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Chapter 28: Both parties wrong about taxes

August 24, 2012

“I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.” —British Prime Minister Winston Churchill 

“Politicians never accuse you of ‘greed’ for wanting other people’s money—only for wanting to keep your own money.” —American journalist Joseph Sobran

“Manipulating taxes to favor or disfavor particular industries, groups or regions is a source of power that Democrats and Republicans alike are loath to surrender. That’s why major tax reform fails, despite routine endorsements from both parties.” —American journalist Robert Samuelson

What’s wrong with our tax policies

  • Citizen distrust. The federal tax code is so complicated and full of loopholes that the typical citizen can’t even file a tax return without expert help. This creates a drag on the economy due to the thousands of accounting and tax jobs that would otherwise be unnecessary. It also requires huge federal bureaucracies—paid for by taxpayers—to monitor and enforce compliance. Most important, this system undermines the trust in government that is so important in a free society and encourages class warfare.
  • Political corruption. Instead of setting tax policies that are good for the economy (and therefore good for the people), politicians use tax policy to favor their friends and punish their enemies. “Elections have consequences” usually means that Big Business is favored when Republicans are in power, and Big Labor is favored when Democrats are in power.
  • Corporate tax loopholes. The 35 percent federal corporate tax rate is too high, but it’s a misleading statistic. Only about 25 percent of corporations actually pay 30 percent or more; another 25 percent pay 10 percent or less or get money back because of loopholes and tax credits. These statistics show how broken the system is thanks to our politicians, Big Business lobbyists, and their loopholes and tax credits.
  • High tax rates hurt the middle class. Higher tax rates hurt the middle class most—especially consumers and small businesses—because big businesses can move their investments to foreign countries with lower tax rates when our tax rates are too high.
  • Class warfare. Democrat demagogues incite fears and encourage class warfare with their calls to “tax the rich”; Republican demagogues do the same with their railing against welfare recipients and their calls for “no tax increases.” Both positions are irrational. Citizens must be smart enough to see through the politicians who talk this kind of nonsense.
  • No tax increases? Republicans who have signed the “no tax increases” pledge are fiscally irresponsible and politically dishonest. The government can’t continue to spend 25+ percent more every year than it takes in—any more than a family can—without soon facing bankruptcy.
  • Tax the rich? Democrats who argue that taxing the rich will solve the nation’s deficit spending are fiscally irresponsible and politically dishonest. If the government imposed a 100 percent tax rate on all income over $250,000 annually, it would only cover 141 days of government spending—with nothing left for the other 224 days of the year. And that’s assuming that none of the rich individuals flee the country to avoid the 100 percent tax rate; obviously, many would leave. Taxing the rich won’t solve the problem; it’s just a way for dishonest politicians to dupe gullible voters and avoid facing up to our nation’s spending problem.
  • Deficit spending. Deficit spending and excessive borrowing hurt the economy, weaken the dollar, and undermine the economy. Only governments think they can get away with spending more money than they have—and it can’t work for them over the long haul either.

 How to fix our tax policies 

  • Get spending under control. Once we remove the career politicians, we’ll be able to limit the roles and spending of government. (See the chapters titled “Career Politicians,” “Election Reform,” “Deficits,” “Entitlements,” “National Security,” and “Poverty.”)
  • Simplify taxes to build trust and stop political mischief. Freedom is at stake when the income tax code is so complicated that the typical citizen can’t understand it. Complicated tax structures open the door to political mischief, special interest lobbying, class warfare, and citizen distrust. All loopholes and deductions should be phased out, with the exception of charitable deductions; this would allow lower tax rates to be phased in. (Gently phasing in these changes is important to avoid disruptions.)
  • One-size-fits-all flat income tax rate. What could be fairer than a flat tax rate that applies equally to all personal income, including capital gains? A 10–15 percent income tax rate should suffice once spending is under control and loopholes are phased out. People wouldn’t pay any income taxes at all on the minimal amount that qualifies them for the negative income tax (as described in the “Poverty” chapter). On all income above that minimum amount, we would all pay the same percentage. The more you earn, the more you’d pay—but the percentage would be the same for everyone above the poverty level.
  • Globally competitive taxes. We live in a global society in the twenty-first century, so tax policies and tax rates must be competitive with those in other countries. The smart thing is to make sure our taxes (on the whole) are competitive globally in order to encourage investment in America. This should always be possible if we don’t overspend or engage in political gamesmanship.
  • Tax consistency. Businesses and consumers hate uncertainty, and uncertainty weakens the economy. (See more about this point in the “Economics” chapter). Consistent and competitive tax rates and policies would ensure a vigorous economy and therefore provide the government with a reasonably consistent flow of tax revenues. If combined with reasonable government spending, we would have balanced budgets.
  • Corporate tax reform. Get rid of the corporate tax code that puts smaller businesses at a huge disadvantage when competing with larger businesses. Substitute simplified business taxes that won’t require armies of accountants and tax consultants. US corporations should be taxed on their worldwide income, with credits for taxes paid in foreign countries. But the corporate income tax rates must be competitive globally so companies won’t be so motivated to park their offshore earnings in other countries.
  • Progressive corporate income taxes. Introduce progressive corporate income tax rates. Smaller companies might pay very low corporate income taxes, but the tax rate would gradually become higher as the company grows. This would discourage monopolies and encourage the voluntary breakup of huge companies into smaller (not “too big to fail”) companies. (See the “Big Business” chapter for the reasoning behind this proposal.)
  • Stop the crony capitalism tax breaks. The government should stop giving special tax breaks to selected industries. Special breaks simply open the door for more lobbying by big companies and more payoffs to politicians.
  • Tax pollution instead of regulating it. As explained in the “Energy” chapter, imposing higher consumer taxes on energy sources that pollute would be a more efficient and effective way to help the environment long-term.
  • Legalize, control, and tax drugs. As explained in “Crime,” ending the war on drugs would bring huge benefits to our society. The new tax revenues would help eliminate government’s deficit spending too.
  • Stop the class warfare. Citizens need to be smart enough to expose and condemn politicians who incite class warfare over tax policy. The top 20 percent of earners pay 85 percent of all income taxes, and that’s okay. Most successful people don’t mind paying more taxes than the less successful as long as the system has integrity and overall tax policy is competitive globally. Broader and lower taxes, along with phasing out tax deductions and special interest loopholes, would restore integrity and consistency to the tax system.
  • Negative income tax. The federal government should replace all its failing poverty programs with a brilliantly simple negative income tax. This would be the best way to avoid the class warfare toward which the nation seems to be careening. (See the “Poverty” chapter for more details about how the negative income tax would work.)

“The only difference between a tax man and a taxidermist is that the taxidermist leaves the skin.” —American author and humorist Mark Twain

 “[The IRS’s] contempt for citizens…is so routine, and so unlimited, that the agency has become a kind of Frankenstein, running wild and terrorizing Americans at will. The IRS hypocritically requires mistake-free returns when its own books are in shambles. It demands exorbitant sums of money without regard to the accuracy of its claims. It doesn’t hesitate to use every possible maneuver to get what it wants, sometimes destroying businesses—and lives—in the process.” —Libertarian author James Bovard

 “As I went about with my father, when he collected taxes, I knew that when taxes were laid someone had to work hard to earn the money to pay them.” —30th U.S. President Calvin Coolidge

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