Creating Fair Taxation

Alright, time for me to eat crow... I owe you an apology, Shiva - I was wrong with my 55% estimate for your Flat Tax... when I ran the numbers again, it came out to 24.96% of income over and above your $50,000 exemption. Sorry about that - shows me not to work on spreadsheets when I'm falling asleep *L*. Seriously, though, I know you've put a lot of work into your plan and it deserves a similar amount of work on the part of anyone responding to it, so in that vein, I've done up this chart to compare actual tax rates to the rates I've projected for your plan (assuming a 24.96% flat tax on Adjusted Gross Income (AGI) over and above $50,000 to maintain revenue neutrality):



The Average Tax Rate (12.78%) is the Flat Tax you'd have if you exempted no income. The Solid Blue Line is the Actual Tax Rates (as a percentage of AGI - not of Taxable Income, as Tax Rates are most commonly referenced) and the Solid Green Line is your Fair Tax Plan. The dashed green and blue lines are simple linear regression trend lines (with equations) from both tax systems. The slope of the trend lines (0.2477 actual; 0.3122 for you) gives an estimate of the progressivity for each system. The R-Squared figure gives a relative measure of how closely the trendlines fit the curve (R-Squared=1 is a perfect fit).

All-in-all, so far I'd say the Individual Income Tax proposal is doable... it is more progressive than the present system [about equivalent to the progressivity of Nixon's (70-73) term (Nixon = 0.310, You = 0.312)], so you are going to be trading off some supply for more demand, but that's okay because I think that's the direction the economy should be going. My major concern is how much you'd want to increase taxes to balance the budget... because your tax burden is concentrated on the upper end, I think you'd start seeing your progressivity (and inflationary pressures) go up rapidly with higher average tax rates.

Where it comes to FICA, am I correct in assuming that your proposal is to channel the receipts of the first $50,000 of Wage and Salary Income to your "private" plan and to use the remainder (sans contribution cap) to fund current benefits? If so, have you run any numbers on this? It seems to me that you'd see a significant revenue shortfall here.

 

Nice work but if my plan exempts the bottom 50% from a personal income tax then why does the graph reflect them paying a tax when they don't earn that much or am I reading the chart wrong?

Working in conjunction with the state tax proposal (eliminating the most regressive taxes in the nation) the necessity for government welfare assistance to mitigate the effects of poverty so government spending comes down. What should also be noted is that with the flat tax (no deductions, credits, or exemptions) that the necessity for government welfare assistance to mitigate the effects of poverty sky-rocket.

Yes, a tax rate for a balanced budget is a mandatory necessity. Any tax proposal that doesn't fund authorized expenditures is fiscally irresponsible. In laymen's terms "The first rule of fiscal responsibility is to pay the bills." We have no right to spend the income of the next generation today with deficit spending. They're going to need their income to pay for their own authorized expenditures when they grow up.

Yes, based upon the median household income the FICA/Payroll/Self-employment taxes on the income up to $50,000 will be funneled directly into private investment accounts identical to 401K's and IRA's today. All income (not just earned income) will be subject to the 15.3% tax (with the noted amount going to private investment accounts) without any caps so not only is the cap lifted but the inclusion of investment income creates a huge new tax resource to cover the costs of 45 year transitional period.

I haven't run the numbers recently on my Social Security tax revenue but let's take a very quick look. In 2013 the projected revenue for Social Security from FICA/Payroll/Self-employment taxes was $959 billion dollars and based upon the 15.3% tax rate it indicates that only $6.27 trillion dollars of gross personal earned income (with cap) was taxed out of over $13 trillion in personal income. Under my proposal all gross personal income would be subject to this taxation would would basically double the tax revenue for Social Security to almost $2 trillion. Of that revenue less than 1/3rd (around $600 billion) would be lost to the private investment accounts.

Is that additional annual revenue enough to fund the 45 year transition? Well my rough estimate is that the transistion will cost between $40-$45 trillion and with roughly $1.4 trillion in revenue that exceeds the projected average cost. As we approach the end of the transition period the government expenditures drop rapidly because even with a higher minimum benefit roughly four-times what we have today that is comprised of private investment funding and then subsidies which will be less than the minimum benefit we're paying today. At the end of the transition Medicare disappears completely (virtually everyone will be able to afford private health insurance when they retire) and only Medicaid will remain as a safety net. The costs of Social Security also drop dramatically at the end of the transition period because even a life-time minimum wage workers is protected to have almost twice the minimum income requirements for the program.

That was intentional on my part because I based the privatization plan on the federal minimum wage because they're the ones that really need Social Security the most. That's why Republican proposals haven't been worth considering. They've based their proposals upon the typical middle class income household that ends up screwing the minimum wage worker in the end.

 

My chart measures income percentile - not returns percentile. According to the IRS numbers, for 2012, returns with an AGI of under $50,000 accounted for about 60% of the population and 18% of total income. If you want to look at returns, the 50% level is about $40,000 and for income, the 50% level is about $74,000.

Well, ignoring the Constitutional questions of compelling State governments to agree to your plan and the fact that getting all 50 to agree to anything is pretty much impossible, let's have a look at the budget numbers (as a percentage of GDP):

FY 2012
Receipts: 15.29
Outlays: 22.07
Balance: -6.78

Now let's assume we get to balance with a 60-40 split (60% spending cuts - 40% revenue increases) - that gives a target of 2.71 for increased receipts. Here's how receipts break down:

FY 2012 Receipts
Individual Income Taxes: 7.06
Corporate Income Taxes: 1.51
Social Insurance & Retirement Receipts: 5.27
Other Receipts: 1.44
Total: 15.28

Now let's say that out of this 2.71 in increased receipts you get about half (1.36) out of Individual Income Taxes - raising it from 7.06 to 8.42, an increase of about 19%. Going back to the Tax Curve Chart, this would raise the Average Tax Rate from 12.78% to 15.24%, your Flat Tax rate to go from 24.96% to 29.77% and the Slope of your Trendline to go from 0.312 to 0.372, which is way above the progressivity measures of the inflationary late-1970's (ie, the highest slope I've calculated from 1962-2012 was 1977 (0.352). And remember, this accounts for only 20% of your deficit reduction. In short, I think balancing the budget with your plan would prove highly inflationary.

I'll give your FICA numbers a run and get back to you on the effects of that.

 

Referencing my previous post, here's how Social Insurance & Retirement Receipts break down:

2012 Social Insurance & Retirement Receipts
Social Security (OASDI): 3.55
Medicare (HI): 1.26
Railroad Retirement: 0.02
Railroad Retirement Soc. Sec. Equiv.: 0.01
Unemployment Insurance: 0.42
Fed. Employee Retirement: 0.02
Total: 5.28

That OASDI includes the 2% Temporary Payroll Tax Cuts in effect at the time - if you back that out, you go from 3.55 to 4.23. Take away the Contribution Cap and it rises to 5.28. Take away the $50,000 for the retirement accounts in your plan and use the remainder to fund current beneficiaries and you're down to 2.23, which gives you a 1.32 shortfall (=3.55-2.23) which pretty much cancels out the hypothetical Individual Income Tax Increase I outlined in my previous post (1.36). Which is fine - you fund the shortfall out of general revenue, but it leaves you with an inflationary tax curve and does close to nothing to reduce the deficit.

 

First of all we can't use 2012 tax information because the tax rates were changed in 2013. In 2012 we were basically under the extended Bush era tax cuts that, while scheduled to expire, had been extended because of the recession. That's why I used 2013 tax and income information in doing my evaluations.

Your numbers from the IRS relate to net personal income after deductions and tax credits as well as capital gains taxation all of which is eliminated by my proposal. There will be no personal deductions or tax credits as they are replaced by the exemption and all income, regardless of source or entity receiving it is taxed the same. The only deductions that will remain are actual expenditures of enterprise required for production of goods or providing services (plus a deduction for dividend payments where the tax on the income is paid for by the stockholder under the personal tax rules to avoid double taxation on the same income).

The proposal does not address "spending" except with the condition that the federal tax rate will be based upon the authorized expenditures. Logically if spending is reduced then the rates go down and if spending is increased then the rates go up. The increase or decrease in spending can be dependent upon Congressional action or independent of it. For example if fewer people require welfare assistance then spending naturally decreases without Congressional action. When it comes to what Congress does as far as spending it's so unpredictable that we can't make any assumptions or impose any conditions upon the spending in a tax proposal.

One problem for many is that they try to put too many things in one bucket. For example border enforcement and immigration reform are two separate issues that need to be addressed independenly of each other. They can influence each other but must be addressed independently. The same is true with taxation and spending. While they can influence each other they are separate issues to be addressed independently.

Short of a Constitutional Amendment (not expected to happen or proposed) there is no way the states can be forced to adopt my state tax proposal although it makes sense for them to do so. If we ignore the political corruption of the FairTax.org proposal and apply the principles of a "consumption tax with prebates" to state taxation it provides a compelling argument for adoption by the states.

There are inherent problems with a complete analysis of my proprosal. For example with the eliminination of the concept of "investment income" because all income is identical it also eliminates the "off shore" tax havens that exist based upon treaty agreements. The proposal makes income for an American in a foreign country subject to taxation because the tax is imposed on "all income regardless of source" for the American taxpayer. The problem is we don't know how much money this is talking about because I've not found any authoritative source that quantifies it. I do know it's somewhere between hundreds of billions and several trillion dollars in income to Americans that is currently not reported and not taxed. In the end I was forced to ignore it for calculation purposes because it wasn't quantified but that only results in the projected revenue from the tax proposal being low.

When it comes to FICA/Payroll/Self-employment taxes I faced a serious problem because I'm not an economist and I really don't have good numbers to work with. I've estimated the cost of 45 year transition to full privatization at $40-$45 trillion but that's just a WAG (wild ass guess) on my part because there are numerous factors involved. It's not a stupid guess but it is a guess-timated cost on my part. One of the numerous factors involved is that as personal wealth grows for the individual it dramatically reduces the government spending obligation as we approach the final years of the transitional phase. The $40-$45 trillion is also a total cost that is not linear but instead starts out low, then rises, and then declines over the transitional time-frame. So while my calculations do show a total revenue that's enough for the transition it doesn't address it on a year by year basis and that's problematic. There could be a situation that's just the opposite of what we typically had since the mid-1980's when the Social Security tax was raised where Social Security might have to "borrow" from the general tax revenues at some point and then repay that borrowing in the future.

One of my final issues is how many people might fall into the "safety net" at the end of the transition period. To not have enough income to meet the minimum $30,000/yr income requirement would require a person (income household) to earn an average of less than $7,000/yr over a 50-year time period (the safety net doesn't kick in until age 70). How many people don't earn that?

Of course inflation will always be an unpredictable issue and ideally there would be no inflation because it's going to rob the investment accounts of assets necessary for income when a person becomes too old to work. Like government spending I'm going to leave dealing with the huge negative affects that inflation can have on investment accounts to another discussion.

 

Shortly after Bush got elected the Treasury and Fed told him that SS could be completely privatized if the tax rates were continued for five years. He chose to cut taxes on the wealthy and use the huge SS surplus to balance the budget, borrowing the money but counting it as income.

 

What difference does it make? Taxes were lower, the deficit was bigger... so what? I'm judging your tax proposal on it's own merits. I could see it making a difference with the 2% Temporary Payroll Tax cut, but I unwound that, so what's the problem?

Actually, my tax rates start from the same baseline as your's - Adjusted Gross Income. Deductions only come into play when computing Taxable Income, but I don't reference that - when comparing your system to actual, there are only two factors - this is what you make, this is what you owe. Just the bottom line.

Exactly - and not only can't you predict what Congress will spend, you've got even less of a handle on how much income people will earn. All you can do is make an educated guess. My main point in putting up the budget numbers was to demonstrate how difficult it quickly becomes to balance the budget every year.

Agreed, but remember, my hypothetical budget balancing exercise with your system included 60% unidentified spending cuts and 20% unidentified other revenue increases - only 20% came from Individual Income Tax increases. We can debate whether this was a realistic division or not, but I don't recall asking you to identify the other 80%.

That's why I was trying to nail down some specifics - for example, OASDI Receipts were 3.55% of GDP in 2012. Unwind the 2% Payroll Tax Cut, and it is 4.23. Scrap the contribution cap and it is 5.28. Setting aside the first $50,000 of wage & salary and self-employment income into private plans would cost 3.05 and leave only 2.23 for current beneficiaries. So maybe your plan is too ambitious? Why not fund your "private" plan with the 1.05 you got from eliminating the contribution cap and leaving the rest for current beneficiaries?

Do you see what I mean? You can fine-tune your proposal to make it more realistic. Constructive criticism is a good thing. It makes your ideas stronger. I like your plan - it's different and outside-the-box. I like outside-the-box thinking... almost as much as I like realism.

 

Based on you subsequent comment from yesterday I'm revisiting this post.

My initial calculations did reflect roughly a 29% tax rate which is still a 25% tax cut from the 2013 rate of 39.6% to 29% which would be accurate because my tax creates a progressive tax without different tax rates (i.e. we discard all but the top tax rates for comparative purposes because the progressiveness is accomplished with the exemption). My more recent calculations resulted in a lower tax rate but I don't object to the higher tax rate as it still reflects a significant reduction while increasing the total revenues.

Of course the predominate reason there is an increase in gross revenue with a lower tax rates is because the top income earners are all taxed at the same rate. The top 1% income earner that earns their income in wages is taxed at the same rate as the top 1% investor that doesn't have earned income. This is even more significant if we look at just the the top 400 with investment income that only pay an average of about 17% on average incomes of over $250 million/yr. under the capital gains tax. For example a 17% tax on $250 million is $42 million but if they paid the earned income tax of 39.6% the tax would be almost $99 million.

The lame-ass response of some is that I'm "attacking the wealthy" while in fact I'm just taxing them the same as everyone else. If a CEO of a corporation had a salary of $250 million/yr they'd pay the $99 million on their "earned income" so why shouldn't an investor?

The only spending cuts I really anticipate are a reduction in welfare expenditure and while the federal income tax proposal would reduce welfare expenditures over time the real reduction in the necessity for welfare assistance would be if the states adopted my proposal of a consumption tax with a prebate. The tax burden for the poor that require welfare assistance is much greater at the state level where taxation is much more regressive. As I've mentioned before I live in WA that has the most regressive taxation in the nation where low income workers have 14-times the tax burden compared to our states's top income earners. A comsumption (sales) tax with prebates offsets the tax burden for the poor and that increases their disposable income for other purposes. As noted though it would be very hard to get all 50 states to indiviually adopt my proposal while it only requires Congress to overhaul the federal tax codes based upon my proposal. Basically my state proposal is 50-times harder to achieve than my federal proposal.

While long term projections on spending and income are often speculative the short term projections are relatively good. Since the tax rate is determined based upon single year projections I'd anticipate them to be fairly accurate. Not perfectly accurate but close enough to establish the tax rate which is all that's required. I believe it would be close enough so the real difference would be within the "surplus" that would be collected to down our huge national debt. Of course that "surplus" is based upon a projection of how quickly we want to pay down the national debt. If we assumed a 20-year payoff then in very rough numbers the additional revenue required would be over $800 billion/yr. That's probably an over-aggressive payoff rate and more reasonable would probably be collecting perhaps $200-$400 billion in excess federal revenue but that still provides a significant cushion for potential shortfalls in revenue albeit requiring significantly longer to pay down the national debt.

Final note. Taxation does not cause inflation. Increases in the fiat money supply by the Federal Reserve causes inflation. Inflation is a completely different topic that I'll avoid in this discussion but will note one thing. If we look at the legal tender coinage produced by the US Mint (i.e. American Eagle coinage) there really hasn't been inflation over the last 100 years. A one-ounce gold coin still has roughly the same market exchange rate for other commodities as it did in the 1920's.

 

Arguably a good point. I based my general considerations for privatization on the minimum wage because it's the low income earner that needs Social Security the most and they're also the ones getting screwed the most today. The live in poverty their entire lives and then receive a poverty level income under Social Security as it currently exists.

A median income household, under my proposal, would have close to $3 million in assets at the end of a 45 year working career that would result, at a fixed rate of 5% interest alone (not touching principle), of $150,000/yr. I don't have any problem with a retiree having $150,000 in annual income but is it necessary? We could logically lower the income level for money dedicated to private investments to provide more funding for the transition period without harming those that eventually retire and by all standards it would still be far superior to our current Social Security welfare program.

 

Here's an idea. Take the required federal revenues and divide it among the 50 states, apportioned by population. Each state gets a federal tax bill, which they must pay as their "membership fee" for belonging to the union. Each state raises their own revenue however they want.

 

It's an idea, and it's certainly Constitutional, but it's a bad idea. LOL The states are far worse at creating regressive taxation than the federal government and it would end up balancing the federal budget on the backs of the poor.

 

Excluding the fact that the Bush privatization plan for Social Security was about benefiting the "middle-class" and screwing the "poor" I've never read this. Do you have a link to any official statement or any references that would indicate this is true?

We do know from the 2001 State of the Union Address by former President Bush he promised us a surplus after his proposed tax cuts that were implemented in 2001 and 2003 and that never materialized (i.e. he flat out lied) but I general tax revenues and Social Security revenues are unrelated. Of course all borrowing from the Social Security Trust fund is recorded as borrowing (deficit spending) by the Treasury.

 

I'm not sure you can say that with certainty. There's no reason why a state could not have a higly progressive tax system. Under this system, you and the people of your state have complete control over how you want to collect your federal membership fees.

And if the burden ever become too onerous, you and the people of your state could dedice to stop paying the membership fee and reqlinquish your membership in the union. That could result in a significant cost savings.

 

I've read numerous studies of state taxation and I'm unaware of any state that doesn't have regressive taxation. For example the real estate property tax, that I believe all states have, is highly regressive because it's a component of the rent. Sales taxes are highly regressive. Can you name a single state that doesn't have regressive taxation today? I can't so I'm assuming that based upon the history of regressive taxation by the states that leaving it up to the states will merely result in more regressive taxation.

There are no explicit provisions in the US Constitution for a state to withdraw from the union although it is conceivable based upon the mutual consent of the US Congress and the State Legislature that formed the agreement in the first place. Of course a state would be expected to pay for it's share of the national debt, based upon apportionment, that was accumulated based upon the federal government incurring a debt for the benefit of the states. I'm unaware of any state that could afford to do that.

 

I would imagine that one would have a better chance of changing the tax code in his state than in changing the federal tax code. States may not have highly progressive tax structures now, but when they have to raise money for their membership fees, they will surely do so. They will need to tax the rich, because that's where the money is.

Yes, I agree. There is no Constitutional prohibition against a state withdrawing from the union.

 

While arguably easier for states to change their tax codes the point is that with that arguably easier method all of the states have regressive taxation. It appears that the easier it is to change the tax codes the more likely they are to be regressive. Of course in dealing with all of the People of the United States addressing taxation is arguably 50-times harder than the federal government.

There isn't a "dissolution" clause either so it's arguabley unconstitutional for a state to withdraw without a Constitutional Amendment to allow it. Even under "contract law" the minimal requirement is consent of both the state legislature and the US Congress that formed the contract. Also under contract law there would have to be an equitable distribution of assets (i.e. gold/silver held by the Treasury) and liabilities (national debt) and I've run those numbers for Texas previously but I'll bring them up to date.

Population of Texas = 25 million (2015 est)
Population of US = 320 million (2015 est)
Texas % of US Population = 7.8% (approx)

Financial Liabilities
Current US national debt = $18 trillion (US Debt Clock)
Texas % of US debt = $1.4 trillion

Financial Assets
US Treasury gold reserves
Gold Reserves = 260 million troy ounces (appox est)
Est value @ $1200/oz = $312 billion
Texas % of Gold = $24.3 billion

Texas Net Financial Obligation = $1.3 trillion (plus)

Texas would not logically want to "cash in" the gold to offset the debt so, in reality, Texas would need to pay off the full $1.4 trillion debt to resolve the financial obligation but Texas has less than $50 billion in all annual state revenue. If every dollar of tax revenue in Texas was saved for a "buyout" of it's financial obligations to the other states it would require at least 28 years. If Texas financed the debt for 28 years, with interest, it would require annual payments close to $70 billion and that would over double the tax rates across the board in Texas. At the same time Texas would also lose valuable US contracts for defense (e.g. F-35 contract) that pumps tens of billions of dollars into the state economy as well as federal financial assistance (Texas receives back 98 cents for every dollar in federal taxes paid).

From just a financial standpoint it's both impractical and illogical for Texas to withdraw from the United States even if it could do so under the Constitution.

 

In my opinion, any state's tax system should be exactly as progressive or regressive as the people of that state choose to make it. It's not my business, really. As long as each state raises enough to cover their federal membership fees.

 

Regressive taxation, where the tax burden relative to income for the poor is greater than the tax burden relative to income for the wealthy, establishes "favoritism" for the wealthy that is crony capitalism. Are you an advocate for crony capitalism?

The United States was not created as a "democracy" but instead it was created as a "republic" for good reason. The average person isn't intelligent enough to run government but the hope of the founders was that the average person would be intelligent enough to select those that are intelligent enough to represent them. Sadly we see that the average person isn't even very good at doing that as they are easily deceived by the politician.

 

I'm not advocating one or the other. I'm saying that how the people of any state choose to tax themselves is their business not mine.

 

I would counter-argue that the 14th Amendment prohibits any state from denying "equal protection under the law" and that applies to taxation. While not adjudicated by the Supreme Court I can easily argue that unfair taxation in a state, when compared to other states, would violate the equal protection clause of the 14th Amendment that applies to all states.

This takes us far afield from my tax proposal and even your proposal is off-topic to this thread. If you want to advocate for your proposal then you need to create a thread on it and be willing to address how it would work as I'm willing to do here on my proposal.

 

Shiva - I've had a chance to go over the numbers and there are a few ideas I'd like to run past you. First off, instead of focusing on balancing the budget every year, why not make allowances for fluctuations within the economy and allow the flexibility to balance the budget over the course of the business cycle? For example, what about setting a goal of 4% GDP growth per year... if you expect growth to come in lower than that allow some deficit spending to help stimulate it and if growth is stronger then run a surplus to not only pay down the debt, but also to keep the economy from overheating? Keeping FY12 as our case study, GDP growth was 2.42%...so why not have a deficit target of 1.58% of GDP (4% Target minus 2.42% Actual)? If you plug in the 60-40 deficit reduction plan from earlier, it gives you the following:

FY12 Target
Receipts: 17.41
Outlays: 18.99
Balance: -1.58

To cover this, Individual Income Tax Receipts would rise from 7.06 to 8.12, requiring an increase in the average tax rate from 12.78% to 14.70%. Keeping your $50K exemption, your flat tax rate would be 28.71% and your tax slope would be 0.359. I have, however, decided to explore an alternative - why not reduce the exemption to $40K? This would reduce the flat tax rate to 25.63% and the tax slope to a more capital investment-friendly 0.293, as indicated in the following chart:



The blue line is the actual baseline tax curve reflecting the 12.78% average tax rate - the red and green tax curves represent the Fair Tax plan with the $50K and $40K (respectively) exemptions at the 14.70% average tax rate. Notice with the $40K exemption, the top tax rates gibe with the maximum tax rates of the present system, but do away with the dip in rates for the very top percentiles of earners due to the preferential treatment of capital gains.

On the OASDI side, I must confess I made an error in estimating self-employment contributions in my earlier numbers - here are my revised estimates for FY12 OASDI Receipts:

Actual: 3.55
Actual without 2% Adjustment: 4.23
Actual without 2% Adjustment + No Contribution Cap: 5.00
Fair Tax with $50K Exemption: 1.90

As you have no doubt noticed, having the $50K exemption on payroll and self-employment income would incur a serious cost (3.10). Instead, I propose dialing the exemption back to $3K - this will only cost 1/10 as much and give you an OASDI Receipt level of 4.69. Doing this will give you an additional 1.14 of deficit reduction, bolster the solvency of the existing Social Security Trust fund, and allow you to eliminate Estate and Gift Taxes (at a cost of 0.09) - all while you meet the receipt side of your deficit target. (Okay, if you're doing the math, it's still 0.01 short of the target, but we can chalk that up to a rounding error - what's $1.6 Billion between friends?) Let me know what you think.

 

Before even addressing the details the 4% GDP Growth target is "Pie in the Sky" right-wing political thinking. It's not going to happen so we'd be running a deficit every year. The 10-year projection for GDP growth from the CBO in 2011 was 2.5% if I recall correctly and the CBO is generally known for over-estimating as opposed to under-estimating GDP growth.

In spite of arguments from politicans (mostly right-wing) it isn't lowering the taxes on the top income earners that drives economic growth but instead consumer spending by low and middle-income households. When addressing recoveries from recessions all of them were driven by consumer spending and low and middle income households have the highest percentage of "consumption spending" relative to gross income. In fact the lower the income the higher that percentage of spending on consumption relative to income. Lowering taxes on the upper income earners does not improve the economy because they don't spend it, they invest it instead but investment doesn't create jobs. Consumption creates jobs.

Tax cuts don't improve the economy during economic downturns but government spending can because the spending goes to working Americans that spend the income on consumption. We have a means for accomplishing that while not running deficits.

While not a Keynesian advocate he got one thing right but we don't follow it. Economic downturns can be mitigated by government spending on infrastructure and Keynes proposal was "saving for a rainy day" but we don't do that. We should note that infrastructure is (theoretically) funded by excise taxes such as the federal fuel tax for our interstate highway system and taxation imposed on our water, sewer, and utility bills. If government wants to become involved in improving the economy during economic downturns then it should increase the excise taxes so that they not only fund the current expenditures but also create a surplus to use in mitigating economic downturns. Sadly we haven't even collected enough in the excise taxes to fund annual necessary expenditures. For example (from memory) in 2007 there was about $40 billion authorized for federal highway spending but the federal fuel tax only collected $30 billion so the balance was paid for with income taxes (or deficit spending that has to be repaid with income taxes). If we properly collected excise taxes and used them to fund the dedicated expenditures it actually lowers the income tax burden on the American people. If we collect more than we spend in the "good years" then we'll have the financial reserves to mitigate the downturns in the economy.

I really appreciate the time you spend but will have to point out that the $50,000/yr exemption (based upon a family of four) wasn't really arbitrary. There was logic behind it so let me explain that.

The exemption replaces all deductions and tax credits. As we know roughly 47% of all households have a zero or negative income tax burder. Applying that to the median income of $50,000/yr (for a household of four) then basically these households represent incomes of $47,000/yr or less. When Sen Rand Paul made his proposal for an exemption with a flat tax (that didn't income caplital gains income and didn't balance the bugdet) his exemption was $48,000 based upon the same numbers related to deductions and tax credits that he also eliminated. The $47,000/yr or $48,000/yr is probably very accurate but it's an odd number that leaves it to the "accountant" to figure out every single year but as soon as the tax deductions and credits disappear the politicians are going to screw with the numbers so I rounded it off to the simple "Median Income" that they can't screw with because it will exist before and after assuming my proposal was adopted.

But wait, there's more.

I looked at the "Living Wage Calculator" as well. It's based upon "county" in each state because it varies so the link below is to my county (Snohomish WA).

http://livingwage.mit.edu/counties/53061

As you will see from the link the estimage "cost of living" for a family of four is about $41,000 but the problem is that the numbers grossly under-estimate some of the costs. For example it states that "medical" expenditures would only be $372/mo but there is no way on earth a person can purchase a health insurance policy for a family of four for only $372/mo. and based upon the following link we could estimate that unsubsidized health insurance costs for a family would conservatively be about $13,000/yr or almost $1,100/mo. and that wouldn't cover deductables and co-pays

http://www.statisticbrain.com/health-insurance-cost-statistics/

My review of the "cost of living" estimates found other significant under-estimates like housing expenses, transportation, and especially "other" that also has to account for retirement investing because we can't all work forever. If we include a general adjustment for gross under-estimates in the actual cost of living it would also take us to the median income of $50,000/yr for a family of four.

On a final note we don't need "investment friendly" because I create a large investment pool with the privatization plan for Social Security and the wealthy don't need any more money to invest. Remember that investments don't actually create jobs or expand enterprise. Based upon rough estimates 99% of investments are not in public stock offering where the money goes to an enterprise to capitalize expansion and 99% of expansion costs for an enterprise are funded with profits based upon consumption of the goods or services they provide to the consumer. The greatest myth being spread today is that investments create jobs because they don't. Consumption fuels the economy and creates jobs, not investments. If you don't believe me investigate how many jobs there are at Solyndra that received roughly $1 billion in investment and lender financing (there are none because it went bankrupt because it couldn't sell it's products). A billion dollars in funding and zero jobs to show for it.

Starting mid-point the OASDI and Inheritance/Gift tax are completely unrelated. Social Security taxes cannot be used to reduce the federal deficits because they're a dedicated tax and all deficits are created by general expenditures funded by income and excise taxes. Since my proposal doesn't create any deficits it no longer is a consideration.

I would also point out that while I refer to the "Inheritance Tax" I actually abolish it and replace it with a "one-time windfall income tax" that applies to any single year large income from any source and I provided a substantial "exemption" of $8 million from taxation on it. This exemption is actually higher than if we applied the $50,000/yr exemption applied over the estimated working lifetime of the individual that would only result in a $2,225,000 exemption. It was a compromise between the right "no taxes at all" and the left "take it all in taxation" and I believe my criteria of "they could live in the top 1% for the rest of their life" was a rather pragmatic compromise.

The amount of OASDI taxes that are contributed to private investments is subjective to some degree but I wanted both low and middle income households to benefit from it. Once again none of this money goes to the government because the person is vested 100% in it and it is directly invested like 401k's and IRA's.

The transitional costs for privatization are actually lower than the projected costs without it but it does take 45 years (typical working career of the person). The tax funded costs will go up for perhaps half of that transitional period and then go down to virtually nothing by the end. By removing the cap and including all gross personal income to be taxed I do generate a significant increase in revenues but as correctly noted a lot is also going to private investment accounts to eliminate future taxation. To meet annual expenditures as the costs initially rise it could require a temporary increase in the tax rates on upper income households but they can afford to pay the additional tax and ultimately they'll see a significant tax reduction in return once we get over the hump.

The costs of fundamentally eliminating a huge social welfare program like Social Security/Medicare that has existed for generation is not an easy proposition but it can be done. Medicare can be eliminated completely (Medicaid remains the safety net) and the "safety net" provisions of Social Security can be virtually eliminated by personal wealth accumulation even when we increase what the safety net provides four-fold based upon minimum benefits being provided. Long term the privatization proposal for Social Security is literally a win-win for both conservatives and liberals but the transition could have a few bumps along the way.

 

Perhaps I misread this or you misunderstood my proposal.

The exemption is on the tax and not on the gross amount. For example a 15.3% that tax on only $3,000 is $450/yr and at that amount being dediciated to investments the person would only have about $178,000 (@ 8% ROI) after 45 years that would only yield $8,900 in annual income at a guaranteed 5% annunity interest rate. That would be far worse than even the crappy Social Security welfare program we have today that averages about $11,000/yr now.

The $50,000/yr is the income taxed and that could result in up a maximum of $7,650 going into the private investment account. Of course lower income workers will be contributing much less than this amount. The average hourly wage (not salary wage) is only $10.55/hr (that shocked me when I read it because, for whatever reason, I thought it would be much higher) and they would only have about 1/2 that amount going into private investments.

 

I think we need to resolve some philosophical questions before we keep going down this road, Shiva. First off, I agree with you that consumption is the engine that drives the economy... but even the most powerful engine needs a little fuel and a little air and a spark or two to keep combustion happening. If you do all of these things and you give a massive jolt to consumption demand but on the flip side you pay for it by taking money away from investment supply, is that not a recipe for massive inflation? Philosophically, if you're going to achieve solid growth, shouldn't there be a stable balance between the two? That's why the slope of the tax curve trendline are so important - if you go back over time, I find that a slope of 0.300 seems to be the sweet spot... higher than that and you see inflationary pressures start to pick up, lower and you start seeing excessive wealth accumulation at the high end and a frothy investment environment - go lower than 0.200 and I suspect you'd start seeing deflation at some point.

Secondly, where it comes to your Social Security Privatization Plan I'm not quite sure how you expect that to operate... who makes the investment decisions? The way I figure it, if it's done by the Government then it can be either transparent via some formula, in which case it will completely distort the stock market as firms bend over to conform to the formula or it can be opaque where directors make the decisions... but that opens up the system to mistrust and potential corruption... "Well, of course they invested $50 billion in Acme - they were big Democratic contributors...". If the investment decisions are to be done privately, then why not make it a big tax credit for your IRA contribution?

Thirdly, where it comes to the Budget, I tried to make it easier for you, but you keep insisting on bringing it to balance but yet you keep adding on costs... you want your big privatization plan, you want more infrastructure spending, you want, you want, you want... well, at some point the rubber is going to have to meet the road here and you're going to have to start making some serious cuts if you want to make your plan viable. Just saying.

 

People often misunderstand investments and the economy. The only investments that directly fuel the economy are those investments in the stock offerings from corporations (e.g. IPO's). These investments are used for initial capitalization or expansion of the corporation and, as you accurately note, this adds "a little fuel and a little air and a spark" to the economic engine. There are a few considerations related to this.

First is the fact that only a very small percentage of enterpises in the nation are publically traded corporations. They do tend to be larger than most enterprises, producing more goods and services and providing more jobs per enterprise, but they probably only represent about 5%-10% of all enterprises. The vast majority of enterprises are sole proprietorships, limited partnerships, or LLC's where the owners are the investors. As mentioned the publically traded corporations do employ more people per enterprise and account for about 30% of all private employment but the smaller privately funded enteprises still account for about 70% of all jobs.

Next it the fact that only a very, very small percentage of investments are related to stock offering from publically traded corporations where the corporation receives the investment. Perhaps 99% of all investments are unrelated to corporate stock offerings. Money markets, mutual funds, bond markets, commodity trading, Treasury securities, and the overwhelming number of stock trades are not related to direct stock offerings from corporations. When, for example, a person purchases $100,000 in Microsoft shares, none of that investment goes to Microsoft. It goes to the prior stock holder and merely represents the transfer of ownership of the corporation from one owner to another that doesn't effect the corporation or the ecomony at all.

As we know ideally when we purchase a stock and later sell it we'd like to see it sell for more than we paid for it but think about why it should or would sell for more. Where is that "money" or value coming from? In reality the corporation, based upon sales, generates income and profits. The profits are then distributed either to the stock holders that are the owners as dividend payments or it's re-invested into the corporation for expansion. All of the profits belong to the stockholders and so when part of it is reinvested in the corporation it increases the value of the corporation which increases the value of the stock that the stockholder owns. When the stockholder sells it's the "additional value" that results in the profit on the stock sale. The other profits of the corporation are in dividends paid by the corporation. Of course mismanagement of the corporation can also result in the wasting of the profits generated and re-invested in the corporation so the stock holder can lose money when they sell as well. Indirectly if the seller, not the investor, uses the income from selling of their investments for "consumption" it does benefit the economy but if they just re-invest that money it's a zero gain for the economy because no consumption of "wealth" occurs.

Bottom line when we address the investments required to add "a little fuel and a little air and a spark" they represent roughly 1% of all investments and they only benefit probably less than 1% of enterprises that might happen to have a public stock offering in any year.

The investments are all privately handled by investment firms and the only government intervention is to ensure that the investors are not exploited by the private investment firms.

There are no "tax credits" in my proposed income tax nor is any tax collected below the exemption level. Tax credits and deductions have been replaced by the exemption.

As we know historically from when Social Security was created roughly half of all people either can't afford to or refused to invest so that they would have the assets necessary to generate income when they become too old to work. Social Security created a welfare program to provide retirement income as opposed to creating wealth accumulation that would provide income. It is co-funded by the worker and the enterprise equally similar to a 401K but instead of addressing the "problem" of a lack of wealth accumulation to provide income it addressed the "symptom" of a lack of income. Congress identified the problem but then addressed a symptom instead. By analogy it was like diagnosing a brain tumor and prescribing pain killers while ignoring the tumor. It started out requiring aspirin but now requires morphine as the tumor has continued to grow.

My proposal simply changes the focus from addressing the symptom to addressing the problem. It is a mandatory investment program using existing funds (FICA/Payroll/Self-employment taxes) so that the lower income individuals don't face a reduction in disposable income that they need to live on.

While I'm only addressing funding measures and not spending measures I don't increase government spending at all and in fact I reduce it.

If we use the projected expenditures for Social Security and Medicare over the next 45 years that are required for privatization my expenditures are LESS than not privatizing and the end result is Medicare disappearing completely and Social Security becoming only a safety net that will require very limited funding from taxation because the safety net expenditures would be very low. My proposal results in about 1/3rd of the federal government disappearing at the end of the 45 year transition period. There are some "bumps" along the way but overall federal spending is dramatically reduced.

My exemption on the income tax is going to reduce federal welfare spending because households will have more disposable income reducing the necessity for outside assistance provided for by welfare. Additionally the privatization of Social Security creates a huge amount of personal wealth that increases generational wealth over time dramatically reducing generational poverty. We'll see average household wealth dramatically increase over time especially for low income and economically disadvantaged households. Let me provide an example. Recently a study found that the average black household only has net assets of $11,000 but under my privatization plan a minimum wage worker would have more than $13,000 in assets in less than 5 years. Basically by age 26, assuming they start working at age 21, they'd already have more personal assets than the average for all black households in America.

Yes, I did address infrastructure spending but I never called for unnecessary spending so it doesn't increase the costs for infrastructure. What I did address is that when we have excise taxes that are dedicated to certain purposes, such as the federal fuel tax for our interstate highway system, we need to collect enough in taxes to fund the annual costs. By collecting enough in the excise taxes used for purposes like infrastructure it reduces the general tax obligation. The fuel tax, for example, is based upon a "user fee" because those using fuel use the highways. If we collect $40 billion in "user fees" for highways through the fuel tax then that's $40 billion we don't need to collect in income taxes so it's a dollar for dollar offset that doesn't increase government spending by even one dollar.

What does drive more spending is the fact that every study shows we're not spending enough to even maintain our infrastructure, much less improve it, but that has nothing to do with my tax proposals.