With less than two weeks until tax day, we should contemplate why we partake in this enormously unproductive exercise, year in and year out.
There does not appear to be a good reason.
The principle rationale for tax reform
is to stimulate productivity and economic growth. This could be accomplished by assessing all economic activity at very low rates in a transparent, efficient and cost-effective manner.
Last year, the U.S. government did not receive $1.6 trillion in tax revenue because of exclusions, exemptions, deductions, tax credits, preferential tax rates and deferred tax liabilities, according to the Joint Committee on Taxation. The Congressional Budget Office estimates that 50 percent of these tax benefits are received by the top 20 percent of the population.
In addition, it is estimated that nearly $2 trillion of income per year go unreported.
Experts also estimate the cost of complying with the tax code is several hundred billion dollars each year. These expenses include fees for tax attorneys, accountants and estate planners; IRS staffing, plant and equipment; and the 6 billion hours of preparation time by all parties.
The idea is to apply the lowest rate of taxation to the greatest quantity of income and wealth at the lowest possible cost. Rather than tax income as it is received, I recommend that we assess the funds as they are utilized: as consumption or savings.
Since savings can be used for productive direct investment that creates jobs and generates significant economic growth, savings would be taxed at a much lower rate than consumption would be.
My tax proposal would eliminate all federal taxes, including income, Social Security, Medicare, unemployment, disability, interest, dividends, capital gains, gift, inheritance and corporate.
These taxes would be replaced by: 1) a 10 percent consumption tax on expenditures that exceed $30,000 for a family of three in the form of a $3,000 refundable tax credit, and 2) a 2 percent savings tax on assets above $100,000 for a family of three, excluding retirement funds ($25 trillion), direct capital investment ($5 trillion, or 30 percent of GDP), charitable foundations ($3 trillion) and education savings ($250 billion). The savings tax would be based on an average daily balance over the entire year to minimize tax arbitrage strategies.
Financial investment, which tends to extract and transfer equity rather than create wealth, would not be exempt from taxation.
The consumption tax exclusion would reduce the $12 trillion in annual consumption to $9 trillion of taxable consumption, according to the Bureau of Economic Analysis. This would generate $900 billion in tax revenue.
The net financial asset flow for individuals and corporations, after all exemptions are accounted for, would be $145 trillion, according to the Federal Reserve. Applying the 2 percent savings tax rate to this figure would generate approximately $2.9 trillion in revenue.
These funds could be sent electronically from the retail point of sale or financial institution directly to the U.S. Treasury — a beautifully streamlined operation that would save billions of dollars.
The combined consumption and savings tax would raise $3.8 trillion, more than the estimated $3.7 trillion in expenditures for fiscal year 2015, according to the Congressional Budget Office. This would balance the budget at current spending levels and reduce future debt increases.
After excluding capital expenditures, corporations would be faced with a 2 percent tax on net profits and retained earnings.
This plan would maintain our significant social service programs, including Social Security, Medicare, Unemployment Insurance, Disability, Medicaid, welfare and the Earned Income Tax Credit.
Any change in tax rates would be immediately transparent to all. This would be diametrically opposed to the highly opaque system in existence today.
Low tax rates would encourage productivity and creativity and reduce the need for tax arbitrage and compliance expenditures. No tax on capital or employment would encourage more investment in these resources, stimulate economic growth, minimize cost and price increases, attract greater capital inflows from abroad and balance the budget at current levels of expenditure.
It would also reduce the unhealthy levels of income and wealth inequalities that exist today.
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