Sensible Tax Reform--Simple, Just and Effective

G. FAQs: Impact upon the Government

(1) How would Sensible Tax Reform affect federal tax revenue?
(2) How would Sensible Tax Reform affect the federal budget deficit?
(3) How would Sensible Tax Reform affect the Social Security and Medicare
(4) How would Sensible Tax Reform affect the need for the U.S. Government to
       borrow abroad
(5) How would Sensible Tax Reform affect relations with foreign

(1) How would the introduction of Sensible Tax Reform affect federal tax revenue?

The STR proposal is designed to be revenue neutral for the federal government. It is strictly a tax-reform program. Although it eliminates most of the social and political engineering of our current Internal Revenue Code, it is not designed to either increase or reduce federal revenues when introduced.

However, the strong economic growth that will ensue from the STR will produce a very substantial increase in the economy in coming years. That will greatly increase tax revenues. Our federal deficit can be reduced and/or our budgetary programs (e.g., defense, infrastructure, education, etc.) financed without raising taxes.

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(2) How would Sensible Tax Reform affect the federal budget deficit?

There have been numerous tax cuts in recent years. All of them have been designed to increase the federal budget deficit and increase the federal debt. As a result of the president’s and Congress’ refusal to live within our government’s means, massive budget deficits are projected annually for years to come. The federal debt has tripled from $6 trillion to $19 trillion, after declining in the latter years of the 20th Century.

Sensible Tax Reform is designed to be revenue neutral in the first year of its implementation. That means that, based upon the projection of government expenditures, the federal deficit will be approximately the same in the first year of the new tax program as is proposed under current taxes. However, STR will produce a much more dynamic economy in coming years. That will lead to higher tax revenues and the opportunity for declining deficits.

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(3) How would Sensible Tax Reform affect the Social Security and Medicare programs?

STR will eliminate the Social Security and Medicare taxation of both individuals and businesses. However, the benefit programs will not be changed. The difference will be that the programs will be funded out of the general federal budget, which will be funded primarily from federal consumption-tax revenues. Under our existing federal tax system, Medicare Part D is already funded out of general revenues. In addition, the rest of Medicare will be in deficit in a few more years and require funding from the general budget--even under our existing tax system. Therefore, the STR transfer of funding to the general budget follows the path of what is already occuring.

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(4) How would Sensible Tax Reform affect the need for the U.S. Government to borrow abroad?

Because our federal debt is so large and our national willingness to save is so poor, the American government has borrowed more than $6 trillion abroad. Most of that has been borrowed from foreign governments, including more than $1 trillion from both the Government of China and the Government of Japan.

This is bad economic policy. But, much more importantly, it places the U.S. Government in a much weaker bargaining position when negotiating with foreign governments on political as well as economic issues.

STR will greatly strengthen the ability of American businesses to compete globally, reduce federal deficits and increase American savings. Those factors will reduce our government’s need to borrow abroad.

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(5) How would Sensible Tax Reform affect relations with foreign governments?

Foreign countries have benefited greatly from America’s poor international economic performance. Their exports to us have soared. Our exports to them have grown much more slowly. Jobs have shifted from the U.S. to foreign countries. Many American companies have moved factories abroad. [The governments of those countries have often lectured the U.S. on its profligacy, but have nevertheless enjoyed the benefits of our bad economic policies.]

Those foreign governments could well be distressed from the prospect of unexpected strategic economic vision that STR will introduce. A variety of past creative tax programs in the U.S. had been designed to stimulate exports, but they clearly violated international treaties and other agreements and were subsequently discarded. A new approach is clearly necessary.

The tax programs of Sensible Tax Reform will have none of those flaws. There will be no basis for foreign objection to the advantages that STR will bring to the United States. We are not obligated to tax business income or to impose Social Security/Medicare taxes. We can freely shift to a federal consumption tax, without the need to seek approval by foreign governments. Most other countries already rely primarily upon their value-added taxes, an alternative form of consumption tax. We would simply be leveling the playing field.

At the same time that their countries have enjoyed the benefits of America’s trade deficits, many foreign leaders have been very concerned about the growing imbalances and weaknesses of the U.S. economy. Our unprecedented budget deficits, a $19 trillion national debt, $500 - $700 billion international trade deficits annually, virtual domination of international debt markets as a borrower, the sub-prime mortgage crisis, the impending Social Security and Medicare crises--all of these and more are indications to foreigners that the world’s sole surviving superpower appears to have lost its way.

Sensible Tax Reform is strategic reform which would show that America has regained economic vision and dynamism. It will be disturbing to some foreign leaders, but most will recognize its desirability. In any event, since STR conforms to global economic norms, other countries will need to accept it.

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