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ORTEL: A tax system that liberates all productive Americans

- - Tuesday, August 19, 2014

Fourth in a series

New York-Tax reform is long overdue in America, and not the kind pushed by lobbyists who care chiefly for cronies but sweeping overhaul in the best interests of an overwhelming majority of fellow citizens.

To achieve sensible tax reform, we must first concentrate on changing the way we collect federal taxes and contributions for social insurance programs.

A flat tax of 12.5 percent on personal and corporate incomes, and a flat assessment of 8.5 percent on these incomes to fund social welfare obligations will turbo-charge America’s economy after too many years of flat-lining.

End a complicated nightmare

Since 1913, when the 16th Amendment to the Constitution was adopted, the process by which we collect federal income taxes has evolved into a living nightmare for most Americans.  

Government in general and the IRS in particular suffer from what seems to be an intractable trust deficit.

Tax forms are virtually incomprehensible, and rationales for rates and for permissible deductions defy logic.

Without doubt, America needs to collect income taxes to pay for our social safety net. However, we need a system that is simple, fair and truly effective.

Simplicity, equity and effectiveness

Analysis of U.S. Commerce Department estimates show that federal taxes on personal and corporate incomes, and contributions for federal social welfare programs averaged 20.75 percent of personal and corporate incomes combined during 2000 through 2013.
 
The collection ratio varied only modestly during this 14-year period, from a low of 18.64 percent in 2009 to a high of 23.90 percent in 2000, and in 2013, the ratio was 20.87 percent.

Rather than enduring torture under the present complex system, a majority of Americans might readily prefer a simple system that levies federal taxes on all personal incomes at one low fixed rate, with no deductions.

Supposed advocates for lower-income Americans will immediately jump on this suggestion as being heartless, but they should check their indignation at the door and concentrate upon available facts.

According to the annual “Consumer Expenditure Survey” prepared by the U.S. Bureau of Labor Statistics, the bottom 40 percent of income earners spend significantly more than they earn.

All of us pay substantial hidden taxes each time we purchase any good or service, and relief for these substantial taxes under current law is, at best, limited.

If we set the federal income tax rate on incomes at a flat 12.5 percent, and if upper-income Americans have confidence this rate would remain for protracted periods of time, the federal government would enjoy a flood of tax collections, likely bolstered in the first several years by extraordinary factors.

Moreover, if we lowered the federal corporate-income tax to the same 12.5 percent rate, we would halt the disturbing trend seen under President Obama’s anti-capitalist tax regime, where American and other multinational corporations shift the emphasis of their global enterprises to concentrate their investment and employment outside our borders.

What is the catch? After all, we cannot simply trim income tax rates for everyone since massive social obligations must met.

Under the current system, upper-income Americans only pay assessments for Social Security on a small portion of their earnings. Corporations, in theory, only pay Social Security assessments in the same limited way.

Under the proposed plan, all Americans would pay a fixed percentage assessment (with no cap) on all of their incomes to help fund our social obligations. However, when it comes time to collect Social Security retirement benefits, upper-income Americans would only receive payments equal to  maximum levels set now, under current law.

In addition, corporations would make unlimited contributions to fund social welfare programs at the same fixed percentage of their pretax income. (These corporations, unlike individuals, would derive only indirect benefits from supporting America's social safety net.)

Toward a lasting bargain

To make sure that the new system would have time to work and that future changes would be made sensibly, modifications (to the law itself and to related regulations) should only be made during a federal election year and should be made prior to the end of the fiscal year so that voters have a fair chance to understand the changes and who supports them.

Let’s give substantive federal tax reform a real chance.

Next: A Sovereign Wealth Fund and Help for the Truly Less Fortunate