Wall Street Journal, March 5, 2012
Tangled Tax Code Primed for Pruning
by John D. McKinnon
Mr. McKinnon is optimistic about tax reform, … President Barack Obama's
business-tax-overhaul plan underscores the growing likelihood of a serious
effort to revamp the nation's much-criticized tax system … The question now
isn't whether a tax rewrite will happen, but how far it will go, and whether
it will stop at business rules or also extend to individuals. Increasingly
the answer appears to be that the entire tax code, all 70,000 pages, could
be in play.
2-4-8 Response
I have spent a lot of time speaking with academics about tax reform plans
that are on the fringe of the political radar. My particular interest is in
a tax mix of wealth, consumption and income that I call the 2-4-8 Tax Blend.
I want to toss out the idea because I am looking for anyone who can identify
a policy flaw or logical argument against the plan rather than the obvious
political long shot argument. I thank you for your consideration and enjoy!
We need to eliminate tax expenditures (a/k/a loopholes) and expand the
tax base to enable the lowest tax rates. It would be far better to tax the
$53 trillion net wealth of everyone at 2% (over a $15,000 exemption) and the
$12.5 trillion income of everyone at 8% (bringing in about $2.1 trillion).
By eliminating payroll taxes (and paying social security and Medicare from
general funds) all individuals get to keep 92% of their income creating
significant economic mobility and wealth. Because the rates are the same for
rich and poor it would also be the fairest tax system on the planet.
The increase in consumer power from individual tax reform will boost the
economy but business tax reform is also needed to shift the economy into
high gear and to raise some additional revenue. Every developed country
except the United States has a business sales tax in the form of a Value
Added Tax (VAT) paid by business. A 4% tax on $10 trillion in sales would
yield another $0.4 trillion in revenue. The taxable income from C
corporations is about $1.1 trillion (FY 2010) and produces only $191 billion
in government revenue. Loopholes and overseas tax deferrals have resulted in
some very profitable international companies paying no taxes. A reduction of
the corporate rate to 8% might be a fair and politically feasible tradeoff
for an elimination of the tax loopholes and unneeded deferrals. The VAT in
combination with the reduced corporate rate also reduces the double taxation
issues that arise from the way C corporations are taxed as compared with
flow-thru businesses.
The political icing on the 2-4-8 Tax Blend cake
is that taxes on capital gains, estate transfers and gifts would not be
necessary - restoring economic freedom to the lifetime planning decisions of
the investment class.
The 2-4-8 Tax Blend is too good to be true –
why not?.
Eugene Patrick Devany, JD, MPA
www.TaxNetWealth.com
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