Monday, December 16, 2002
Tax Reform Thoughts-There's some (dare I say it) Clintonesque changing the terms going on with the Bush team, where they are seeming to want to avoid including payroll taxes in figuring out overall tax burden; this will make the tax burden of the working poor a lot lower, since they pay payroll taxes from $1 and don't pay income taxes until about $5-7000 in income. Of course, the left is in full-throat on this one, and rightly so, although the tax-increases for the poor line is overplaying their hand. Here's a proposal to help both sides of the issue at once. (1) Abolish the FICA tax and fund Social Security based on income taxes. This would require a hefty increase in the income tax, but would help lower-income workers who have to pay FICA on $1. Keep the format for determining how much SS everyone would earn for now. You could discuss a privatization plan as well, but that's a second issue for now. (2) Give a Net Investment Deduction to taxpayers. Savings at end of year minus savings at beginning of year would equal the deduction. Savings in this definition would include checking and savings accounts, stocks, bonds, mutual fund, rental real estate, partnerships and individual businesses. This will turn the income tax into a de facto sales tax, for what you earn less what you save is what you purchased. If you look at the economic impact of the abolishment of the FICA tax, it would help the working poor at the expense of everyone else. It would also tend to help labor-intensive business over capital-intensive ones. To make this change more equitable for the more capital-intensive firms, and to encourage investment, we then move the income tax into a de-facto sales tax. The investment deduction will allow the cost of capital to drop, allowing firms to raise money to buy plant and equipment easier. A move towards a consumption-based system will encourage savings and thus encourage long-term growth. The reduction in FICA tax will encourage small business growth, as small business will pay 7% of their payroll in taxes whether they're profitable or not, as well as giving a break on the cost of capital.. Who wins in this combination of changes? The working poor, labor-intensive industries, people with money to invest. Who breaks even? Capital intensive industries-the higher income taxes are offset by lower cost of capital. Who loses?-Middle-income-or-higher taxpayers who don't save much. How about that as the starting point for some serious tax reform that might be salable to both parties?
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