Sensible Tax Reform--Simple, Just and Effective
A. FAQs: The Need for Revolutionary Tax
Reform
| (1) Why is revolutionary tax reform necessary in the United States? |
| (2) Can the necessary tax reform be accomplished by simply changing the existing federal tax system? |
| (3) How do our current federal taxes hurt the poor? |
| (4) How do our current federal taxes hurt the middle class? |
| (5) How do our current federal taxes hurt the wealthy? |
| (6) How do our current federal taxes hurt American business? |
| (7) How do our current federal taxes hurt the American economy? |
| (8) How do our current federal taxes hurt the American government? |
| (9) What is the role of tax lobbyists in our current federal tax mess? |
(1) Why is revolutionary tax reform necessary in the United States?
The United States has what is probably the most complicated federal tax system in the entire world. Annual compliance costs alone exceed $260 billion--an amount larger than the entire economies of most countries in the world.
- It is unfair and damaging to all sectors of the economy.
- It is bewilderingly complex.
- It is contradictory and dysfunctional.
- It hurts Americans families.
- It hurts American companies.
- It hurts the entire American economy.
- It is cumbersome and costly.
Despite the nightmare of its design, if our tax code accomplished its theoretical goal of effectively collecting the funds needed by the government, we might need to simply accept our fate. However, our federal tax system does not even do an effective job of tax collection. Our current system:
- Slows our economy.
- Discourages savings and investment.
- Encourages individual Americans, and businesses as well, to go excessively into debt.
- Increases interest rates.
- Seriously hurts our ability to compete in global markets.
- Encourages American businesses to keep trillions of dollars of profits abroad in order to avoid U.S. taxes.
- Even encourages U.S. companies to move overseas to avoid taxes here.
- Greatly increases our need to rely upon borrowing abroad, especially from foreign governments.
- Has destroyed entire American industries and millions of jobs.
Our current federal tax system is broken. A replacement must be found. The longer that we wait, the greater the damage will be and the more difficult and expensive it will be to fix.
Back to Top(2) Can the necessary tax reform be accomplished by simply changing the existing federal tax system?
The entire Bible has about 1400 pages. Our current Internal Revenue Code (IRC) is comprised of more than 70,000+ pages--as long as 50 Bibles combined. The tax code is changed almost daily. [President Bush’s Advisory Panel on Tax Reform reported in 2005 that, in the previous nineteen years, the tax code had been changed more than 15,000 times! That averages more than two changes per day, seven days a week, fifty-two weeks a year and it does not appear to have slowed in the years since.]
No one really understands the IRC--not tax accountants, not the members of Congress who passed the laws and not even the Internal Revenue Service (IRS)--the agency responsible for enforcing the tax code.
In addition, the tax code has been transformed into a social-engineering mechanism for promoting numerous social goals (home ownership, charitable donations, savings, energy conservation, childcare, etc., etc., etc.). It has also deteriorated into a political-engineering mechanism for politicians to provide gifts to tax lobbyists and their sponsors. While many of the social-engineering manipulations (but few of the political) are commendable goals, the federal tax system is not where they should be hidden. Most of the tax benefits go to the wealthiest and most sophisticated taxpayers--not to the majority of individuals or small companies.
Many taxpayers cannot even figure what their tax rights are. The system is unfair. It should not require great financial expertise for poor and middle-income taxpayers to receive their just rights under our tax system. Also, all taxpayers should have the same protections and beneficial provisions under our tax code as everyone else.
Our federal tax code is no longer tenable. It is too unjust, too complicated, too contradictory and too ineffective and damaging to our economy. It also seriously undermines even our basic political system. Politicians have become addicted to catering to the wishes of tax lobbyists (the most highly paid lobbyists in Washington) who represent only a small percentage of taxpayers--the favored few individuals and businesses who have unfair influence with the White House and Congress.
We need to create a brand new federal tax code that is just and easy to understand, helpful to our businesses and economy, and which will help America to reclaim its economic leadership in the world. We need Sensible Tax Reform--Simple, Just and Effective.
Back to Top(3) How do our current federal taxes hurt the poor?
The poor (defined by the federal government to be about $25,000 for a family of four) pay Social Security and Medicare taxes (payroll taxes) on almost every dollar of their income while the very wealthy may not pay those taxes on most of what they receive (for example, dividends and capital gains). Payroll taxes are the most regressive taxes in America. Many of the poor also pay income taxes.
So, even those families that are defined as being at or below the poverty level are taxed by our federal government. And, because of the complexity of our tax code, 60% of the poor actually need to seek tax-preparation assistance every year.
Recognizing the injustice of this situation, our government has created credits and subsidies to ease the burden of poverty (for example, the earned-income tax credit and the child-care credit). That is irrational. Since the poor are in such desperate condition, why are they taxed in the first place? They should be relieved of their entire tax burden. Then they might not need government subsidies.
Under Sensible Tax Reform--Simple, Just and Effective, the poor will be “untaxed” from both our current taxes and the proposal federal consumption tax. All rules will apply the same to everyone. Millions of jobs will be created. And, real incomes will rise for the poor.
Back to Top(4) How do our current federal taxes hurt the middle class?
Earned income:Most of the income of the middle class is earned income (e.g., wages, salary, bonuses and commissions). That income is subject to Social Security and Medicare taxes. In addition, it is taxed at the standard income-tax rates. For example, the maximum personal income-tax rate of 39.6%, which is designed to tax the very wealthy, is currently imposed on taxable income above $466,950 (in 2016). That is a high income but it hardly qualifies as “very wealthy.”
Unearned income:On the other hand, the extremely wealthy receive most of their income from unearned income in the form of dividends and capital gains. Such income is taxed at a preferential maximum tax rate of only 20%--even with $100 million or $1 billion of annual income.
That is very unjust. Why should unearned income be taxed at half the rate on earned income? America envisions itself as a meritocracy (that is, we reward merit). However, our current federal tax system primarily rewards wealth--not merit.
There are many ramifications of this regressive tax policy. It limits the ability of the middle class to save for their children’s education or for their own retirement. [America’s national savings rate is much lower than in most other industrialized countries.] With our Social Security system underfunded and our Medicare system in a crisis condition, it will become increasingly important for Americans to save much more in the future. This problem is aggravated by the increasing weakness of business pension and retirement programs.
Our current tax system also limits the ability of Americans to save for starting new businesses, which are the core of our nation’s economic vitality and the source of much of annual job growth.
Sensible Tax Reform--Simple, Just and Effective will totally eliminate Social Security and Medicare taxes (but not the underlying social safety net) as well as income taxes from the middle class. Real income and standards of living will increase greatly. The opportunity of the middle class to save will increase rapidly. Their ability to prepare for their children’s education, for their own retirement and to plan for starting new businesses will all be markedly improved. STR will truly be simple, just and effective for the middle class.
Back to Top(5) How do our current federal taxes hurt the wealthy?
Our current federal Social Security/Medicare and personal income-tax systems generally treat the wealthy very preferentially. All of the tax “reforms” since 2000 have been designed to primarily benefit them. For example, the cut in the tax rate on capital gains and dividends to 15% or 20% saved many of the wealthiest families tens or even hundreds of millions of dollars every year. [The capital gains tax is progressive but much less so than ordinary income taxes that can be as high as 39.6%.]
Estate taxes:In contrast to ordinary-income and capital-gains taxes, our federal estate-tax system is extremely progressive. Generous exclusions exempt 99% of all estates from paying any estate taxes--only about one out of 500 (1/5 of 1%) of estates, the very wealthiest estates, pay any estate taxes at all!
Those estates that are taxable are essentially taxed at a marginal estate-tax rate of 40%. However, even they pay an average tax of less than 17%. Nevertheless, the rules of estate taxation are incredibly complicated. Often the extremely wealthy are treated much more fairly than the mere wealthy. That is not how our tax system should operate; everyone should be treated comparably.
With the implementation of Sensible Tax Reform--Simple, Just and Effective, the tax rules will be much more beneficial to our economy and economic position in the world. The wealthy will be subject to the same rules as everyone else. Estates will be distributed without estate taxation. However, the inheritance will be taxed along with all other income of the heir. The process will be simple, just, and effective.
Back to Top(6) How do our federal taxes hurt American business?
The Internal Revenue Code increases the costs to American companies of doing business. The Social Security and Medicare taxes increase the cost of labor. They, together with income taxes, lower profitability and the ability of companies to invest in new plant and equipment or research and development programs. These factors hurt the efforts of American companies to compete in the global marketplace. They reduce our creativity and innovation and they increase the prices of American-made goods.
As a result, the United States has suffered very serious long-term harm. Factories are lost to China and other foreign countries. Likewise, service operations are off-shored to India and elsewhere. On the import side, foreign-produced goods overwhelm American producers.
We have already lost millions of jobs and are at risk of losing many more. Our balance of trade deficit is $400 - $700 billion year after year--often over $2 billion every day. Most of the money to pay that cost must be borrowed abroad by American companies and our federal government.
Sensible Tax Reform will help unleash the competitive genius of American companies. They will effectively be un-taxed. They will be free to innovate, modernize, compete aggressively, strengthen the economy, create jobs and help America to again reclaim its international economic leadership.
Back to Top(7) How do our federal taxes hurt the American economy?
Companies are weakened. Our ability to carry our weight in international markets is reduced. Jobs are lost. Our existing federal tax system is a severe drain on American businesses. Business taxes and the tax-compliance burden are wasted money. Investments that are not made hurt us. The falling real compensation of workers hurts them and our country. Higher interest rates hurt all sectors of the country--individuals, businesses and governments.
The code is like pollution which hurts everything that it touches. Sensible Tax Reform will give American business an unparalleled opportunity to innovate, compete and prosper.
Back to Top(8) How do our federal taxes hurt the American government?
The American government is hurt when:
- Our economy underperforms,
- Job markets are weak,
- Our trade balance is heavily in deficit,
- American companies shield profits abroad,
- Tax revenues decline,
- The government must borrow abroad and
- The tax code empowers tax lobbyists to buy political influence.
The untaxing of businesses and citizens under Sensible Tax Reform--Simple, Just and Effective will greatly benefit our economy. That will increase government revenues. It will also increase savings in this country, which will reduce our government’s need to borrow abroad. And, it will lower interest rates, which will substantially reduce government expenditures. [Every 1% increase in interest rates can cost the federal government (and therefore American taxpayers) more than $100 billion every year!]
Back to Top(9)What is the role of tax lobbyists in our current federal tax mess?
Tax lobbyists are agents for big companies, big organizations and wealthy individuals who contribute generously to the White House and congressmen to encourage them to vote as the lobbyists wish. Many of the federal tax laws are actually written by tax lobbyists--not by our elected representatives or senators. The tax proposals are then given to members of Congress to be passed into law.
The congressmen and women often do not even read the tax legislation that they vote into law. That is a scandal! It has been made possible by a tax system that is hopelessly complicated, filled with loopholes, and easy for politicians to hide tax measures which are not available to most taxpayers. Sensible Tax Reform--Simple, Just and Effective will so simplify our federal taxes that the White House and Congress will find it difficult to manipulate. It will also cost many tax lobbyists their jobs--which would be a very good thing for our political system.
