Reforming Our Tax System

Everyone complains about the unfairness of our tax system. Between tax breaks for the rich and exemptions and tax deductions for specific classes of individuals, the Internal Revenue Service (IRS), which employs over 100,000 people, has written 50,000 pages of instructions to comply with the thousands of laws and regulations governing taxes. The paper work burden just to satisfy the voracious appetite of the IRS amounts to an estimated 6.7 billion hours per year and a staggering cost of $225 billion just to keep records, obtain tax accounting advice and then file the necessary forms and payments each year. This boils down to a cost of about $850 for every man, woman and child in the country. There is no dispute that this time-consuming process takes away many man hours of productive labor that should be better spent on producing goods and services to enhance the economy.

President Jimmy Carter had it correct over 20 years ago when he stated that the U. S. income tax system was a “disgrace to the human race.”

There are many fallacies with the current system including the hated tax loopholes enjoyed by the rich. Too often through tax shelters and investment credits, some rich people pay no taxes at all. In an attempt to change some of the more inequitable provisions of tax law, from 2001 to 2004, there were four separate tax cuts. The 2003 tax cut accelerated tax rate reductions and substantially lessened the double taxation of dividends and capital gains. In applying a test of reasonable, this cut was by far the fairest. The 2004 corporate tax cut, which was supported by both Republicans and Democrats, reduced the double taxation of income earned in other nations. Many people who both support strong taxation (only the gods know why), decried the tax cuts as advantageous to the rich. In a few cases this is true, but generally the cuts were made to boost the economy by placing more money in circulation, regardless of your political bent. Unfortunately, any new law designed to enhance the economy apparently has to have a dose of “pork,” too. The bill included a new deduction on Federal returns for the state income tax, which is really a subsidy for bigger state budgets. Other provisions benefited specific companies or industries, which are unfair to the American public. In the past 40 years, Congress has revised the system 31 times.

Of interest:

· In 1900, the average American household paid $1,500 a year in taxes.

· In 1950, that figure escalated to $7,000.

· In 1995, the average household paid $20,000.

Of additional interest, America has experienced three periods of very strong economic growth that coincided with reductions in tax rates. In 1923, after World War I, President Calvin Coolidge cut income taxes. In 1963 the Kennedy tax cut lowered the top rate from 91 to 70 percent, and in 1981, President Ronald Reagan cut tax rates 25 percent across the board. After both the Kennedy and Reagan tax cuts, wealthy Americans, as illogical as it may sound, actually paid more in taxes but I won’t bore you as to why that was so. Just accept my statement as gospel.

Who Pays Income Taxes?

First of all, there is a horrible misconception that the little people share an unfair burden of taxes. The chart that follows illustrates the percentage of taxes paid by individuals during tax year 2001 (source: National Taxpayers Union).

Percentage Ranked by Adjusted Gross Income	Approximate Income Level	Percentage of Federal Personal Income Tax Paid
Top 1%	$292,913	33.89
Top 5%	$127,904	53.25
Top 10%	$92,754	64.89
Top 25%	$56,085	82.90
Top 50%	$28,528	96.03
Bottom 50%	Less than $28,528	3.97

These income tax statistics are based on an individual’s Adjusted Gross Income (the amount used in the calculation of an individual’s income tax liability). What these numbers mean is that the top 1% of wage earners pay 34% of the personal income taxes, while the bottom 50% of the population who make the least amount of money pay less than 4% of the personal income taxes. Therefore, if the president/Congress authorizes tax rebates, regardless of the reason, how can anyone complain that this 50% of the population did not receive their fair share of the rebate when they only paid 4% of the total tax revenue?

The most ridiculous argument I’ve heard to date is when I actually heard people on TV lamenting the fact that the poor people, WHO PAID NO TAXES, did not share in the rebate. Are the people making these statements ignorant of the facts or just mentally deficient?

American Corporations

Before we examine alternatives to the archaic and unfair tax system we live with today, let’s examine how the super rich people and American corporations fare in today’s society.

America has become a plutocracy, a government system where wealth is the principal basis of power, with the government controlled by both wealthy Republicans and Democrats, who in turn control American corporations. During the late 1800s, “robber barons” amassed great wealth and power without paying any taxes. Over the years, various administrations have attempted to reduce the wealth enjoyed by this privileged class starting with Teddy Roosevelt, who enacted legislation to break up huge trust funds and monopolies at the beginning of the twentieth century. Woodrow Wilson and Franklin Delano Roosevelt also battled to reduce the power exercised by these giants with minimal success. Let us not forget that with all of that wealth, they can afford the top-notch financial advisors and tax accountants.

After World War II, American workers made great strides in improving their economic clout. Since the Reagan years, these gains have been curtailed, with the disparity between rich and poor escalating at an alarming pace. American workers work approximately 350 more hours per year than their European counterparts, although the French and German governments are trying to reel in the generous work schedules and vacation time allotted to their workers, as they can’t compete in the world market.

Between 1979 and 1989, the percentage of wealth owned by the top 1% jumped from 22% to 39%. On the other hand, the average real take home income of American workers from 1977 to 1999 actually declined.

We are deluged by stories of the massive amount of wealth enjoyed by a few families. The family fortune is passed down by the use of legal trusts. The moneyed interests have successfully coerced Congress into reducing the bite on estate taxes, and in 2004, under the reign of President George W. Bush, the taxes on capital gains and dividends were reduced to “stimulate” the economy. Instead of a reduction, these taxes, which can be substantial, should be increased and not decreased, to reduce the burden on the middle class.

A number of authors have stated that the avowed goal of the wealthy class is that by 2030 one thousand mega-corporations will rule the world. The World Trade Organization, which supposedly exists to enhance free trade and fairness in economic policies, is one of the shady vehicles to accomplish this goal. Huge protests ring out whenever this organization holds annual meetings. The goal of the free market as endorsed by many economists such as Adam Smith was that the economy would consist of small firms and independent entrepreneurs. In many industries today, a few gigantic corporations control all means of production and distribution (does this not smack of communism?). These companies are intertwined with the wealthy with strong lobbies and Federal and state legislatures. An example of this alarming trend is Microsoft, which literally controls the software market, although a few upstarts such as Linux-related companies occasionally try and buck the trend. Small business is being squeezed into oblivion by monopolistic practices, regulations and taxes. Can’t something be done about this? A toothless government agency that exists to prevent this situation is the Federal Trade Commission, which in reality is powerless to stop the onrushing globalization of the world’s economies.

From 1996 to 2000, 63 percent of U.S. corporations paid no taxes, while 94 percent paid taxes equal to less than 5% of their net income. The most disturbing trend is that CEOs of large corporations pay themselves huge salaries, bonuses and stock options, while the business profits are often dismal at best. CEOs, who are hired by the Board of Directors, in turn authorize this greed. Now why would they permit this outlandish behavior? It’s really quite simple. Generally, the people who sit on the Board of Directors are CEOs of other large corporations, so it’s an incestuous relationship. You scratch my back and I’ll scratch yours. We have all seen how these monsters declare themselves excessive bonuses just prior to declaring bankruptcy, wiping out the stock investments and pension plans the workers have judiciously accumulated over the years while contributing to the corporation’s growth. Finally, a few of these gangsters are being prosecuted after the people rose up in one voice to protest this egregious behavior. This corruption existed while millions of jobs were lost due to the economic slowdown and outsourcing.

We must fight this globalization effort and also demand that corporations pay their fair share of taxes, reducing the burden on the middle class.

Possible Alternative Tax Plans

Most realists agree that attempts to salvage the current archaic and anti-growth tax systems are unrealistic. We must start over from scratch. But what do we replace it with is the $64,000 question? Make no mistake. No matter which system is eventually developed to replace the current quagmire, there will be winners and losers.

There are a number of viable options including:

· National retail sales tax

· Value-added tax

· Flat tax

The differences between these tax options are shown below:

Tax Type	Explanation
National retail sales tax	A set percentage, such as 23%, is added to any purchase, over and above any existing state taxes.
Value-added tax	The value-added tax is only imposed on the value each firm adds to a product, as opposed to paying the full amount of tax during each step from manufacturing to the end sale to the consumer.
Flat tax	A flat percentage would be payable from your income eliminating all of the deductions such as real estate interest or medical deductions.

Variations on Proposed Tax Plans

In simple terms, the flat tax takes a chunk of your income as it’s earned, while the sales tax takes a chunk while it’s spent. The flat tax, although simple in concept, has too many inequitable ramifications, and would place an unacceptable burden on the lower and middle classes.

One of the nastiest parts of the entire tax picture is how during every session of the state or Federal legislatures, new seemingly unimportant taxes are enacted to nibble away at your wallet, but add up significantly over a few years. It’s all a carefully rehearsed little game played by the politicians.

The solution is obvious: greatly shrink the Federal government (the long-term objective) and completely revise the tax code.

The Proposed National Sales Tax

One of the proposed methods to simplify the tax situation in this country is by introducing a national retail sales tax via elimination of the myriad of taxes that bring in government revenue including payroll and corporate income taxes. The plan (on the surface) looks quite simple but remember that it does not replace many of the other taxes such as gasoline taxes in place now. Everything sold would be taxed at a rate of 23% over and above the state sales taxes, which average about 6.2% throughout the nation, for a total tax of about 30%, not a trifle to most people. But be aware when you listen to proponents of the national sales tax. In many instances, when they speak in terms of a 23% tax that is not reality. Let me explain. If you buy an item for $100 and pay $30 in tax for a total bill of $130, tax proponents claim this is a 23% tax ($130 divided by $30 = 23%) on the TOTAL SALE, which is a complete distortion of the truth.

Now the 23% national sales tax (regardless of which version you use for discussion) sounds very unfair to the poor people who normally would pay none or minimal taxes under the current system. But there would be no taxes for anyone under the poverty level of $9,310 for an individual or $18,850 for a family of four. Since these individuals would need to pay the 23% on any purchases, how would these people get their money back? According to most versions of the plan, at the end of each month, these people would receive a rebate (or prebates) check. Since this process would involve millions of people, you would still need a portion of the IRS (or a new organization) to administer the rebate program, which tends to defeat one of the major reasons for the national sales tax. Not only that, since people would no longer file the mandatory income tax forms, how would the government know who qualifies for the “prebate?” It’s a sticky problem. The only method that can be applied is that the 35 million poor people would need to file (gulp!) a tax return to qualify for the prebate negating the concept of eliminating or greatly reducing the size of the IRS.

Would everything be taxed? In most states, various items such as food and clothing and some medical procedures are exempt. But it varies by state. Would the new Federal sales tax need to follow the rules set by the individual states complicating this “simplified” process?

When you take into consideration all of the potential exemptions, various economists do not believe that a 23% tax is adequate to replace the monies reeled in by the current tax system. These people believe that a tax of from 26% to up to 60% may be necessary – if the tax system that is implemented is designed to replace ALL Federal taxes. One of the fears is that people may stop spending when they encounter the very stiff tax. For example, if they purchase a new car for $30,000, the state and Federal tax would be about $9,000-$11,000. And they wouldn’t be making payments on the tax as they would on the car. That money is paid up front before they leave the premises. They may elect to keep the old buggy running a little longer stifling the economy.

The national sales tax is being used in a number of countries today with great success. Even Russia, a country we have long considered to be backward by our standards, has a 13% national sales tax. About 20 countries use the national sales tax while 20 countries use a value-added tax. When the satellites of the Soviet Union broke free from the grasp of the Kremlin and defined their independence, one of the first acts many of these countries enacted was to establish a flat tax system. Estonia, Latvia and Lithuania established flat tax rates of between 26, 25 and 33 percent. Serbia was next with 14 percent. Slovakia and the Ukraine created systems with 19 and 13 percent, respectively. This year, Romania and Georgia established flat rate systems of 16 and 12 percent Estonia’s system has been so successful that they are reducing the rate from 33 to 24 percent after they found that the top 10 percent of wage makers are paying 41 percent of the taxes. Although Slovakia’s tax system is not yet two years old, income tax revenue is larger than estimates. New investment money is flooding Slovakia. So many car companies are building factories that the country is being called the Detroit of Europe.

Western European lawmakers, including those of Spain, Greece, Denmark, Holland, Germany and Great Britain are discussing the merits of implementing a flat tax.

Depending on the depth with which the national sales tax is implemented to remove the thousands of existing taxes, one of the key difficulties will be that government employees will need to review all of the vast Federal legislation wherein many of these “hidden” taxes are buried in obscure tax laws. If we don’t eliminate many of these taxes, then the conversion to the national retail sales tax will be an empty gesture. Make no mistake – this is a massive undertaking. For one, the XVI Amendment to the Constitution (which supposedly authorized a Federal income tax) must be repealed – not an easy process by any means.

Another major difficulty with this type of tax is people will want to know why a single mother of two has to pay the same tax as a super-rich mogul. But a little common sense dictates that this is not true. Let’s say the single mother spends $300 a week on gasoline and necessities. Her tax for the week would be $69, while the mogul might buy a new Mercedes-Benz for $60,000. He would then pay $19,800 in taxes. A significant difference, I’m sure.

Pros and Cons of A National Flat Tax/Sales Tax

Advantages of a National Flat Tax/Sales Tax

· All of the “hidden” taxes that must of us never realize are buried within obscure Federal laws will theoretically be eliminated. Instead of the government surreptitiously adding little taxes here and there to keep filling the government coffers, these taxes will no longer be permitted under a national sales tax.

· Various economists predict that once the existing glass house tax system comes crashing down, a price reduction approaching 22 % will be realized, which just about cancels out the negative cost of the national sales tax. It should also promote faster economic growth by minimizing tax penalties on risk-taking and entrepreneurship.

· Whether a flat tax or a sales tax is implemented, all taxpayers are treated on a level playing field. This tax will end preferences or penalties of certain behavior by taxpayers.

· The flat tax scraps the graduated income tax that is applied to earnings and replaces it with a set percentage that cannot be altered by interest income, capital gains and dividends, as with the current system.

· Most importantly, the new tax will end a corrupt system that allows politicians to trade tax loopholes for votes. Therein lies the difficulty of getting the new tax plan approved by the House and the Senate.

· You will enjoy an immediate savings by eliminating your CPA or accountant who does your taxes. Even if you prepare your own taxes, at least you’ll save on the upgrade price on your tax software some of us buy each year.

· The millions of people who offer tax consultation services (you know, those people who do your taxes on April 15^th) will need to find real jobs that add to the economy of the Unites States instead of draining monies for services that add nothing to the growth of the country.

· One of the best advantages of this proposed tax is the delightful thought of eliminating at least 3/4 of the employees of the Internal Revenue Service, which currently numbers almost 100,000 people. As with tax consultation services, these Federal employees will need to find employment within other branches of the government or in the real world. In itself, the savings would approach $10 billion.

· With the elimination of the corporate income tax, American companies would significantly lower their cost of doing business overseas, as the cost of their products would be lower.

· Millions and millions of taxpayers do not file tax returns. Out of a population of 290 million, the IRS received 23 million corporate tax returns and 100 million individual tax returns. Based upon the number of working Americans (200 million driver’s licenses issued), it’s anyone’s guess but the best estimates suggest that somewhere between 50 and 75 million Americans do not file tax returns and pay only the minimal taxes that have been withheld from their paychecks. With a national sales tax, these people will have little choice greatly increasing the revenues that can be realized from this change.

· The best advantage that can visualized with this one single-source tax is that the government will have a harder time pulling the wool over our eyes with incremental hidden taxes. If they want more money, they will need to convince the voters to raise the tax rate from say 23% to 24% or 25%. The only way we can more or less guarantee that this rate will not increase is by demanding efficiency in government and spending cuts, which is not an easily attainable goal.

Disadvantages of a National Retail Sales Tax

· The proposed new tax system would do away with the existing income tax provisions; therefore, the tax revenue previously obtained from interest, capital gains and dividends would no longer be a huge source of revenue especially during periods of economic growth.

· Homeowners would no longer be able to deduct their state property tax or the interest on their home loans since they no longer would file Federal income tax forms at the end of the year. It is recognized that for most homeowners this is a substantial loss of money.

· Likewise, if your family has relied on deductions for excessive medical expenses, or for child tax credits, these too will be eliminated. The loss of mortgage interest and medical deductions are the two main obstacles under this plan.

· Under the plan, since the poor would pay nothing and the rich would likely pay less than they do now, the tax burden would fall on the shoulders of the middle class.

· Citizens of large metropolitan areas, like New York, pay a much steeper combined state and city tax than residents in rural regions of the country. A taxpayer in New York making $100,000 per year might pay $10,000 per year just to the state and city. The disparity between urban and rural taxpayers is somewhat offset by the fact that these taxpayers can deduct both the state and city from their Federal return. With the new national sales tax, that possibility is eliminated.

· Charitable contributions, which are the mainstay to feed and house the poor and homeless, would disappear as deductions. A strong possibility exists that these contributions would drop significantly if they are no longer deductible, but historically whenever massive tax cuts have been made, charitable contributions have increased.

· The elderly will suffer under a national sales tax as much of their income is protected under the current system.

· If a flat tax is selected, high-end wage earners would be stumbling over one another beating a path to their accountant’s door to have their income shifted into stocks, bonds and derivatives, as these items are not taxed. With a national sales tax, the high-enders would not be able to avoid paying the tax on any purchase.

· Twenty countries around the world started out with a national sales tax and then switched over to a value-added tax, because people found ways around the sales tax, especially when the rate was higher than 12%.

What Is the Best Way to Reform the Tax System?

Tax reform is a worthy goal and we should not cease in our efforts to find a simplified and equitable method to modernize the current system. But the major approach to reduce the burden on the taxpayer lies more in external factors than it does in reforming the tax system. Regardless of whether a national sales tax or flat tax or some other idea is found to simplify the process, in reality there are many other factors at work that must be accomplished:

1. Make American corporations pay a fair share of the burden

2. Reduce the Federal and state budgets with particular emphasis on massive cuts in defense and extraneous expenditures

3. Payoff the national debt and demand a balanced budget.

Sleazy Tactics

In South Carolina, the Democratic candidate for the open Senate seat, Inez Tenenbaum, used very twisted logic to make her opposition to tax reform the centerpiece of her campaign. Naturally, the Republican candidate, Jim Demint, made tax reform his primary issue. DeMint proposed that we abolish the IRS and replace the current tax system with the national retail sales tax. Tenenbaum accused DeMint of supporting a 23% tax on middle class families; an effective ploy except she failed to mention that the income tax would be eliminated under the plan.

2004 State Tax Ballot Measures

Since we are examining proposals to revise the current tax code, there are many tax code changes routinely proposed in the various states during every election. Thanks to the National Taxpayer’s Union (NTU) for providing the following list of 2004 major tax state ballot measures, which in some cases only apply to one or more counties within that state.

Take note of the names of the states where these ballot measures have successfully been placed before the people for their consensus. You will not see even one tax related ballot measure listed for New York, New Jersey, Connecticut, Pennsylvania, Rhode Island, Massachusetts or Delaware. The lack of tax ballot measures should immediately alert you about those states corrupt politics because the people are totally suppressed by the machines.

These ballot measures are a mixed bag. Some of these measures have been placed on the ballot by state officials to raise more money. Some have been placed on the ballot by the people to restrict the state’s taxation greed. By reading the measure overview, it should be fairly easy to determine how individuals in those states will likely vote.

State	Name of Measure	Overview
AK	Ballot Measure 1	Would make it considerably harder to qualify measures for the ballot in Alaska by adding new petitioning requirements.
AR	Amendment 1	Allow House Members to stay in office for six terms of two years rather than the current three terms of two years. It would also allow Senators to stay in office for three terms of four years instead of two.
AR	Amendment 2	Allow the Legislature to issue large amounts of bonds (up to 5 percent of general fund revenues) for so-called economic development projects that invest a minimum of $500 million and create 500 jobs.
AR	Referendum 1	Raise the Arkansas property tax rate from 25 mills to 28 mills for additional school spending.
AZ	Proposition 101	Require all ballot measures that propose mandatory state revenue expenditures have a funding source in place to cover all present and future costs of the initiative or referendum.
AZ	Proposition 200	Require recipients of state and local benefit programs to submit proof of immigration status.
AZ	Proposition 300	Increase the salaries of State Legislators to $36,000.
AZ	Proposition 400	Extend a 1/2-cent sales tax increase to fund light rail and other transportation projects.
CA	Proposition 63	Raise income taxes on high-income Californians for more spending on mental health programs.
CA	Proposition 65	Require voter approval for license fee reductions, sales tax reductions, and property tax cuts.
CA	Proposition 67	Raise by 3 percent the existing surcharge on telephones, and would hike tobacco levies and traffic penalties.
CA	Proposition 72	Would force employers to pay employee health care costs, even for part-time employees.
CA	Ballot Measure A	Would raise the sales tax by 1/2-cent (more than a 6 percent increase) to supposedly hire more police officers.
CA	Ballot Measure M	Would repeal the local utility tax.
CA	Ballot Measure N	Would raise the hotel occupancy tax from 12 percent to 14 percent.
CO	Amendment 35	Would raise the state’s cigarette tax by 64 cents and increase the excise tax on other tobacco products by 20 percent.
CO	Referendum A	Modernize the management of state employees by making it easier to hire and fire them.
CO	Referendum 4A	Increase the sales tax rate from 0.6 to 1.0 percent, and spend $4.7 billion over 12 years to fund a huge expansion of mass transit.
FL	Amendment 2	Force citizen-initiative petitioners to file their measures with the Secretary of State by Feb. 1, much earlier than current law provides.
FL	Measure 5	Increase the state’s minimum wage to $6.15 per hour and index it to inflation.
FL	Measure 6	Repeal the costly and unnecessary bullet train project, thus saving Florida taxpayers at least $25 billion.
FL	Sales Tax Measure	Raise the sales tax by 1/2-cent per dollar for additional school construction.
FL	Property Tax Referendum	Raise the property tax rate by 50 cents per $1,000 of property value, to raise teacher salaries.
IN	Public Question 1	Empower the General Assembly to create exemptions for certain major classes of property, including a homeowner’s primary residence, personal property used in the production of income, and business inventory.
KS	Regional Referendum	Increase the sales tax rate by 0.25 percent to raise $1.2 billion for sports stadiums and arts programs.
KS	Advisory Referendum	Raise the sales tax by one percentage point, a 15.9 percent increase over the current amount, for 30 months.
MD	Question A	Forbid the County Council from overriding an established property tax limit by an affirmative vote of seven out of nine Council Members.
MD	Question B	Limit the County Executive and County Council Members to three consecutive terms in office.
ME	Question 1	Limit property taxes to 1 percent of assessed value of property, roll back base valuations to their 1996-1997 levels, limit valuations to 2 percent annually, and require 2/3 voter approval for any non-property tax increases.
MO	Amendment 3	Require that all revenues from the existing motor vehicle fuel tax be used only for state and local highways, roads and bridges, and require that vehicle taxes and fees paid by highway users be used only for constructing and maintaining the state highway system.
MO	Regional Referendum	Increase the sales tax rate by 0.25 percent to raise $1.2 billion for sports stadiums and arts programs.
MO	Proposition A	Would prohibit using public funding for sports stadiums without voter approval.
MT	Constitutional Amendment 42	Amend the Constitution to extend term limits for legislators from the current maximum of eight years in a 16-year period to 12 years in a 24-year period.
MT	Initiative 149	R