REAL TAX REFORM Our income and payroll-based tax system: • Reduces disposable income; • Stifles consumer demand; • Makes it difficult to save; • Gives employers a major incentive to eliminate jobs; • Creates significant opportunities for tax evasion; • Rewards investors and punishes people who work for a living; and • Concentrates wealth (which is measured in assets, not income). What’s more, this system generates insufficient revenue to fund essential services, resulting in an endless cycle of budget deficits, program cuts, and un-funded program mandates that force states and municipalities to raise local taxes. Unfortunately, the Government’s dependence on income and payroll taxes is increasing, while less destructive taxes are cut or not even considered. Consider these facts: • The percent of revenue coming from income vs. corporate and other taxes has steadily increased over the past 20 years. • Taxes on corporate profits have declined from high of 52% in the 1950’s to as little as 15% today. • During the same period, taxes as a percent of total income increased from 27% to 32%. • To make matters worse, taxes on wealthy individuals making more than $500K declined from 91% in the 1950’s to just 40% today, shifting the tax burden from high to middle income taxpayers. Most “tax reform” proposals do little to reform the system. “Liberal” proposals focus on cutting taxes for “poor” and “middle” income wage earners (as defined by government regulators!). But they leave the income and payroll-based tax system, with its myriad deductions and opportunities for fraud, virtually in tact. These proposals offer no relief from Social Security and Medicare taxes, which take 8% of a minimum wage earner’s salary but exempt income over $90,000 from taxation. What’s more, by focusing on redistributing income instead of wealth, these proposals do little to stop the transfer of wealth from people who work for a living to those who live off their investments. “Conservative” “sales tax” proposals seek to eliminate taxes on investment income by replacing the income tax with a tax on goods and services. Because everyone is taxed at the same rate and lower and middle income families spend a greater percentage of their income on goods and services, these proposals actually accelerate the transfer of wealth from people who work for a living to the new “investor class”. Taxpayers with the highest incomes benefit the most, and those with the most property and assets benefit most of all. “Conservative” “flat tax” proposals focus on “simplification”. These proposals eliminate most deductions, but because they also tax everyone at the same rate, taxpayers with the highest incomes get the most relief, and most wage earners would continue to pay 25% of their income and in Federal taxes! None of these proposals offers significant relief to people who work for a living. The only way to lower taxes for the vast majority of Americans is to shift from a system that taxes income to a system that taxes profit and wealth. Start with the following principles: Our tax system must: • Generate revenue sufficient to fund “world class” health, education, and retirement benefits, as well as defense and discretionary spending priorities; • Eliminate the national debt without chronic deficit spending or unfunded mandates that shift the tax burden to states and municipalities; • Increase disposable income to promote consumption sufficient to drive the economy; • Be broadly progressive in terms of distribution of wealth; • Provide for adequate capital formation; • Be fair and enforceable. Here’s how to accomplish those goals: 1. Eliminate all payroll taxes (including the Social Security and Medicare taxes) on income up to (20) times the current poverty level (approximately $400K for a family of four based on 2005 Census and HHS guidelines). 2. Tax all income (including capital gains) exceeding (20) times the current poverty rate at a 90% rate (in other words, restore the top tax bracket to where it was in the 1950’s). (Revenue generated: $600 billion). 3. Impose a 5% Federal Assets Tax (“FAT cat” tax) on assets exceeding $500K (excluding primary and secondary residences, retirement savings, and family-owned farms and businesses valued at less than $2 million). (Revenue generated: $700 billion). 4. Impose an 8% business gross receipts tax dedicated to funding Social Security and our national health care system. (Revenue generated: $2,000 billion). 5. Tax corporate profits at a rate of 50% (in other words, restore the rate to where it was in the 1950’s). (Revenue generated: $416 billion). Such a system would generate $3,716 billion in annual revenue---sufficient to fund expanded health, education, and retirement benefits and other essential programs without deficit financing. By contrast, the current tax system generates $2,057 (billion) annually--- insufficient to fund the current $2,422 (billion) budget without deficit financing, let alone expanded health, education, or retirement benefits! Because personal income and payroll taxes would be eliminated for all but the wealthiest taxpayers, most Americans would keep what they earn to spend or save as they pleased. By taxing assets as well as income, the system would be “progressive” where it counts most---in terms of actual wealth. Even if gains were partially offset by higher prices, most Americans would see a 20% increase in their disposable incomes. Because fewer individuals would be subject to the tax and most deductions and tax shelters would be eliminated, the system would be easier to enforce. In addition, because proceeds from the 8% business gross receipts tax exceeding current obligations would be invested in private sector fixed-rate securities (as opposed to Federal debt), the system would create a huge pool of new investment capital (approximately $200 billion annually if benefits were expanded as suggested here; $1,000 billion annually if benefits were kept at current levels). What’s more, the return on these investments would be shared by all Americans, instead of a small “investor class”, creating the first genuine “ownership society”.