Sensible Tax Reform--Simple, Just and Effective

F. FAQs: Impact upon the Overall


(1) How would Sensible Tax Reform benefit the overall economy?
(2) How would Sensible Tax Reform affect exports and imports?
(3) How would Sensible Tax Reform affect America’s international
(4) How would Sensible Tax Reform affect employment?
(5) How would Sensible Tax Reform affect interest rates?
(6) How would Sensible Tax Reform affect inflation?
(7) How would Sensible Tax Reform affect the stock market?
(8) How would Sensible Tax Reform affect the astronomical level of debt in        the U.S.?
(9) How would Sensible Tax Reform affect savings in the United States?
(10) How would Sensible Tax Reform affect charities?
(11) How would Sensible Tax Reform affect the mafia, drug dealers and
        other crooks
(12) How would Sensible Tax Reform affect foreign visitors to the U.S.?

(1) How would Sensible Tax Reform benefit the overall economy?

The introduction of STR will offer a strong stimulus to the American economy.:

  • Greatly increased ability of American producers to successfully export as well as to compete against imports
  • Reduced balance of trade deficit and much less need for foreign borrowing
  • Increased savings (for retirement, college, creating a new business)
  • Lower interest rates
  • Much greater business profits and higher dividends
  • Strong stock market
  • Increased equity financing
  • Lower debt (both business and individual) and debt ratios
  • Sharp increase of business investment, both domestic and from abroad
  • Much stronger economy with millions of new jobs
  • Higher real incomes and standards of living

The above is only a partial list the advantages that are likely to flow from the introduction of Sensible Tax Reform. There will, of course, be transitional adjustments which will occur over several years. However, some positive economic responses will occur immediately. Many wholesale prices will begin to fall as producers pass on savings from the elimination of income, Social-Security and Medicare taxes on business. This will especially help exporters become much more competitive internationally. Likewise, American producers will be greatly strengthened in import-competing industries, giving them the leverage to compete much more aggressively against foreign companies in American markets. Our trade deficit and international borrowing will decline.

Interest rates will also decline, since lenders will not have to pay income or Social Security taxes. Companies will ba able to refinance higher-cost debt. The elimination of most income taxes and the decrease of tax-related operating costs of businesses, with the prospect of increased profitability and of higher dividends, should spark a strong stock market.

Many businesses will use the higher stock prices and the STR-created opportunity of paying untaxed dividends as an opportunity to sell new stock in order to expand their operations or to retire debt and reduce their debt ratios. The strong economy and lower financing costs will also encourage a surge in capital investment. Collectively, these economic improvements will increase jobs and incomes.

Despite the decline in prices, because of the new federal consumption tax, there will be some initial retail inflationary pressure. However, from the very first year, for most Americans the benefits are likely to far out-weigh the disadvantages. Real incomes and standards of living will rise even with the new consumption tax. The capacity to save and to pay down debt will increase dramatically throughout the economy--for households as well as businesses. There will be a very significant inflow of funds into the financial markets.

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(2) How would Sensible Tax Reform affect exports and imports?

One of the strongest arguments in favor of discarding our current federal tax systems in favor of STR is America’s dreadful international economic performance. We export much less than an economy of our size is capable of doing: China and Germany, both much smaller economies, export much more than we do. Even worse is our massive amount of imports. We often import $700 billion more goods every year than we export--almost $2 billion each and every day! That is lost economic growth. It also means the loss of hundreds of thousands of jobs. And to pay that huge excess-import bill (each and every year), American companies and the U.S. Government need to borrow most of the needed funds from governments and private investors abroad.

Today, when American companies sell, they have already embedded in their prices more than $1 trillion of annual tax-related costs. Those costs are, of course, passed on to their customers in the form of higher prices. Under Sensible Tax Reform, those tax expenses will be lifted from companies. They will have the capacity to compete much more aggressively against their foreign competitors, which in general already have much lower effective tax burdens, in both export and import-competing markets.

  • American exports will rise substantially.
  • Our imports should drop and domestic production increase significantly.
  • Our balance of trade deficit will decline rapidly.
  • Our need to borrow abroad will decline.
  • Our companies and their profits will grow.
  • There will be very strong job growth, especially in import-competing and exporting industries.
  • Fewer American companies will outsource their production of goods and services.
  • Many of those that have already outsourced will bring some of those jobs and factories home.

International business is very important to the American economy. Our existing federal tax system hurts our businesses in many ways. Sensible Tax Reform will be very benefitial for U.S. businesses, workers and the overall economy.

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(3) How would Sensible Tax Reform affect America’s international indebtedness?

America’s unwillingness to live within its means is disgraceful!

  • It undermines our economic strength.
  • It weakens our government.
  • It even weakens our own ethical principles.

The United States used to be a nation of thrift:

  • Our citizens saved 8-10% or more of their income.
  • Businesses had much lower debt ratios.
  • Our government ran deficits that were much lower relative to the size of our economy, even running surpluses as recently as the late 1990s.

Now we have become a nation of spendthrifts. The savings rate of individuals in this country is among the lowest among industrialized countries, while household debt skyrockets. Businesses borrow aggressively, even borrowing to buy back their own stock. And, since the early 2000s, our federal government has thrown all semblance of fiscal discipline away as it runs massive deficits year after year.

The unwillingness of Americans to save, coupled with our annual international-trade deficits of $700 billion, forces American businesses and the federal government to borrow heavily abroad. The federal government’s debt alone is $19 trillion. Almost $4 trillion of it has been borrowed from foreign governments--more than $1 trillion from both Japan and China!

Sensible Tax Reform will:

  • Greatly reduce our trade deficit;
  • Allow the federal government to reduce its budget deficits;
  • Encourage businesses and individuals to live within their means; and
  • Substantially increase the flow of both domestic savings and foreign capital into our financial markets.

As a result, both our reduced need to borrow and our increased ability to finance domestically will greatly slow the increase of our foreign borrowing.

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(4) How would Sensible Tax Reform affect employment?

A $500 - $700 billion annual trade deficit represents an enormous drain on the domestic American economy. It has resulted in the loss of millions of jobs. Whether they are factories moving to China or service centers to India, the loss of American jobs is part of the price we pay for our weak performance internationally. Entire factories, companies and even industries have been off-shored. Some of that loss is irretrievable: once lost, it is unlikely to be reclaimable. However, many other factories can be brought back to the U.S. STR will allow a leveling of the global playing field. Hundreds of thousands of jobs can be saved and millions more can be created or brought home.

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(5) How would Sensible Tax Reform affect interest rates?

Interest is the price that is charged for renting money. Interest rates are a composite of many different factors, including demand, inflation, federal monetary policy, default risk--and the taxes that lenders, both commercial and individual, must pay on their profits from lending.

If lenders do not need to pay income, Social Security and Medicare taxes, interest rates will fall. Under our present system, the interest paid by municipal governments (e.g., cities and states) is not subject to federal taxes. As a result, the interest rate on such municipal debt (“munis”) is often lower than even the federal government must pay. Under Sensible Tax Reform, since most income will not be affected by federal taxes, interest rates will fall toward the level of “munis” today.

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(6) How would Sensible Tax Reform affect inflation?

There are many different measures of inflation. They each measure the impact of costs upon different sectors of the economy (e.g., wholesale prices, consumer prices, import prices, cost of living, etc.) The different measures will be affected in very different ways by STR. Wholesale prices will undoubtedly fall because of the reduced costs resulting from the removal of business taxes. Also, many U.S. import prices will likely decline as foreign producers strive to remain competitive with domestic producers.

Measuring the impact upon consumer inflation will be much more difficult. Indeed, it may even require a new measure of inflation. Consumer prices will decline for the same reasons as wholesale prices. Retail costs (prices plus taxes), however, will increase. Thus, a retail inflation index that omits taxes will decline. One that includes taxes will rise somewhat.

However, a broad-based inflation index that would include the decline of other costs resulting from Sensible Tax Reform (e.g., the elimination of income and Social Security taxes, tax-compliance costs and the taxes embedded in what we buy) would provide the most accurate measure of tax changes for consumers. In the first year, there will likely be an inflationary effect due to a natural slowness of businesses to pass through cost reductions (from the $1 trillion of tax and tax-related savings) until they fully understand that those savings are large and permanent and until competition forces a drop in prices. Such an index would show that the elimination of tax costs significantly offsets the costs of the new federal consumption tax in the first year and completely offsets them in later years for most Americans.

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(7) How would Sensible Tax Reform affect the stock market?

STR will produce many changes that will greatly benefit stock markets:

  • Production and sales will grow rapidly.
  • Profits will rise.
  • The economy will be very strong.
  • Interest rates will decline.
  • Dividends will increase significantly.
  • Inflation will decline.
  • Our balance of trade will improve.
  • The dollar will strengthen.

All of those are factors that affect the stock market favorably. STR is likely to produce a very strong stock market.

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(8) How would Sensible Tax Reform affect the astronomical level of debt in the U.S.?

Businesses will have a wonderful opportunity to reduce their debt levels with the introduction of STR. Costs will be down. Profits will be up. The cost of equity financing (i.e., selling new issues of common stock) will decline, since dividends will no longer be taxable to the company (or to the recipient either). All of these factors will encourage businesses to reduce their debt levels. In addition, much of the remaining corporate debt can be refinanced at the lower interest rates that STR will bring.

Households will also experience lower interest rates. The interest paid on personal debt, however, will be subject to the federal consumption tax. The effective cost of borrowing for consumers may rise under STR. The tax will encourage Americans to be more frugal, borrow less and save more. That will be very beneficial for both our society and our economy.

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(9) How would Sensible Tax Reform affect savings in the United States?

America, the richest country the world has ever known, has one of the lowest savings rate of any developed country in the world. That is a tragic and dangerous condition. We do not save enough domestically to finance the borrowing needs of our households, companies and governments. As a result, America borrows abroad more than half a trillion dollars every year. Those are very unhealthy, even dangerous, trends. We must both increase our savings and reduce our borrowing--especially our foreign borrowing.

STR will greatly increase the ability of Americans, especially the middle and high-income groups, to save and invest for our futures. With uncertainties about Social Security and Medicare and worry about the safety of retirement plans, we must do a much better job of saving and providing for our own futures. Under STR, the real income of most Americans will greatly increase. We will have the opportunity to save much more for our futures. Those savings will reduce America's need to borrow abroad.

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(10) How would Sensible Tax Reform affect charities?

Charities should be very supportive of the STR tax system. Americans will be wealthier and therefore more capable of making donations. Donations will not be subject to the federal consumption tax. And, there will be unlimited charitable deductions for both ordinary income and estates.

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(11) How would Sensible Tax Reform affect the mafia, drug dealers and other crooks?

The Internal Revenue Service estimates that the “tax gap” (the amount of taxes that is due and should be paid but which is either overlooked or deliberately evaded) exceeds $400 billion annually. Crooks, of course, do not generally report any of their ill-gotten income. They also cheat by not paying Social Security and Medicare taxes. However, many legitimate businesses and individuals also cheat on their taxes by failing to file, overstating exemptions, deductions and credits, and especially by under-reporting income.

Under Sensible Tax Reform, businesses will owe neither Social Security/Medicare nor income taxes. Individuals will owe no Social Security/Medicare or estate taxes and only the very rich will owe any income taxes. Most of the current sources of the tax gap will find it very difficult to cheat the federal consumption tax. It will be much harder for crooks to avoid taxes because they will be taxed when they spend. Even the mafia and drug dealers spend most of their income domestically in the U.S. Although their illegal income cannot be taxed, their purchases on houses, cars, jewelry, clothes, etc. will be subject to the FCT. They will increase federal tax revenues significantly.

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(12) How would Sensible Tax Reform affect foreign visitors to the U.S.?

Foreign visitors to the U.S. spend money here and will be treated just like American residents will be: They will be charged the FCT on their purchases here. Most foreign countries already charge a national consumption tax on all purchases in their countries--the value-added tax (VAT). Americans traveling abroad on business or vacations are subject to those taxes on everything that they purchase abroad. Foreign visitors here will thus be treated just as American visitors are treated abroad--which is not the situation now.

There will be a procedure for a rebate of the tax (or part of it) on purchases of large items that foreign visitors take with them or ship home (e.g., clothes or electronics). This will be similar to how most countries with VATs treat Americans traveling in their countries. This would be consistent with STR principles of equity and consistency, since such purchases by foreigners are actually our exports. Sensible Tax Reform will not tax any exports.

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