Tax Law Must be Overhauled!

 

For What It’s Worth….    return

Here are some compromise solutions that Congress is ignoring.  Obviously, congressional Republicans are resisting any solution that the administration might claim credit for during the next election cycle.  Regardless, here are some ideas that we can push for.

Absolutely Needed to be First Understood - Social security payments are NOT taxes! They are annuity payments for a future flow of income. Medicare payments are NOT taxes.  They are health insurance premiums.  Everyone must realize that the "employment tax" IS Social Security?   MSNBC's Lawrence O'Donnell explains how Herman Cain's 999-plan would destroy Social Security and Medicare.  It is not just Cain.  Paul, Perry, and other Republicans are out to destroy all forms of "entitlements."
     It is currently estimated that the "Employment Tax Holiday" as configured will cost Social Security over 1 1/2 billion dollars!  See our separate discussion regarding Social Security.
 

Here are a few bed-rock facts that must be included in any income tax discussion.

1.  Only 53% of U.S. citizens are paying income tax.  The remaining 47% include low income families, 15%, and seniors living on Social Security, 22%. Adding together unemployed, low income and seniors represents about 90% of those paying no taxes.  The remaining 10% include those receiving  tax-free interest on municipal bonds, loss carry-overs from previous years, educational credits, etc.

2.  The top 1% of earners pay 36+% of all income taxes (2009 figures).  The top 10% of earners pay 70+% of all income taxes. See 2009 chart.

3.  Individual Income taxes represents about 41.6% of the federal budget and corporate income taxes represent about 8.9% of the budget. Social Security represents about 40%. See 2010 chart.

4.  Tax opponents argue that the U.S. corporate tax is about the highest in the world at 35%.  Fact is that 35% is the maximum, incremental tax and the average corporate effective tax is closer to 17%.  Tax rates for partnerships, LLC's and small businesses, etc. are actually individual tax rates as all profits are passed through to the owners and is reported on their individual returns.  Most owners of small businesses do not make over $200,00 a year.

5.  The U.S. tax code, while overly complex and riddled with congressional favoritism, is more that just defining taxes.  The tax code is used to encourage individuals and corporations to support charities, engage in research, make long term investments and to encourage emerging technologies, etc.  If long-term gains were to be fully taxed as ordinary income it would encourage speculation and discourage the kind of investments that build our nation for the long haul.
     The U.S. is far from the only nation supporting these ideals.  China, for instance, is extremely involved in supporting emerging industries and their competition with other nations.

6.   We must maintain the tax exempt status of municipal bond income and other special issue bonds issued in emergency situations.  Our tax code needs to encourage these investments and support for local municipalities.  Municipalities receive a lower interest rates than taxable bonds because the investor receives a higher "after tax" income.  Most municipalities are taxing bodies. Should the tax exempt status be removed, municipalities would need to create higher bond debt levels to cover the higher interest rates.   Individuals would end up paying higher taxes to pay off the bonds.  In the end, we would simply be hurting our local communities just to channel more dollars to the federal government.

Discussion:
     First of all, out political parties are enormously split regarding taxes. Attempts to reconcile debt and taxes get muddied by the issues of "entitlements" which should be treated separately. 
     We obviously need to address our ballooning debt level or face serious national and international repercussions. The fact is that we have spent beyond  our short-term capacity to pay off the created debt.  The bills are coming due and we must face the fact defaulting is NOT a reasonable option!
     A compromise is needed including spending cuts to reduce a deepening debt and tax increases to pay for what we have already spent. This will require a delicate balance to avoid damaging our ability to increase investments and employment. 

Summary:
     The U.S. tax code, and various regulations for that matter, are probably the most politicized areas of legislation.  Between political contributors and lobbyists the pressure on Congress is enormous to play favorites - even at the cost of sound financial management of the country. 
     Taxes and regulations are probably the greatest areas of "The Big Lie" as described on our "Getting Realistic" page.  Many tax revision proposals actually contain ways to pull more money from individuals directly or indirectly without openly raising published tax rates.  Sneaky and dishonest but all too common!

Suggestions to Revise Our Tax System:
1.
 Increase taxes for higher income individuals by 4.5% to the earlier level of 39.5%.  The really high income individuals do not create jobs with their own income (mostly from investments).  Their corporations create jobs! 

2.  Offset the negative effect for small business owners with a 10% re-investment tax credit for putting profits back into their businesses.  There's a lot of wrangling over taxes hurting employment.  So... businesses could use the tax credit IF they re-invest.  Otherwise they are just "blowing smoke."

3.   Create a large independent panel of experienced CPA's actively working in various areas of individual, small business, corporate and trust tax preparation.  The purpose of this panel would to be identify needless regulations in their areas of expertise and recommend changes that would be tax neutral.  All work would be in secret without outside lobbying!  Consensus and recommendations would not be released to the public in a way that would subject participants to outside pressure. 

4.  A flat tax would be nice and our tax code can be far more streamlined but not simplistic. Further, our tax code must reflect the differences between individuals, trusts & charities, small businesses and large corporations.  Some "tax revisionists" calculate that various tax breaks and incentives, etc. cost the U.S. $1 trillion @ year!  That is sophomoric and misleading at best as it  ignores the broader role of the tax code.  We absolutely do need to revise the tax code but it is not, by any stretch of the imagination, a simple task.  Also see #5 above.

5.  Encourage the repatriation of foreign profits with tax breaks linked to actual re-investments in the United States.  A significant reduction of excessive regulations would be needed to make this effort a reality.

6. Finally, Pass no more unfunded mandates that create financial burdens on state and local governments.  All mandates must be accompanied by an accurate plan for financing the regulation, etc.

Unfunded Mandates: See Item.  From GovTrack
Unfunded Mandates from GSA
More on Mandates - Congressional Research Service, Detailed 48 page paper.
Example from New York State Board of Education, List of Mandates
NY group seeks local government mandate relief from Wall Street Journal

 

Beneath all the political verbiage there are significant, ignored facts and considerations that we need to be aware of.  And, this is what Fogcutters is all about

Fogcutters.net - Finding Where Truth Hides

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Searching for solutions avoided by politicians and activists!

 

Fraud & Tax Evasion are costing the programs Billions of dollars.  Congress needs to crack down on fraud and tax evasion!

P.S. So why hasn't Congress already cracked down on fraud? Remember "Past is Prologue."