Thursday, October 13, 2011

Why care about revenue neutrality?

Watching the debates, it seems the first question Herman Cain gets about his 999 plan is whether it will be able to raise as much tax revenue as the federal government as does the current tax system.

I find that to be a fundamentally wrong-headed question.

After all, we are suffering from a federal government which is spending on way too many things that go beyond the common defense and general welfare of the country. Maintaining the flow of resources from the private sector in to the hands of bureaucrats is the last thing we should be worried about.

9% income tax rate

Under the current system, incentives to make more money are distorted all the way from the poorest to the riches. At the low end, there are so many programs and subsidies for people who remain under certain income limits that it may not pay a poor family to exert the effort to earn 10% more. At the higher end, people who are close to various thresholds between $100,000 and $1,000,000 annually may see close to 60% of any additional income they make disappear.

Sure, when you are comfortably making millions year after year, you can end up hiring good tax lawyers who reduce the ratio of income taxes you pay to the income you make, but that also comes at a cost and not just to you. The rest of the economy suffers because there is nothing but waste in you and your smart tax lawyer doing nothing but trying to figure out how you can avoid paying tax. You can use that time to actually produce goods and services people want. Your tax lawyer or accountants may direct their efforts into providing their services in other pursuits than just helping people avoid the tax man.

A flat tax income tax does that. I am not averse to having first chink of income we earn be exempt from federal income taxation. What size chunk? Something like the Poverty Thresholds 2009 published by the Census Bureau may be used for guidance here. I figure $15,000 is a good round number. Thanks to Herman Cain's 9% federal income tax, the incentive to earn beyond that chunk is not distorted much: Every extra dollar you earn would always bring in 91 cents after the federal government takes a bite.

Now, there are also state, county, locality taxes, I know. But, those will be there no matter what the federal government does. The existing federal income tax structure did not prevent New York, Illinois, and other states from jacking up their tax rates. A comparison of, say, Indiana's income tax forms to New York's will show you what I mean.

Therefore, it is incumbent upon you to put pressure at the local, city, county, and state levels to get government spending under control.

Is the local sales tax in your village being used to offer free child care at the local library? Why is there a local library to being with?

Is the mayor in your town also a state representative who is not only drawing two salaries from the two positions but is going to have two pensions after he retires at age 42 until he passes away (which, at the rate medical advances are being made may take another 40 years)? Speak up. Elect people who will stop the gravy train.

9% national sales tax rate

Yup, that's going to increase prices you pay for things you consume. Yup, lower income individuals will pay a greater share of their income in sales taxes. But, then, lower income individuals pay a greater share of their earnings in payroll taxes already. With the payroll tax gone, you'd have more disposable income.

In addition, all those business who supply all those items you want will have to pay less to keep lawyers and accountants busy. Reduced "cost of doing business" would make producing and providing goods and services people want a more profitable activity. That would put downward pressure on prices.

9% business tax rate

The important thing here is to eliminate double taxation of dividends which reduces the incentive to invest and increase productive capacity. Plus, with all the special exemptions for this or that politically preferred activity gone, business would be less inclined to waste resources on unproductive activities. For example, switching to all LED light bulbs for no other reason than that it would make some bureaucrat happy is a waste.

The important thing to keep in mind here is that, in the long run, the consumer ends up paying all costs of the business. Lower those costs, reduce barriers to competition, and prices go down.

What revenue neutrality?

Projections made today using data based on the current mess of taxes and regulations cannot tell you what will happen in a future of clear and concise rules. They can only tell you the effects of changes around the edges.

A lower, flatter income tax rate is a key ingredient of a growth oriented economy. There are other ingredients, such as free markets in health care, a health insurance system where you are free to shop for coverage that fits you, privatized personal retirement, private education markets etc also play a role.

Tossing out the current system in favor of a clear and simple one would send a strong signal that the U.S. going to avoid the lost decades of Japan. Positive outlook means growth.

Growth is what we need.

Not making sure Goliath is kept well-fed at all times.

1 comment:

  1. Along with 999 plan, I would eliminate the capital gains taxes on equity gains as they clearly represent double taxation.

    We need a low flat tax for fairness as well as sustained growth and global competitiveness. Also just think of the government costs to be saved from elimination of the IRS (or its size being greatly reduced) and the effects of its reach (all the tax lawyers and CPA's who make a great living now). That is exactly why it will never happen. Too many interests involved by parties who run the government.

    The only workable solution, I am afraid, is secession of conservative states from the union and banding together as a new constitutional republic that will undo a century of damage done to the Constitution by politicians and activist courts.