Assuming that the foreign investment bears fruit and returns money or equivalent cash value to the U.S., there will be a refund at the same tax rate on the value repatriated. This serves two purposes: it prevents American companies from sending income to offshore accounts for favored executives without paying the appropriate income tax, and it minimizes the incentive for companies to ship jobs overseas where labor costs are less than in the U.S. When (if) the overseas operation returns the whole amount originally expatriated, the “tax bond” account will be closed and any further money coming into the U.S. for that account will be untaxed profit to the company.

Political Influence

It has been traditional for both individuals and businesses to deduct political contributions from their taxable finances each year before computing taxes due. New rules are needed for this area.

  1. Personal contributions:

    Since deductions from personal income will no longer be allowed, there is no reason to limit contributions that individuals can make, after taxes, to any politician or political organization. People should be free to give any amount to anyone they wish without penalty. This same logic applies to gifts from one person to another. Tax must already have been taken from the person giving the gift, so there can be no additional tax on the recipient (no double taxation).

  2. Business contributions:

    Since business profits will no longer be taxed in the traditional manner, it is necessary to consider the basis for any political contribution from a business source. The primary consideration, of course, must be that a business does not contribute to a political entity for purely altruistic reasons; such giving is necessarily always done to gain some influence or advantage that would not be available otherwise. In other words, money is used to buy favorable legislation and/or attention. For this reason, there should be a cost to the business for the advantage it expects to realize. This same reasoning applies to Unions, Charities, or any other business or organization.

    A simple and effective arrangement would be to require a tax donation equal to the political donation, dollar for dollar. If business executives or union bosses believe it is worth a large donation out of untaxed business or union funds to get the favorable action they want, it is only fair that they pay the cost of such favors in taxes, in the same amount. The penalty for failure to pay the equal amount in taxes should be a fine of ten times the amount not paid up front.

    Corporate and union influence in Congress both are notorious sources of bad legislation. This always has been and always will be true. At least by matching tax and donation influence we may achieve a better balance. I would urge that taxes realized from this source be dedicated to paying down the National Debt rather than simply going into the General Fund. This would go a long way toward defraying the costs of “crony capitalism”.

    To circumvent this 100% tax, it should be apparent that a business (corporation, union, or other) could pay the desired contribution to a business officer, who could then pay the ordinary personal income tax and contribute the after-tax balance to the desired political recipient. I cannot envision how this rule could be perceived by our courts as a violation of the First Amendment Free Speech rule, so I do not anticipate any legal argument. In any case, viewing this problem logically, if a business is unlike a “person”, as is implied by the first two sections of this article in order to exempt businesses from taxation, then it follows that the Free Speech rule cannot apply in the same way to a corporation as it does to an individual. This is undoubtedly a ruling by our Supreme Court that is likely to be revisited. One obvious flaw in the Court’s recent decision is that, if a Corporation is a “Person” then the same donation limit should have been applied to both. Even our Supreme Court can make some curious blunders!

Part V – Retirement Reform Rules

There are two methods available for making Social Security sustainable. The first protects Social Security, as it is now, from long term losses and ultimate bankruptcy; the second shifts it gradually over to privately owned Personal Retirement Accounts (PRAs). Both methods can, and should, be implemented simultaneously.

A. Making the current “defined benefit” system sustainable:

  1. Redefine the Income Cap on which “Payroll Taxes”, or FICA taxes, are paid to twice the Median Income (MI), or MI x 2. This is a close match to the current cap, and has the advantage that it adjusts automatically to inflation and economic growth (proxy for COLAs).

  2. Redefine the standard monthly payment, after retirement, for those who are fully vested and have paid the FICA tax up to the income cap level, to Median Income times 3.5%1. This would put the standard S.S. payment at $1750 on the 2010 MI of approximately $50,000. The current SSA rules for adjusting the monthly payment based on early or late retirement will be retained, as will the current rules for adjustment based on income lower than the Cap.

  3. For those whose incomes have been above the Cap for most of their working years, and whose post retirement income from sources other than Social Security remain greater than the Cap (as defined above), will receive monthly SSA checks which are corrected by the ratio of the Cap divided by their non-SSA income. Thus, if in some future year the MI grows to $60,000 and a retiree has a Gross Income (before tax and before SSA payment) of $150,000, then his SSA check will be only $1680 rather than the standard $2100, (2100 x 120000 / 150000). This is similar to the concept of a “Means Test” currently under discussion in Congress but does not involve any convoluted legislation.

  4. The portion of both employee and employer contributions to FICA taxes should be reset to 5% of each employee’s paycheck. Combined with the remaining 20% of GI permitted toward the Tax Deferred Savings Accounts (see Part II – Further Discussion, Section C) this will provide a much better retirement pension than the current system, at least for those with incomes greater than 20% of MI. (This is the GI at which TI = 5% of GI. Very few workers spend much time at such low incomes.)

  5. FICA taxes collected from those still employed, from employer and employee, must be invested in “locked” accounts like those defined below (see Section B-rule 11), not put into the Treasury’s General Fund.

B. How to gradually shift from today’s “defined benefit” scheme to a “defined contribution” retirement plan:

Every suggestion I have read is a variation on the theme of starting new employees, as of a set Starting Date, on their own Private Retirement Plans such that they and their employers deposit a mandated percent of each regular paycheck into the employee’s private account. These accounts would be invested so that the contributed sum plus growth would provide for living expenses after retirement. The advantages would be that under normal market growth the accounts should provide a better retirement than the current SSA system, and the entire account would belong to the retiree and his or her heirs.

This approach has the one major flaw that everyone already in the SSA system would still be contributing to it until retirement and then withdrawing from it for as much as 30 years (or more in rare cases), but the new workers, after the set Starting Date, would be contributing to SSA at a significantly lower rate or not at all. So the already negative balance between Payroll Tax inflow and Social Security check outflow would become steadily worse for at least the next 50 years. Our country is technically bankrupt already; this would certainly push us over the cliff!

I propose an back end approach, starting with employees at or near retirement and working year-by-year toward the youngest workers. This way the first people to shift into the new plan will already have paid in most of the Payroll Taxes they will ever owe, and will withdraw from S.S. slightly less, year-by-year, as they shift into their own PRA accounts. According to simulations I have run, this method actually results in a marginal improvement in the SSA balance sheets. Along with the “sustainability” modification in Section A, this should totally eliminate the present SSA deficit.

Coupled with my recommended Tax Deferred Savings Accounts (Part II)this plan should provide adequately even for those retirees at the lower end of the income spectrum, provided they learn to save responsibly throughout their working lifetime.

  1. Once Congress has agreed on the rules for Private Retirement Accounts we can define a starting year as Year 0.

  2. On the SSA-designated retirement age birthday in Year 0 of any workers who already have at least a 40 year record of payment into SSA, those workers would be eligible to retire on normal standard Social Security pay-out. If they decide to continue working and contributing to a greater retirement fund, they will have the option of discontinuing their FICA payments and instead putting the same amount into their own Personal Retirement Account.

  3. In order to maintain an adequate flow of funds into the SSA account, the matching funds from their employer will continue to go into the SSA.

  4. When those workers do elect to retire, they will collect their standard S.S. checks enhanced by the years their employer continues paying the matching contribution into the SSA account (about 1.25%2 per year), and they will have a small PRA account of their own as well.

  5. In Year 1, the same rules will apply to those at standard retirement age minus one year and who have a 39 year input record in SSA. They may discontinue their payment into the SSA fund and instead direct the same amount into their PRA. They will realize the ownership of their PRA funds, plus any investment gain on those funds, and they will lose 1.25%2 of the SSA pay-out they would have received at normal retirement age. Again, if they work beyond retirement age, their S.S. checks will grow at the same 1.25%2 for each added year of employer matching contribution.

  6. From Year 2 through Year 9, the optional switchover to PRA will proceed starting an additional year ahead of normal retirement age, with the same reduction of S.S. payout for each earlier switchover year. Thus, by Year 10 all of those who are eligible to retire in Year 20 may choose to switch to the PRA plan, take a loss of 12.5% (10 times 1.25% per year) of their S.S. checks and enjoy the ownership of all the funds growing in their own PRA.

  7. Assuming that the switchover has been a success up to this point – no shortfall in funds available in the SSA Trust Fund to pay all of the S.S. checks due to both full- and partial-beneficiaries, and satisfaction with the growth of their PRAs among those who have made the switchover – then it would be reasonable to accelerate the switchover option to an additional two or even five years for each additional year after Year 10. By Year 11, for example, the accelerated PRA option might allow workers at retirement age minus 15 years to shift earlier rather than having to wait until Year 15 to make the shift.

  8. At this rate, we can assume that some people will be starting their careers, forty or more years before anticipated retirement, with the PRA option available to them immediately, possibly as early as Year 16. These first workers who opt to put all of their retirement money into a PRA will have the additional option of having all of their employers’ matching funds also put into their PRA, rather than into the SSA. At this point we would begin to see the full benefit of Personal Retirement Accounts.

  9. At some point between Year 16 and Year 40, all workers will be able to start directly into the PRA scheme and all retirement fund pay-in for these new workers from that point on, from both employees and employers, will be into PRAs. There may be a significant number of older retirees still receiving S.S. checks, but they will be a diminishing number, and many of those checks will be reduced by many years of attrition at the 1.25% per year rate (due to some employee contributions going into their PRAs rather than into SSA).

  10. Beyond about Year 30, or earlier if all goes as well as anticipated, no employer matching funds should be allowed to go into the SSA fund, but will instead be directed into each employee’s PRA. The turnover point should be determined when it is clear that sufficient SSA funds exist to cover the few remaining retirees still drawing S.S. checks.

  11. The accounts used for accumulating PRA funds will be managed by reputable investment firms and the structure of those accounts must be approved by Congress, with criteria such that income and growth are maximized within the absolute constraint that risk will be as close to zero as possible. Many similar 401K and other fund accounts exist today, and most show returns averaging between 5% and 10% over many decades.

  12. The SSA itself should be required to put all of the contributions accruing to it into similar accounts so that there will no longer be any way that Congress can spend them on General Fund items. This change should be made now, completely separate from any discussion of the rules given here. By locking these funds away, the SSA can essentially guarantee that it will have the funds necessary to pay S.S. checks to all remaining beneficiaries of the old system, without having to borrow in order to honor its obligations. Once all remaining SSA beneficiaries have died, all funds still left in the SSA accounts, if any, will automatically revert either to the General Fund or, better, go directly to paying down National Debt liability.

  13. The single most important rule for Entitlement Benefits is that all of the above rules will apply equally to everyone. Specifically, this means that all Federal employees, including our elected servants, will abide by these rules; they will no longer be covered by separate pensions, retirement plans, medical coverage or any other benefits that are not equally available to every citizen of the United States. (See also Part VI – 2, below.)

  14. This same argument applies also to all laws which benefit or restrict some people and not others. Congress will not pass any law benefiting Federal Employees which is not available to all citizens; and Congress will not pass any law restricting or punishing any citizen which does not apply equally to themselves. The present ability of Congress to establish its own perquisites: salaries, vacations, pensions, healthcare coverage, etc., must be subject to approval by all other branches of government and by the people.

  15. This reasoning also implies that all businesses should provide the same basic minimum benefits, specifically pension and healthcare benefits, for all full-time employees. If employers elect to provide additional benefits, they will be valued at cost and taxed to the employees as income. In accordance with our Constitution and Declaration of Independence, the time has come to honor the “Equal Opportunity” clause and treat every citizen with the same respect. This does not imply equal outcomes for all, but it does mean that everyone will receive the same outcome results versus input worth as anyone else. Obviously, “input worth” is subjective and requires cooperation and agreement between the employer and the employee, which in turn requires honesty and integrity on both sides.

1 This percentage figure is approximate and may need to be adjusted.

2 The 1.25% value is predicated on a nominal work-life of 40 years, with employer and employee combined putting in 2.5% of the 40 year total each year.

Table 4 demonstrates three possible schedules for the transition from SSA to PRA. The Starting Year (Year 0) is assumed to be 2015. The first ten years in each case are restricted to a one-year advance in eligibility age per year in the new plan. Starting in Year 10 (2025) the first pair of columns shows a continuation of the one-year advance per year, the next pair shows an acceleration factor of 2, and the third pair shows an acceleration factor of 5. If this plan is completely successful, we could see the last of our outdated and non-sustainable SSA scheme disappear by as early as 2031, except for those few living retirees who elected not to make the shift into a PRA at their earliest opportunity.

Assume PRA Law Becomes Effective in 2015 (Year 0)

Year Eligible for PRA Shift

Years of SSA Contribution (No Accel)

Age eligible for shift to PRA

Years of SSA Contribution (Accel * 2)

Age eligible for shift to PRA

Years of SSA Contribution (Accel * 5)

Age eligible for shift to PRA

2015

40

67

40

67

40

67

2016

39

66

39

66

39

66

2017

38

65

38

65

38

65

2018

37

64

37

64

37

64

2019

36

63

36

63

36

63

2020

35

62

35

62

35

62

2021

34

61

34

61

34

61

2022

33

60

33

60

33

60

2023

32

59

32

59

32

59

2024

31

58

31

58

31

58

2025

30

57

30

57

30

57

2026

29

56

28

55

25

52

2027

28

55

26

53

20

47

2028

27

54

24

51

15

42

2029

26

53

22

49

10

37

2030

25

52

20

47

5

32

2031

24

51

18

45

0

ALL

2032

23

50

16

43

 

 

2033

22

49

14

41

 

 

2034

21

48

12

39

 

 

2035

20

47

10

37

 

 

2036

19

46

8

35

 

 

2037

18

45

6

33

 

 

2038

17

44

4

31

 

 

2039

16

43

2

29

 

 

2040

15

42

0

ALL

 

 

2041

14

41

 

 

 

 

2042

13

40

 

 

 

 

2043

12

39

 

 

 

 

2044

11

38

 

 

 

 

2045

10

37

 

 

 

 

2046

9

36

 

 

 

 

2047

8

35

 

 

 

 

2048

7

34

 

 

 

 

2049

6

33

 

 

 

 

2050

5

32

 

 

 

 

2051

4

31

 

 

 

 

2052

3

30

 

 

 

 

2053

2

29

 

 

 

 

2054

1

28

 

 

 

 

2055

0

ALL

 

 

 

 

 

 

Table 4

 

 

Part VI – Congressional Reform Rules

Congress has, for far too long, viewed its own members as though they were a “Ruling Class”, not bound by the same rules they write for the “rest of us”. This is perhaps the clearest sign that our government has turned away from the Constitution and has taken upon itself the role of a Monarchy. A new set of rules is needed to get our nation back onto the track established by the Founders. I strongly recommend that these rules should be encoded in the form of an Amendment to the Constitution so that the resulting benefits would be much harder to abrogate in future years.

  1. Congress shall make no law which in any way restricts or penalizes all of the Citizens, which does not apply equally to Congress and all members of the Government Bureaucracy. (E.g., Insider Trading)

  2. Congress shall make no law which in any way benefits or favors its own members, or other Federal employees, which does not apply equally to all citizens of the nation. (E.g., Government pension and medical plans)

  3. Congress shall pass no law which it is not certain is clear and devoid of damaging “unforeseen” consequences, or which it is not convinced is fair and enforceable. (E.g., Illegal immigration problems)

  4. In keeping with the letter of the Constitution, no new laws or binding regulations may be made and enforced without full Congressional approval. Furthermore, all laws and regulations which are approved by Congress (and by the President), once passed, must be fully enforced. There must never again be situations where a new administration decides unilaterally that it doesn’t like laws passed by a previous administration and then refuses to enforce such laws; nor may Congress ever decide that it doesn’t approve of a law from an earlier administration and simply refuse to fund its enforcement. Once properly passed, every law must be followed rigorously unless and until it is determined that the law was not well advised and needs to be removed. A government divided against itself is destructive and self-defeating.

  5. Congress shall make a concerted effort to remove any and all old laws which have proven to be poorly written, unenforceable, duplicative of other better written laws, or otherwise simply not worthy of retaining. Frankly, I would much rather vote for a Congressman who would promise to get rid of bad laws before I would ever vote for one who would promise to try to pass a law that would benefit me personally!

  6. Congress shall permanently terminate the practice of adding riders to bills unless the riders relate clearly and objectively to the primary subject of the bill in question. If the subject of any unrelated rider is worthy of passage, it must be considered on its own merits as a separate bill, with no exceptions.

  7. Congressional salaries should not be determined by Congress alone. Any increase in any Government salaries must be approved, on a case-by-case basis, by both houses of Congress and the President, and by the people of the Congress person’s district. There should never be a general Congressional salary increase without voter approval, on a case-by-case basis.

Part VII – Consequences

It can easily be seen that the above six sections, if fully implemented, would produce consequences, most of which would be viewed, by most people, as beneficial; but some of the consequences will require some adjustment from some people. Let’s look at how these new rules will affect various segments of the population.

  1. With the greatly improved predictability of business costs – taxes, healthcare and retirement contributions, regulations – it can be assumed that business will thrive. All businesses and most employees will benefit and jobs will grow.

  2. The new tax rules are likely to be popular with nearly everyone, except for those whose current livelihood depends on tax code complexity. However, it is likely that many IRS employees will no longer have jobs.

  3. Many of the tax lawyers, tax accountants in private business and the thousands of minor employees working in tax and accounting departments will have to be retrained in other aspects of corporate business. With the explosion of profitable businesses one should expect from all this, the number of productive jobs available to absorb this loss of “make work” jobs should be satisfying to almost everyone.

  4. Since a very large part of government business is based on and supported by tax complexity, a huge chunk of government “make work” will disappear, with concomitant reduction in cost of government.

  5. The details of the shift from Social Security to the Private Retirement system will require retraining the surplus IRS, SSA and other accounting personnel to make sure the SSA accounts remain balanced and no retirees lose payments they have coming to them. No net loss to the treasury is foreseen here.

  6. The same potential applies to government’s reduced presence in the healthcare and education “industries”; just releasing its grip on these areas of public affairs, in which the Federal Government has no Constitutional authority in the first place, will take some years of careful extraction, with a large number of qualified workers to untangle the mess.

  7. The growth in productive business – and corresponding growth in profits – will create a need for more workers at all levels, especially more highly qualified workers. The increased need and the growth in profits will work together to make higher pay rates both necessary and affordable, to the benefit of workers at all levels. It’s the exact opposite of what we have with creeping Socialism, which stifles business and causes far greater harm to both lower paid workers and the middle class than does healthy Capitalism.

  8. Inevitably, there will be some individuals – in government, in the corporate world, and in the unions – with a lust for power who will try to suborn this new system to their advantage (and to everyone else’s disadvantage), so it will always be necessary for honest members of Congress and The People to maintain careful oversight.

  9. Weaning taxpayers from the current Special Interest system in which many investment vehicles are “Tax Free” or “Tax Exempt” (Municipal Bonds are typical of this class) will be a gradual process. It would not be reasonable to expect to break existing contracts just to more quickly realize the benefits of these new rules, so some degree of “grandfathering” of contracts now in place must be accepted, but all new investment should be fully locked into the new rules. It should be noted, however, that this comment applies specifically to Federal Tax loopholes. The States must still be free to handle State tax regulations free from interference from the Federal Government.

  10. It will likely take at least 20 years, possibly longer, with this system in place before the National Debt will be adequately reduced, or eliminated – about the same length of time it should take to fully shift over to the Private Retirement Accounts. By that time it can be assumed that our economy will have shifted into high gear and our future should look far more promising than it does today.

    The transition from our current way of doing things to full implementation of all parts of this new system will take time and more will and courage than is evident in some of our present Members of Congress. Hopefully, this change will encourage a higher quality of candidates dedicated to public service.

     

 

 

 

 

 

 

 

 

How to Fix Taxes, Entitlements, Congressional Rules

Government Reform

 

Contents

Part I, An overview of sources and strategies for collecting tax revenue.

Part II, Gives a detailed formula for taxing ordinary personal income, with the following attributes:

  1. Set one time and run forever without Congressional adjusting,

  2. Adjusts automatically to inflation,

  3. Adjusts automatically to correct for deficit spending or surplus,

  4. Protects low-income people from over-taxation,

  5. Provides tax-deferred saving for retirement, healthcare and education.

Part III, Provides a method for regular (annual or quarterly) collection of taxes on Investment Gains.

Part IV, Discusses taxation of businesses.

Part V, Shows how to keep Social Security from bankruptcy and provides a method for privatization of Social Security without incurring up-front deficits.

Part VI, Suggests a set of Constitutional rules for Congressional behavior.

Part VII, Lists the most obvious consequences expected from implementation of all of the above.

Part I – Taxation Overview

Let’s make a list of available tax source categories and strategies:

A. Personal Income – This is the simplest and fairest taxable category.

B. Business Income or Profits – This category is quite plainly self-destructive because it inhibits employment and reduces workers’ wages more than any other form of taxation. Additionally, any tax a business is forced to pay will always be passed directly on to the consumer. Finally there is the problem of defining what is “profit” in a business and what is necessary funding for current or future expansion, for research, for ongoing maintenance of offices, manufacturing plant, etc., and finally, for any unforeseen increases in costs due to government regulations or union demands. Some further thoughts on Business Taxes are discussed in Part IV.

C. Personal Consumption – This is also easy to tax, but it has the disadvantage that it is extremely regressive. Poor people spend all or most of their income on basic necessities and would therefore be taxed on virtually everything they earn. With increasing wealth, necessities become an ever smaller fraction of total consumption, and consumption gives way to investment as the major use of income, so the wealthy would pay a much smaller effective tax rate than the poor. Any form of tax protection for the poor would necessitate complicated and arbitrary rules for what constitutes “basic necessities” – with lower or no taxes applied – and what classifies as “non-essential” or “luxury” purchases at higher (how high?) tax rates. Adding to this would be the cost of essential services, with more of the same problems. By now we are all well aware of the 70,000+ page abomination of current Tax Rules that have resulted from subjective responses to these types of problems.

D. Tax on Wealth or Net Worth – In a sense this seems to be an eminently fair way to tax, because it seems to take in proportion to ability to pay. To a Socialist this probably makes good sense; it provides the ultimate “Redistribution of Wealth”. Of the many problems that come to mind the most obvious is: how would the government go about measuring any person’s net worth. There is no way they could measure the value of “intellectual property”, for example, and it would be impossible to measure the relative value of different people’s real estate, cars, home furnishings, etc., especially when one considers that the exact same items would typically be valued differently in different locations. We see aspects of this problem in the application of Property Taxes as they vary from city-to-city and state-to-state across the country. At best it would result in another 70,000 pages of special interest rules and in never-ending complaints and lawsuits, just as with our current tax code.

E. Value-Added Tax – This is perhaps the worst form of tax ever conceived. It is used extensively in Europe, and is roundly hated by everyone who pays it. Its worst feature is that it is a multiple layer tax on already taxed goods. Like compound interest, the final consumer is paying the VAT rate raised to a power which is unlimited, depending solely on the number of steps from acquiring and processing raw materials through creation of many separate parts, through combining parts into a section of a final product, through the completion of the whole product, then finishing, inspections, wrapping and shipping to distribution centers and finally to the consumer. If the VAT rate is, say, 15% and a product goes through, say, 15 steps (typically both of these numbers are low estimates!), the materials gathered in the early steps of production will have been subjected to a final tax rate over 700%! This is the sort of tax paid by Europeans on almost everything they buy. Is it any wonder that the Euro-Zone is galloping into Socialism and bankruptcy?

Further discussion of what to tax seems unproductive to me. For purposes of this discussion I will assume that we can agree on the Personal Income Tax as the only logical tax source for Federal revenue. My next topic is to build a set of rules that is simple, equitable and that can be applied uniformly to everyone.

Rule 1 – The same tax rate will be applied to all taxable income.

Rule 2 – A simple exemption formula is needed to protect those at the low end of the income scale from abject poverty. At the same time, the exemption will not absolve anyone from paying some amount of tax. Since we all enjoy the benefits of living in this country, we should all accept some share of the costs of those benefits.

Rule 3 – A tax deferred Savings Account will be available to allow everyone to set aside some money to cover Medical Expenses, Education and Retirement. Deposits to this account must be limited to no more than a taxpayer’s Taxable Income or 25% of current annual Median Income, whichever is less. Normal income tax will be paid on any funds withdrawn from this account. More details on this will be given in Part II.

Rule 4 – There will be no special-case rules or exemptions for any group of people, regardless of wealth, health, time or place of birth, education, “connections” or any other of the thousands of situations to which our current tax codes pander. Our Constitution says plainly that we are all identical when it comes to opportunity. This implies that there will be no more special deals, subsidies or bailouts for any person or any group of people, even if they have the potential to improve our way of life. If the potential is there, every person or business will be able to access funding through normal private channels if government will simply get out of the way.

Rule 5 – All personal income must be taxed one time, but no income will be taxed more than once. This is perhaps the single most important rule. It requires that all accounts containing cash or cash-equivalents must be carefully labeled as “pre-tax” or “taxed” and all money added to or withdrawn from the two types of accounts must be kept carefully segregated and treated appropriately.

Rule 6 – The maximum tax rate under normal conditions should never exceed 15%. If our government undertakes to involve itself in areas not explicitly covered by the Constitution, and the costs of these activities force an ongoing tax rate over 15%, Congress has the responsibility to cut the offending activities and bring the spending back under control. Too many of the intrusive activities of our Federal government today involve things that should fall within the capabilities and responsibilities of the States or The People. Education, healthcare, welfare, minimum wage laws, industrial regulations, and scores of other areas into which the Federal government has intruded over the past 100 years or more, should all be returned to State control.

The only exception to this 15% rule would be a National Emergency, such as war or a natural disaster of major proportions. However, with the monstrous debt our government has amassed over the past half century, a somewhat higher tax will have to be tolerated until the debt is brought under control; but again Congress must take responsibility and correct this problem as quickly and painlessly as possible.

I would point out that the ancient tradition of tithing, used by many early tribal and “nation/state” groups for thousands of years (and still common among religious groups today), set the cost of “government” at just 10% of each member’s productivity. The same should be true today if we reject dependency and wean ourselves from expecting government to handle what ought to be our personal responsibilities.

What is Income?

One common definition has two types of income: earned and unearned. Earned income is simply the regular pay a person receives for services rendered. Unearned income generally applies to profits from various forms of investment. Since this would also include investment earnings such as interest or dividend payments, which tend to be quite regular, I would prefer to include these payments in the same group with wages and call this type of income “Ordinary Income”. Then “Non-Ordinary Income” would cover all forms of increase in assets or asset values, such as Capital Gains, profits from gambling or from trading real property. The term “investment income” is similar to “Non-Ordinary Income” but the latter indicates this broader field of asset forms.

With these definitions we can now design an Ordinary Income tax code that honors Rules 1 and 2 very nicely (see Part II, next), and a Non-Ordinary Income code that conforms to the rest of the above rules (see Part III).

 

 

Part II – Tax rules for Ordinary Income

 

  1. Personal taxes will be paid on ALL ordinary income; there will be no tax-exempt or tax-free status for any kind of income from any source, nor will there be any other form of deduction or exemption for anyone – in particular no special interest exceptions or loopholes for those in positions of power – with the sole exception of the cost-of-living exemption formula defined in section 2, next.

  2. A cost-of-living exemption which will apply to all ordinary income can be defined using two variables which must be reset annually: personal Ordinary Gross Income (GI) and national Median Income (MI). Then:

    Exemption = a percentage of GI that starts at 100% at GI = 0, and decreases linearly to 50% at an income of GI = 2 x MI; above an income of 2 x MI, the exemption will remain constant at the value MI. This results in:

    TI (Taxable Income) = GI² / (4 x MI) up to GI = 2 x MI, and

    TI = GI – MI for incomes above 2 x MI.

  3. A third variable, Flat Tax rate (FT), is needed to calculate the tax, so that:

    Income Tax owed equals TI x FT for all taxpayers and for all taxable income.

  4. Each year the value of FT will be updated to reflect Federal Spending (FS) and the Total Tax Revenue (TT) collected during the preceding year, as follows:

    FT(new) = FT(old) x FS / TT

    If Congress spends more than it collects, FT will increase; if it spends less, FT may decrease. A small surplus should be figured into each new FT value to gradually pay down the National Debt; however, in years of serious economic difficulty, Congress may, by 2/3 vote of both houses, waive all or part of a required increase. It might be reasonably expected that this feature will not only act as a brake on Congress’ spending habits, it may well prove to be more effective than Term Limits for replacing unrepentant spenders in Government. In keeping with Part I – Rule 6, above, Congress must begin ASAP eliminating unconstitutional departments and activities in order to bring FT down to 15%.

  5. Note that the above restrictions do NOT allow exemptions for dependents, regardless of family size or condition. Social Engineering is not a proper responsibility of the Federal Government. The maximum exemption under the above formula, MI, is more than double the “poverty level” that Congress has defined over past decades, so this exemption should be more than adequate for any normal household situation.

 

The following tables show how these rules would work out with the MI in 2010 (Table 1a) and in 2015 (Table 1b – extrapolated using MI growth from 1960 to 2010).

 

Tax Table Using New Tax Code with MI = $50,000 (2010 level)

Gross Income

Exemp-tion

Taxable Income

 

Total Tax

 

 

 

FT=15%

Eff.Rate

FT=20%

Eff.Rate

FT=25%

Eff.Rate

FT=30%

Eff.Rate

$10,000

$9,500

$500

$75

0.75%

$100

1.00%

$125

1.25%

$150

1.50%

$20,000

$18,000

$2,000

$300

1.50%

$400

2.00%

$500

2.50%

$600

3.00%

$30,000

$25,500

$4,500

$675

2.25%

$900

3.00%

$1,125

3.75%

$1,350

4.50%

$40,000

$32,000

$8,000

$1,200

3.00%

$1,600

4.00%

$2,000

5.00%

$2,400

6.00%

$50,000

$37,500

$12,500

$1,875

3.75%

$2,500

5.00%

$3,125

6.25%

$3,750

7.50%

$60,000

$42,000

$18,000

$2,700

4.50%

$3,600

6.00%

$4,500

7.50%

$5,400

9.00%

$70,000

$45,500

$24,500

$3,675

5.25%

$4,900

7.00%

$6,125

8.75%

$7,350

10.50%

$80,000

$48,000

$32,000

$4,800

6.00%

$8,100

9.00%

$10,125

11.25%

$12,150

13.50%

$90,000

$49,500

$40,500

$6,075

6.75%

$8,100

9.00%

$10,125

11.25%

$12,150

13.50%

$100,000

$50,000

$50,000

$7,500

7.50%

$10,000

10.00%

$12,500

12.50%

$15,000

15.00%

$150,000

$50,000

$100,000

$15,000

10.00%

$20,000

13.33%

$25,000

16.67%

$30,000

20.00%

$200,000

$50,000

$150,000

$22,500

11.25%

$30,000

15.00%

$37,500

18.75%

$45,000

22.50%

$300,000

$50,000

$250,000

$37,500

12.50%

$50,000

16.67%

$62,500

20.83%

$75,000

25.00%

$500,000

$50,000

$450,000

$67,500

13.50%

$90,000

18.00%

$112,500

22.50%

$135,000

27.00%

$1000000

$50,000

$950000

$142500

14.25%

$190000

19.00%

$237500

23.75%

$285000

28.50%

$2000000

$50,000

$1950000

$292500

14.63%

$390000

19.50%

$487500

24.38%

$585000

29.25%

$5000000

$50,000

$4950000

$742500

14.85%

$990000

19.80%

$1237500

24.75%

$1485000

29.70%

$10000000

$50,000

$9950000

$1492500

14.93%

$1990000

19.90%

$2487500

24.88%

$2985000

29.85%

$50000000

$50,000

$49950000

$7492500

14.99%

$9990000

19.98%

$12487500

24.98%

$14985000

29.97%

Table 1a

 

 

 

Note that over all the years for which MI has been tabulated (I have been able to find this information only from 1950 to the present, so some earlier periods, such as 1929 – 1940, may be an exception) MI has increased by rates between 0% and about 6 – 8%, while inflation rates have generally ranged between 0% and about 5%. I am unaware of any year since 1950 in which inflation grew faster than MI, until 2008. From 2008 through 2012, inflation has grown at a fairly normal rate, but according to the best sources I have found, MI has actually seen negative growth, dropping by about $4300 over the past four years. Given this information, my extrapolated MI for 2015 may not be realized until some years later!

 

 

 

Tax Table Using New Tax Code, MI = $60,000 (2015 level?)

Gross Income

Exemp-tion

Taxable Income

 

Total Tax

 

 

 

FT=15%

Eff.Rate

FT=20%

Eff.Rate

FT=25%

Eff.Rate

FT=30%

Eff.Rate

$10,000

$9,583

$417

$63

0.63%

$83

0.83%

$104

1.04%

$125

1.25%

$20,000

$18,333

$1,667

$250

1.25%

$333

1.67%

$417

2.08%

$500

2.50%

$30,000

$26,250

$3,750

$563

1.88%

$750

2.50%

$938

3.13%

$1,125

3.75%

$40,000

$33,333

$6,667

$1,000

2.50%

$1,333

3.33%

$1,667

4.17%

$2,000

5.00%

$50,000

$39,583

$10,417

$1,563

3.13%

$2,083

4.17%

$2,604

5.21%

$3,125

6.25%

$60,000

$45,000

$15,000

$2,250

3.75%

$3,000

5.00%

$3,750

6.25%

$4,500

7.50%

$70,000

$49,583

$20,417

$3,063

4.38%

$4,083

5.83%

$5,104

7.29%

$6,125

8.75%

$80,000

$53,333

$26,667

$4,000

5.00%

$5,333

6.67%

$6,667

8.33%

$8,000

10.00%

$90,000

$60,000

$33,750

$5,063

5.63%

$6,750

7.50%

$8,438

9.38%

$10,125

11.25%

$100,000

$60,000

$41,667

$6,250

6.25%

$8,333

8.33%

$10,417

10.42%

$12,500

12.50%

$150,000

$60,000

$90,000

$1,3500

9.00%

$18,000

12.00%

$22,500

15.00%

$27,000

18.00%

$200,000

$60,000

$140,000

$21,000

10.50%

$28,000

14.00%

$35,000

17.50%

$42,000

21.00%

$300,000

$60,000

$240,000

$36,000

12.00%

$48,000

16.00%

$60,000

20.00%

$72,000

24.00%

$500,000

$60,000

$440,000

$66,000

13.20%

$88,000

17.60%

$110,000

22.00%

$132,000

26.40%

$1000000

$60,000

$940000

$141000

14.10%

$188000

18.80%

$235000

23.50%

$282000

28.20%

$2000000

$60,000

$1940000

$291000

14.55%

$388000

19.40%

$485000

24.25%

$582000

29.10%

$5000000

$60,000

$4940000

$741000

14.82%

$988000

19.76%

$1235000

24.70%

$1482000

29.64%

$10000000

$60,000

$9940000

$1491000

14.91%

$1988000

19.88%

$2485000

24.85%

$2982000

29.82%

$50000000

$60,000

$49940000

$7491000

14.98%

$9988000

19.98%

$12485000

24.97%

$14982000

29.96%

 

Table 1b

 

 

 

Additional General Rules

 

There are three classes of deferred tax exceptions that will be allowed in addition to the standard Exemption Formula (see Part I, Ordinary Income, Rules 2 and 3):

 

A. Personal Retirement Account (PRA) (see Part V – Retirement Reform Rules):

 

  1. As long as the current Social Security Administration continues to exist, each taxpayer may add a portion of his 25% limit toward a PRA account, in addition to what is required under the SSA law. Additionally, until SSA is fully privatized, the “Payroll Tax” percentage will be treated as part of the 25% limit.

  2. Once privatization is started, the mandatory PRA contribution will be 5% and the remaining 20% can be distributed between PRA and the other tax deferred accounts defined below. With this extension, even those toward the lower end of the income scale would be in a position to retire in reasonable comfort at a normal retirement age provided they manage their finances responsibly.

  3. Since all of the funds going into the PRA are tax deferred, it necessarily follows that all withdrawals from this extended PRA after retirement will be taxed as current ordinary income, with the standard exemption formula applied.

 

B. Health Savings Account (HSA)

 

  1. All taxpayers will be encouraged to contribute a portion of their Taxable Income to a Health Savings Account (HSA), also tax deferred. This account may be used as needed either to purchase a Health Insurance Policy, or to pay for medical services directly. The limits stated at the beginning of this section will apply.

  2. The HSA can be left to accumulate indefinitely (including investment growth) until needed. Like the PRA accounts, when a withdrawal is needed, it will be taxed as income.

  3. It is anticipated that by starting new young employees early in contributing to their future healthcare costs, the need for Medicare and/or Medicaid can be phased out over time, or at least greatly reduced in scope. Some employers may consider contributing to their employee’s HSA accounts in lieu of income, but in this case employer and employee must coordinate to assure that the 25% limit is not exceeded. Since input to the HSA is pre-tax, it makes no difference whether it is contributed by the employer or the employee.

 

C. Education Account

 

  1. Many families are all too familiar with the problems in our education system today, and many of them would welcome the opportunity to put their children in a private school if one is readily available. By starting as early as possible and contributing some of the tax deferred 25% to an education account, they should have no problem affording the best education they can find for their children.

  2. Families without children may also contribute to such an account on behalf of children of relatives or friends, at their discretion, for education only.

  3. The only restriction is that ordinary income tax must be paid on withdrawal.

 

The sum of these contributions may not exceed Taxable Income or 25% of MI, whichever is less. The current Payroll Tax, or the 5% PRA contribution (see Part V), must be treated as a portion of this 25% limitation. (For those whose incomes are so small that the Payroll Tax or PRA contribution would exceed their Taxable Income under the formula given in Part II, the government will have to come up with some creative bending of these rules. My suggestion would be to simply limit the amount mandated for Social Security Tax to the lesser of TI or the current mandate.)

 

Note that since MI tends to increase from year-to-year, and since each person’s GI also is expected to increase with time, normally a few percent faster than MI, the contributions put into these accounts are likely to be relatively small during the early working years but to increase toward the 25% of MI maximum in later years. I would anticipate that as more people learn how to manage their finances more responsibly, we will find that the slow slide into Socialism will begin to reverse direction fairly rapidly, to the benefit of all.

 

These options will be available to all taxpayers, regardless of income level. But note that care must be taken to assure that the sum of all contributions to these optional tax deferred accounts does not exceed the 25% of MI limit for any individual. I would suggest that all three of these accounts should be merged into a single tax deferred Savings Account. This way, the entire amount saved may be used as needed for any of the three purposes listed – but not for any other purpose. I would also propose that, if our citizens can exercise the self control and responsibility to accumulate enough to provide for themselves in this way, Congress should be willing to accept a permanent cap on the tax rate applied to withdrawals from these Savings Accounts at 15%, even if government spending (and repayment of debt) require that the FT for all other income taxes goes above that level, per Tax rules for Ordinary Income, Section 4.

 

(As a matter of curiosity, I wonder if anyone reading this will have realized that the taxable portion of GI under these rules does not reach 25% until GI equals MI. The implication of this is that a low-income earner may put any or all of his/her taxable income into this tax-deferred savings account and thus avoid paying any income tax. This is not too different from our present situation where nearly 50% of our tax payers pay no income tax, but one critical difference is that under this new rule the taxes not paid at the time the income was earned – and deposited in the Savings Account – will be paid later when the money is withdrawn. Since withdrawal would normally occur years after contribution, an inflation factor might also be considered to further protect the responsible saver, as discussed in Part III, next.)

Part III – Optional Tax Rules for Non-Ordinary Income (Asset Gains)

Although current Gain tax laws are generally acceptable there are three major flaws:

  1. Capital Gains are not adjusted for inflation. With investments often held for many years, inflation causes significant degradation in asset gain values.

  2. Current laws allow the exemption of most, or even all, of the Gains through the loophole of contributions to charities or to political agendas. Since this violates Part II, Section 1, this flaw needs to be eliminated. The ongoing controversy about a “Buffett Rule” is a distraction that is simply political posturing.

  3. The fact that good investment strategies promote long-term investment also means that gains are not taxed until they are “realized” – i.e., until assets are actually sold. The result is that the treasury is deprived of legitimate income for extended periods of time. A secondary result is that investors are tempted to hold onto investments beyond their point of viability simply to avoid paying the taxes. This works to the disadvantage of both government and investor.

    Current laws require that tax on ordinary income be withheld from every paycheck, or that a quarterly estimate and payment be made. Achieving the same effect with investment income would correct this flaw.

Each of these flaws is addressed in the following section:

All of the various types of Non-Ordinary Income are subject to a final outcome which may be either a Gain or a Loss, and it is impossible to predict when or how much Gain or Loss will be realized. It is for this reason that the current tax code imposes no tax on Gains, and provides no relief from losses, until the end of the year in which the Gain or Loss is “realized”. I believe, however, that it would be in the best interests of both the government and the investor to change this system so that taxes on gains may be estimated and imposed annually (or even quarterly). It is not feasible to recover losses until an asset is actually sold, but most investors will sell a losing asset quickly unless there is very good reason to believe that the asset will recover the loss in a reasonably short time.

The following set of rules accomplishes this goal and may provide enough incentive to persuade investors to adopt them. For the government, the obvious incentive will be that they would guarantee a steady stream of tax revenue that, with today’s code, is both irregular and uncertain. A secondary benefit to the government would be that the constant stream of tax receipts from Gains would provide a quick and accurate measure of the effectiveness of the numerous laws and regulations emanating from Congress and from the many Departments that have appeared in recent years. From the investor’s viewpoint, the inflation adjustment described below should be a strong enough incentive.

These rules depend on the same Flat Tax rate, FT, and the regularly updated value of Median Income, MI, as defined in Part II. To simplify definitions used in the following, I will use common stock market terms and refer to all assets as “stocks”, and all “non-ordinary income” as Capital Gains. The extension to less common forms of “non-ordinary income” should be straightforward.

  1. When a stock is purchased on a given date, a “Cost Basis” is fixed (price times number of shares + fees or incidental charges). An MI value can be set as of either the end of the previous year (when the government typically determines a value for MI), or the date of purchase (by interpolation) if greater precision is preferred.

  2. At the end of the following tax period (quarter or year, to be established by Congress) the stock price will reflect a gain, a loss or no change. If the price has gone up the stock value will show a Gain equal to the new price times number of shares minus the original Cost Basis. If the price has not gone up, there is no action to be taken.

    For the following sections (3 – 7), we assume that the price has increased:

  3. For each tax period a Gain value can be figured from the end of the previous period and the tax obligation will be Gain x FT. This tax amount should be included as part of the regular assessment of estimated taxes in the same way that the government now mandates an estimated payment for regular income tax. This calculation will be repeated for each tax period until the end of the tax year.

  4. At the year-end, the price again will be compared to the purchase price and a Gain value computed for the annual tax return. At this point, the Gain value will be adjusted for inflation as follows:

    Taxable Gain (TG) = Gain x MI(old) / MI(new) where MI(old) is the Median Income at the end of the previous year and MI(new) is the MI for this year.

  5. Then the final annual tax owed on the Gain for this stock will be TG x FT. Any estimated tax already paid will of course be taken into account. A new Gain Basis can now be set to the year-end value of this stock holding.

  6. For each year this stock continues to increase in value, a new Gain value can be calculated the same way, but always with reference to the Gain Basis from the previous year rather than the original Cost Basis.

  7. When a stock is sold, the Gains Tax owed will be calculated on only the gain since the previous year-end or estimate payment. For an asset held for many years, this final tax will typically be a small fraction of the amount required with today’s rules. In addition, the final total tax on any investment gain will have been reduced to compensate for inflation during the holding period.

  8. Now let’s assume that the stock price went down during the past year, but is still above the original purchase price. In this case, the investor will have paid more in Gains tax through the end of the current year than he owes, so he will have a tax refund due. The overpayment amount will be simply the Gains taxes paid up to this year-end times the ratio of the Remaining Gain (this year-end) divided by the Maximum Gain (at the time when the last previous Gain taxes were paid).

  9. If the stock price drops to the original purchase price, or lower, then all of the taxes paid up to this year-end must be refunded and the Gain Basis reverts to the original Cost Basis, and the MI(old) reverts to the MI at the time the stock was purchased. If the investor, under these conditions, continues to hold the stock, no other tax consequences are incurred at this time. The stock will remain in the Loss column either until it is sold, or until the price goes back above the purchase price. A loss at time of sale will be treated exactly as it is now.

Annual (or quarterly) payment of Gains Taxes, with inflation adjustment included, should provide sufficient incentive to investors to follow this option. However, I recommend that this method should be made available as an option initially, because some investors may have good reasons to stick with the current Gains Tax method until the consequences are fully understood. As long as the total real Capital Gain is taxed before any exemptions or deductions, this choice is of little concern to the Treasury. This rule of tax first, other distributions later must be the primary consideration.

Part IV – Taxation of Businesses

The reason people form businesses is to make a living, that is, to make money for themselves. The only way this can work is for the business creators to develop an idea for a product or a service that their business can provide, and which they believe will be useful to other people, at a price that their consumers will be willing to pay. Therefore, the concept of a business “profit” is inherently meaningless; any money the business brings in must go either toward maintaining, expanding and improving the business, or to the business owners, managers and operators. It is people who realize any real profit, not the business itself.

As a general rule, any form of “Profit Tax” on a business operation has a net negative effect, directly on the business, indirectly on the national economy. It automatically diminishes the ability of businesses to hire more employees and it discourages higher wages. In addition, any tax imposed on a business will necessarily be passed on to those who would become consumers of the business’s products or services, increasing costs and further depressing the economy. No company could remain profitable if it did not add the cost of taxation to the cost of its output. Following this logic, I propose the following rules:

  1. Business income/profit which stays in the business, to be used for expenses and for growth and improvement of the business, will not be taxed.

  2. Any business income which is extracted from the business for the benefit of an individual in any form will be taxed as income to that individual. Payroll, employee benefits, employee insurance premiums, bonuses, dividends, interest payments, etc., all will be taxed as personal ordinary income.

    Where it is simpler for the employer to pay both a benefit and its concomitant tax directly (as when an employer pays for a group policy, plus tax, for example for medical insurance for many employees), the total amount of the benefit plus tax must be used in calculating the correct total amount of the tax. My reasoning here is that the full insurance benefit is a part of each employee’s income. If the cost of the insurance were added to employee’s paychecks, tax would be owed from them on the entire amount, and the extra tax on the insurance benefit would come out of the employee’s take-home pay along with the cost of his individual insurance premium, which would likely be far greater than each worker’s share of the cost of the group policy.

    For example: a company purchases a group policy for all of its employees at a cost of X dollars. The net tax must be FT x (X + tax), so the tax paid by the employer should be calculated as:

    Tax = FT x X / (1 – FT)

    To demonstrate this, let’s say that a benefit paid by a company has a cost of $1000, and FT for this year = 20%. Then the tax paid by the employer will be $250, not just $200. If the $1000 were just added to the employee’s paycheck he would have to pay at least the $1000 to cover the premium, plus the $200 tax on the extra $1000 income. For those on low incomes this might be a deal-breaker for any insurance coverage.

  3. Non-commercial organizations, such as Unions, Churches, Charities, Social Groups, Homeowners Associations, etc., are all considered businesses under these rules, and they will pay no taxes on already taxed money that is contributed to them by individuals or households. When any organization pays wages to others who classify as Personal Taxpayers, those persons will pay the appropriate Personal Taxes, as above. A charity or church, however, may provide food, clothing, general welfare materials to those it deems to be in need, without incurring any tax obligation on the part of the recipient or the provider. That is the nature of the charity’s business rather than payment for goods or services; for example, a union may provide temporary wages or support in the form of food to members who are unemployed, without being taxed. If a union pays a union employee for services, however, that is income to the worker and is subject to standard income tax, paid by the worker.

    Implicit in these rules is the requirement that unionized workers must pay the normal income tax on their earnings before paying their union dues. The only alternative would be for the unions to pay the tax out of the dues they collect. In this latter case, the unions would have to pay the full FT tax rate on all the dues they collect because it would be impossible to determine an average cost-of-living exemption formula covering all of the union members contributing.

  4. If a business contributes to a charity and such support does not qualify as a part of the business’s normal activity, then there will be a Personal Income Tax obligation to be paid by that business (note the tax calculation under Rule 2, above) or by the receiving charity, a) because the end beneficiary of the donation is the welfare recipient, and b) because no prior taxes have been paid on the amount donated.

  5. When one business buys stock in another business, to increase its cash reserves or improve its product, or any other legitimate business purpose, any profits realized from such transactions which remain in the business will not be taxed.

  6. Any business which sends money overseas, to open a new plant or start a new branch operation for example, will post a “tax bond” in the amount of the current FT personal tax rate applied to the amount of money expatriated. Assuming that the foreign investment bears fruit and returns money or equivalent cash value to the U.S., there will be a refund at the same tax rate on the value repatriated. This serves two purposes: it prevents American companies from sending income to offshore accounts for favored executives without paying the appropriate income tax, and it minimizes the incentive for companies to ship jobs overseas where labor costs are less than in the U.S. When (if) the overseas operation returns the whole amount originally expatriated, the “tax bond” account will be closed and any further money coming into the U.S. for that account will be untaxed profit to the company.

Political Influence

It has been traditional for both individuals and businesses to deduct political contributions from their taxable finances each year before computing taxes due. New rules are needed for this area.

  1. Personal contributions:

    Since deductions from personal income will no longer be allowed, there is no reason to limit contributions that individuals can make, after taxes, to any politician or political organization. People should be free to give any amount to anyone they wish without penalty. This same logic applies to gifts from one person to another. Tax must already have been taken from the person giving the gift, so there can be no additional tax on the recipient.

  2. Business contributions:

    Since business profits will no longer be taxed in the traditional manner, it is necessary to consider the basis for any political contribution from a business source. The primary consideration, of course, must be that a business does not contribute to a political entity for purely altruistic reasons; such giving is necessarily always done to gain some influence or advantage that would not be available otherwise. In other words, money is used to buy favorable legislation and/or attention. For this reason, there should be a cost to the business for the advantage it expects to realize. This same reasoning applies to Unions, Charities, or any other business or organization.

    A simple and effective arrangement would be to require a tax donation equal to the political donation, dollar for dollar. If business executives or union bosses believe it is worth a large donation out of untaxed business or union funds to get the favorable action they want, it is only fair that they pay the cost of such favors in taxes, in the same amount. The penalty for failure to pay the equal amount in taxes should be a fine of ten times the amount not paid up front.

    Corporate and union influence in Congress both are notorious sources of bad legislation, and have been for as long as the United States has existed. At least by matching tax and donation influence we may achieve a better balance. I would urge that taxes realized from this source be dedicated to paying down the National Debt rather than simply going into the General Fund. This again would go a long way toward defraying the cost of “business as usual” in our “crony capitalism” society.

    To circumvent this 100% tax, it should be apparent that a business (corporation, union, or other) could pay the desired contribution to a business officer, who could then pay the ordinary personal income tax and contribute the after-tax balance to the desired political recipient. I cannot envision how this rule could be perceived by our courts as a violation of the First Amendment Free Speech rule, so I do not anticipate any legal argument. In any case, viewing this problem logically, if a business is unlike a “person”, as is implied by the first two sections of this article in order to exempt businesses from taxation, then it follows that the Free Speech rule cannot apply in the same way to a corporation as it does to an individual. This is undoubtedly a ruling by our Supreme Court that is likely to be revisited. One obvious flaw in the Court’s recent decision is that, if a Corporation is a “Person” then the same donation limit should have been applied to both. Even our Supreme Court can make some curious blunders!

Part V – Retirement Reform Rules

There are two methods available for making Social Security sustainable. The first protects Social Security, as it is now, from long term losses and ultimate bankruptcy; the second shifts it gradually over to privately owned Personal Retirement Accounts (PRAs). Both methods can, and should, be implemented simultaneously.

A. Making the current “defined benefit” system sustainable:

  1. Redefine the Income Cap on which “Payroll Taxes”, or FICA taxes, are paid to twice the Median Income (MI), or MI x 2. This is a close match to the current cap, and has the advantage that it adjusts automatically to inflation and economic growth (proxy for COLAs).

  2. Redefine the standard monthly payment, after retirement, for those who are fully vested and have paid the FICA tax up to the income cap level, to Median Income times 3.5%1. This would put the standard S.S. payment at $1750 on the 2010 MI of approximately $50,000. The current SSA rules for adjusting the monthly payment based on early or late retirement will be retained, as will the current rules for adjustment based on income lower than the Cap.

  3. For those whose incomes have been above the Cap for most of their working years, and whose post retirement income from sources other than Social Security remain greater than the Cap (as defined above), will receive monthly SSA checks which are corrected by the ratio of the Cap divided by their non-SSA income. Thus, if in some future year the MI grows to $60,000 and a retiree has a Gross Income (before tax and before SSA payment) of $150,000, then his SSA check will be only $1680 rather than the standard $2100, (2100 x 120000 / 150000). This is similar to the concept of a “Means Test” currently under discussion in Congress but does not involve any convoluted legislation.

  4. The portion of both employee and employer contributions to FICA taxes should be reset to 5% of each employee’s paycheck. Combined with the remaining 20% of GI permitted toward the Tax Deferred Savings Accounts (see Part II – Additional General Rules) this will provide a much better retirement pension than the current system, at least for those with incomes greater than 20% of MI. (This is the GI at which TI = 5% of GI. Very few workers spend much time at such low incomes.)

  5. FICA taxes collected from those still employed, from employer and employee, must be invested in “locked” accounts like those defined below (see section B-rule 11), not put into the Treasury’s General Fund.

B. How to gradually shift from today’s “defined benefit” scheme to a “defined contribution” retirement plan:

Every suggestion I have read is a variation on the theme of starting new employees, as of a set Starting Date, on their own Private Retirement Plans such that they and their employers deposit a mandated percent of each regular paycheck into the employee’s private account. These accounts would be invested so that the contributed sum plus growth would provide for living expenses after retirement. The advantages would be that under normal market growth the accounts should provide a better retirement than the current SSA system, and the entire account would belong to the retiree and his or her heirs.

This approach has one major flaw, which is that everyone already in the SSA system would still be contributing to it until retirement and then withdrawing from it for as much as 30 years (or more in rare cases), but the new workers, after the set Starting Date, would not be contributing to SSA at all. So the already negative balance between Payroll Tax inflow and Social Security check outflow would become steadily worse for at least the next 50 years. Our country is already bankrupt; this would certainly push us over the cliff!

I propose an back end approach, starting with employees at or near retirement and working year-by-year toward the youngest workers. This way the first people to shift into the new plan will already have paid in most of the Payroll Taxes they will ever owe, and will withdraw from S.S. slightly less, year-by-year, as they shift into their own PRA accounts. According to simulations I have run, this method actually results in a marginal improvement in the SSA balance sheets. Along with the “sustainability” modification in Section A, this should totally eliminate the present SSA deficit.

Coupled with my recommended Tax Deferred Savings Accounts (Part II) this plan should provide adequately even for those retirees at the lower end of the income spectrum, provided they learn to save responsibly throughout their working lifetime.

  1. Once Congress has agreed on the rules for Private Retirement Accounts we can define a starting year as Year 0.

  2. On the SSA-designated retirement age birthday in Year 0 of any workers who already have at least a 40 year record of payment into SSA, those workers would be eligible to retire on normal standard Social Security pay-out. If they decide to continue working and contributing to a greater retirement fund, they will have the option of discontinuing their FICA payments and instead putting the same amount into their own Personal Retirement Account.

  3. In order to maintain an adequate flow of funds into the SSA account, the matching funds from their employer will continue to go into the SSA.

  4. When those workers do elect to retire, they will collect their standard S.S. checks enhanced by the years their employer continues paying the matching contribution into the SSA account (about 1.25%2 per year).

  5. In Year 1, the same rules will apply to those at standard retirement age minus one year and who have a 39 year input record in SSA. They may discontinue their payment into the SSA fund and instead direct the same amount into their PRA. They will realize the ownership of their PRA funds, plus any investment gain on those funds, and they will lose 1.25%2 of the SSA pay-out they would have received at normal retirement age. Again, if they work beyond retirement age, their S.S. checks will grow at the same 1.25%2 for each added year of employer matching contribution.

  6. From Year 2 through Year 9, the optional switchover to PRA will proceed starting an additional year ahead of normal retirement age, with the same reduction of S.S. payout for each earlier switchover year. Thus, by Year 10 all of those who are eligible to retire in Year 20 may choose to switch to the PRA plan, take a loss of 12.5% (10 times 1.25% per year) of their S.S. checks and enjoy the ownership of all the funds growing in their own PRA.

  7. Assuming that the switchover has been a success up to this point – no shortfall in funds available in the SSA Trust Fund to pay all of the S.S. checks due to both full- and partial-beneficiaries, and satisfaction with the growth of their PRAs among those who have made the switchover – then it would be reasonable to accelerate the switchover option to an additional two or even five years for each additional year after Year 10. By Year 11, for example, the accelerated PRA option might allow workers at retirement age minus 15 years to shift earlier rather than having to wait until Year 15 to make the shift.

  8. At this rate, we can assume that some people will be starting their careers, forty or more years before anticipated retirement, with the PRA option available to them immediately, possibly as early as Year 16. These first workers who opt to put all of their retirement money into a PRA will have the additional option of having all of their employers’ matching funds also put into their PRA, rather than into the SSA. At this point we would begin to see the full benefit of Personal Retirement Accounts.

  9. At some point between Year 16 and Year 40, all workers will be able to start directly into the PRA scheme and all retirement fund pay-in for these new workers from that point on, from both employees and employers, will be into PRAs. There may be a significant number of older retirees still receiving S.S. checks, but they will be a diminishing number, and many of those checks will be reduced by many years of attrition at the 1.25% per year rate (due to the employee contributions going into their PRAs rather than into SSA).

  10. Beyond about Year 30, or earlier if all goes as well as anticipated, no employer matching funds should be allowed to go into the SSA fund, but will instead be directed into each employee’s PRA. The turnover point should be determined when it is clear that sufficient SSA funds exist to cover the few remaining retirees still drawing S.S. checks.

  11. The accounts used for accumulating PRA funds will be managed by reputable investment firms and the structure of those accounts must be approved by Congress, with criteria such that income and growth are maximized within the absolute constraint that risk will be as close to zero as possible. Many similar 401K and other fund accounts exist today, and most show returns averaging between 5% and 10% over many decades.

  12. The SSA itself should be required to put all of the contributions accruing to it into similar accounts so that there will no longer be any way that Congress can spend them on General Spending items. This change should be made now, completely separate from any discussion of the rules given here. By locking these funds away, the SSA can essentially guarantee that it will have the funds necessary to pay S.S. checks to all remaining beneficiaries of the old system, without having to borrow in order to honor its obligations. Once all remaining SSA beneficiaries have died, all funds still left in the SSA accounts, if any, will automatically revert either to the General Fund or, better, go directly to paying down National Debt liability.

  13. The single most important rule for Entitlement Benefits is that all of the above rules will apply equally to everyone. Specifically, this means that all Federal employees, including our elected servants, will abide by these rules; they will no longer be covered by separate pensions, retirement plans, medical coverage or any other benefits that are not equally available to every citizen of the United States. (See also Part VI – 2, below.)

  14. This same argument applies also to all laws which benefit or restrict some people and not others. Congress will not pass any law benefiting Federal Employees which is not available to all citizens; and Congress will not pass any law restricting or punishing any citizen which does not apply equally to themselves. The present ability of Congress to establish its own perquisites: salaries, vacations, pensions, healthcare coverage, etc., must be subject to approval by all other branches of government and by the people.

  15. This reasoning also implies that all businesses must also provide the same basic minimum benefits, specifically pension and healthcare benefits, for all full-time employees. If employers elect to provide additional benefits, they will be valued at cost and taxed to the employees as income. In accordance with our Constitution and Declaration of Independence, the time has come to honor the “Equal Opportunity” clause and treat every citizen with the same respect. This does not imply equal outcomes for all, but it does mean that everyone will receive the same outcome results versus input worth as anyone else. Obviously, “input worth” is subjective and requires cooperation and agreement between the employer and the employee, which in turn requires honesty and integrity on both sides.

1 This percentage figure is approximate and may need to be adjusted.

2 The 1.25% value is predicated on a nominal work-life of 40 years, with employer and employee combined putting in 2.5% of the 40 year total each year.

Table 3 demonstrates three possible schedules for the transition from SSA to PRA. The Starting Year (Year 0) is assumed to be 2015. The first ten years in each case are restricted to a one-year advance in eligibility age per year in the new plan. Starting in Year 10 (2025) the first pair of columns shows a continuation of the one-year advance per year, the next pair shows an acceleration factor of 2, and the third pair shows an acceleration factor of 5. If this plan is completely successful, we could see the last of our outdated and non-sustainable SSA scheme disappear by as early as 2031, except for those few living retirees who elected not to make the shift into a PRA at their earliest opportunity.

Assume PRA Law Becomes Effective in 2015 (Year 0)

Year Eligible for PRA Shift

Years of SSA Contribution (No Accel)

Age eligible for shift to PRA

Years of SSA Contribution (Accel * 2)

Age eligible for shift to PRA

Years of SSA Contribution (Accel * 5)

Age eligible for shift to PRA

2015

40

67

40

67

40

67

2016

39

66

39

66

39

66

2017

38

65

38

65

38

65

2018

37

64

37

64

37

64

2019

36

63

36

63

36

63

2020

35

62

35

62

35

62

2021

34

61

34

61

34

61

2022

33

60

33

60

33

60

2023

32

59

32

59

32

59

2024

31

58

31

58

31

58

2025

30

57

30

57

30

57

2026

29

56

28

55

25

52

2027

28

55

26

53

20

47

2028

27

54

24

51

15

42

2029

26

53

22

49

10

37

2030

25

52

20

47

5

32

2031

24

51

18

45

0

ALL

2032

23

50

16

43

 

 

2033

22

49

14

41

 

 

2034

21

48

12

39

 

 

2035

20

47

10

37

 

 

2036

19

46

8

35

 

 

2037

18

45

6

33

 

 

2038

17

44

4

31

 

 

2039

16

43

2

29

 

 

2040

15

42

0

ALL

 

 

2041

14

41

 

 

 

 

2042

13

40

 

 

 

 

2043

12

39

 

 

 

 

2044

11

38

 

 

 

 

2045

10

37

 

 

 

 

2046

9

36

 

 

 

 

2047

8

35

 

 

 

 

2048

7

34

 

 

 

 

2049

6

33

 

 

 

 

2050

5

32

 

 

 

 

2051

4

31

 

 

 

 

2052

3

30

 

 

 

 

2053

2

29

 

 

 

 

2054

1

28

 

 

 

 

2055

0

ALL

 

 

 

 

 

 

Table 3

 

 

 

Part VI – Congressional Reform Rules

Congress has, for far too long, viewed its own members as though they were a “Ruling Class”, not bound by the same rules they write for the “rest of us”. This is perhaps the clearest sign that our government has turned away from the Constitution and has taken upon itself the role of a Monarchy. A new set of rules is needed to get our nation back onto the track established by the Founders. I strongly recommend that these rules should be encoded in the form of an Amendment to the Constitution so that the resulting benefits would be much harder to abrogate in future years.

  1. Congress shall make no law which in any way restricts or penalizes all of the Citizens, which does not apply equally to Congress and all members of the Government Bureaucracy. (E.g., Insider Trading)

  2. Congress shall make no law which in any way benefits or favors its own members, or other Federal employees, which does not apply equally to all citizens of the nation. (E.g., Government pension and medical plans)

  3. Congress shall pass no law which it is not certain is clear and devoid of damaging “unforeseen” consequences, or which it is not convinced is fair and enforceable. (E.g., Illegal immigration problems)

  4. In keeping with the letter of the Constitution, no new laws or binding regulations may be made and enforced without full Congressional approval. Furthermore, all laws and regulations which are approved by Congress (and by the President), once passed, must be fully enforced. There must never again be situations where a new administration decides unilaterally that it doesn’t like laws passed by a previous administration and then refuses to enforce such laws; nor may Congress ever decide that it doesn’t approve of a law from an earlier administration and simply refuse to fund its enforcement. Once properly passed, every law must be followed rigorously unless and until it is determined that the law was not well advised and needs to be removed. A government divided against itself is destructive and self-defeating.

  5. Congress shall make a concerted effort to remove any and all old laws which have proven to be poorly written, unenforceable, duplicative of other better written laws, or otherwise simply not worthy of retaining. Frankly, I would much rather vote for a Congressman who would promise to get rid of bad laws before I would ever vote for one who would promise to try to pass a law that would benefit me personally!

  6. Congress shall permanently terminate the practice of adding riders to bills unless the riders relate clearly and objectively to the primary subject of the bill in question. If the subject of any unrelated rider is worthy of passage, it must be considered on its own merits as a separate bill, with no exceptions.

  7. Congressional salaries should not be determined by Congress alone. Any increase in any Government salaries must be approved, on a case-by-case basis, by both houses of Congress and the President, and by the people of the Congress person’s district. There should never be a general Congressional salary increase without voter approval.

Part VII – Consequences

It can easily be seen that the above six sections, if fully implemented, would produce consequences, most of which would be viewed, by most people, as beneficial; but some of the consequences will require some adjustment from some people. Let’s look at how these new rules will affect various segments of the population.

  1. With the greatly improved predictability of business costs – taxes, healthcare and retirement contributions, regulations – it can be assumed that business will thrive. All businesses and virtually all employees will benefit.

  2. The new tax rules are likely to be popular with nearly everyone, except for those whose current livelihood depends on tax code complexity. However, it is likely that many IRS employees will no longer have jobs.

  3. Many of the tax lawyers, tax accountants in private business and the thousands of minor employees working in tax and accounting departments will have to be retrained in other aspects of corporate business. With the explosion of profitable business one should expect from all this, the number of productive jobs available to absorb this loss of “make work” jobs should be satisfying to almost everyone.

  4. Since a very large part of government business is based on and supported by tax complexity, a huge chunk of government “make work” will disappear, with concomitant reduction in cost of government.

  5. The details of the shift from Social Security to the Private Retirement system will require retraining the surplus IRS, SSA and other accounting personnel to make sure the SSA accounts remain balanced and no retirees lose payments they have coming to them. No net loss to the treasury is foreseen here.

  6. The same potential applies to government’s reduced presence in the healthcare and education “industries”; just releasing its grip on these areas of public affairs, in which the Federal Government has no Constitutional authority in the first place, will take some years of careful extraction, with a large number of qualified workers to untangle the mess.

  7. The growth in productive business – and corresponding growth in profits – will create a need for more workers at all levels, especially more highly qualified workers. The increased need and the growth in profits will work together to make higher pay rates both necessary and affordable, to the benefit of workers at all levels. It’s the exact opposite of what we have with creeping Socialism, which stifles business and causes far greater harm to both lower paid workers and the middle class than does healthy Capitalism.

  8. Inevitably, there will be some individuals – in government, in the corporate world, and in the unions – with a lust for power who will try to suborn this new system to their advantage (and to everyone else’s disadvantage), so it will always be necessary for honest members of Congress and The People to maintain careful oversight.

  9. Weaning taxpayers from the current Special Interest system in which many investment vehicles are “Tax Free” or “Tax Exempt” (Municipal Bonds are typical of this class) will be a gradual process. It would not be reasonable to expect to break existing contracts just to more quickly realize the benefits of these new rules, so some degree of “grandfathering” of contracts now in place must be accepted, but all new investment should be fully locked into the new rules. It should be noted, however, that this comment applies specifically to Federal Tax loopholes. The States must still be free to handle their tax regulations free from interference from the Federal Government.

  10. It will likely take at least 20 years, possibly longer, with this system in place before the National Debt will be adequately reduced, or eliminated – about the same length of time it should take to fully shift over to the Private Retirement Accounts. By that time it can be assumed that our economy will have shifted into high gear and our future should look far more promising than it does today.

    The transition from our current way of doing things to full implementation of all parts of this new system will take time and more will and courage than is evident in some of our present Members of Congress. Hopefully, this change will encourage a higher quality of candidates dedicated to public service.