What Do You Think Is Wrong With The Current Tax System in America?

“Everything!” it seems.

No matter who you talk to, everyone seems to have a gripe with the current tax system in America. Part of it you can chalk up to the fact that no one really loves to have any of their hard-earned money extracted from their wallets to pay for government services. There is always a perception of ‘waste, fraud and abuse’ as well as funding certain government programs that you completely disagree with.

Maybe the tax code is the work of the Devil. "Obey Me! Or Else!"

The other part has to do with the notion that everyone thinks ‘everyone else’ should be shouldering more of the tax burden: the not-so-well-off think the rich should pay more; the rich think the middle-and-lower income wage-earners should pay something and everyone thinks foreigners like the Chinese should pay more to import their products to America…except when it is something you want or need like cheap underwear.

We fought a Revolution to get away from ‘taxation without representation' in 1776 in case you have forgotten.  Now we have ‘excessive taxation WITH representation” so how’s that working out for you?

Let’s tick down the problems with the current system and see if we can come up with a magic bullet that might solve these burrs under your saddle:

1. ‘I pay too much in taxes’.
2. “Rich people don’t pay their ‘fair share’”.
3. 50% of Americans don’t pay any income tax any more.
4. ‘I pay more in payroll taxes than I do in income taxes’.
5. Lobbyists in Washington get special tax breaks and loopholes for big corporations.
6. ‘Little guys like me can’t take advantage of the tax code like rich people and corporations do’.
7. ‘The tax code is way too confusing’.
8. ‘I pay through the nose on income and payroll taxes and we still don’t have balanced budgets!’

All of these perceptions are true in one way or another to some group or sector of the economy. With over 140 million households filing tax returns, a significant percentage of the population is going to feel aggrieved some way or another each year.

We are sure we never heard anyone come to us in Congress in over 12 years of service and say: ‘You know, I think I am being taxed just about the right amount to live in a free society protected from invasion and attack by the best military in the world, drive on highways to anywhere in the nation and have a safety net that I could fall into if adverse circumstances befell me or my family’.

So what can be done about it? Every single time we have seen a ‘tax reform’ effort pass Congress, the tax code has become 10 times more complicated and the law of unintended consequences has run amuck by producing outcomes far removed from original goals.

We are becoming increasingly interested in the concept of a consumption tax being passed to completely replace the existing federal tax code in America. But we most definitely do not advocate any sort of consumption tax to be placed on top of the sclerotic tax system that already resembles swiss cheese with all the loopholes now in it. There is a perception that there are relative winners and losers in the US tax code every year, that it is ‘unfair’ in many regards and that is not a good thing for any democracy.

Let’s tick off some of the reasons why a consumption tax would address the concerns listed above:

1. Everyone would pay the same form of tax.
2. No one would be able to escape it with a tax loophole, deduction or exemption.
3. Class warfare would end because people could not be singled out for targeted tax treatment as is the case now.
4. It is simple…1 consumption tax collected at the point of sale would very clearly show people what they are paying for the benefits of living in the American democratic republic.
5. Lobbyists, and PACs and all the other things that drive people crazy about the current tax system and campaign finance would be reduced to next-to-nothingness because there would be no loopholes to get or defend.
6. Rich people would pay more in taxes because they consume more each year. If they choose to buy 10 luxury homes and yachts after hitting it big in business, all those purchases would generate consumption tax payment after consumption tax payment.
7. People would be encouraged to save and invest because interest, dividends and capital gains would no longer be taxed.  The stock market might quintuple for all we know.

There are two things we would like to see explored further by economic experts, although since hardly any economics expert saw this tidal wave of recession coming along even as late as summer 2008, we are not sure we put a lot of credence in their opinions anymore. The first would be the level of taxation that would be necessary to generate 19% of GDP which seems to be the fixed level of federal taxes people are willing to part with since 1970. The other would be protecting low-income people from adverse effects of the consumption tax since they are really the ones who need government assistance, not higher-income folks.

It seems to us that the current price levels of everything we buy have all the income, corporate, payroll, excise and death taxes already baked in them because those are included in the costs of goods sold in the first place. If they are all eliminated, wouldn’t prices then fall flat as a pancake? And then wouldn’t the new consumption tax start pushing up prices from this much lower, compressed level, not a higher one?

We are not sure that price levels might not stay just the same under a well-constructed consumption tax as they are under the current system.  And maybe with tax revenue that gets picked up in the black market, perhaps we might even increase tax revenue collections without massive hit squads sent out by the IRS each year.

We have asked some very important people in Washington (ok, a senior Congressman) to come up with some numbers, projections and analysis as to what level of consumption tax would be necessary to completely replace the current miasma of federal taxes. And when they do, we will forward it on to you as quickly as possible so you can decide for yourself if shifting to a broad-based consumption tax would be better than sticking with the devil we know, the current US federal tax code.

Cause the current tax code sure looks to be the work of the Devil himself, even a funny one portrayed by SNL's Jon Lovitz, don't you agree?

Jon Lovitz courtesy of SNL, NBC

“Keep Your Government Hands Off MY Medicare!”

This is one of our favorite signs from the entire healthcare debate over the past year.

If the federal government does not have its grubby big old hands all over the current Medicare system, then who does?  The Tooth Fairy?  Santa Claus?  The guy from the Monopoly game with all his funny money?

We recently highlighted the apparent philosophical inconsistency when people who love more government, for the best altruistic reasons, decide not to send their tax refund back to Washington to help pay for expansion of government services they strongly support, i.e. health care reform under President Obama and Speaker Pelosi.

On the exact flipside of the parallel universe are the people who, well-intentioned they may be, are seen holding signs such as this one above, screaming in protest against any ‘more socialism in America!’ all the while receiving enormous sums of federal taxpayer-supported programs such as Medicare.

Receiving copious amounts of taxpayer assistance in any form, ladies and gentlemen, is the very definition of 'socialism'.  We have had socialism creeping into our previously independent American cowboy psyche for at least the past 80 years or so in some form of government program or another.

Some of it has been progress like Social Security. It started as the 'Supplemental Security System' designed to get money to our moms and dads and grandparents who were starving during the Truly Large Recession That Turned into The Great Depression Because of Stupid Misguided Policies Like Raising Taxes, Cutting Spending and Limiting Free Trade.  But universal coverage and an ever-growing population has a way of turning even the best, most altruistic programs of 80 years ago into something that are just simply unsustainable going forward given the laws of economics, finance and taxes.

Something has got to give, people.  We can’t have ‘everything for nothing’ and not pay for everything you may want government to provide for everyone else.  What is it going to be?

It is time to make some fundamental, hard decisions about what we want our government to do and, more importantly, NOT do. Then we can proceed with some firm set of political principles based on facts and figures, not emotions and polemics.

We personally support a government that defends our borders and provides a safety net to those who are physically or mentally incapable of providing for themselves.  We don't think the Founders would be very happy seeing a welfare state that encompasses even the very wealthy in our society and a tax system riddled with all sorts of special tax favors for this set of special interests (meaning ones we agree with) or that set of special interests (meaning those you support).

Here’s the truth about our current America health care system, to return to the sign above.  It is already a form of ‘socialized medicine’ whether we want to admit it or not.  50% of every dollar spent on health care in America today comes from a federal or state government source of funding in Medicare, Medicaid, HHS, or research from any of the alphabet-soup named agencies ranging from NIH to CDC.

The debate over Obamacare was not about replacing it with a pure private-based market system; it was about whether to push it more towards a complete socialized system more like the ones currently in play in Europe and Canada. And apparently, that is where we are heading even as HHS came out with a report that shows ObamaCare increasing the cost of health care, not decreasing it.

Remember, there are at least 3 intervening elections that have to take place before Obamacare becomes fully operational, if ever, in this nation.

Here’s some basic, useful and yet ‘inconvenient truths’ about Medicare that you should burn into your memory banks:

-Medicare is NOT an insurance plan but a government-funded (read: 'Taxpayer Dollars') program that redistributes money from people like you to pay for the majority of every single senior citizens’ health care bills each and every year.

-Medicare Part B is a mandatory-enrollment (meaning everyone is forced into it whether they can afford their own health care plans or not, like Warren Buffett or Bill Gates) federal program that is fully 75% paid for by taxpayers, not seniors.

-The average senior pays about $300-$325/month for Medicare Part B health care coverage for physician visits and care. You, the American taxpayer, pays the balance of about $900-$1200/month per senior citizen. Times 40 million seniors. And now about to explode in number with millions of retiring Boomers. You do the math.

-Medicare Part A is the hospital reimbursement part of senior health care paid for by current worker’s contributions through the FICA tax withholding on every one of your paychecks.  Part A is just about to go into the red because there are not enough current workers (especially in this nasty recession) paying current payroll taxes into the Part A program to cover all the hospital costs of senior citizens.

-We don't have time to go into Medicare Parts C and D and any of the new Parts E-Z created  by Obamacare but you get the bottom line:  we can't afford all of these programs either.

- Medicare and our current private health care plans are NOT insurance plans in the strictest sense of the word.  They are ‘health care payment’ plans that pay all health care costs ranging from checkups to minor problems.  A true ‘insurance’ plan would invest money in a risk-managed, actuarial program to cover the catastrophic costs of large adverse medical outcomes such as heart attacks, cancer or car accidents for a very small percentage of people each year and leave the smaller costs to be paid out-of-pocket by every patient. The premiums for such a catastrophic high-end national plan would be dramatically smaller across-the-board and the American health care system could be saved, hopefully.

We do not need any more pandering or lip service coming out of either major political party in Washington. And with the advent of the Tea Party and the rise of registered Independent voters now approaching 35% in many states, we don't need them to be walking around with signs like the one above that are completely incorrect at their core.

For the past 230 years of our history, the people have chosen wisely when leaders have leveled with them about the threats we have faced from the British, from slavery, from Japan, from communism.  They will do so again when our leaders speak candidly and stop hiding behind the veil of PR advisors and spin by sycophantic* hangers-on.

'Approval Ratings' never got us out of any trouble before.  Leaders have.

origin unknown for the sign

* comes from the Latin meaning 'slanderer' or 'swindler' which is appropriate

What Do People Who Support ‘More Government’ Do With Their Tax Refunds Each Year?

We asked this hard-hitting question recently because of Tax Day, April 15 and not surprisingly, got a lot of feedback, response and, yes, ‘emotion’.

“Of course, I deposited my tax refund from the government!” said a strong supporter of President Obama and his expansive plans for government health care and who looked and sounded like Yosemite Sam come to think of it. When asked why he didn’t just countersign his refund check back to the US Treasury to help pay for all the new services to the previously uninsured, he became somewhat defensive and said: “Because it is mine! I paid my ‘fair share’ to the government to support all the good things we want and need like good schools and roads and helping poor people".

Yeah, but, we were just talking about paying for this massive expansion of health care, not all the ‘other stuff’. Somebody's got to pay 'more' for it, don't they?

Operative phrase to keep in mind: ‘Fair Share’. It carries a lot of weight in American debate and discourse.

We are of the opinion that if you are strongly for the expansion of government services, you should also be willing to pay more in taxes for it. Somehow, Americans have always been tricked, coerced and flim-flammed into thinking all we gotta do is just ‘raise taxes on the rich!’ and ‘everything will be hunky-dory’!

It won’t; there are not enough of them. And believe us, they are smart enough to hire the best financial planners, lawyers and tax accountants money can buy to minimize the amount they have to pay each year to Uncle Sam.

Former Congressman Alex McMillan used to argue this point so adroitly on various budget and economics committees in Congress by saying to his colleagues and their staff: “There are 535 of us elected officials writing laws and 300 million American citizens out there trying to figure out how to get around them. According to the law of averages, who do you think is going to win most of the time?”

We think it is no accident that a billionaire such as Warren Buffett almost plainly boasts of paying himself ‘only’ $100,000 per year in salary. Why not? He only gets taxed in income and payroll taxes up to that point and then all of the other wealth he is generating gets bounced around and stirred up by his expert tax advisors to where we would be very surprised if Mr. Buffett paid any taxes personally over and above what he pays on that $100k annual salary.

How do you think such people get to be billionaires in the first place, by being stupid?

And despite all that, 42% of all income taxes are now paid by the top 1% of American taxpayers anyway. So that should pretty much end the charade that class warfare activists like to claim that rich people are not paying their ‘fair share'.

We have one question:  Who gets to determine what our 'fair share’ of taxes, or income for that matter, should be anyways?  Legendary Senate Finance Chairman Russell Long of Louisiana used to talk about who got to make the decisions this way: "Don't tax you; don't tax me...tax that fellow behind the tree!"

We had one prominent liberal activist tell us point-blank to our face that the top tax rate should be 90% of all income AND assets of every rich person each year. Really?  C'mon!  Then we really would slay the goose that lays the golden eggs.  We did not have the heart to ask to see her tax returns when she got into her new black Mercedes-Benz and drove away.

We also think the American public has been hoodwinked somehow into believing that when they do get a tax refund back from Washington, somehow it looks like a ‘gift’ to them. Why is that?

Because of the methodical withholding of every single penny of income and payroll taxes for the vast majority of American workers from their weekly paychecks. They never see that money in the first place! It goes right from their place of employment to Washington to pay for trillions of dollars of spending and never runs through their own personal checking account. If you somehow overpaid your federal tax during the previous year, the good folks in Washington will send the balance back to you,  without interest of course.

What would happen if every person had to write out a check for at least $2500 on April 15 each year to cover the payroll taxes they owed for the previous year? That would make every living breathing American taxpayer as mad as the 'real' Yosemite Sam.

And then you would see some real decisions made on spending priorities, taxes and balancing the budget.

courtesy of www.math.ku.edu

Air-Conditioned Doghouses and the VAT

What is the VAT or Value-Added Tax anyway and why would we Americans want anything that resembles the tax structure of Europe?

The VAT is sort of a national excise tax except that it is applied to every marginal level of ‘value-added’ during the production process when a transaction is made. For example, when an agricultural distributor ships corn to Frito-Lay to make chips, Frito-Lay would pay a VAT tax on the ‘value-added’ (work input, including the brains and talent to do it in the first place) by the distributor for collecting all the corn, processing it and then putting it in a truck or train container to get it to Frito-Lay.

There is ‘value-added’ at every step of the way for successful businesses, believe it or not. The current prevailing attitude emanating from Washington that damns all private enterprise activities has got to stop before we run every productive person and business out of business.No one in the Obama Adminstration or the current leadership in Congress seems to have any appreciation for the free enterprise system in any way, shape or form.

After all, they can’t redistribute any wealth if it is not created in the first place by hard-working people in the private sector, not the public sector.

But here is why the VAT would be such an improvement over the current tax system in America: It would be far more simple and would not discourage the investment and savings we desperately need right now to reinvigorate our economy.

Think about it for a minute. What would you do if suddenly you had 20% of your entire income back in your own hands that you would no longer send to Washington through payroll taxes and income taxes? (if you are self-employed, your payroll tax bite is over 15.7% right now alone)

Would you: A) spend it all; B) put it into savings: C) Pay off credit cards, car payments or mortgages; or D) invest it in a new business on your own or in the stock market?

Answer: ALL of these are good things for the economy. There is absolutely zero downside to Americans reducing debt, saving more, investing or buying your neighbors’ products and services which means more jobs for your friends and neighbors.

What are the downsides for the VAT? #1 is the regressive nature of the tax. People with lower incomes would be harder pressed to pay the increased prices of products and services and measures would need to be taken to help them. And if the VAT were set at say, 19%, prices would rise to cover that tax at every step of the way.

But just how much will they rise across-the-board? No one knows for sure. One thing that is often over-looked is that everyone is already paying for corporate income and payroll taxes in terms of higher prices for goods and services they pay today! All the VAT would do is roll all our federal taxation needs into one program, not thousands, and basically tax those who consume the most, including expensive yachts, massive homes and Rolls Royces.

The very first debate on the floor of Congress in 1789 was over a similar 'consumption tax' of sorts, the import duty fees. After all, now that they had a new country to run, they had to find some way to pay for it, didn't they?

One thing we do know for sure: Without the mind-numbing labyrinth of confusing personal and corporate income taxes to deal with, decisions on buying and investing will return solely to the economic fundamentals of each decision, not on the tax ramifications of every decision.

And here is the best part for those of you are concerned about ‘progressivity’ of the tax code: Rich people will pay more than their fair share in taxes every single year! Why? Because all of the deductions for massive $4 million second homes on the coast will disappear as well as every other tax loophole that only very wealthy people can afford to pay tax lawyers and accountants to find for them.

Our favorite example of how great the free enterprise system really is was when Jim and Tammy Faye Bakker of PTL fame and fortune were accused of having used funds to pay for an air-conditioned doghouse and gold-plated faucets in their spacious mansion. Many people were understandably upset to find out that funds they were donating to advance the Good News were instead being used to keep Fido cool in the hot and humid heat of the Carolina summers.

We shared that concern but were more than amazed that some guy had figured out a way to manufacture and sell air-conditioned doghouses in the first place! Those expensive doghouses were made by someone and we hope they were made by hundreds of craftsmen here in the States and not in China.

Think of the taxes that could be generated off the value-added at each step in the air-conditioned doghouse process...we could pay off the national debt with those cash-flows.

The VAT has a lot going for it but only as a complete replacement for the current insane system that really doesn’t work very well any more, not as an add-on.

UGA VI I picture courtesy of http://georgiasports.blogspot.com/2008/09/uga-vii-pictures-from-gsu-game.html

“Democracy is the Worst Form of Government…”

‘…except all those other forms that have been tried from time to time.”—Winston Churchill

You might be saying a hearty 'AMEN!’ to the first clause of Sir Churchill’s observation* out loud right now after all the machinations of Congress and the White House over the past year or so.  We have heard many say lately that ‘our system of government is broken’; ‘it doesn’t work anymore’ and the words ‘nullification’ and ‘secession’ seem to be creeping up in conversation more and more.

Well, to that, we say a hearty ‘Boo!’. We also say we have not been this optimistic about our democratic republic in a long, long time.

“Why?’ you say.  Because people in this country are finally understanding just how important and precious the freedoms are that we have been guaranteed in the U.S. Constitution as individuals, as a nation and as a society. They were not won ‘lightly’ and without major costs, and they can be taken away in a moment in time if a democracy is not always on its guard to protect those freedoms.

We human life forms live on a pendulum in government that swings from total control from on-high (think ‘Kings’) to total freedom of individual thought and action (think ‘America’ in its finest hours).  Based on our calculations, we think we are due to start moving away from the 'total control' camp right about now and this fall election we will see a radical departure back towards freedom and fiscal sanity.

Our gut feeling is this:  'Just wait til the GenXers and the Golden Millennial generations get a load of the taxes they are going to pay for this expansive government on top of the $13 trillion debt already now in place! They are going to go bonkers!  Most college students today don't even have any idea of what a 'FICA' tax is!'

If you want to find out why we have a democratic republic in the first place here in the United States of America, you owe it to yourself to read the truly great book, ‘The Peloponnesian War’, by Donald Kagan of Cornell University.  Joseph Ellis, who wrote another great book that you owe it to yourself to read, “Founding Brothers’ said that if you really want to understand the thoughts and rationale behind the decisions made by our founding fathers during their consideration of the Constitution, you need to read the same books they read and grab the concepts they thought would work based on their reading of history, which was enormous.

Dr. Kagan’s great book is based on one of the great books our Founders all read by the same title by Thucydides and probably had major passages memorized. His book will show you how the democracy of Athens, from 439 to 404 BC engaged in the first true ‘World War’ with the Spartan Empire which later also involved the Persian Empire.  Complicated international affairs, conniving, cheating, stealing, governments running out of money, clever political gamesmanship and leadership, great and flawed military strategy; the Peloponnesian War had it all and then some.

And mark this name of perhaps the greatest ‘politician’ the world has ever seen, and you have never heard anything about, Alcibiades. His name runs through the 30 Years War of the Peloponnese like George Washington’s runs through our history, except Alicibiades started out as a George Washington-type of leader of Athens, and then defected to head up the armies of Sparta, their mortal enemy, and then switched over to help lead and advise the Persians against both the Athenians AND the Spartans, and then was triumphantly returned to power in good old  Athens near the end of the War!

For these reasons, we say he might have been the greatest ‘politician’ ever, not the greatest moral or ethical leader, for obvious reasons.  Can you even imagine W or Bill Clinton being President of the US; changing over to become the Soviet Premier during the height of the Cold War tensions; defecting to go over to Beijing to become their Secretary of State with war powers, and then coming back to the US where he would be elected again to be President unanimously with 435 electoral votes in the presidential elections, all within a 30 year time frame!

Anyway, our point is not to sell Dr. Kagan’s book but rather to give you a solid resource to read for yourself and make your own determination about what will happen next in America’s political evolution.  Without ruining the ending, the Athenian Democracy lost this 30-year war, only to restore it less than a year later and return it to its radical democratic roots of equality for all and freedom for the individual.

We have attached a syllabus of sorts of other books below that James Madison devoured before he went to Philadelphia to present his main draft of the Constitution as he thought it should be written. (He lost on many points in debate and we still wound up with the greatest written Constitution in history)

Read them yourself and get armed for the ‘battle’ ahead.  You don't need to arm yourself or hoard gold and food and hunker down in some bunker in Montana.  You just need to get prepared for the intellectual and political debate that is about to ensue.

Democracies get rejuvenated every now and then by vigorously opposing the encroachment of 'Oligarchs' in Washington like 'The Ossified Entrenched Leaders of Both Parties', 'The Trial Lawyers', 'The AARP' and so on (see Kagan’s book and you'll see why they should all be called Oligarchs because of their united position to 'Keep Things Just The Way They Are').

When democracies push the reset button, things get a lot better really quickly.

Do your part.  Reading this Kagan book is one great first step.


* (actual full quote: ‘Many forms of Government have been tried, and will be tried in this world of sin and woe. No one pretends that democracy is perfect or all-wise. Indeed, it has been said that democracy is the worst form of government except all those other forms that have been tried from time to time.’  Sir Winston Churchill, Hansard, November 11, 1947 British politician (1874 - 1965))

-Madison’s research was compiled in a paper called “Of Ancient and Modern Confederacies,” which outlines the structure and history of the Lycian, Amphictyonic, and Achaean confederacies of Ancient Greece; the Holy Roman Empire, the Swiss Confederation, and the United Provinces of the Netherlands.  He recorded his notes in a booklet of 41 pocket-size pages.  He referred to this booklet in both the Federal Convention and the Virginia Ratifying convention.  Large portions of these notes appear almost verbatim in Federalist # 18,19, and 20.