The right wing think tanks regularly pump out ideas for tax proposals which on the surface sound appealing to the majority of Americans who loathe seeing as much as fifty percent of their paycheck eroded each week by the tax man. Who could blame a working class American for appreciating the idea that they would have the ability to control 100% of their paycheck if we simply instituted some version of a Value Added Tax or the "Fair Tax" as these right wing pundits call it. Of course the reality is that this tax would not raise enough revenue to replace the progressive income tax and it would further shift the burden of taxation onto the backs of working class Americans, and virtually eliminate taxes for the wealthy with exemptions for business use of goods purchased, and the pundits rarely explain that side of their lopsided equation.
Presently about $1.2 trillion of revenue to the US Treasury comes from the payroll tax which provides funding for Social Security and Medicare benefits. I would propose NOTHING to replace this system because it works well. I would agree that removing the cap on the payroll tax would help increase the solvency of two of the most vital entitlement programs that America has developed to ensure a social safety net for the elderly and the disabled, but that is not the subject, nor the focus of this article.
The same right wing pundits often call for the elimination and repeal of the corporate income tax because loopholes in the tax code have reduced the revenue it generates to far less than the amount raise by the payroll tax, and "corporate taxes are bad for business." I agree. We should eliminate the corporate income tax altogether.
The same right wing pundits also often complain about the capital gains tax and suggest that high capital gains rates discourage reinvestment and growth by business. I agree, let's eliminate it entirely. But not for the reasons that they suppose, but rather because unless and until an investor decides to realize a gain, this income can, will, and does remain untaxed anyway.
These same right wing pundits argue that it is unfair to tax people at different rates and that the progressive income tax discourages people from making more money because when they make more money the government taxes them more. Of course this makes it clear that they have absolutely no understanding of how the progressive income tax actually works, or are simply bald faced liars, but again, I'm going to agree with them, and say, yes, let's repeal the income tax. It is unfair to the working class, more so than the wealthy, and unlike most, I believe there is a tax the federal government could impose to replace the revenue lost by the repeal of the corporate tax and the income tax which would make taxation more fair. I also believe that imposing this tax would allow the government to eliminate the problem of sheltering income from taxation by holding income in overseas tax havens.
So what is the tax, and how could it possibly be more fair than the "Fair tax" or the current system of progressive income taxes?
FIRST, it would free up massive amounts of capital for consumers by eliminating all, but the payroll tax burden from the poor, middle, and working classes. The considerable influx of consumer dollars would cause a major stimulus to economic growth.
SECOND, it would eliminate international income shifting as a tax advantage, which would encourage business to invest their resources into the most productive economies to ensure the greatest return on investment, which gives the United States of America a MASSIVE ECONOMIC ADVANTAGE!
THIRD, comparable taxes to this tax already exist and are regularly imposed on the American middle class, so it would be hard for the wealthy to suggest that the tax was unfair.
FOURTH, the tax would raise between $2.5 and $3.5 trillion in revenue annually depending on the rate at which the tax was imposed, and the fluctuations in the tax base.
FIFTH, more than 90 percent of the tax would be paid by the top 10 percent of income earners, AND, the typical annual costs paid by those taxpayers for management fees associated with what will be taxed are ALREADY GREATER than the tax to be imposed, meaning the cost is negligible for the taxpayer.
SIXTH, the system of taxation I propose to replace the income tax not only encourages economic growth, it demands it. If a business fails to grow its revenue, there is a very good chance it won't continue to exist under this system of taxation, unless it is a company that makes a steady profit equal to 10 or 20% of the company's value annually, which is not atypical for many private businesses.
SO WHAT IS THE TAX?
If you are poor, middle, or working class, you more likely than not already pay a similar tax, as I have said. If you own a home or any other real estate, you definitely pay a similar tax, and if you own a car in some states you directly pay a similar tax, and in all states, similar costs of ownership are imposed by the state upon you. Between 1 and 3 percent of the value of real estate is charged as property tax in most American taxing jurisdictions.
Presently, the residential real estate market in the United States, which includes the one room shack in the woods and the mansion on the beach or the penthouse in Manhattan is valued at approximately $25 Trillion. For most Americans, their biggest asset is their home, and they pay an annual tax to own that asset, and once you factor out the value of those mansions or penthouses, it becomes quite obvious that the average American home, isn't really a huge asset, but the poor, middle, and working classes pay a large portion of their income to the tax man to keep that asset.
Yes, the wealthy pay taxes to own a home too, but for the wealthy, their home is often a small portion of their assets. The largest portion of the wealthy's assets are held in securities, which include corporate stocks, bonds, options, membership interests in limited liability companies, limited partnership interests, swaps, and other exotic derivatives. The same holds true for corporations which own subsidiaries, and keep their cash in bonds, or invest their money into other liquid securities, i.e. the stock market. The publicly traded securities, i.e. the companies listed on the New York Stock Exchange or the Nasdaq and their options, are valued at approximately $20 Trillion, which might lead some to believe that the wealthy keep their money in their homes too, especially since about $2 trillion worth of pension assets are held in the stock market. Of course, the public securities market is merely the tip of the iceberg when it comes to US securities ownership.
The total value of publicly traded, and privately held securities in the United States, this includes US foreign investments -such as Mitt Romney's Cayman Island's corporation- are valued at IN EXCESS of $100 trillion. When the wealthy hold securities through Hedge Funds or Mutual Funds they often pay the managers of these funds 2% of the value of the assets held in the funds, and 20% of the growth in value of the fund annually, in fees to the fund managers.
The tax I propose replacing the progressive income tax with, is a tax on retained income held in securities. Essentially a property tax on securities, paid annually as a cost of ownership for the biggest asset class owned by the wealthy.
To level the playing field I would exempt from taxation any securities held in a pension plan's trust account, which would include public employee benefits plans, and IRAs and 401(k)s or similar pension plans. This would mean that $2 trillion worth of assets held by the working class would be untaxed, but in excess of $100 trillion of securities held, primarily by the top 10 percent of American income earners and corporations would be subject to tax.
The tax would apply to all assets held worldwide, which would mean that the Bahamas corporation where a major US company stashes its international profits to avoid the US income tax would be subject to the US securities asset tax every year, so they can continue to do that with their income as long as they want. More importantly, it would mean that Warren Buffet who paid a lower tax rate than his secretary, despite owning $72 billion in assets would face a hefty tax next year, well in excess of his current rate, as would Donald Trump, and Bill Gates, and Michael Dell, and Jack Welsch, and a ton of Hedge Fund managers on Wall Street.
What tax rate would I propose be imposed on these securities? 2.5%, which is roughly equivalent to the property tax rates that the poor, middle, and working class pays to own a home, and FAR LESS than the 2% asset value and 20% of growth fees that the wealthy pay fund managers to invest in securities for them. In other words, this is a negligible tax for the wealthy.
It won't only impact the wealthy though. It will also impact the neighborhood restaurant that operates as a corporation, where the owners take home $75k a year in income before taxes, and the business is valued at $500K. A 2.5% tax on that asset would mean that the business owner is paying $12,500 in the new securities tax, and depending on how they structure their salary from the business, could be paying an additional $11,250 in payroll taxes if it is all salary. In other words, their taxes would remain fairly comparable to the old rates if they operated as an S Corporation. However, that same business owner could dissolve the corporation and operate their business as a sole proprietorship and pay $0 in the new securities tax. What do you think that small business owner would do with the tax savings? Buy a new pool? Invest in improvements for their business? Pay their workers a little better? Start another restaurant?
More importantly, what happens to the members of their wait staff who make $25K a year now, and pay the tax man considerably less in taxes next year? I bet they spend that found money, which creates more demand, which causes business to expand. What do you think?
Here is the more important question though, let's assume that you are a major US electronics manufacturer, such as Apple, who has billions of dollars in cash parked overseas that is doing very little economic good because repatriating the money to the US will cost you a large amount in taxes. Under the new rules, you will be taxed for that money, no matter where it is held as the value of your securities assets including the foreign subsidiary corporation you are holding it in, will be taxed. Do you bring that money back into the US where the money will only be taxed once, or do you invest it in China where all of the income will be taxed? If I'm Apple, I build the new car factory -if you believe the talk about Apple's next lateral move- in the good ole US of A.