Taxes - A New Beginning to Freedom

The Power Game

Did you ever wonder why the tax code is so complicated? In 1913 the tax code consisted of 400 pages. Compare that to 2012 where the amount of pages of the various tax code laws have ballooned to 73,608 (Income tax centennial: 100 years of income tax code (cnbc.com)). I know I am not an expert in tax law, lawyer, or accountant, but are all those laws truly necessary? I always prescribed to the "KISS" method, keep it simple stupid, when it comes to any process or system. The fewer things in the system the less chance of an issue. In my humble opinion, there is no reason that a sane individual can give me for how our tax system is structured.

It is set up to be a progressive punitive system for those that succeed and provides incentives for those that choose to be less productive. Case in point: the more you make the higher percentage of your money is confiscated by the government. Based upon the chart below, you can see the share of the tax burden is sharply skewed to take money from those that climbed the ladder of success and distribute it to those that are at the lower 50% of income or waste it through various spending programs.

This is only one year worth of data, but if you look at prior years the bottom 50% of the income earners are barely paying 3% of all income taxes to the federal government. What happen to the everlasting words that we are all created equal? There are some in that 50% grouping that actually receive more money back than they pay. This is due to all the credits, exemptions, and deductions. So how is this a fair tax system in which some people can benefit off the backs of others. It seems more like a socialist system of taxation. In the end, all it does is segregate people and create divisions where resentment fosters. I would call it a perfect triangulation strategy of those in power to pit groups against each other so as to divert attention from their inept policies.

In addition to the inequities mentioned above, you have a non-elected agency, Internal Revenue Service (IRS), with 93,00 to 116,000 employees that have a history of abusing their power. Most recently, discriminating against conservative groups regarding their 501C(x) status. Their annual budget of around $12B. In my opinion it is a waste of tax payer money as you should not need to spend that much money to guarantee the appropriate tax receipts. If you think about it, the representatives create a tax code so complicated that it is almost impossible to file a return accurately. Then you have an agency holding a big stick above your head just waiting to hammer you for your mistakes. Yet when they make their own mistakes they just want to sweep it under the rug. We have done better and can do better again.

What is the Solution?

Scrap the over 73,000 pages of tax code and start over. I have long favored a flat tax. In a flat tax system everyone is created equal and shares in the sacrifices of the country. If you make more money you will pay more in taxes since 18% of $10,000 is less than 18% of $100,000. But everyone pays fairly. So what would this new tax code look like:

1. Individual tax rate is 18% with no credits, exemptions, or deductions except health savings account deposits are tax free.

2. Corporate tax rate for on-shore money is 22% with no credits, exemptions, or deductions except health savings account contributions to their employees are tax free

3. Corporate tax rate for off-shore money is 30% with no credits, exemptions, or deductions

4. Tax increases can only be approved by 2/3 majority of both house and senate votes

5. If a budget surplus is generated - 50% of the surplus would go to pay down the debt and 50% would be refunded back to the taxpayers. Once the debt is paid off then 50% would go into a rainy day fund and 50% be refunded back to the taxpayers.

What will this solve?

• Reduction in the number of IRS employees by 80-90% since now you only need a staff to verify the calculations are correct. There are not the various forms to contend with...

• You have a clear obligation of paying off your debt instead of wasting money on more spending programs.

• Businesses get a clear picture of their liabilities and can plan according. In addition, they can lower their labor expense regarding accounting and legal teams since their return is very simple

• You provide an incentive for businesses to maintain on-shore labor since the tax rates are lower for on-shore production. In addition, at the start you could offer a one-time tax break for those companies that want to move their money back to the states.

• It makes it much harder for politicians to increase the tax rate which shifts the burden on the reduction in spending side of the ledger. Like a business it is difficult to raise prices to bring in more money so it is about increasing efficiency and reducing cost.

• Most importantly you have a fair tax system in which everyone contributes to the system and groups are not pitted against each other. As you move up the success ladder you are paying more in real money but as a percentage is the same as anybody else.

The Federal government currently brings in about $2.3T dollars currently. Based on my rudimentary calculations utilizing 2010 IRS data (total number returns in each income group x the average gross income of that group x 18%) I calculated ~$3T of tax receipts. This does not include corporate taxes or any other taxes. So it proves to me that an 18% tax is feasible.

I firmly believe if we go back to the concept of a limited government and keep things simple while providing constraints on our representatives we can implement this system which will not only make it easy for every person with taxable income, but will generate a new industrial revolution in this country that has not been seen for far too many years. There are many out there that would argue different points among this plan. For example, without a home mortgage deduction you are going to reduce home sales. Also, you will not provide an incentive for 401k or IRA savings without their deductions. Simply stated in a free society everyone makes choices. One of those choices is to seek shelter. If I have more money in my pocket rather than sending it to the government and then begging for it back when I submit a return I will spend it on buying a house, condo, or an apartment... It is my philosophy that each individual decides for themselves the best behavior for their life and situation, and we don't need a government entity to tell us or force us to do something. We know our lives and what is best for us. I will buy a house and save money because for me that is the prudent thing to do. Others may choose to rent a house and save money in their bank or CDs.... Bottom line, the main goal of the tax system is to generate funds to pay our governmental obligations. In doing that it needs to allow business to grow and provide jobs so that each person can make a decent living and climb one step at a time up the ladder of success. We survived hundreds of years without 401k or IRA or any number of plans that were setup to get around paying taxes. In the end you will pay the tax on the money whether it is now or later. So let the individual decide not the government

In conclusion, you cannot please everyone and that is not what I was going after. I believe that each of us need skin in the game and it should be equal. You do not need credits, deductions, or exemptions to try to manipulate behavior. A free society is left to their own choices, and I will bet my money on a free society over a society forced into a box any day of the week.

So until next time - Make Each Day Count!

Beach Bum Philosopher