Donald Trump has had two important victories this week. First he got Gorsuch appointed to the Supreme Court. Next he showed great flexibility in his swift, strong response to Assad’s horrible use of poison gas. The contrast between Donald’s reaction and that of Obama to similar provocation has sent a message to the world not to take him lightly.
Now is time to turn to tax reform. The advisors to Donald should gather for a preliminary meeting to agree on the goals for their tax reform and to review some fundamental principles.
First, a copy of the entire US Tax Code should be at each place setting. This document has subsections A through K and runs to 9,834 paragraphs. It should be the goal of the Trump tax reform committee to open this tome as infrequently as possible. I suggest blank letter size note pads also be at each place.
The first assumption to be agreed upon is that this tax reform must be revenue neutral. That is, new revenue sources must be found to replace each cut in revenue from this program.
The revenue neutral aspect of this tax reform is a legacy from the Obama administration. One area in which the Obama administration excelled was running up the national debt. Obama’s creeping socialism managed the astounding feat of doubling the national debt from 10 trillion to 20 trillion.
In effect, Obama maxed out our national credit cards before handing over the helm to Donald. The income taxes provide the funds to run the Federal Government. Most tax advisors frown on cutting your income when you are broke.
Another important principle is that the new revenue code should be designed to raise revenue, not re-distribute income or punish those in disfavor. This approach will meet stiff resistance from the liberal left. These social engineers want to take the Robin Hood route to tax reform. They want to steal from the rich and give it to the poor.
Finally, it is time to begin. Everyone in the room should be encouraged to spend a few minutes thumbing through the Tax Code documents on the desk before them. That is the status quo.
That leads us to our final goal. The new tax code should be simple, easily collected and equitable.
The new corporate tax should be described on our first page. The corporate tax rate should be reduced from the present punitive thirty-five percent to fifteen percent. That lost revenue will be replaced in a later part of this document. That would bring our corporate tax rate more in line with rates paid by corporations in other countries around the world.
My suggestion for cutting the personal income tax is simplicity itself. The present tax code in all its complex glory should be used to determine something called preliminary tax. That should be the third line from the end on the tax return. Instructions for the next line should read, “Multiply the preliminary tax by . 5 and place the answer on the bottom line of the tax return. That is the total tax due. This is a fifty percent tax rate cut. The capital gains tax should be cut from fifteen percent by the same amount as the final income tax cut percentage.
This model is totally flexible. The amount of the income tax cut should be determined by the amount that can be raised by a combination of selective tariffs and a value added tax. These indirect taxes are similar to the excise taxes on liquor and cigarettes already on the books.
If the tax cut multiplier is changed from .5 to .7, a thirty percent tax cut across the board will be achieved.
We live in a world of perceptions. The income tax is the tax most deeply felt by the taxpayers. Value added taxes and tariffs have much less of an effect. Shifting 30 percent of the tax burden from income taxes to a combination of tariffs and value added taxes will give the taxpayer the feeling that they have had a substantial tax cut. This will occur even though the reality is that the tax change was revenue neutral. This should cause an upward surge in the economy, lifting the overall growth rate and the stock market. This will increase government revenue by itself.
The Trump tax reform program should ignore the conventional wisdom on taxes. Liberal economists praise the income tax as progressive and attack indirect taxes like the value added tax as regressive. I have spent a lot of time researching this issue and have found that it ain’t necessarily so.
The income tax rate schedule is perfectly progressive and as white as the driven snow. The schedule is just that, a printed schedule. What matters for those of us trying to get along down here in the real world, is the effective tax rates. These are the rates that are actually paid by those in the different income classes. Examining this we find a progressive range and a much larger regressive range. Warren Buffet’s secretary has a higher effective tax rate than he does. Does that sound progressive? Is that what the fisc, the taxing authority was trying to accomplish? How can we ignore that when revising the tax plan?
Indirect taxes like tariffs and value added taxes tend not to affect housing and food consumed off premises. Those are the two largest items in the budget of the working class. When we examine the progressivity of an indirect tax, like the California sales tax I examined, we find it is progressive for a range and regressive for a range. Not that much different from an income tax except the ranges start and stop at different places. Any effective tax reform effort must include both direct and indirect taxes.
Let the battle begin.
Professor Joe Launie is a Professor Emeritus of Risk Management at California State University,
Northridge. His latest book is “The Road to the Ox Carts”, where he warns that continued abuse of the middle class by the government may lead to an insurrection.