Tax Reform

1. Income Tax only covers a small portion of real income and wealth in the form of ownership.
It is also important to consider that when we are discussing income tax, we are only the “adjusted gross income.” That is after they have used every deduction, tax shelter, hidden money in off-shore accounts and otherwise limited the small portion of their incomes on which they actually pay taxes.

The income tax also excludes all the additional income they receive from capital gains (taxed at only 25%) made on their investments and the value of their perquisites and stock options which will also eventually be taxed at the modest gains rate. It makes no attempt at measuring “net worth” or the “owned value” of their multiple estates, yachts, airplanes, memberships to elite clubs often costing over a $ million, stocks or other ownership of business – or [only a little tongue in cheek] the Congressmen they own. It does not include the way that low estate taxes allow the accumulation of wealth to be transferred from generation to generation in a way that at least imitates the wealth and power of nobility in previous times. So when we talk about seriously reducing their after tax income, we are only talking about a very small percentage of what gives them undue advantage over everyone else.

2. Eliminating Tax Exemptions
First of all, we propose that virtually all exemptions be stripped from the tax system. Exemptions are one of the most corrupting influences on all levels of government. They are the result of all sorts of backroom politics, and are bought by campaign contributions and outright bribes. They allow one party to benefit in ways not granted to others. They are absolutely contrary to the democratic principles our country is based on. It would seem that proponents of the so-called “free market” would be the first to insist that exemptions not be allowed because they are contrary to their “principles.” Exemptions clearly and necessarily interfere with the free market. In the fairest system, all income from all forms would be taxed at the same rate as earned income. Removing all exemptions and tax havens leaves personal economic decisions to be made solely on their own merits without arbitrary limits or incentives. Tax advantages distort economic decisions toward the interest of one particular group. Where incentives are needed for the benefit of society or the economy at large, there are other, fairer ways to provide a boost for worthy goals.

Another major advantage implicit in eliminating all exemptions is that the tax structure would infinitely simplified. Without a million complicated regulations and exemptions, “gross taxable income” would be identical to what is today the “adjusted gross income.” There are no adjustments to taxable income or any of the painfully wasteful processes of trying to maximize deductions. With the elimination of all adjustments, the games, cons and dodges are all gone. The need for hoards of tax consultants to understand the arcane tax regulations [which run thousands of pages of mind-numbing accounting babble], to produce the complicated forms and the similar mass of IRS employees needed to check our deductions and the calculations is almost completely eliminated – and all the costs implicit in the process. I have seen numbers on the possible savings that result from tax simplification: They are very large numbers. We have better ways to spend that money.

The simplifications brought about by eliminating exemptions are exactly the same arguments made by those like Steve Forbes in support of a “flat income tax” based on a single “tax rate” for everyone regardless of their total income. Or alternately, a “flat sales tax” as the only tax. Good idea Steve. But there is no reason to couple the elimination of exemptions and loopholes to the flat tax rate which favors the wealthy instead of the common wealth. Such a flat tax always hits the poorest the hardest – taxing necessities more harshly than luxuries.
No tax deductions are assumed in our proposal.

3.How a “Progressive” Tax Works
Many people think that if a progressive tax has a highest rate of 90% as it did in the 1950s, it means that those people in that bracket pay 90% on every dollar they earn? How could that be fair. The shock of this misunderstanding leads many to reject the idea of a strongly progressive tax as unreasonable from the start and precludes any further consideration of the issue. If this is your understanding, imagine as your income approached a new tax bracket making your rate increase from say 30% to 35% and that a few more dollars in income meant that you would be paying an extra 5% on your entire income. If you got a raise of $2,000 which cost you an additional tax of $3,000 in taxes, earning more money would be a set back. Moving up the tax brackets seems like a step backwards.

It doesn’t work that way. Only that small additional amount would be taxed at the higher rate. If you went $2,000 into the higher bracket, you would pay an additional tax of $700 while your after tax income would go up by $1300. In other words, you always have economic incentive to better yourself. If you hate paying taxes altogether, you can always quit your job. Then you won’t have to pay any taxes at all. Otherwise, taxes are simply a cost of being a citizen of our country and paying your share of our government and its programs according to the level you have been blessed to achieve.

So how exactly does the progressive tax work? Using purely hypothetical numbers for simplicity, let’s say incomes below $30,000 wouldn’t be taxed at all – as they weren’t in the early years of the income tax. That would mean that the first $30,000 everyone makes would be untaxed. If the next bracket tops at $100,000 and is taxed at 10%, everyone at or above that bracket would pay 10% only on the income between $30,000 and $100,000 or a maximum of $7,000. If the next bracket tops at $200,000 and is taxed at 20%, they would pay that only on the next $100,000 making their maximum tax $27,000 [$7,000 + $20,000] giving them a net after tax income of
$173,000. Up to this point, these are close to what people pay today on “first income.” Everyone would get the same net income on the first $200,000 – and so on up the ladder. Confusing isn’t it? There are several points. 1) The “first income” of everyone is taxed at the same rate regardless of how high the income reaches. 2) It needs to be understood that the very rich pay the maximum tax rate only on the income falls within that top bracket.

If we apply this to the current tax rates, what do we discover? Today’s rates top at 35%, an extremely low rate not seen since 1930! Those in the bottom half of the income earners [below $32,000] pay an “effective tax rate” of only 2.99% while the very top income earners pay an effective rate of 22.45%. The best numbers available tell us that the top 400 incomes in our country are all in excess of $87 million each. At that level, they have an after tax net income of $67 million – more than pocket change, wouldn’t you say? But even that is deceiving in that there are a few incomes that are in excess of $400 million, meaning that they would have an after tax income of $312 million. In a country where poverty and starvation still exist, that’s obscene!

Now suppose taxes went all the way to a record high of 99% on income over $87,000,000, the people making $400,000,000 would still get an additional net income of $3.13 million dollars plus something on the order of $9 million net on income under $87,000,000. Even at these historically high progressive rates, they end up with approximately $12 million net income. That’s still a lot of money and is hard to justify in any sense of fairness. These numbers are at least in the ball park and are what they don’t want us to know. These are the Wall Street executives who brought us toxic mortgages, derivatives, who brought the world to economic collapse, and who have just given themselves another $20 billion in bonuses.

Why do we put up with this? In what sense are they earning their [our] money? What have they done to the benefit of our nation? Our answer is “Nothing at all!” They are ripping us off.

If we quit believing that such a strongly progressive tax is in the final analysis unfair,… and if we instituted these rates, it would create something on the order of $2 TRILLION in tax revenue. That’s more than enough to put the budget in the black and pay for the needed programs plus begin to pay down the national debt. And they tell us we should reduce their taxes even further and cut the national deficit by cutting more programs that serve the public need. Who can explain to me again why high taxes for the rich are wrong?

4.The Strongly Progressive Income Tax Works Behaviorally
Now back to the “dampening effect:” For those who are always looking for “more of the pie,”… status, power, etc.: they face diminishing returns for their gambits and gambles. The strongly progressive tax works in a very “behavioral” kind of a way by taking away the results of extreme greed – the more the greedy take, the more the government takes back. There is progressively less incentive for extreme greed. That’s behavioral. Unlike attempts at regulating every minute aspect of the economy, it doesn’t matter how they make their money… it doesn’t matter if it is fair, just or moral… One tax policy covers the entire economy including every profiteering ploy they might create. The need for tons of minute attempts at regulation and the cost of enforcing the rules is all but eliminated. The results are moral without being judgmental or moralistic. Once you begin to let your mind “live within” these ideas, all sorts of positive possibilities begin to flood your mind.