Thursday, November 05, 2015

Time to get government out of the business of engineering society through taxation

We need a complete overhaul to our tax code, replacing the current income tax code with a consumption based tax. Doing so has several advantages over the current system. First among these is that a consumption based tax system would illuminate the real burden of government.

Our current tax code does three things, all of them are bad. It distorts capital flows by introducing tax considerations into spending decisions and undermines utility based decision making. It hides an individual’s real tax burden by embedding a portion of it into the product price of the goods and services he/she buys. (Companies actually don’t pay taxes, their customers do) And last, our tax code perpetuates moral hazard by shifting the responsibility from the citizen who receives a federal benefit to the citizen who actually pays for it, thus undermining the concept of self-reliance and personal responsibility.

By changing the way we finance the Federal government we can make business more competitive and individuals more rational in their financial decision making.  Both business and individual spending decisions would become utility based, government would be forced to become more rational in its spending decisions, distortions to capital flows embedded in our current code would be eliminated, and light would be focused on the actual costs of government on a daily basis. All of these improved features of a consumption based code would, in turn, produce greater macroeconomic performance and job growth.

Today's tax code provides many "incentives" that create concentrated benefits and distribute harm in ways that politicians believe will curry favor with some constituent group without upsetting an equal number of voters in the aggregate. Our politicians, both democrats and republicans, are manipulating us and in the process are doing economic harm to the nation.

For those concerned with maintaining a progressive structure to the code, certain items such as food and a basic housing cost allowance could be excluded from the proposed consumption tax. This would benefit the less affluent. This proposal would also ensure that everyone understands that they are paying for government services, that they have a stake in the political process, and hopefully make them question the marginal utility of the next bad spending idea coming from either the Congress or the Administration.

Of course, there are no real incentives for anybody in either party to reduce the size and power of the federal government. That’s the real problem with Washington.

When Senators were appointed by state legislatures, as the Founder intended, there was the correct balance of federal and state power and a real check on the growth of the federal elections. The direct election of Senators, an early policy objective of the Progressive Movement, undermined that balance forever.

Tax increases? A trillion? Barack Obama and his liberal friends are out of mind, out of control, and out of any discernible shame.

Taxes are required for necessary government services. However, too much of our taxation is to control what people can or cannot do, functions which people approve or disapprove or what is considered fair.

Any discussion of tax reform must begin by eliminating the politically charged phrase “cost to the government or treasury” from our vocabulary. My wife and I figure that we’ve rendered nearly 40% of our net worth in all taxes paid over our lifetimes.

Taxes are a cost to those who add real value to our currency, those who’ve earned a living by generating goods and services actually worth paying for and then in turn generating tax revenues.

The cost to the taxpayer is reflected in lost lifetime personal earnings, capital accumulation, spending and investment opportunities. This is versus government redistribution and spending that has the tendency to distort the investment curve, discourage savings and create unsustainable asset bubbles.

What we need to do is reform the tax code in a way that takes politics out of it.

Of course, Washington politicians would have a fit if we took this tool away from them and special interest groups would have to operate on a level playing field.

So, I would say, more than anything else, don’t raise taxes, no revenue increase. I hate that word revenue. Government sells no products, no services, it does not have revenue, it collects taxes. Call them taxes please.

There is another interesting plan floating around that would reduce the current individual tax brackets into two—10% and 25%.

I think this would be ok, if they would broaden the base by eliminating all itemized deductions and requiring everybody to take the standard deduction on the personal. These deductions could even be phased out over a period of time so that nobody gets their knickers in a wad by being whacked all at once. For most people the itemized deductions would be devalued below the standard deduction in a few years.

While the itemized deductions are being devalued, we could drop the tax rates down 1% a year to synchronize with the devaluing of itemized deductions and maintain revenue neutrality This phased “broadening and lowering” could be an easy thing to accomplish, with a minimum of opposition, if the politicians would be bold enough to do it.

I am sure that all the critics will come climbing out of the woodwork to dis these plans. But, get real — you can’t be bold on reducing the rates unless you’re also bold on reducing the loopholes and deductions.

However, most Americans will merely consider this particular type of tax reform — simplification, elimination of loopholes and an across-the-board lowering of rates — as a giveaway to the corporations and the rich. Furthermore, Obama and the liberal left would demagogue this tax reform as precisely that.

We should begin teaching basic economics, particularly the functioning of the market, in grade school, and certainly during the freshman year of high school. Only then will the population understand the essence of something as esoteric as dynamic scoring.

More people would understand the market principle that taxing something will create disincentives to its production and decreasing a tax lowers the cost of production and increases the incentive to produce or use more. This simple principle applies to just about anything, including labor and income. Lower the tax on income, for example, and, soon, more income will be created. This is the embodiment of dynamic scoring.

A population with an understanding of the market will be far less susceptible to liberals who can secure votes by merely screaming nonsense like “Yes we can.”

I am all for some sort of tax reform, but realistically the chance we could have reform right now is less than we have in immediately repealing Obamacare.

It’s unlikely that the tax code will be revised for many reasons, principle among them is that political power flows from the code. If Congress is smart, which it is not, it would eliminate all deductions and all corporate taxes. Additionally, the code should be changed to one that taxes all forms of income the same way since “double taxation” would no longer be an issue.

By taking these simple steps our economy would prosper because the capital flow distortions that inevitably flow from a code that manipulates individual and corporate decision making would no longer exist. This improvement in capital allocation would result in better economic decisions which would yield accelerated economic growth, faster industrial modernization, greater productivity, and either higher tax revenue or the possibility of lower tax rates.

In addition to the changes I’ve listed above, I would also eliminate the earned income tax credit and put in place a minimum tax rate that everyone would have to pay. From an equity stand point it is unfair for a class of citizen to basically steal the property of another citizen via the power of the state in order to benefit themselves. Perhaps the easiest way to do this would be to implement a national sales tax whose rate would be set based upon the amount of tax revenue previously raised through corporate income taxes divided by the GDP.

Eliminating corporate taxes would have the additional benefit of reducing the influence of corporate lobbyist and their ability to create advantages for their corporations that create barriers to entry for potential competitors and thereby gain an unearned market position unrelated to their customers interest and a pricing advantages for themselves at the expense of us all.

I also doubt that any of my suggestions have a chance of becoming law–our politicians are too invested in today’s tax code. This is true for both parties, but it is particularly true for progressive democrats who believe private property rights are malleable and that government has the inherent to choose whose property to steal and who to give the spoils to in order to secure their own reelection.

In the end, a far simpler, more predictable and less gameable tax system, for both corporations and individuals, may not immediately spur growth, but can’t help but do so strategically, because it reduces artificial factors on growth and settles matters, at least for a time. The biggest priority needs to be getting government, to the maximum extent possible, out of the business of seeking to engineer society through a tax code.

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