Let’s Rethink Our Dysfunctional Revenue System: Taxes

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The World Economic Forum estimates the total number of billionaires on the planet at just above 2,200. The wealthiest 26 of them own more “stuff”—money, stocks, bonds, mansions, cars, yachts, planes, art—than the 3.8 billion people at the bottom of the economic ladder combined.

Currently a typical warehouse worker employed by Amazon gets paid about $10-12 per hour and has a net worth slightly above zero. The man who runs Amazon, according to Forbes’ estimates, has a net worth of over $200 billion.

A review of the tax returns of 250 large American corporations for the years 2008-2015 discovered that eight of them paid no taxes during the entire period. The Institute on Taxation and Economic Policy cited firms like General Electric, International Paper, Priceline.com, and PG&E as leading examples of zero-tax businesses. At least 100 firms in the study—40 percent—paid no tax in at least one of those years. Recent news reports indicate that Amazon, a firm with a stock market capitalization approaching a trillion dollars, paid no tax for the most recent year.

Does it seem like somehow, somewhere along the way, the American economic miracle got hijacked? Did the Founders miss something as they went about designing the economic model for the Republic? How did the “land of opportunity” devolve into the land of “winner takes it all?”

These questions have perplexed political activists for a long time and over the past decade or so they have become ever more acute and more politically urgent. The gap between America’s haves and have-nots stands wider than it ever has and it grows wider by the day. Some sociologists predict a looming crisis that could degenerate into class hatred, social unrest, civil disorder, and possibly even violence.

I believe the time has come to completely rethink the way we pay for the Republic. The long-running political tug of war between the “soak the rich” faction and the “cut the taxes” faction has gotten us exactly nowhere. So far as I can tell, no significant player in the current national conversation can visualize any option other than trying to push the axis of that conflict toward one extreme or the other.

Capitalism vs. Socialism: a False Choice

If you want a sure-fire way to scare the bejeezus out of most Americans, just say the S-word: Socialism. “Socialized Medicine” will usually do it for sure. Tagging a political opponent as a socialist has long had a favored place in the political arsenal.

For decades, America’s political leaders have sloganized and emotionalized the national conversation regarding the interplay between politics and economics. The dominant narrative has always framed our choices in terms of class conflict: the presumably irreconcilable difference between the interests of the haves and the have-nots.

For people who like to categorize and villainize competing ideologies, the capitalism vs. socialism dichotomy has become the favorite battleground. They seem to like to position socialism, in its most extreme incarnations—with images of Russian or Chinese communist state-controlled everything—against a virtuous view of capitalism as the natural, benevolent, God-approved way of life.

But any fair-minded comparison of the two ideologies must recognize the toxic extremes of both.

Certainly the colossal failures of the grand Marxist dramas like the cold-war Soviet Union, post-WW2 Communist China, and various Latin American states like Cuba, have shown us the fatal flaws of a mindless state-controlled socialism.

But success stories like the Scandinavian countries have also shown that a share-the-wealth philosophy—which they and many Europeans comfortably refer to as socialism—can co-exist productively and profitably with a democratic free enterprise economic system. Even the Chinese government has adopted “capitalism with Chinese characteristics.”

By contrast, we know all too well the history of predatory winner-takes-it-all paleo-capitalism. In the hands of sweat-shop factory owners of the 1800s, and legendary figures like John D. Rockefeller, Andrew Carnegie, and J.P. Morgan, it produced astonishing wealth for some and abject poverty for others. It persists to this day in various incarnations.

Can anyone reasonably dispute that we Americans actually practice and cherish our own brand of socialism, and have for many decades? We just can’t bear to call it that.

We have a publicly funded school system throughout the country. We have publicly funded colleges and universities in every state. We have public assistance programs for homeless people; mental health services for the indigent; and unemployment payments for people who lose their jobs.

Military veterans receive a range of government-provided services including medical care, special loans, and educational benefits. The federal government guarantees many kinds of loans for businesses and individuals, including student loans. We even call our retirement system Social Security. And, Medicare pays for healthcare services for people who collect Social Security benefits.

Let’s Stop Taxing People and Start Taxing Transactions

The Internal Revenue Service—our infamous IRS—estimates that the tax gap, or the amount of income tax revenue that goes uncollected each year, averages nearly $500 billion on unreported income of about $2 trillion—every year. For just the past decade, that astonishing figure adds up to five trillion dollars in missing tax revenue.

If we believe those figures, just one year’s lost revenue would pay off half of the federal budget deficit or fund the Defense Department’s operations for most of a year.

Even with its 76,000 employees, the IRS has not succeeded in closing the tax gap, or even narrowing it by very much. The agency’s management admits that they probably can’t. By recent reports they audit less than one percent of tax returns.

Before we condemn Americans as a bunch of deadbeats and tax cheats, however, let’s note that we have one of the highest tax compliance rates in the world, estimated by the Vienna Institute for International Economic Studies at about 83 percent. The UK, Switzerland, France, and Austria clock in at about 75 to 77 percent. The Institute estimates that less than 63 percent of Italians pay their lawful share of income tax.

The Income Tax System Has Utterly Failed

The stark reality of the tax gap makes our long entrenched system of trying to tax income fundamentally and irreparably flawed and unfair. With a one-percent audit rate, people who lie on their tax returns run very little risk of getting found out, so long as they keep their deductions in bounds. Some businesses use questionable or illegal accounting methods to understate income or inflate expenses.

Some people even skip filing altogether and don’t get caught. Lots of small business owners who operate on a cash basis justify skimming money from the register by pointing to a tax system they see as unfair to the little guy. Some food service workers justify under-reporting their tips for the same reasons. We have no way of knowing how many workers in the gray economy—housekeepers, gardeners, free-lance construction workers, and others—underpay or fail to pay the taxes dictated by law.

With only 83 percent of the legally mandated income taxes actually coming in, 17 percent of Americans enjoy a free ride at the expense of the rest. As a ratio, five honest taxpayers have to pick up the tab for one dishonest non-payer. As a side issue, consider that nearly 15 percent of the money the IRS takes in goes back out in the form of tax refunds.

But the grotesque unfairness of the practice of taxing an imaginary something called income doesn’t stop there. Corporations and wealthy individuals have, for a century or more, bought their way into Congress and state legislatures, offering campaign funds, mysterious “donations,” and sometimes outright bribes to get tax laws that favor their interests. While hyper-capitalists complain about the supposedly high tax rates imposed on American corporations, very few corporations actually pay them.

Using creative tax strategies, a person with a net worth of many millions or billions of dollars can appear to have earned no income at all. Their net worth can soar as the corporate stocks and real estate they own appreciate, but unless they collect something called a salary in some form, they have no income tax obligation. If they sell some of their assets for cash, those “capital gains” bear a lower tax rate than the wages of their less affluent fellow citizens.

Financial advisors to the wealthy have a whole toolbox of gimmicks to help them minimize or eliminate their taxes. But Larry and Linda Lunchbucket, the working stiffs who put in their forty hours every week for a paycheck, have no tricks.

Clearly, the income tax system, in any imaginable incarnation, cannot fund the Republic in a fair or equitable way.

Albert Einstein advised,

“There’s no right way to do the wrong thing.”

The alternative to this unfair and irrational—but blindly accepted—income tax scheme lies in a concept so stunningly new and so elegantly simple that it repels the mind. For that reason it needs a careful explanation. Here goes.

imagine . . .

To paraphrase the Beatles’ legendary song, “Imagine,” written by John Lennon, “Imagine there’s no income tax; I wonder if you can?”

Let’s start by supposing that all income taxes, at all levels, in all sizes, shapes, colors, and incarnations, disappear. All of them, everywhere—gone. No federal income tax, no state income tax. No tax on salaries. No tax on tips. No tax on your retirement pension. No tax on the gain from that rental condo you own when you sell it. No tax on the gain you make when you sell those shares of stock or the bonds or the mutual fund. No tax on the stock dividends you received. No tax on the profit you make with your small business. No taxes on people and no taxes on businesses.

Can you conjure up that alternative reality in your mind? No income tax—none, nada, nichts, zip.

“OK,” you say. “I’ll hold still while you explain the rest of the theory. But the government has to get the money to run the Republic from somewhere. Who—or what—gets taxed?”

The answer: we stop taxing people and start taxing transactions. Our new system for funding the Republic has two key components: 1) a small “goods and services” tax, a.k.a. “value added tax,” collected at every step in the value chain, and 2) a small asset transfer tax.

Continued on page 213 . . .


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