Flat Tax: Another transfer of wealth to the rich?

At first, a Federal Sales Tax to replace the Federal Income Tax sounds like an excellent idea. The idea being that the Federal Government can make the tax lower for the poor by not taxing necessities such as food; and, directing consumers to products that are better for the nation using industry targeted taxes such as green energy (e.g. 1% tax on high mpg cars vs. 20% tax on the lowest mpg cars). This would tax consumption and reward earned income and savings. The wealthy consume more, so they pay more in taxes. Sounds like a simple and tidy plan. The IRS can even concentrate on businesses only, to collect the Federal Sales Taxes and audit as necessary, rather than target the larger number of consumers.

When one starts crunching the numbers, a problem with this plan becomes apparent. In 2006, the Federal Government brought in tax revenue of 2 Trillion, 407 billion dollars. Of this, 1 Trillion and 44 billion was from the Federal Income Tax, 354 Billion from Corporate Taxes, and 1.009 Trillion from Other Taxes (e.g. FICA).

The Federal Sales Tax would need to, at minimum, replace the 1.044 Billion in Federal Income Taxes. Considering the population of the United States is 301 Million strong, and that each household has 2.1 people, this means an average household needs to fork over $7,284. Since were now using averages, we must consider that the median household income is $43,000. Considering that certain expenses like rent and food wouldn’t be taxed because that would target the poor, and that those things likely make up 40% of the median household income (e.g. 33% isn’t uncommon for housing alone), then the remaining 60% ($25,800) is to be presumed to be spent on taxable consumption. And if this is so, then the tax rate would need to be 29%. In this way, when the average consumer spent $18,516, they’ve been charged an extra $7,284 in taxes.

You’re thinking wait one minute. The rich would spend more, so the taxes could be lower to compensate for how much more they are spending. This sounds like a reasonable argument. There is only one major problem. It’s called the L-Curve (http://www.lcurve.org/). For 99% of the population, the income is under $300,000 which is still low enough that they use most of that income for consumption. This would then support the Flat Tax. However, it’s that last 1%, where the average salary is $1 million per year that the Flat Tax fails and which causes the other 99% of the population to pay for their ability to avoid the tax.

So then, you must ask, why would the one percent making $1 million a year avoid the Flat Tax. There is only so much one household can consume after which the profits go into savings and/or investments that create more wealth. And, although the stimulation of wealth is a good thing, this means the money isn’t going to pay for Government Services used by 100% of the population. This tax paying deficiency by the wealthy causes the other 99% of the population to have to pay a higher tax rate to make up for the lack of consumption by the one percent.

The Corporations pay a very low tax rate in comparison to the Households. However, if taxes are raised on the corporations, then they would then pass those costs on to the consumers. So then an argument might be made that the corporation tax should just be eliminated. Especially since it only contributes 15% of the funds. But, that would be a mistake. The current system promotes corporations to spend down the profits to avoid the higher taxes. The spending down of profits means higher wages for employees (a business expense), or investment in equipment (spurring supplier business success).

So, I find the Flat Tax idea to be appealing but in the end see it as gimmick saving one percent of the population a fortune while distributing the bill to the other 99% of the population. The Federal Tax system does need an overhaul, but this method is not the answer.

True up income to spending at EOY

Elected officials divert American’s attention using sound bites that sound good. There is often much more to the tail than a few words can portray. Politicians fear saying too much as they can be attacked on their words. And, Americans are portrayed as not having the attention span and education to understand the message.

When it comes to spending, this perpetual lie has resulted in out of control spending for a theoretically noble cause, while simultaneously fulfilling the dream of lower taxes. This irresponsible behavior would put normal families into bankruptcy. But, for our Federal Government to do it, we’re paralyzed with a bickering government and a dollar on the verge of complete collapse. The dollars purchasing power is weaker than any tax hike would have been to cover our costs; we’ve effectively ended up with the worst of all worlds (i.e. high debt, rising unemployment, under employment of the employed, decreasing federal revenue, increasing federal spending, and inflation).

Politicians pretend that spending is not a tax increase. Eventually, one party finally takes some responsibility for the spending and either increase’s taxes or cuts spending. That party then takes the blame associated with the pinch Americans finally feel. But, it takes years to recover from these spending sprees. By the time we do recover, people tend to forget how we got ourselves in the mess in the first place.

We need to balance the income and expenses at the end of every year. If the government didn’t collect enough revenue for the spending, then they didn’t collect sufficient taxes or they overspent. Either way, they should not be borrowing money on Americans behalf and then making our children pay for these burdens. Rather, they should bill us at the end of the year. Let it be each American that decides if they need to carry the debt using interest rates similar to those the government currently pays on bonds, or if they want to pay the debt in the same year.

In order to accomplish this paradigm shift in thinking, the government must assign the debt incurred for the year just ended back to the tax payers based on their respective AGI and associated tax rates. Americans can then decide to either pay their AGI adjusted portion of the National Debt in a single payment, or annually using the interest rate the government is paying for the average bonds and treasury bills. Those people that die and whose estates cannot payoff the debt will be assigned as bad debt, and those that hold the bonds and treasury bills would incur those loses (i.e. just like any other investor risks).

There would be a few immediate impacts to this proposal that would be realized:

1. Income taxes would be reduced by the portion that is currently allocated to the national debt. As this debt would be individually assigned and thus no longer paid for out of the general funds. This should be about a 33% tax cut.
2. Annual invoices representing an individual share of the National Debt would list each year debt is being carried and minimum amounts due. It would be undeniable which year, and who was in power, that incurred the largest debts. Invoice would include the year debt was incurred, the name of the congressional session and the President that presided in that year, a link to a website with detailed revenue and spending for that year, your personal allocation of the balance, the balance you’ve paid off so far, the payoff amount, and the minimum payment amount inclusive of interest charges for the upcoming year.
3. The debt is now assigned to the people that voted for (or had the chance to vote for) the Elected Officials responsible for making the debt and not to their children.
4. Because debt is paid for within the given year, or assigned out to the people that incurred the debt, each congressional session is given a chance to budget their year without the burden of debts and associated political blame games that their predecessors (possibly of opposing parties) got them into. And, taxpayers are forever reminded which administrations got them into the debts in the first place; whilst having the opportunity to pay it off quickly or to finance the debt over terms similar to what the government was going to do without our permissions.
5. Debt would be paid off quicker than having the current system because a percentage of Americans prefer to not carry debt and have the means to cover it.
6. The US Government would no longer be in debt to foreign regimes.
   
   

This method assigns accountability where it must be; with the taxpayers that put people in power. It serves as an annual reminder of the consequences of spending, therefore assigning accountability of collecting the revenue to the administrations that incurred such spending. In families, kids do not inherit their parents’ debts. In government, there is no reason our kids should inherit their parents debt.

In this manner, we as voters are reminded annually….

• In the Carter years, congress failed to collect $648 per person to pay for the programs.
• In the Reagan years, congress failed to collect $5930 per person.
• In the Bush Sr. years, congress failed to collect $4983 per person
• In the Bill Clinton years, congress failed to collect $4280 per person
• And, prior to the bailout reports, during the Bush Jr. years, congress has failed to collect well over $11,000 per person…. Though, we can tell you how much each congress has left us to date. For example, the 109th Congress failed to collect $1663 per person for 2007.

If Government is truly we the people, then we the people are responsible for the oversight of our representatives. Oversight includes the money they spend. The debt should not be carried forward. It should be assigned to the citizens with oversight authority (thru their media and votes) that supported the policies and actions that incurred said debt.

Health Care Solution

We need a National Health Insurance plan that every American belongs to and which every Doctor, hospital, and pharmacy is required to take. The NHI should be a comprehensive medical insurance plan that covers everything from preventive health to catastrophic health care. Its goal should be to provide the healthcare cost reimbursements at a base level suitable to the majority of its citizens.

The NHI should not cover experimental surgeries, cosmetic, off schedule or excessive labs, or extraordinary and/or high risk procedures. Rather, it’s the baseline of which other insurance can be built. Though it should provide for general care, it should be possible for Americans to purchase Health Gap Insurance to obtain a greater level of care. This secondary insurance would pay doctors where the NHI leaves off and prior to the patient billing.

The leading complaint of a government run NHI type organization is that it would stifle the “Best Health Care in the World”. However, if Insurance companies are able to provide gap insurance, the “best” doctors could still charge higher rates based on their experience and/or research.

For example, if the NHI standard for an office visit is $90 and the patient’s doctor actually charges $250, then NHI may pay the first $90 while the Gap Insurance may pay another $90 of the office visit which then leaves the patient with a $70 co-payment. This leaves some of the responsibility with the patient whom could have selected a doctor that charges closer to $90 for an office visit and foregone the Gap Insurance.
The NHI, like insurance companies do today, would need to compute the customary charges for services and adjust them accordingly on an annual basis. The government might also offer doctors a student loan write-off incentive for keeping rates below or equal to the published customary charges.

Kick start the Economy

To get out of this mess, you have to recognize how we got here. Typically, growing the economy needs a couple of fundamentals.

1. Job volume growth. The more people the country has, the greater the supply of workers and consumers. The number of jobs available must keep up with the growth in population.
2. Wage increases. Wages need to keep pace with inflation. If wages fall behind the pace of inflation, then the consumers have less purchasing power. If wages increase faster than inflation, then the increased wages will themselves be a cause of inflation.

As we’ve heard President-elect Barack Obama state on the campaign trail, during the Clinton Presidency job wages increased $7500. During the same length of time for the Bush Presidency, job wages decreased $2000. I have no reason to question those numbers. However, one must wonder why the economy appeared to be growing from 2000 through 2006.

American homeowners saw that their wages purchased less and less. However, they were sitting inside a house that was growing in value quickly. For many, their home equity value growth outpaced their wages. For example, a family making $50,000 a year in wages was also making another $50,000 in Equity. This effectively doubled their income. As their wages decreased in relation to inflation, they turned to their equity to supplement the shortages.

The Department of Labor tracks useful information enabling us to see the big picture, albeit they don’t make it easy to find. The historical data paints an ugly picture. Almost no jobs were created for Bush’s first 4 years in office. The next 3 years in office found job creation, although weaker than his predecessor, but this is followed with 2008’s job loss in every single month. In fact, by October of 2008, more jobs were lost than were created the entire year of 2007. Effectively, this means that during the last 8 years, anemic job growth occurred for just two of those years.

So let’s summarize the obvious. We’ve had anemic job growth over 2 of the last 8 years, and those jobs have come with declining wages. The remaining 6 years we created zero jobs. Homeowners turned to home equity to supplement their wages, but as of the last two years that pot of gold has dried up.

Conventional conservative wisdom has been to increase the wages of the wealthy (e.g. cut their taxes) so that they’ll have more money to spend which should create jobs. The theory has been tried for 20 of the last 28 years with dismal results.

I think the tax policies that Obama is selling are on the right track. However, I do not think it goes far enough to change the tide as fast as it needs to be changed.

I propose a ONE YEAR moratorium on taxing an AGI under $200,000 a year. I propose that we increase taxes on those with AGI above $250,000 a year to compensate for the tax revenue’s of those with the tax break.

This program would not give immediate help to those who don’t currently pay taxes. However, it would give a significant, though temporary, raise to a large population base with the breadth of consumption necessary to turn the tide. This consumption would then help the bottom of the income scale secure jobs.

This is the seed money the common folk needs to help kick start the economy. It does not tackle the gorilla in the closet. That gorilla is health care costs. It’s not hard to find American’s that spend more on health care than they do the historical number one cost of housing. This is a burden other first nation citizens do not face. But, this is a problem that must be solved before the end of the first year. It, alone, is capable of relieving the budget of Americans enabling them to have that extra income they didn’t get in wage increases, and of which the one year moratorium on taxes gave them.

Wait one minute! Before I hear the whining of those making over $250,000 because of the extra burden, because they think they’ll have to lay off people…. Please think first. If you were fortunate enough to be in this category, what would you do? You make a million dollars in Revenue as reported on Schedule C. Your costs of doing business are just $700,000. Okay, you have profits of $300,000 that will be carried over to the 1040 form. That’s not good because you’re going to get hit with more taxes than normal. Ah, but all you need to do is spend more on the business to stop that from happening. You can hire another $50,000 in labor and actually accomplish more things. Or, you can invest that $50,000 into more facilities to expand your business. Either way, the long term impact is that you’re investing to grow your business. Sure, your personal life will have to suffer at just $250,000 AGI. As most of the population makes less than that, you’re not going to find much sympathy. And that investment pushes the trickle down economics theory into motion.

US House Representation

I have a friend I run into frequently while walking the dog. When we meet, we solve the problems of the United States. His speciality is economics. One of the highest priority items that should be addressed is US House Representation. Because of how isolated these folks are, how expensive it is to get into office, the inability for most constituents to be heard by their representative, we need to revisit how it came to be only 435.

Let me cut to the chase. We need to abolish 1929 legislation limiting the House membership to 435. The US Constitution Article I, Section 2, clause 3 states "The Number of Representatives shall not exceed one for every thirty Thousand, but each State shall have at Least one Representative".

The "shall not exceed" is left for interpretation. There was enough concern that the real first amendment was created to address the issue. It did not get ratification.

But, we can still look at the precedent set prior to the 1929 legislation. After each census through 1910, a law was passed to distribute one representative per 30,000. If we continued on this course, this would give us approximately 10,100 house representatives today (e.g. based on 301 million population per US Census).

Why is this important? With this many representatives, it would not be possible for lobbyists to have influence. At 1 representative for every 30,000 people, the representative would be easily accessible to his/her constituents. The representative wouldn't need a large staff effectively isolating them from their constituents.

Logistically, it would be impossible to have all 10K plus representatives at the same location. With today's technology, this isn't a problem at all. And, with today's terrorists risks, putting them all in the same brick and mortar building isn't too smart an idea.

Technology allows for this high number of representatives to work in collaborative sessions such as committees, within secure VPN sessions, using web casts, screen sharing, teleconferencing, and other such tools commonly used in today's business world. This technology allows for secure and accurate voting and audit trails without the costs of representatives traveling back to their home towns.

Just think - Everyone would be able to visit their local US House Representative within just a short distance from their home; town meetings would be common place... and he/she would actually be rooted at home - to hear and represent their people’s views.

Finally - the state representation would be fairly divided such that Alaskan voters don't, by virtue of the math, have a vote 3 times more powerful than a Californian.

My economist friend has a website you can reference for more information: http://www.greatervoice.org/