Tag Archives: Fair Tax

Are We About To Throw The Baby Out With The Bath Water?

Tom Kite is PGA Tour player whose low Major total belies his resume as a player….He only led the Tour in earnings twice, but he was the second Tour player to crack $1 million in a season (1989, a year after Curtis Strange did it), he finished in the Top 20 in money 17 times, and he was the first player to accumulate $6 million, $7 million, $8 million, and $9 million in career earnings.1 Tom, although an excellent player was not Greg Norman, Ben Crenshaw, Arnold Palmer or Jack Nicklaus; names one might expect to head that list. How? He did it by having a considerably higher finishing average than other players and naturally earned more prize money as a result.

In 1960, the New York Yankees lost to the Pittsburgh Pirates, 3 games to 4. Amongst the Yankees’ roster were future Hall of Fame Players Berra, Maris and Mantle. Still the Yankees lost despite having scored a total of 55 runs to the Pirates’ 27 runs.

These stories seem relevant to today’s political campaign rhetoric. We are told our system is corrupt. It may be; but wouldn’t it be a good thing to look at where and how? In light of the twisted language of our politically correct consciousness, which makes honest substantive discussions on issues difficult at best, it would likely be prudent to ensure my words here are clear.

Ever since our nation’s founding, we, the average citizen, have had a say in our national elections and discourse. But, aside from our votes, it has never been direct. Our votes, other than on state and local initiatives, nearly always involve our selection of someone to represent us. We delegate our political desires to someone who, hopefully, will reflect our views when they cast their votes on specific legislation.

We are not, as a political structure, a pure democracy. Never have been, although it could be argued that we have moved more in that direction. Our founders did not trust a pure democracy: structurally, we are a representative republic.

“what is government itself, but the greatest of all reflections on human nature? If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary. In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself. A dependence on the people is, no doubt, the primary control on the government; but experience has taught mankind the necessity of auxiliary precautions.”

– Federalist No. 51, James Madison

As Franklin, replying to a woman who asked as he left the Constitutional Convention, “Well Doctor what have we got, a republic or a monarchy?,” stated, “A republic . . . if you can keep it.”

Note Madison states the obvious: government is necessary due to the flaws of humanity generally. Not that people are evil per se (though some most certainly are – Hitler & Stalin come to mind), but that self interest is a universal human characteristic. Yet, government, established to prevent individual self interest from becoming anarchy or rule of the jungle, is an organization run by people. So how do you prevent the very self interest government is set up to protect against from becoming a tool of those who work in government?

A republic. A pure democracy is essentially mob rule: 50%, plus one negates the 50% less 1 in all matters. That is law of the jungle, lynch mob governance. A republic on the other hand is a layered form of democracy that attempts to mitigate the aggregation of political power. This form is still imperfect because people are still people.

I’ve recounted all of this because we’re being told nearly every day how corrupt the delegate system is. When, in truth, if any one cared to go beyond the railings and look into the process, it is actually a full demonstration of the principles of our founders’ efforts to keep us from being our own worst enemy. How?

First, the delegate selection is NOT controlled, at least in one political party’s structure1, by one centralized entity or small group of elites. Each state has it own rules, means and methods. This means that no one person or small group can control the outcome. A successful candidate must be able to navigate many different process rules, from state to state. It is much the same as a business in one state seeking to expand its offices to another state – they have to look at how the laws, taxes, etc., impact how they conduct business in order to successfully operate there.

This multi-faceted, variable process is accidentally brilliant. Accidentally because the states themselves and the state party structures were set up independently, over a period of decades, and through their own localized self interest developed whatever delegate process they thought would serve their own constituents best. Each of these statewide party representatives are individuals who got involved in the process because they wanted to influence the outcome however they could.

Perfect? Not at all. But it does keep political power less concentrated and more diverse. And that benefits us all.

Confusing? Yes. Corrupt? Not likely; it is just too diversified, too disconnected for full centralized control. Those who argue for pure democracy would do well to recognize the dangers of mob rule. Is that what you really want? How long would our society survive if that were how we decided things?

Don’t like the outcomes? Get involved. But regurgitating easy and disingenuous slogans which tend only to stoke emotional fervor is destructive. It is the very thing that lead to the rise of some of history’s most wretched atrocities. One only need look to 1789 France to appreciate the horror of the mob. Our elected officials, particularly in the last three election cycles, have not been as representative as many had hoped they would be as to the direction of the country, the size, scale and scope of government’s influence in our daily lives. But to allow that disappointment and frustration to literally blow up the layered system meant to protect us from ourselves is precisely what some advocate for – an utter collapse of the system allowing for who knows what.

It should be noted that what makes government necessary is at the same time the very thing that requires government be restrained and limited in size, scale and scope. Otherwise, we cease being even the imperfect representative republic.  The Constitution acknowledges the imperfections of humanity and attempts to allow each of us to enjoy individual liberty to pursue life as we envision it. It seeks to protect our God-given, unalienable rights by preventing each of us from using political power to our own advantage over one another. And while, we’ve done considerable damage to that bulwark, it is not yet fully lost.

But, if the tone and language, accompanied by blind, emotional outrage and verbal assaults are any indication, we could inadvertently usher in that which disassembles the very thing that ensures each and everyone of us are able to continue being a free people, to enjoy life as we would pursue it.

“Those who would give up essential Liberty, to purchase a little temporary Safety, deserve neither Liberty nor Safety.”

– Benjamin Franklin

  1.  PGA Tour Career Money Leaders History
  2. The Democratic Party delegate process has what are known as “super delegates”. These delegates are solely controlled and assigned by the DNC directly to the candidate the Party decides, not the voters. CNN interview DNC Chair Debbie Wasserman Schultz explaining this: https://youtu.be/w5llLIKM9Yc

Lex Rex
April 20, 2016

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Senator Rand Paul’s Very Good Tax Plan Needs One Important Tweak

Senator Rand Paul’s Very Good Tax Plan Needs One Important Tweak

Our nation very much needs fundamental tax reform, so it’s welcome news that major public figures – including presidential candidates – are proposing to gut the internal revenue code and replace it with plans that collect revenue in less-destructive ways.

A few months ago, I wrote about a sweeping proposal by Senator Marco Rubio of Florida.

Today, let’s look at the plan that Senator Rand Paul has put forward in a Wall Street Journal column.

He has some great info on why the current tax system is a corrupt mess.

From 2001 until 2010, there were at least 4,430 changes to tax laws—an average of one “fix” a day—always promising more fairness, more simplicity or more growth stimulants. And every year the Internal Revenue Code grows absurdly more incomprehensible, as if it were designed as a jobs program for accountants, IRS agents and tax attorneys.

And he explains that punitive tax policy helps explain why our economy has been under-performing.

…redistribution policies have led to rising income inequality and negative income gains for families. …We are already at least $2 trillion behind where we should be with a normal recovery; the growth gap widens every month.

So what’s his proposal?

…repeal the entire IRS tax code—more than 70,000 pages—and replace it with a low, broad-based tax of 14.5% on individuals and businesses. I would eliminate nearly every special-interest loophole. The plan also eliminates the payroll tax on workers and several federal taxes outright, including gift and estate taxes, telephone taxes, and all duties and tariffs. I call this “The Fair and Flat Tax.” …establish a 14.5% flat-rate tax applied equally to all personal income, including wages, salaries, dividends, capital gains, rents and interest. All deductions except for a mortgage and charities would be eliminated. The first $50,000 of income for a family of four would not be taxed. For low-income working families, the plan would retain the earned-income tax credit.

Kudos to Senator Paul. This type of tax system would be far less destructive than the current system.

That being said, it’s not perfect. Here are three things I don’t like.

  1. The Social Security payroll tax already is a flat tax, so it’s unclear why it should be wrapped into reform of the income tax, particularly if that change complicates the possibility of shifting to a system of personal retirement accounts.
  2. There would still be some double taxation of dividends, capital gains, and interest, though the destructive impact of that policy would be mitigated because of the low 14.5 percent rate.
  3. The earned-income credit (a spending program embedded in the tax code) should be eliminated as part of a plan to shift all means-tested programs back to the states.

But it’s important not to make the perfect the enemy of the good, particularly since the debate in Washington so often is about bad ideas and worse ideas.

So the aforementioned three complaints don’t cause me much heartburn.

But there’s another part of the Paul plan that does give me gastro-intestinal discomfort. Here’s a final excerpt from his column.

I would also apply this uniform 14.5% business-activity tax on all companies…. This tax would be levied on revenues minus allowable expenses, such as the purchase of parts, computers and office equipment. All capital purchases would be immediately expensed, ending complicated depreciation schedules.

You may be wondering why this passage is worrisome. After all, it’s great news that the very high corporate tax rate is being replaced by a low-rate system. Replacing depreciation with expensing also is a huge step in the right direction.

So what’s not to like?

The answer is that Senator Paul’s “business-activity tax” doesn’t allow a deduction for wages and salaries. This means, for all intents and purposes, that he is turning the corporate income tax into a value-added tax (VAT).

In theory, this is a good step. After all, the VAT is a consumption-based tax which does far less damage to the economy, on a per-dollar-collected basis, than the corporate income tax.

But theoretical appeal isn’t the same as real-world impact.

Simply stated, the VAT is a money machine for big government.

All of which helps to explain why it would be a big mistake to give politicians this new source of revenue.

Indeed, this is why I was critical of Herman Cain’s 9-9-9 plan four years ago.

It’s why I’ve been leery of Congressman Paul Ryan’s otherwise very admirable Roadmap plan.

And it’s one of the reasons why I feared Mitt Romney’s policies would have facilitated a larger burden of government.

These politicians may have had their hearts in the right place and wanted to use the VAT to finance pro-growth tax reforms. But I can’t stop worrying about what happens when politicians with bad motives get control.

Particularly when there are safer ways of achieving the same objectives.

Here’s some of what I wrote last year on this exact topic.

…the corporate income tax is a self-inflicted wound to American prosperity, but allow me to point out that incremental reform is a far simpler – and far safer – way of dealing with the biggest warts plaguing the current system.

Lower the corporate tax rate.

Replace depreciation with expensing.

Replace worldwide taxation with territorial taxation.

So here’s the bottom line. If there’s enough support in Congress to get rid of the corporate income tax and impose a VAT, that means there’s also enough support to implement these incremental reforms.

There’s a risk, to be sure, that future politicians will undo these reforms. But the adverse consequences of that outcome are far lower than the catastrophic consequences of future politicians using a VAT to turn America into France.

To wrap things up, there’s no doubt that Senator Paul has a very good proposal. And I know his heart is in the right place.

But watch this video to understand why his proposal has a very big wart that needs to be excised.

 

 

For what it’s worth, I’m mystified why pro-growth policy makers don’t simply latch onto an unadulterated flat tax.

That plan has all the good features needed for tax reform without any of the dangers associated with a VAT.

P.S. You can enjoy some good VAT cartoons by clicking here, here, and here.

Reposted from International Liberty.