2009 04 01 A Radical Tax Idea

A Radical Tax Idea

In the United States, we have a variety of governmental levels. Each level has branches similar to the National Government, with Executive, Legislative and Judicial functions. This system was established because the American colonies felt they had no representation when the king of England imposed onerous taxes, which did not benefit local causes. The colonists felt that government was not to be trusted, so it needed internal checks and balances in order to guarantee that no part of government got too powerful. What has developed over the years have been many layers of government. Of course, each level of government needs money to run properly. But none are run like a business, where profit and loss measures are critical to efficiency. Instead, government tries to solve perceived problems no matter what the cost. Our elected politicians cry poor when their pet projects cannot be implemented. And once in place, programs self-perpetuate whether they are effective or not because the people who run them want to feel that they are important in fulfilling human needs. No one, including myself, enjoys seeing misery and unfairness. But to try to erase every misery and injustice through government is folly.

Because the different governmental entities need revenue to function, taxes of various kinds have been debated, voted upon and signed into law by our elected officials.
So we have taxation with representation. But there is a problem. The local tax is separate from the state tax, which is separate from the Federal Tax. Within each level, there are a variety of ways to fund programs. For example, at the State level, there are income taxes, sales taxes, excise taxes, tobacco taxes, gas taxes, capital gains taxes, property taxes, library taxes, park taxes, and inheritance taxes (in some states). Many of these taxes are designed to redistribute wealth as much as they are to fund good programs. Then there are taxes called by other names such as the family leave act, unemployment insurance, workers compensation insurance, state disability insurance, park use fees, vehicle license fees, marriage license fees, parking meter violations and bridge tolls. I haven’t even mentioned two big Federal taxes, FICA and Medicare. One can argue that each of these taxes is individually worthwhile. But I would argue that we’re close to the tipping point where government cannot be expected to solve all our problems, and if it tries, it will not only fail, but that there will be a deep and prolonged collapse which will hurt many people.

What can we do to avoid this trouble? First of all, we need to realize that government cannot solve all our problems. When asked to solve a problem, politicians will need to respond, “We cannot solve that problem!” Remember the war on poverty? What a great idea! It was argued that our nation is so wealthy that there is no excuse for anyone to live in poverty. So the government redistributes wealth to those who need it the most. The only problem is that it hasn’t helped. There are still people in poverty and productive people in society are taxed to solve an unsolvable problem. Don’t get me wrong in this. There are people who because of their inability to work due to physical or mental limitations must be supported by the rest of us. The question is where to draw the line and at what governmental level. Local is better. We cannot expect our president to feed every person who is hungry. I would argue that poverty needs to be defined at the desperation level of people’s ability to function, and that almost any other means of support would be more efficient than the government. Even that definition leaves room for an “under the table” economy...the person getting unreported cash for providing a service or just begging. That is why it is so counterproductive to give people handouts on the street. If the Federal government got out of the poverty business I’d be much more willing to help my neighbor in need. Some needy people simply will not rise to the occasion to bring themselves up through creative use of their brainpower or muscle power when it is easier to laze around waiting for a handout based on sympathy.

Head Start is another Federal program that tries to break the cycle of poverty through education. I have had some experience in the Head Start program through gifting books. In my opinion, Head Start has failed to break the poverty chain in any significant way. Parents must learn to expect that teaching young children is their responsibility and not the government’s. Federal public education has the same failure probability as the poverty problem. We cannot expect our president to teach every child. That needs to be done at the most intimate level so the learning feedback is instant, decisive and effective.

National defense is another area taking enormous resources. It is clear that there are people in the world who want to kill us. So we must provide for our defense, being ready at a moment’s notice to eliminate such an adversary by whatever means necessary. However, the best defense is a strong trading partner…one which depends on our goods and services—and we on theirs. Trading leads to trust and an intelligent understanding of varying cultures. What makes that difficult, however, are the fanatics who believe that the world is better off living in the dark ages with no international trade whatsoever except to impose their idea of religion on all people. Some of those people breed hate—an attitude that cannot ever be countered by reason or trade. Therefore we must be ready to counter them with force if necessary so that they know we will not tolerate their narrow imposition into our lives. Such actions cost money. That money is not willingly spent, but without it everything else we stand for fails.

So, what is my radical solution, you ask? Insofar as possible, government should be provided in as local a manner as possible. The only role of our national government should be defense. It makes no sense to have our Federal Government involved in education, welfare or health care for example. To ask for Federal aid means that taxes have to go up the line and back down again with strings attached. Congress stipulates, “To get ‘our’ Federal money you must do thus-and-so.” First of all, it is not congress’ money to begin with. In the last week, my California senators and representatives have proudly indicated to me how much they have gotten of the Federal (non)-stimulus for “my district”. I’m supposed to be grateful? That’s my money being spread around and they want me to be happy that they control it. Honestly, it would be better to phase out Social Security over the next fifty years than to perpetuate a program that ultimately will fail under its own weight. If people know what is not in store for them in the future, they can and should plan for that future. If they fail to plan, they can expect to have a harder time than if they do plan. It is amazing how little a human being actually needs to survive. A little food, water, shelter and love is all it takes to survive if you have a positive attitude rather than a chip on your shoulder which says, “Poor me, you owe me”.

Next, are regional issues, currently handled by the States. Such issues include transportation corridors, prisons, education, parks and public safety. Users of these services should, as much as possible, pay directly. That way they’ll see the results of their hard work.

So, if I were the people’s king, I’d have only three taxes: Consumption, Property and Real Estate Transfer Tax. The consumption tax would be capped at 20%, the Property tax at 1% and the Real Estate Transfer Tax at 5%. Here are the laws I’d enact as your king:
1. No tax shall be passed which redistributes wealth (progressive taxes).
2. No tax shall be passed which selectively penalizes behavior (tobacco, liquor). Government intrusion into our lives robs the very freedoms we fought so hard to gain. We should be free to mess up our bodies and act in what others might call stupid ways.
3. Bonds should not be a way to finance any government activity. That only defers the pain for another generation. Instead we should save for those big projects, building them out of current income even if it takes longer.
4. All taxes should be as close to the end user as possible.
5. Income tax should be eliminated. Tax on consumption is fairer than tax on income. Those who make more, spend more and use more, pay more. Businesses that need to spend to acquire goods to sell pay tax when they buy. That will be a known operating expense. When any buyer purchases a product, they pay the tax at that point.
6. Monitoring compliance should be easy and straightforward. Tax avoidance is now a huge problem, because any system we set up will find “creative circumventors”. Currently, people stash money overseas, barter, spend lavishly on their businesses to reduce net income and deal in cash only. With lower taxes on transactions, people will be more willing to report their activities. Any transaction not reported would result in a substantial fine, one hundred times the amount of the unreported transaction. The reason for this penalty is that it must be assumed that if one transaction is not reported, one hundred other such transactions have not been reported and the tax would have be paid on those hundred.
7. Tax deductions should be eliminated altogether. The only purpose for deductions has been to redistribute wealth. Since there would be no income tax, deductions are unnecessary.
8. Government can only spend what has already been paid in taxes. No more deficit spending. The money must be in hand before it can be spent.
9. Estate tax should be abolished. This is the most insidious of all taxes. My experience in business shows that most people who receive lots of money (a life insurance settlement, for example) end up spending that money quickly. That being the case, the consumption tax is a better way to go.
11. Property tax should be paid annually on the assessed valuation, as it is today in order to keep land and real estate actively on the market. Such property tax shall be capped at 1% of the value of the property with no more than a 2% per year increase. That would allow our government to recoup the land value over the period of one hundred years. Transfer tax of no more than 5% shall be paid on any change of title. There shall be no exceptions for transfer between family members.
12. Transitioning to the new tax system should be phased in over five years. At the beginning of the five-year period, all sales of new government bonds would be prohibited.

Will this new tax structure ever be implemented? Probably not. Such changes would require enormous agreement among too many self-interested individuals. Would it work? Probably. Does it make sense? I think so. How about you?

©Frank Bliss, All rights reserved
April, 2009