Tags: Tax | Code | Reform | Prosperity

Tax Code Reform is Key to Economic Prosperity

By    |   Friday, 18 May 2012 07:02 AM

Tax-code reform will transform our politics and economics in ways that promote fairness, opportunity and prosperity.

During the past decade, the available labor supply grew 33 percent less than the potential labor supply. In fact, nearly 18 million individuals have voluntarily exited the labor force over this period.

If these individuals are counted as unemployed, the number of unemployed would be 128 percent greater and the unemployment rate would double to nearly 18 percent. This figure excludes the underemployed population (e.g., those overqualified for their position and/or working fewer weekly hours).

Approximately 36 percent of the potential labor force is not working, a level not seen since 1980. Twenty years of labor supply growth has been obliterated by the precipitous decline during the previous decade.

The dismal unemployment data can be alleviated by serious tax code reform.

We spend $1 to save $2 with the given tax code. That is, we save $1 trillion in taxes through income tax deductions by spending nearly $500 billion to comply with the complex tax code.

I recommend the following:

1. Eliminate all income tax deductions except one for basic sustenance ($20,000 for a family of 3, based on the poverty line estimate by the US Department of Health and Human Services)

2. Apply a low tax rate to all income above this level (e.g., 30 percent).

This would be viewed as fair and liberate individuals to focus their energies on positive, creative entrepreneurial endeavors that add value to themselves and society. Moreover, tax compliance expenditures would be reduced substantially, permitting a more optimal allocation of resources, such as money and time.

These incentives would result in greater productivity, larger incomes, lower deficits, and a better quality of life.

According to the Joint Congressional Committee, removing all income tax deductions would generate an additional $1 trillion in annual tax revenue. Including an income deduction for basic sustenance would reduce annual tax revenues by $500 billion.

The net result would be a $500 billion increase in annual tax revenues and a $500 billion decline in the annual budget deficit (nearly 50 percent drop immediately).

The aforementioned is based on the following assumptions:

(1) US Department of Health and Human Services estimates the poverty level for a family of 3 is approximately $20,000 ($2 trillion total for the US).

(2) Federal tax rate for this level of income is 10 percent.

(3) Social Security tax rate of 15 percent (half paid by employee and employer).

At this rate of deficit reduction, the annual deficit could be eliminated completely within in several years, especially if coupled with prudent spending reductions. Moreover, the decrease in tax compliance expenditures of $500 billion would increase disposable income by the same amount, which could then be used for consumption, savings and investment.

A fair, simple and transparent tax code will minimize political manipulation, ensure more optimal resource management, and better position our economy toward long term productivity and prosperity: a welcome prescription for our battered employment prospects.

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