A Citizen's 2% Solution

How to Repeal Investment Income Taxes, Avoid a Value-Added Tax, and Still Balance the Budget

Archive for October, 2010

Rational and Equitable Tax Reform is the Greatest Challenge of Our Generation

I am exhausted by politicians and economists who persist in pretending that a minor manipulation of marginal tax rates is an adequate response to what Alan Greenspan recently described as a pending catastrophe.  Have we learned nothing in the last thirty years? 

“Progress is impossible without change, and those who cannot change their minds cannot change anything.”

George Bernard Shaw

For decades now the economics profession has chanted (almost in unison) a false mantra; asserting that lower tax rates, most particularly on investment income, would place us on the Golden Path toward growth and prosperity.  It has been the justification for policies which allow the privileged and elite of our society to pay lower tax rates on their business and investment income than the working stiff pays on salary and wages.  Commencing in the Reagan era, this primary mantra was reinforced by a secondary rationalization: that depriving government of revenues would impose fiscal discipline on Congress. 

What has been the result?  Favorable treatment of investment income has fueled an ever-increasing concentration of wealth accruing to the already rich while government services and entitlements have expanded unabated.  However logical it may have been, the assumption that constricting revenues would result in lower expenditures has proven to be to be wrong.  Indeed it seems to have gone the other way.  Congress embraced deficit spending and, absent the obligation to pay for its activities by raising taxes, spending restraint seems to have disappeared entirely. 

Our central policies have clearly failed.  So why do we still debate those same policies, pretending they are key to our future?  Why are we locked in a debate over marginal tax rates applied to a flawed system instead of stepping back to reexamine the landscape and contemplate more substantive structural reforms? 

Today, Congress a) rewards their wealthy campaign contributors with favorable tax policies that result in grossly unequal tax treatment while they b) buy the votes of their fractured constituencies with promises of unsustainable program benefits.  As a result, the working middle class is being crushed under an ever-increasing burden and our future generations can look forward to little but higher taxes and broken promises. 

We need to chart a different course.  We need to re-think our tax policies, and implement structural change.  Our vaunted Progressive Tax Policies are a Myth.  Today our highest marginal tax burden (inclusive of employment taxes) is borne by the working middle class making between $34K and $107K in taxable earned income.  Pass that threshold and your marginal tax burden drops sharply.  Investment income is taxed at less than half the rate of middle class wages.  Even more egregiously, a man or woman whose wealth is already so substantial that they do not need their income, can structure their investments to generate nothing but unrealized gains and avoid an annual tax bill altogether. 

It is with this perspective, and with perceived equity as my starting point, that I have formulated a view (as a motivated and interested citizen, not a trained economist) that guides me to ask “Why we don’t tax wealth directly? –  and equally?”    A nominal 2% annual asset tax on accumulated net wealth (as replacement for existing investment and business income taxes and estate taxes), coupled with a flattened and reduced personal income tax rate, would level the playing field, re-impose equal treatment under the tax code, eliminate the preferential treatment provided to the rich and influential which has driven the increasing concentration of wealth in our nation, and redistribute the tax burden more equitably among those most able to pay.  It would also encourage real wage growth for the middle class which would stimulate consumer spending and reinvigorate the economy. 

 I am neither a celebrity, nor a political mover/shaker, and my efforts thus far to stimulate interest and reaction from those self-referential circles have been unproductive.  So I turn my appeal here to the general public. 

If you see a flaw in my logic, please identify it for me.  And if you are intrigued by the perspective and proposal’s I’ve set forth, please help me introduce this question and perspective into a broader public dialogue. 

Or, if you’ve got a better idea?…. Bring it forward.  We need to hear it.