Other than in the past on a professional basis, when he wrote highly technical articles about IBM's AS/400 computer system, Brian Kelly receives no compensation for his work. Additionally, Kelly has not taken any donations or contributions other than for his US Senate Campaign of 2012. Mr. Kelly has recetly canceled his write-in campaign for the US Senate, and instead he endorses Tom Smith for US Senator from Pennsylvania v. Robert P. Casey Jr. If you would like to donate to the closed campaign to help defray costs, feel free to go to www.kellyforussenate.com and click the DONATE button. Your donations are most appreciated.
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When the report came out it was aptly titled, “The Moment of Truth,” in December 2010. It unapologetically stressed that the United States is on an unsustainable fiscal path. The Preamble to this report shows its serious tone. It made me feel good just to read this as it is not often I find the work of any government body either truthful or thorough. Again, though not perfect, this was our best attempt ever to get our tax structure right and our fiscal house on the way to order. The preamble is compelling:
“Throughout our nation’s history, Americans have found the courage to do right by our children’s future. Deep down, every American knows we face a moment of truth once again. We cannot play games or put off hard choices any longer. Without regard to party, we have a patriotic duty to keep the promise of America to give our children and grandchildren a better life. Our challenge is clear and inescapable: America cannot be great if we go broke. Our businesses will not be able to grow and create jobs, and our workers will not be able to compete successfully for the jobs of the future without a plan to get this crushing debt burden off our backs…The American people are counting on us to put politics aside, pull together not pull apart, and agree on a plan to live within our means and make America strong for the long haul.”
Former Federal Reserve chairman Alan Greenspan chastised President Barack Obama for his off-hand rejection of the Simpson deficit-reduction proposal. “The worst mistake the president made was not embracing that vehicle right away.” Greenspan made these remarks at the Bloomberg Washington Summit, as reported by the Wall Street Journal.
Though not all of the report is recognized as being perfect, the plan put forth by the co-chairs represents a very thorough tax reform initiative, and surely the best effort at solving the taxing, spending, deficit and debt issues in recent years. It is such a well done study that it continues to be referenced as part of most conversations on tax reform.
It is not the intention of this op-ed to replay the debt commission report or to use pieces of the report to highlight the ways to fix the system in a big way. Overall, my plan for recovery, which I call RRR, is designed to bring America back to prosperity and to bring Americans back to work. It is far more comprehensive than Simpson-Bowles. That said; tax strategy and the tax reduction and the simplification of the tax code are very much a part of both plans.
Unfortunately, our Congress is dysfunctional. When one branch advocates capitalism, and the other socialism, there really is no middle. When the President gets involved it gets worse as he tries to play both sides against the middle to improve his reelection possibilities.
On April 15, 2011, still believing that American institutions created by the founders have a traditional role in the US government, the House passed a resolution to establish a federal government budget for fiscal year 2012. It also provided a spending framework for the next ten years. In many ways, it was Simpson Bowles all over again but there was no tax increase in the plan. Most economists agree that a tax increase in a recession is a fool’s play. The overall objective was to support growth and like the 1986 Reagan plan, the House Act was simple, fair, and efficient. The budget was adopted in the House by a vote of 235 – 193; but it went nowhere in the Senate.
The Personal Income Tax Plan, which is the feature of this op-ed, is a piece of the RRR: A unique plan for economic recovery and job creation. In fact, the RRR plan itself is so big, and so comprehensive that there are actually three different pieces to just one of the thirteen R’s in the RRR Plan. The, R which we are currently addressing is Reduce Taxes. Besides the Personal Income Tax Plan, the other parts include (1) RRR: Reduce Corporate Taxes to 8 Per Cent, and (2) Foreign Tax Deferrals and Repatriation Schemes. The former has been previously published by CAA and the latter will be explored in a CAA op-ed in the future.
The purpose of the new RRR Personal Income Tax Plan structure would be to raise revenue to run the government to supply needed services for American citizens. The tax code would no longer be used as part of a government redistribution scheme. If the taxes from the newly designed tax code are based on income, tax refunds would be given only to the extent that a taxpayer paid something into the system. Tax refunds, no matter whether called credits or subsidies, or allowances, are not a gift from you, your neighbor, or me, through the government, to a non-worker.
No tax code gimmick should create a tax refund greater than the amount the taxpayer has had withheld from wages. In fact, all Americans should pay some tax and so the proper restructuring of the code must include a mechanism that is not hurtful to the poor yet includes all able bodied, non-helpless people who work in America. Nothing in America is free, and nobody should sit back on the couch and collect on the hard work of somebody else. Even if that tax rate is 1% or 5% or 10%, or whatever is right, all Americans must pay some tax to their country in order to be contributors to the nation. Right now, other than those who are exempt from taxes, everybody’s taxes should be reduced to help stimulate the American economy.
Early in the last year of his life, John F. Kennedy, on Jan. 21, 1963, in his annual message to the Congress expressed his thoughts on taxation. The Economic Report of The President offered the following summation of why Personal Income Taxes must be reduced: This applies today as much as in the 60’s. “In today’s economy, fiscal prudence and responsibility call for tax reduction even if it temporarily enlarges the federal deficit – why reducing taxes is the best way open to us to increase revenues.” Kennedy never called for refunding money to anybody who did not pay anything into the treasury.
The RRR Reduce Taxes plan does not permit 100% tax parasites in America. The RRR plan tax code says that after earning $100.00 in a given year, the most any taxpayer can keep of his or her income is 99%, regardless of the source of the income. If that means that 46% of the taxpayers that today pay nothing immediately begin to pay 1% FIT on all income over $100.00, so be it.
There are a number of taxing models out there already, proposed by scholars and candidates alike, none of which are fully complete in covering all contingencies or with all questions answered. But, they are all a good start compared to the 75,000 pages of blather and corruption in our current tax code.
Please see three recent Conservative Action Alert (CAA) articles by Brian Kelly to get a perspective on other tax changes that are included in the RRR Plan to Reduce Taxes. The titles of these articles are:”An Introduction to RRR: A unique plan for economic recovery and job creation, RRR: Reduce Corporate Taxes to 8 Per Cent, and Buffet Rule: A Sure Loser for Republicans.” Put any of them in your search engines when you have the time.
A few smart financial people can get together and advise the government how to reduce the income tax code to just 50 pages and the old tax code should immediately be thrown away. Within the code, there are more than 200 temporary rules that must be reworked and updated regularly. I would advise the government analysts and the independent analysts, who examine any of the 75,000 pages, to create a better plan; take as little as possible from the old plan; and mostly pretend it does not exist. It is that bad. All the favors and lobbying tricks included in the code are a disgrace and this burdensome tax code has hurt America for years. It has created unfairness for us all.
We learn a lot about what happens with various tax actions by observing them through history. For example, Congress approved a tax rebate for individuals in 2008 to stimulate the economy. It was a government check that Americans received in the mail. However, Americans did not rush out and spend it their new bounty. Consequently it had little to no effect on the economy. It was a one shot deal to theoretically stimulate the economy and make people feel better since the dollars appeared to be real. There were no strings attached and so many simply saved the proceeds or they paid off some debt. This did not help the economy because it was one time and it was temporary. Don’t count on seeing it again. Even Democrats sometimes can recognize something that does not work.
Through this and other history, we have learned as a nation that small shots of cash simply do not help to sustain the overall economy. People have to plan and know what is happening tomorrow and the next day in order to limit their spending when times are tough. The tax cuts that were part of the stimulus bills and supported by President Obama were all bad and they did not work. Things got worse. They were all temporary and did not help the uncertainty that all US commerce is affected by today. More importantly, even if the 75,000 page tax code were a perfectly tuned instrument, and it is not, it should not have been cooked to support a welfare scheme for redistribution of taxpayers’ contributions to non-contributors.
As the master blueprint for redistribution of income and wealth, the Obama plan included $500 in cash to low-income adults who had not paid any income taxes. Most taxpayers don’t really know this or chose not to care since it did not affect their checks. But, what was that all about? It was a quick welfare handout to able bodied Americans. As noted above, the tax code should not be used for welfare, period. Neither corporate welfare nor personal welfare should be permitted through the tax code. If the Congress wants to give people, who do not contribute to the treasury, a welfare increase let them publically enact welfare legislation to do so. This should not be done by executive fiat and it should not occur in what the people need to believe is a permanent and fair tax code.
The 2009 Obama plan was simply a welfare plan and welfare plans make the takers think they are on welfare while the proceeds come out of the taxpayer’s pockets. . For the first time, the government tax refund system handed out money to able-bodied men and women who did not have dependent children. Worse than that, they had no income and paid no taxes. It cost $23 billion from the US treasury. Why? So the presumed giver, the government, would appear to be a hero, and thus worthy of reelection?
In 2010, the Obama stimulus bill was even worse. His bill wiped out the great welfare reforms of 1996 that Bill Clinton took credit for passing. But that is another topic. Before Obama, the US was on a track to make welfare an option that was not very desirable for able bodied people, but which helped when needed for the helpless. The United States would not have to collect so much in tax revenue if we managed our expenses better. The US Treasury is not a slush fund or a stash for the President or Congress to buy votes.
The point is that history shows that permanent reductions in personal and business tax rates, such as the Kennedy tax cuts, unlike temporary tax credits, do a much better job of stimulating the economy. Has the Obama plan worked? We all know things are worse now than before the plan.
When Americans can count on keeping more of their hard earned income, they make plans to spend or invest it. Spending and investing do help stimulate the economy. The key is making things permanent so all can plan. Even the Bush tax cuts were temporary and that is why we relive them again every year, and that is why they no longer help as they once did.
If the RRR corporate tax recommendation were 35%, and if the Capital Gains tax were eliminated so that Warren Buffet pays his real fair share, the rich would have a real beef and it would be partially justified. However, the RRR Plans recommends an 8% maximum domestic corporate tax rate, which admittedly may serve us better if it were even a bit lower. With such a low corporate rate, a fair capital gains tax approaching the wage tax schedule would not be double taxation at all. Consequently, nobody looking for investment tax relief for the wealthy needs to pretend that in such a plan there is double taxation.
There are some who believe the only way for both fairness and growth is the flat tax. Like me, they believe that the 75,000 pages of corruption and complexity in the IRS code must be replaced with something that can be executed on a post-card tax return or no return at all. They suggest that there be one low personal tax rate with no double taxation for corporations. I see the 8% or lower corporate tax as almost getting us out of the double taxation conundrum, so let’s consider that part done.
The perception of fairness that a flat tax gives is one that would be good for the economy and competitiveness. For the Mitt Romney lovers out here, it means that if Mitt Romney makes 100,000 times more than you, he’ll pay 100,000 times more in tax. Likewise, for the last several years, with his huge book sales, President Obama has made about thirty times what I have made, and he too would be paying thirty times more in taxes.
During the Republican Primary, we saw a number of options to restructure the tax code. All of these are better than the 75,000 page monster we now have. Any new code should be no more than 50 pages. During the campaign, we all got to see the Cain 999 plan, the Perry 20; the Busler 20, 20, 0; and various flat tax approaches such as Gingrich’s 15%. My favorite is a slightly modified Fair Tax which is explained in detail shortly.
The Fair Tax would be hard to implement for sure but it is the most fair as its name implies. It has been out there for awhile and in my opinion, it is the best tax solution for the nation. Again, almost anything is better than our current unworkable tax code. I say almost because there were a lot of people in 2008 who said that anything would be better than Bush. How’s that working out for you? Perhaps almost better would have given a lot of people room for the big mistake we got.
We are fortunate in America that the high wage earners pay so much of the tax burden. Few of us take the time to thank the rich for taking the wrath of the IRS on a continuing basis. Even our President insults them rather than thanks them. Many articles have been written showing that the top 1% earners pay about 40% of the taxes and there are 46% of Americans who now pay no taxes. So, from my point of view, a lot of people should be thanking a lot of other people, rather than complaining.
The Fair Tax Explained
Former House Ways and Means Committee Chairman, Bill Archer, reported the following about the Fair Tax: “A recent survey was done, in Europe and Japan, of the major corporations and I was astounded at the results. They were asked, ‘If the US abolished its income tax and went to a sales tax, would that have any impact on your decisions?’ Eighty percent of the corporations said they would build their factories in the United States of America. Twenty percent said they would move their international headquarters to the United States of America!”
The biggest complaint waged against the Fair Tax by progressives is that it is not progressive. This is simply not true. The key element that enables the Fair Tax to be progressive so that the poor do not get whacked with huge taxes; is that there is a mechanism cleverly called a prebate. This does have a more official name: family consumption allowance. Understanding the family consumption allowance is essential to understanding how the Fair Tax is progressive and actually helps the poor. Unlike a rebate which occurs after you spend; a prebate comes to you before you spend. It prebates the amount of the consumption tax based on your family size, anticipating the tax you would pay at a 23% rate up to the poverty level. If you spend less, you can theoretically make money on the prebate. In the RRR plan, to assure that everybody pays something in federal taxes, the prebate would be 99%, thus leaving 1% for taxing up to the poverty level.
Hard as it may be to believe, the government will send you a check (more than likely via direct deposit) every month of every year. The prebate makes the Fair Tax perfectly progressive. In other words, the poor are compensated for the Fair Tax up to the poverty level ahead of time. Honesty is not required as every item you buy will bear a 23% imputed tax so the prebate is merely paying the sales tax on what you buy. Nobody would any longer pay the Payroll (FICA) or the income tax and so, all of us, not just the poor would be 99% tax free up to the poverty level.
The prebate payment is paid monthly to families based on a family size schedule. So, in this scenario, taxpayers start off with money in their pocket from the government to pay the tax. The personal income tax (16th amendment), a big part of President Wilson’s progressive plan, would be repealed with the inception of the Fair Tax. Additionally, the Payroll tax, Gift tax, Estate tax, Capital gains tax, and the Alternative minimum tax would be eliminated. The Corporate tax is supposed to be eliminated also but I would like to see a small corporate tax remain in the neighborhood of 8 percent or less.
The notion that the Fair Tax punishes the poor is fallacy. In fact, the poor will pay just a 1% tax and not a dime more unless they consume at a rate greater than the poverty line. It is a very clever approach. The official Fair Tax proposal eliminates the corporate income tax completely. As noted, I think it is better to have some corporate income tax but very negligible. When the corporate income tax rate goes down to 8% or perhaps lower based on the RRR plan, this will work well with the Fair Tax and the revocation of the 16th Amendment.
I do not like the notion of a zero corporate income tax. Eight percent is fine. Something less might also be fine, but not zero. Eight percent is almost unnoticeable compared to 35%. Corporations are not necessarily trustworthy. Government must have a carrot and stick system to control corporations. Even the Founders did not trust in corporate benevolence. The tax system is to be fair to Americans, not corporations. On their own, corporations will not do the best thing for America and so Americans, through government must watch them closely. The tax rules for small corporations must not be onerous. Both, however, should pay the 8% tax or perhaps a smaller rate but even the corporate regulations must be simplified.
Corporations must be required to file data with the government because they have proven that they cannot be trusted to do what is best for the American people. They need to be watched closely so that the people, not the corporations are served. I don’t like big government and I don’t like big corporations or big unions. To the extent that corporations will be big, regardless of what I like, some entity must keep an eye on them and the only entity big and strong enough is the government.
If the government would always represent the people, this would make the job much easier. But, I presume the people will still have to keep a wary eye on the government while it keeps a wary eye on corporations. Reducing the domestic corporate tax from 35% to 8% or lower will create more dividend income, which will either be taxed at ordinary rates, or via the Fair Tax, it will be taxed when it is spent.
More on Capital Gains:
So that we are all on the same page, if there is a Fair Tax as the experts have devised it, there would be no capital gains taxes at all since there would be no income tax at all. However, there might need to be another revenue generator so those that live from capital gains, who reinvest and do not buy anything at retail stores in line with their income, will also pay some taxes. Remember the Fair Tax applies only when you spend something at a personal level.
Obviously, this might not be such a good deal for Americans if all the well-to-do simply stop spending, considering the top 1% picks up 40% of the tax tab today. The question of the day would be: “Do Bill Gates or Warren Buffet ever spend a dime on anything personal?” If they do then the Fair Tax will works. If they do not the Capital Gains transaction mechanism needs to be tweaked.
In the Perry Plan and the Gingrich tax plans (Not Fair Tax oriented), which are still available for adoption by any candidate, including President Obama, there would be no tax at all on Capital Gains. We would have to really see if this can work. That would mean on Warren Buffet’s $100,000 salary, if Perry or Gingrich’s plans were adopted by the country, he would pay taxes on just his relatively small salary earnings ($100,000.00) However, on the millions and millions Buffet makes on investment earnings he would not pay a dime. Mitt Romney would also pay the same non-dime. Therefore, one can see that the total exclusion of capital gains from the tax man with an income tax may not be too fair for too many people.
With the Fair Tax, if the well-to-do actually spend a lot of money on end assets, such as cars and yachts, then maybe my concern about capital gains is unfounded. We will have to analyze this aspect further in the future. If there is no Fair Tax coming soon, Romney has a better plan on capital gains. In his plan everybody has a zero rate up to $200,000 in income.
The bottom line on personal taxes – America first!
The bottom line on Personal Income Taxes is that they should reflect the needs of America first! While we work to perfect the Fair Tax, the current tax schedules should be reduced immediately to jump start the economy. Meanwhile the whole tax code should be rewritten from 75,000 pages to 50 pages. Every American should pay at least 1% after their first $100.00 in earnings until they hit the first bracket, and there should be no refunds for those who did not pay any withholding tax. A flat or almost flat tax would serve just as well as a graduated tax as the rich don’t pay as much anyway with Capital Gains in play.
Having the states collect federal income tax withholding, a good notion that might surface from an income tax rewrite, is a very novel approach to keeping the Feds honest and giving the states the ultimate power. In this scenario, individuals pay only to their states, and the state pays the Federal government.
Overall, the best long term personal taxing solution is the Fair Tax with a small corporate tax payable through the states. This eliminates the IRS, and it brings in the underground economy. However, depending on the spending patterns of the ultra rich, it may need some tweaking to handle investment income while remaining revenue neutral. The Fair tax has another big advantage as it reengages expatriates and this too is good. The timeline for the Fair tax should be one year after the new Congress and president take office in 2012. In the meantime, Congress should pass the whole RRR plan and should begin to make life easier for expatriates, who have fled because of uncertainty and excessive taxation, to join America again.
About Brian Kelly
Brian Kelly is a business owner and former assistant professor at Marywood University; he and his wife, Pat live in Northeastern Pennsylvania. Kelly ran for COngress and for the US Senate in his state and he believes limited government brings liberty and freedom. Brian's 48th book is titled, Saving America, The How-To Book. It is available at www.checkoutking.com and www.itjungle.com.