One of the problems is that the social insurance programs are running in the red. While these programs cost about 1.5 trillion dollars a year at this time, only about 960 billion dollars are collected in taxes, or premiums if you prefer. Anybody who thinks that the congress is going to significantly change this picture is not facing a brutal fact. The Democrats need those programs. They're the bait the keeps a lot of their constituents in line and loyal to that party. Interest on the national debt must be paid (6%) so that leaves only defense (20%) and other discretionary funds (19%) to play with. It is my opinion that we must not sacrifice defense on the alter of entitlement programs.
There are some things that could be done to balance the books for the social insurance programs, but that would be a really tough sell for any congress, let alone a Democratic congress. Just a hint that Social Security could be on the table for some change to make it more viable from a cost standpoint, causes a storm from the AARP and it's millions of members, as well as all the seniors who are now on SS or approaching that age. I don't think the congress has the guts to tackle the problem in a meaningful way. Messing around with the social insurance programs is the third rail of politics for any politician. So, it seems to me to be a fact of life that the Social Security, Prescription and Medicare/Medicaid programs are going to continue to run in the red, in fact escalating as more and more as baby boomers become eligible for the benefits. Exacerbating the problem is the ever increasing life span of the population due to advancements in the standard of living and medical science. Of course as we get older the cost of medical care goes up significantly. The deficit funding for the social programs is going to get larger and larger with time in the foreseeable future. When the eligible age for SS was set at 65 years the average life span of the population was about 68 years. Now the average life span has increased into the high 70's. The individual that has reached near retirement age can expect to live in retirement almost as long has they worked.
In a sane world the social insurance programs would be separated from the general budget and revised to make them self sustaining. We tried that with the US Postal Service and you see where that got us. Congress will not be willing to allow the program to make the changes that would make it financially viable. So, one way or another we, as taxpayers, must shoulder the burden of supporting these programs; they are here to stay.
As a result of that thinking, it is my belief that any tax program must raise the money equal to the budget, including the social insurance programs. We can not continue to dive deeper and deeper into debt until the interest on that debt becomes so overwhelming that the country moves into bankruptcy. It can happen. Look at the now defunct Soviet Union and the present situation in Europe, especially Greece and Italy. The Soviets spent their way into bankruptcy funding a military at a rate they couldn't afford and many of the European countries have saddled themselves with social programs they can't afford and are unwilling to support by higher taxes. They want all the government benefits without paying. Sound familiar. Sweden presents a little different view in that they tax themselves at around 50% of their income to support their social programs. I don't think that is path a highly industrialized country can travel.
No taxing program is going to be levied on the citizens without some pain. The question is what kind of tax program gives this country and it's citizens both the fairest distribution of the burden and at the same time strengthens our financial picture and enhances our position in the world global economy. It is my belief that a national sales tax, along the lines I have discussed in earlier posts, fits the criteria better that the current model.
Let us reiterate the advantages of a national sales tax as opposed to the current model and perhaps brush against some of the possible consequences of this model.
- All taxes would paid at the point of sale for all purchases made in the US. There is no IRS forms to fill out at the end of the year, you pay as you go. Contract for work would be treated as a sale. If an individual want's some service, they can either take on the service provider as an employee and pay the SS and Medicare taxes as appropriate, or obtain the service via use of a legitimate contract and force the contractor to pay the appropriate sales tax.
- Having no taxes on corporations and business, the cost of American made products would become a lot more competitive in the global economy as well as cheaper for internal consumption. We need every advantage we can get in this world of cheap labor overseas and the consequent flight of manufacturing to these foreign countries.
- By exempting certain items that are "essential to life" you end up reducing the tax burden on the lower earning citizens of the country. Such items as Groceries, Medical Care and Housing are examples. If the so called poor citizen buys designer shoes, that 46 inch LCD TV or an IPad, and they do, then they would be taxed like everybody else.
- Let's be clear, every item that is bought, except those deemed essential to life is taxed. That includes the purchase of stocks and bonds. The exception here would be US Treasury and Municipal bonds and purchases made by government and charity organizations. All stocks,corporate bonds, and other financial purchases would be taxed at the current sales tax rate upon purchase.There would be no capital gains tax on stocks or bonds bought on the American markets and the sales tax paid. You pay your money going in and take your chances. If you win, great; but if you lose that's your problem. Uncle Sam gets his money going in, win or lose. After all, what the stock market likes to call investing is really nothing but speculating, i.e. gambling. When you buy a stock from a broker you are not investing in the company, that was done a long time ago. You're taking a piece of ownership and gambling that it will pay you back for your bet. Much like Vegas. The liberals among us will really like this one, except the rich liberals of course. Poor people don't gamble in the stock market, even though they do go to Vegas. So these taxes will fall mainly on the wealthier members of our society.
- The wage earner, the guy who can not take advantage of the many tax dodges in the present system, gets an immediate raise in pay of something like 15 of 20 percent; depending on how much they deduct as withholding. After all, its the worker who gets a W2 form reporting their income and has few tax loopholes to crawl into. This is really significant and offsets the increase in costs at the checkout counter due to the federal sales tax. The downside of course is that there are no more tax loopholes, for rich or poor. About the only ones available to the middle and lower class now, interest on the mortgage and excessive medical expenses, will be gone. That will impact the average taxpayer very little. The poorer classes not at all because they generally don't buy property and they use the other available means for medical help.
- While the upper 1 or 2 percent pay about 40% of all the taxes collected by the federal government, their impact on the overall economy is really rather small. Even though it sounds like the taxes are heavily weighted proportionally against the top tier of the wealthy, they in fact pay a much smaller percentage of their true income to the government than the great unwashed masses (the rest of us). But the middle classes are the ones who support the economy by their consumption of goods and services. How does a sales tax even the field then? For the simple fact that money is not put under a mattress. The wealthy buy things. Lots of things. Clothes, cars, stocks, bonds, and so forth. They buy a lot more than the average man on the street. And everything they buy is taxed. When the government no longer has to sell bonds in order to pay it's bills, then that avenue to escape taxes will be closed. Only short term bonds will be sold. No need for long term government paper. Under the current system the wealthy can hide earnings through a myriad of tax loopholes, but they can't hide consumption. That gets taxed. Many very wealthy people, living in ultra luxury, pay little or no taxes at all. The common bloke however, does not enjoy the use of the many tax loopholes built into the complex taxing system now employed.
- The downsides, at least potential downsides. This system might discourage the frequent trading of stocks and bonds, at least the short term in and out trading that takes place in order to get a small gain on every buy and sell. It would encourage the "investment" for the long term. Buy and hold would become more common. Buying stocks and bonds which return dividends, interest and long term appreciation would become the basic strategy. To my mind that's a good thing, even though the brokers who depend on the traders won't like it. It would add stability to the market and discourage speculation to a large extent.
In order to compute the required tax rate to meet the budget, some basic information is readily available, but some of the adjustments to that data estimated. I would hope to refine these estimates later, or maybe someone reading this posting will have better data.
I have said that we want to raise enough money to meet the current federal budget of 3.456 trillion dollars. I would like to plan on raising a little more in order start paying down the federal debt. But, that is not realistic. Give congress a little extra money and they would spend it.
The government will raise .96 trillion direct from social programs taxes and 26 billion directly from tariffs.
In trillions of dollars needed to fund the government:
3.456 - .96 - .026 = 2.47
The source of taxable sales are:
GDP of 15 trillion per year. I estimated that 50% of GDP falls in the non taxable sales category. This is hard to determine. It is known that 70% of the total economy is due to consumer spending. Not all of that is taxable however, so I used an estimate of 50% as being taxable.
We import about 2 trillion dollars per year to be sold in this country. After taking into account exports which are not subject to sales taxes the trade deficit amounts to 408 billion dollars/year.
(50% x 15x10\12) + .408 x 10\12 dollars = 7.9 x 10\12 dollars
The total value of stocks and bonds sold on the US stock market are:
Stocks NYSE 19 trillion dollars/year
NASDAQ 13 trillion dollars/year
AMEX 10.7 trillion dollars/year
OTC 4 trillion dollars/year
Bonds 84 trillion dollars/year --- We are currently selling about 1 trillion dollars to finance the government. I haven't found a good figure how much the accumulated municipal bonds would amount to but I would think they would be on the same order. So total taxable bond sales would be about 82 trillion dollars.
Total taxable sales in trillion of dollars are:
7.950+19+13+10.7+4+82=136.65trillion dollars
Direct income from tariffs is about 26 billion dollars.
To compute the required tax rate (TR) then
( TR x 136.65x10\12) +.000026x10\12 = 2.47x10\12
TR= 1.8%
This will mean a tremendous tax break for the average American. Only those people that consume big ticket items on a regular basis, and the wall street speculators will likely come out worse off. But, if a buyer of stocks doesn't expect to realize at least 1.8% return on their stock purchase within a fairly short time, they likely wouldn't put up the money to start with. Just leave it in the bank.
The obvious concern will be that American money will flee "investment" in the American stock market and will use the European and Asian markets to serve as their casinos. I honestly don't think that is likely. American companies stocks will continue to be traded on the American markets and, I believe, will get a shot in the arm from this tax policy and will thrive. Making American companies more attractive, due to reduced costs, will be an even more attractive place to bet your money. And with no capital gains tax on American market traded stocks and bonds.
What about American money put into foreign paper? It is my plan that foreign purchased" investments" would be taxed just as if they were bought on the American market. That may take a little work to figure out how to keep people from trying to cheat on paying the appropriate taxes, but I'm sure it can be managed. The biggest problem of course is that money which is earned overseas and re-invested there will not be taxed. That is really no different than it is now.
This would reduce the IRS role significantly, their principle task would be monitoring and collecting taxes on the capital gains on foreign investments. Of course that bureaucracy won't like that very much. It would mean a potential work force reduction; something that doesn't sit well with any government agency. Some agency would have to oversee the collection of the sales taxes and enforce their payment. I suppose that would be a role the IRS would assume. Most states have a sales tax and have mechanism in place to deal with those taxes. That could be the model for the federal tax.
I have said that we want to raise enough money to meet the current federal budget of 3.456 trillion dollars. I would like to plan on raising a little more in order start paying down the federal debt. But, that is not realistic. Give congress a little extra money and they would spend it.
The government will raise .96 trillion direct from social programs taxes and 26 billion directly from tariffs.
In trillions of dollars needed to fund the government:
3.456 - .96 - .026 = 2.47
The source of taxable sales are:
GDP of 15 trillion per year. I estimated that 50% of GDP falls in the non taxable sales category. This is hard to determine. It is known that 70% of the total economy is due to consumer spending. Not all of that is taxable however, so I used an estimate of 50% as being taxable.
We import about 2 trillion dollars per year to be sold in this country. After taking into account exports which are not subject to sales taxes the trade deficit amounts to 408 billion dollars/year.
(50% x 15x10\12) + .408 x 10\12 dollars = 7.9 x 10\12 dollars
The total value of stocks and bonds sold on the US stock market are:
Stocks NYSE 19 trillion dollars/year
NASDAQ 13 trillion dollars/year
AMEX 10.7 trillion dollars/year
OTC 4 trillion dollars/year
Bonds 84 trillion dollars/year --- We are currently selling about 1 trillion dollars to finance the government. I haven't found a good figure how much the accumulated municipal bonds would amount to but I would think they would be on the same order. So total taxable bond sales would be about 82 trillion dollars.
Total taxable sales in trillion of dollars are:
7.950+19+13+10.7+4+82=136.65trillion dollars
Direct income from tariffs is about 26 billion dollars.
To compute the required tax rate (TR) then
( TR x 136.65x10\12) +.000026x10\12 = 2.47x10\12
TR= 1.8%
This will mean a tremendous tax break for the average American. Only those people that consume big ticket items on a regular basis, and the wall street speculators will likely come out worse off. But, if a buyer of stocks doesn't expect to realize at least 1.8% return on their stock purchase within a fairly short time, they likely wouldn't put up the money to start with. Just leave it in the bank.
The obvious concern will be that American money will flee "investment" in the American stock market and will use the European and Asian markets to serve as their casinos. I honestly don't think that is likely. American companies stocks will continue to be traded on the American markets and, I believe, will get a shot in the arm from this tax policy and will thrive. Making American companies more attractive, due to reduced costs, will be an even more attractive place to bet your money. And with no capital gains tax on American market traded stocks and bonds.
What about American money put into foreign paper? It is my plan that foreign purchased" investments" would be taxed just as if they were bought on the American market. That may take a little work to figure out how to keep people from trying to cheat on paying the appropriate taxes, but I'm sure it can be managed. The biggest problem of course is that money which is earned overseas and re-invested there will not be taxed. That is really no different than it is now.
This would reduce the IRS role significantly, their principle task would be monitoring and collecting taxes on the capital gains on foreign investments. Of course that bureaucracy won't like that very much. It would mean a potential work force reduction; something that doesn't sit well with any government agency. Some agency would have to oversee the collection of the sales taxes and enforce their payment. I suppose that would be a role the IRS would assume. Most states have a sales tax and have mechanism in place to deal with those taxes. That could be the model for the federal tax.
