Trump's Tax Proposal

These are the Trump rates, simplifying our current system of 7 brackets down to 4 brackets and doing away with many of the deductions, sort of a Reagan redux but less ambitious; Reagan's tax reform left us with 2 brackets.  Also, he plans to close loopholes and stick it to the hedge fund managers.  I like simplicity in the tax code.

 

As someone who would love nothing more than to abolish the IRS and repeal the 16th Amendment to the Constitution (the one that provides for an income tax), it will come as a surprise that I don't like the 0% bracket.  Everyone should pay some tax.  Of course, that is a political loser since so many people are already in the 0% bracket in the current tax system.  Yes, that is a bad thing.  If someone pays no income tax, he has no incentive to keep taxes from rising.  In fact, there is an incentive to have taxes on others rise in order that those not paying taxes can receive more generous government benefits.

 

Though my econ classes taught that an old tax is a good tax (because the market has already adapted to it), I disagree.  Income tax requires that the government know everyone's income.  What business is it of government how much a person makes?  What happened to that right to privacy?  It requires a massive and, as recent events have shown, corruptible bureaucracy.  This is why a national sales tax is preferable.  It taxes consumption, which will have the benefit of encouraging saving.  Much as state sales taxes exempt food items, a national sales tax could do the same.  The rich will pay much more because they will consume much more.  Better still, the government need not know how much anyone earns and no one need ever file a tax return.  Furthermore, Congress wouldn't be able to pit the rich against the poor against the middle class.  The very best of all would be the visibility of it on every transaction by every taxpayer; no more withholding that hides the cost of government; if it goes up a penny, everyone will know and want an explanation.  Yes, the tax accountants would hate it and I am sure they are even now lobbying against such a wicked idea.  Such a system would take too much power away from politicians so they will never willingly allow it to pass.

 

Trump's plan is better than what we have but not as good as Rand Paul's.  He would have a single tax rate of 14.5% with certain deductions.  This would be for everything.  Now that is simplicity.  The economy would love it though Congress would, as aforementioned, be apoplectic about the loss of power.  As stated in another blog, the tax code is a protection racket where the Congress provides special tax breaks to certain donors and lobbyists.  This is why the codes keeps getting convoluted and colossal.  So long as the 16th Amendment exists, that will forever be the case.

Not Enough Taxes

President Obama wants $1.6 trillion in tax hikes over the next ten years and the Republicans are offering $800 billion over that time period.  Either one sounds like a lot of money.  The President claims that our deficits and expanding debt are not because of excessive spending and massive entitlements; they are from a lack of taxation.  Though I would disagree, let us work on that assumption.  For the last four years, we have run over $1 trillion deficits.  If the problem is insufficient taxation, then the president should be calling for something around a $10 trillion tax increase over the next ten years.  His call for a mere $1.6 trillion will only reduce our yearly deficits by $160 billion a year.  Had such taxes been collected for the last 4 years, the budget deficits would still have exceeded a trillion dollars each.  So, if taxes are really the issue, they need to be raised considerably higher than the president proposes.

The Republicans claim that our deficits are a result of overspending.  The government takes in $2.4 trillion in taxes... er... revenue and spends... er... invests $3.5 trillion a year.  Of that $3.5 trillion, $727 billion is going to Medicare & Medicaid, $759 billion is going to Social Security, $652 billion is going to the military, $360 billion is going to income security (e.g. food stamps, earned income tax credits, unemployment, etc.), $258 billion is debt service (just paying the interest on that borrowed $16 trillion), $212 billion to federal pensions, and the remaining $600 billion to all those other functions of government.  Contrary to popular belief, spending on wars and the military is not the problem.  You could abolish the military and still have $500 billion deficits.  Let's even cancel the pensions and health care for veterans and that would bring us down to $300 billion deficits.  If we were to dust off the 2008 budget and just use that, our deficits would be instantly cut in half.  Really, now that the economy is 'poised' for recovery, we should be able to cut back government spending to pre-crisis levels, right?

 

One does not go into debt by a lack of income.  I have a friend who has darned near no income and yet he has considerable savings.  He understands spending within his means, meager as they are.  One goes into debt by spending too much, not earning too little.  A wise person budgets according to their income but the federal government seems to think that it can demand a raise (i.e. taxes) from the boss (i.e. taxpayers).  It might sound something like this:

 

"Gee, taxpayer, I've been spending 40% above my salary for a while now so I'm gonna need a substantial raise, okay?"

 

"No, I can't afford that right now.  Times are tough."

 

"Oh, sure you can.  Just cut the pay of the top earners and give it to me instead.  I insist."

 

Doesn't work in most cases but the government really can insist, on penalty of imprisonment.  Insist they shall and it will make hardly any difference.  The debt will continue to rise and the economy will continue to struggle.

Tax Returns

Senator Harry Reid is still claiming that Mitt Romney has not paid taxes for ten years.  He says he has a credible source, an investor from Bain Capital.  I have some questions.  First, how would a Bain investor or even and employee know whether or not Romney had filed taxes?  The only people who should know are the Romney's, their accountant, and the IRS.  Second, why doesn't Senator Reid put this investor in touch with the IRS?  I'm sure the IRS would be eager to audit a multi-millionaire who didn't pay taxes for ten years.  If he did skip paying taxes for 10 years, how did they miss that?  Senator Reid has inadvertently made an argument for getting rid of an apparently incompetent agency that didn't notice the long gap in tax returns.

Since we are on the topic of releasing tax returns, word is out that Harry Reid became a multi-millionaire through shady land deals in Nevada while he has been Senator.  Clearly, Senator Reid needs to answer this rumor.  He has not released ANY tax returns.

Tax Rate doesn't Matter?

I had heard from some pundit that the tax rate didn’t matter. Regardless of what the tax rate is, the federal government collects approximately 18% of gross domestic product (GDP) in taxes. That didn’t sound right. The Laffer Curve states that beyond a certain tax rate, you start collecting LESS money. So, for instance, at a tax rate of 90% you might get a lot but at 100% you will get less since most people won’t work when their cut is zero. Though I have long accepted Laffer as axiomatic, the constant rate of returns didn’t sound right. There should be a curve, not a line. So, I decided to research this notion that the tax rate didn’t matter.

The chart shows the top marginal tax rate and the tax income as a percentage of GDP. Amazingly enough, despite a rate as high as 94% or as low as 28%, the portion of GDP collected in taxes is very consistent. But that forces a question: If high tax rates don’t bring in more money, what is the point? If government will collect 18% of GDP with a low tax rate or a high tax rate, why wouldn’t you keep it low? What is the benefit of high tax rate? It strikes me as needlessly punitive.

But what actually happens? The tax law is a protection racket. Congress writes exemptions and deductions for those who support them. If the tax rate was constant and unchanging, congress would have a harder time raising campaign cash. Also, the government wouldn’t have nearly so much power. Paul Ryan has proposed tax reform that will bring us back to a two rate system: 10% & 25%. Though our current top rate is 35% but with all the deductions in the complex tax law, the typical person in that bracket only pays 25%. People in the lower brackets generally pay 10%, so it makes sense to just simplify to those two rates which will bring in the same amount money but save millions of hours in tax filing. You can bet the tax accountants are opposed to Ryan’s plan.

On a related point, note the big jump in tax receipts from before World War II vs. Post WWII. It is no coincidence that withholding taxes were introduced during WWII. Taxpayers never saw the money and didn’t write a check to government at the end of the year. Moreover, they got a ‘Refund’ the following year. It is only through the withholding tax that the populace was tricked into carrying a heavier tax burden, a burden they carry to this very day.

10 to 1 Cuts vs. "Revenue"

Much has been made of the question in last night's debate where the candidates were asked if they would walk away from a budget deal that promised $10 in cuts for every $1 in tax increases. The candidates unanimously walked away. And so they should. The cuts never happen, as Reagan discovered with TEFRA. He was promised $3 in cuts for every $1 in tax increase. He got the tax increase but future Congresses were not bound by the $3 in cuts which never materialized. No matter the ratio, the tax increase will come but the cuts won't. It's like that email where the Nigerian lawyer promises you a million dollars if you forward him $500. Sounds like a great deal. Do you walk away? What if it was $10 million? $100 million? The ratio is irrelevant.

If you change the tax code, the new tax structure continues until modified by some future Congress. On the other hand, cuts don't have that same structural longevity. If Congress cuts Program B by $1 billion this year, there is nothing to prevent them from restoring it next year. Worse still, the Congress can play the 'We would have spent' game. How does that work? Well, Congress was planning on spending $5 billion on Program C but instead only spent $4 billion. That's counted as a $1 billion cut. A cut should be when you look at what you spent last year and spend less than that amount. Such rarely happens. However, oddly enough, it happened last year. Lacking a new trillion dollar stimulus, 2010 saw a 2% reduction in federal spending. Before that, the last time spending was less was 1955.

If someone offers 10 to 1, one should skip the taxes and just take the $9 in cuts. Same difference, right? If someone offered you $10 if you paid them a dollar, wouldn't it be easier if they just gave you $9? Should give you the same balance, right? But that's not the point. That's not the goal of the person offering 'cuts' for taxes. A tax for cuts deal is doomed from the start and should never be accepted, no matter what ratio is offered.