A Citizen's 2% Solution

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

Archive for June, 2012

The Reasons I Lie Awake at Night

The Best Kept Secret In America

Open any general interest newspaper or periodical published in the last two years and you are likely to see the same question:  “Why is this a jobless recovery?”  While professional pundits and media talking heads treat this question as a deep dark mystery, I suggest the answer is all too obvious.  It is the same reason why job growth stalled over the last two decades and the middle class stagnated while wealth and income increased its concentration at the top.  

Our tax and monetary policies have been aimed at protecting and increasing wealth, not stimulating productive enterprise.

Too-eager pursuit of Alan Greenspan’s “wealth effect” has inadvertently stimulated recurring asset bubbles and destabilized our economy.  Regardless of how well-meaning those policy choices may have been – they have been extremely damaging. 

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Conservative economists argue that incrementally higher tax rates discourage investment and work, and cause people to horde their pennies (presumably in lumpy mattresses) while they saunter off to sulk on the beach.  There is, of course, an active debate about how high is too high, and what might be an optimal balance.  But the dominant voices on both sides of the spectrum seem to me to be missing the more important and most destabilizing aspect of our existing tax structure and policies.   

The issues that keep me awake nights are –

1)      Existing structural tax preferences, intended to stimulate savings and investment, inadvertently subsidize unproductive capital allocations and stifle growth.    

  • We’ve made tax avoidance and valuation manipulation far more profitable than productive enterprise. 
  • Our tax and monetary policies have stimulated dangerous and unstable financial engineering and created recurring asset bubbles and collapses – while simultaneously subsidizing the transfer of billions of dollars in investment capital and millions of productive jobs overseas. 

2)      America is headed toward the polls in November faced with a false choice between two mutually flawed options. 

  • The hyper-partisan battle in Washington is a power struggle of bad ideas in which both sides turn a blind eye to the underlying structural flaws that have destabilized our economy. 
  • Unless we modify existing structural misincentives, higher tax rates (the liberal choice) will encourage more aggressive tax avoidance efforts and thereby exacerbate economic stagnation and instability. 
  • Doubling down on the failed strategy of tax cuts for the wealthy (the conservative choice) will accelerate wealth and income inequality, increase budget deficits, undermine social welfare programs, and eventually lead to social unrest.   

Alternative:  Evaluate and Implement Structural Tax Reforms 

  • We need to stop subsidizing unproductive capital with preferential tax treatment – so that holders of private capital will be incentivized to put their money more productively to work. 
  •  We need to eliminate the Crony Capitalism through which government focuses on protecting wealth – to allow the free workings of legitimate capitalist theory to stimulate more productive private investment and economic growth. 
  • I believe it is possible to equalize effective tax rates between labor and capital while simultaneously stimulating more productive investment. 

But political and economic theorists have abandoned capitalism’s core principle of the Invisible Hand in favor of preferential tax treatment for holders of wealth.   

If we desire to make progress toward broadly shared prosperity and growth, we need to illuminate the discrepancies between fact and dogma on both sides of the argument – and seek to reconcile the strengths and weaknesses of opposing positions.   Our investment incentives have become distorted.  We cannot simply argue about the rate schedules utilized in a flawed structure.  We need to be analyzing and evaluating structural changes that will stimulate more productive capital allocations. 

I believe the place to start that analysis is by assessing the factual misperceptions and outright distortions that characterize our current public debate and obscure the path to more equitable and efficient policies.  I urge you to consider the discussion and analysis on this topic published 6/18/12 in Tax Notes under the title Factual Distortions Derail Productive Debate on U.S. Tax Reform.  

Our rigidly polarized debate upon tax reform is built upon erroneous facts and assumptions that offer flawed options and false choices.  I invite you to consider a fresh perspective aimed at reconciling the strengths and weaknesses of the opposing arguments into a viable alternative path.  See  A Confluence of Benefits posted nearby.

Let’s Abolish Spin

I’d like to start a crusade to return honesty to public discourse.  Is anyone interested in joining? 

Here’s my premise:  It is exceptionally rare for good decisions to arise from bad facts or shoddy reasoning.  So why don’t we try to stamp out “spin”.  Spin is, of course, simply a polite word for willfully distorting the facts: torturing logic to obscure sound interpretation and balanced assessment of circumstances, causes, effects and implications.   The ability to “spin” facts is also, much to our detriment, our most highly valued political talent.  How did that come to be? 

In a logical and rational world, one would expect obvious practitioners of spin to be shunned and despised.  In American political circles “spin doctors” are highly praised and compensated. 

H L Mencken claimed no one ever lost money, or public office, by underestimating the intelligence of the public.  But America is heading toward financial Armageddon, at least in part, because our leadership doesn’t trust or respect the intelligence of our citizenry.  Our leadership distorts reality, often using gross misrepresentations of the facts to shape public opinion, because they simply don’t trust the public.  In fairness, for some I’m sure it is the result of wishful thinking and self-delusion, not willful deception.   But the persistent manipulation and distortion of facts, and broad acceptance of the practice, has done enormous damage to the quality of our public discourse. 

The competition of allegations between politicians and pundits, telling people what they want to hear and building arguments in support of pre-determined dogmatic opinions, has become so prevalent that avoiding difficult judgments and choices has become a simple process.  All one has to do to justify an opinion is pick a different source from which to cite facts.  It is human nature to sort new facts into one’s existing view of the world.  But it is an abdication of responsibility when our political leadership and media stop applying intellectual rigor to the challenges that threaten our future. 

Today we are engaged in a critical debate over the fiscal profligacy and dysfunction of our tax and budget policies.  We allow that debate to be framed by the allegation that “nearly half the public pays no taxes”.  When crafted with care, specifically defining “income taxes”, that allegation is semantically accurate.  But in substance, it is demonstrably false.  Our federal government collects more employment taxes than income taxes.  Inclusive of employment taxes, the working middle class pays higher marginal tax rates than the most affluent and privileged among us.  Warren Buffett and his billionaire peers pay tax rates half as high as their office staff.  Our leadership pretends we have progressive tax policies and argues vociferously over relatively minor changes in the income tax rates.  But our progressive rates apply to less than 25% of the overall federal/state/local tax burden and unless we fundamentally change the structure we use to tax investment returns changing those personal income tax rates will not make a significant dent in the preferential treatment now extended to holders of accumulated wealth.  Yet a large portion of the population argues against their own principles of equal treatment and their personal self-interest, because we distort the facts upon which we conduct our debate.   

Nearly thirty years of experience in crisis management and business workouts suggests to me that when disputing parties don’t share a common knowledge and understanding of the facts, compromise is extraordinarily difficult and productive agreement is functionally impossible.  So why do we allow politics to be conducted in a fact free zone?  Why are we surprised that politicians can’t agree on a course of action when we know they habitually cite conflicting, irreconcilable “facts” – and we allow them to do so largely unchallenged.  

So join me in calling for the abolishment of “spin”.  Encourage our political class and media to stop deliberately twisting the facts to fit their theories; demand they test and reconcile their theories against objective reality.  Will we still have disagreements about the facts and implications of our circumstances?  Of course we will.  But if we start by honestly debating the facts, simple things like, “Who hands a higher proportion of their income and wealth over to the government each year?” and “Does deferring taxes on unrealized gains stimulate investment, or obstruct fluid capital reallocations to more productive uses?”, then maybe we could make some progress on the critical challenges that confront us. 

Our representative government is becoming increasingly dysfunctional; largely because we ignore or distort inconvenient facts.  Public debate, that examines the pros and cons of alternative positions and cooperatively works through the issues, is fundamental to the democratic process.  But surely, a commonsense minimum requirement of that process is to demand a more honest and objective discussion of the facts upon which those debates and decisions rely. 

Douglas Hopkins Author – A Citizen’s 2% Solution: How to Repeal Investment Income Taxes, Avoid a Value-Added Tax, and Still Balance the Budget. ISBN 978-0-9828328-0-6

A Confluence of Benefits

Advocates for tax reform typically seize upon one of three alternative objectives which they treat as though they are, of necessity, mutually exclusive.  The proposal outlined in detail upon the pages of this site is designed to offer simultaneous stimulus toward all three of those equally worthy objectives. 

 1.       ECONOMIC GROWTH

  • Repealing corporate income taxes will stimulate business hiring and make U.S. corporations more competitive
  • Flattening and reducing earned income taxes will stimulate growth in middle class disposable income and thus consumer demand
  • Removing the tax bias toward unrealized gains will stimulate more fluid and productive reallocations of private capital

2.       EQUAL TREATMENT

  • Proposal normalizes effective tax rates between earned income and investment returns
  • Avoids regressive VAT or consumption taxes
  • Eliminates “double taxation” of corporate income and dividends/capital gains
  • Eliminates preferential treatment of the already privileged
  • Replaces the “pretence of progressivity” as depicted in our income tax rate schedules with equal treatment toward holders of wealth that will allocate a greater portion of the tax burden based upon a citizen’s real ability to pay. 
  • Repealing the corporate income tax and reforming existing tax expenditures, thereby eliminating the morass of special treatment policies and loopholes now written into our tax code, will take investors’ and business’ hands out of our government’s pockets

3.       FISCAL RESPONSIBILITY

  • Increased tax revenues are a required step toward a balanced budget
  • A balanced budget will convert the hidden taxes of inflation and debt imposed on future generations to a current tax burden,  which can thus be more readily and responsively monitored, managed and matched to expenditures
  • A balanced budget will stabilize the currency

The long-term cost of inflation exceeds the cost of a 2% asset tax which could control deficit spending and stabilize the currency.  Any benefit from inflation on the Public Debt is overwhelmed by the cost imposed upon Private Debt Holders, whose aggregate holdings are four times the amount of our national public debt. 

By improving the perceived equity of tax revenue policies we can minimize the divisive lobbying for government programs funded with Other People’s Money – and hopefully thereby also impose greater discipline upon disbursement programs and priorities.