cosmoscon

Corporate taxes and our complicated system of personal income taxes are a main reason our economy will never reach its full potential.  With the current IRS scandal and bipartisan outrage against this corrupt department, there will never be a better time to reform our current system and replace it with a new system that is fair, easy to administer and pro economic growth.

I’ll credit Herman Cain with getting the ball rolling with serious tax reform talk during the Republican presidential debates in 2011 when he proposed his 9-9-9 plan.  That plan wasn’t perfect and it had some issues/details to be worked out but his leadership in this area got the other Republican candidates talking about tax reform and now I think we have a great plan that we can actually get passed.  It’s call the Fair Tax.

The basic premise of the Fair Tax is to eliminate all corporate, payroll, estate and income taxes and replace them with a tax on purchases via a national sales tax.  That is a big paradigm shift for the US since we’ve been more accustomed to taxing INCOME vs. taxing CONSUMPTION.

Imagine the economic boom for companies if they didn’t have to pay a corporate tax!  For many companies, the reason to manufacture their products in a foreign country is based solely on the company paying much less corporate tax in the off shore location than if they kept the manufacturing site (and jobs!) in the US.

Imagine being able to control the amount of taxes you wish to pay.  Your paycheck will have zero federal taxes withheld so you keep the money you earn and you decide how to spend your paycheck and how much taxes you will pay.  If you don’t want to pay more taxes then limit your spending.

Imagine eliminating 90% of the IRS!

Imagine not having to spend days/weeks filling out your 1040 forms each year!

I know you might have many questions and concerns that this idea sounds too good to be true.  Trust me, I once thought that way too.  The Fair Tax website has a very exhaustive list of FAQ’s and I suggest you check that out to see if your concerns have been addressed.

But even if you agree with me that this is a much better taxation system than our current one, how the heck can we get that kind of change through Congress and the White House?

Great question but since our current tax system is the anchor that is holding us down, shouldn’t we devote as much time and resources as needed to cut us free from that load stone?  I don’t care if it takes us 2 years, this is what we need to be working on.  Period.

Conservatives will like it because it is pro business and gets rid of one of the biggest leaches in our Federal Government – the IRS.  Liberals should like it too because it will keep the same tax revenue coming in and will actually be better since consumption is much less cyclical than income.  Plus it can be sold to Leftists by pointing out that the uber wealthy can no longer hide behind tax shelters off shore and will continue to pay their ‘fair share’ because they consume more than the average middle class family.   The richest Americans will still have the lion’s share of the tax revenue pie because they’ll spend more than the rest of us.  Elizabeth Warren would approve!

It is my feeling that this kind of pro business reform will lead to an economic boom for our country that will bring more jobs back to the US and which will increase the spending of our citizens and raise tax revenue without raising tax rates.  Increasing revenue will go a long way to help shrink our debt and with more people working we can seriously address entitlement reforms and reign in that spending as well.  Economic growth is a rising tide that floats all boats and I really think the Fair Tax is the way we open the gates and flood the harbor.

Read up on the Fair Tax details and if you agree with me, then write your Representatives and push this.  If we are still the greatest country on the planet then this huge undertaking is within our capability.  Our future depends on it.

Fair Tax Now!  If not now, when will we ever have this opportunity again?

Last weekend my son got invited to a party with some of his 2^nd grade classmates and something interesting happened that I had not expected – I observed a social experiment that demonstrated the failures of Liberal policy.

There were 7 boys at the party and the plan was for the kids to spend 2 hours at a very large Fun Park that is loaded with all sorts of fun link video games, go-karts, a large indoor playground, putt-putt, bowling, lazer tag, etc.  The father who threw the party gave every kid a $25 card to be used at the park and this was very generous considering the games usually required just $0.25 for each play.  These 2^nd graders could do anything they wanted to do as long as their gift cards still had money on them.

And that is where the social experiment happened!  Since this is a fairly safe place, I had toyed with the idea of buying my own card and riding go-karts for an hour or so and then tag along and watch the kids for the rest of the time.  Hey sue me; I’m still a kid at heart!

But knowing my son and knowing how difficult it is for 2^nd graders to make their money last, I decided to just hang out and observe how these kids handled this new found wealth.  I knew it would take much less than 2 hours before the money ran out!

Immediately after receiving the gift cards and the ‘rules’ of the party, my son and one of his friends went to the most expensive ride there (one of those roller coaster simulators where you sit in an enclosed booth that moves) and they dropped $4.00 on one ride that lasted about 5 minutes.  Sigh, that’s my boy!

The 7 kids split up into different groups and occasionally reconnected but they were doing what many 2^nd grade boys do in a fun park with a fully loaded gift card – spending money like drunken sailors on leave.  And sure enough, after about 45 minutes the harsh reality set in with most of them that their cards were getting close to empty.

All of them but a couple – Two of the boys had been frugal about what games they played and it appeared they had plenty of money left on their cards when the majority of the kids’ cards were empty.

What do you think happened next?  Did the 5 kids watch as the other 2 played out the rest of their cards?

No!  The 5 kids ran around the park to find their parents to reload their cards.  I got the sad puppy dog eyes from my son when he said that he had run out of money and the other kids were getting their cards reloaded from their parents.  Guilt trip!

I bit and reloaded my son’s card with $5 and watch him join the other kids who suckered their parents out of more money and then the spending frenzy continued.

But after about 15 minutes the 5 kids were then faced with the all too familiar reality that their cards were empty but it still appeared the same 2 kids still had money left.  It was getting near the end of the 2 hours and the other parents seemed to take the same approach I did with my son in telling them that there would be no more reloads of the cards.

So now what do you think the 5 kids with empty cards did?  That’s right; they lobbied the 2 kids with money to ‘share’ their money with the rest of them so the whole group could continue to play games.  Unfortunately, that seemed to work and the kids played for a little while longer and then the party was over – all gift cards fully exhausted.

It’s risky to draw parallels between the spending behaviors of 2^nd graders to that of adults but I think human nature is hard wired in us at an early age and how we react to ‘free’ money basically stays the same whether we are 8 years old or 48 years old.  These kids all come from upper middle class homes so they aren’t kids who grew up on the street hustling for money but yet look how easy it was for the majority of them to bully money out of the minority who were wise with their money.  Once they realized that their ‘free’ money had run out, it was then deemed morally right for them to shake down those who still had money and make them give it to the rest of them.

I can’t help but draw a parallel to current Liberal policy and our sad situation in the US.  We hear all the time from people like Elizabeth Warren and Barrack Obama that everyone needs to pay their ‘fair share’ of taxes.  We have a country where basically 50% of the people pay taxes and the other 50% receive Government aid.  Unemployment benefits can continue for 99 weeks and this removes the motivation for people to seek less than optimum jobs.  Liberals tell us that Stimulus spending from the Federal Government is the only way to reduce Unemployment.  Entitlement spending amounts to over 90% of all Federal Income taxes collected.  The people who are ‘makers’ are penalized by the ‘takers’ because now the ‘takers’ have significant numbers to vote people into office who promise to keep the redistribution of wealth flowing.

We have allowed the fostering of a culture in this country that makes people more concerned about what the Government can give them (and who we can take money from) versus what they can do to earn and create their own wealth.  This is a dangerous condition that is not just confined to 2^nd graders but goes all the way up to the leader of the free world.

The 1^st Quarter GDP growth measurement was reported last Friday and it came in at 2.5% which was well below expectations.  2.5% GDP growth will not give us the recovery we need to get people back to work but if you listen to some economists, they are spinning this as a good report and lowering future expectations of US economic growth.

From American Public Media:

“Michael Goldstein teaches finance at Babson College: “We’re the world’s largest economy. How fast could we possibly grow? When you’re huge, you’re going to grow slower. 2.5 percent is probably what you could reasonably expect. We’re not, I mean, we’re not Bangladesh, nothing against Bangladesh.”

Here’s how University of Michigan Economics professor and huge Obama shill Justin Wolfers put it:

Summarizing the GDP report: An early & noisy indicator of what happened a few months ago was OK, not great, & a bit below what was expected.—
Justin Wolfers (@justinwolfers) April 26, 2013

Our current GDP growth rate is ok, not great, a bit below expectations but GDP is a ‘noisy’ measurement anyway.   And since we’re the world’s largest economy, we should be happy with average GDP growth rates in the 2.0-2.5% range.  We can’t compete with 3^rd World countries, like Bangladesh, who are experiencing rapid growth in the 6% range so we should just accept this new normal.

Sorry, I don’t buy that argument at all!  I don’t subscribe to the viewpoint that once a country’s economy grows to a particular size that it stops growing and innovating.

We’ve been the world’s largest economy for quite some time and that hasn’t prevented us from seeing GDP growth rates in the 4-8% range and there is no reason we shouldn’t be seeing the same thing right now, especially after coming out of a deep recession.  In the past, when the US recovered from a large recession, the GDP growth rate rose in equal proportion but that has not been the case under Obama.

Using the graph below (with data obtained here), compare our GDP growth rates after the Recession in the early 1980’s (left side of the graph) to our recent “recovery” from the 2008 recession (right side of the graph).

Both recessions were very severe and the recovery under Reagan saw GDP growth rates for 4 consecutive quarters at or above 8% but under Obamanomics we’ve only sniffed 4% a couple of times.

The US had the world’s largest economy in the 1980’s and 1990’s but that didn’t stop us from seeing average GDP growth rates of 4% or more over this long period of time.  Starting with the year 2000, you can see a step function decrease where the US GDP growth rates went from an average of 4% growth to an average of 2% growth.  Granted the tech bubble bursting compounded by 9/11 hurt the first part of this decade but we never recovered from that.  Sure China has grown rapidly during that timeframe and more US manufacturing has been shipped overseas but what happened to the Free Market that prevented us from filling this void in our economy?

Here is another chart averaging the quarterly GDP growth rates during the terms of each of the last 5 US Presidents.

If a Leftists or Obama-bot sees this graph their first response will go something like this – “But Obama had to dig us out of the hole Bush put us in!”  I’m not going to debate whose fault the 2008 recession was but just for the sake of argument I’ll cut Obama a break here and eliminate his first 2 years of quarterly GDP growth rates from his calculation.  That seems fair to give a President 2 years to recover from a deep recession and I did the same thing for Reagan’s average GDP growth rate calculation just to be consistent.

But look how pitiful the economic recovery has been under Obama – An average of 2% GDP growth rate even throwing out the first two years of his presidency.  We should also remember that Obama got his 2009 stimulus package that was supposed to stimulate economic growth and keep us from having Unemployment Rates go above 8%.  We know how well that worked out!  Government spending went through the roof during these first two years and it was a Keynesian dream but as history has proven over and over again, these failed economic policies don’t work!

Still the question remains – What has changed over the last 13 years to cause our economy to be stalled at a 2% average GDP growth rate?  I think this is a complex answer but I can’t help but find a correlation to increased Government spending during this same time frame.  I touched on this in a previous post and here is the graph to back it up.

I believe in the Free Market and American Exceptionalism so I don’t accept failure as the new normal for the United States.  It’s true that some industries (such as textiles and electronics manufacturing) have moved to other countries but I still believe that US industry will continue to grow in new areas in this knowledge based economy.   But not when the Free Market is attenuated by massive Government intervention and crony capitalism, as we’ve seen over the past decade.

We have to get back to Free Market principles or the Leftist economists will be right, this is the new normal.

One of the Left’s favorite memes is telling people that everyone should pay their fair share of taxes.  Of course they can never define what a ‘fair share’ is and it’s no accident we never see people like Elizabeth Warren tell us exactly what she means by this term.  If they told us what their real definition was it would frighten people because they basically want more tax revenue until there are no more wealthy people and we are all poor and dependent on the Government.

Instead of making everyone poor, I am a Conservative and I prefer to increase everyone’s wealth by following Free Market principles.  Since I’m not afraid to tell people what I feel is a ‘fair share’, let me attempt to define that term and prove that the wealthiest 50% of Americans are actually paying MORE than their ‘fair share.’

There are two measurements that I’ll use to formulate my ‘fair share’ definition – Adjusted Gross Income (AGI) share percentage and Total Income Tax share percentage.   These terms are reported annually by the IRS and are broken down by income demographics (Top 1%, 5%, 10%, 25% and 50%).  The IRS reports how much of the total US AGI is accounted for in each income demographic and how much each income demographic pays as a percent of overall income tax for that year.

So my definition of a ‘fair share’ is this – Each income demographic group should pay a percentage of total income tax that is equivalent to their corresponding AGI percentage.  In other words – If you are in an income demographic group that accounts for 20% of all income in the US then your total group should account for 20% of all income taxes collected.

Sounds fair, right?  Your percent of the income tax is equal to your share of the income.

Side Note – This definition is not the same as a Fair Tax system and while I’m a big proponent of this, we don’t have that now so I’m attempting a definition of ‘fair share’ that works with our existing progressive income tax structure.

Ok, now let’s dig into the data and see how close we come to my ‘fair share’ definition.  And in an interest to fully disclose my data source – I use the IRS website to obtain the particular spreadsheet that I need to generate the graphs you’ll see below.  Tax year 2010 is the latest data the IRS has published so that is what I’ll be using here.  I did a similar analysis with 2009 tax data and you can go here if you are interested.

Here is a graph showing how the various income demographic groups are divided in 2010 based on the minimum annual income (in 2010 dollars).

Now let’s look at the percent of AGI for the top 3 income demographics over the past 10 years and you can see that the top 1% accounted for roughly 20% of the total AGI, the top 5% accounted for around 35% and the top 10% accounted for around 45%.

If my definition of ‘fair share’ is correct then the amount of total income tax by these three income demographic groups should be about equal to their AGI percentages (20% for the top 1%, 35% for the top 5% and 45% for the top 10%).

Wait a minute!  These income demographic groups are paying almost twice their percentage of tax revenue when compared to their AGI revenue.  How can Leftists say they aren’t paying their fair share?  The IRS data show that they are paying much more than their fair share!

To show it another way, I’ve graphed the AGI percentages vs. Tax percentages of the top 50% for 2010 and compared that with what the graph should look like if we used my definition of ‘fair share’ (Tax percentage equals AGI percentage).

When you look at a graph over the past 10 years (comparing 2001 with 2010) comparing AGI share with Tax share, you see that we are moving in a direction of more unfairness (each income demographic is paying a bigger share of the Tax revenue that doesn’t match their AGI share).

It looks even worse when you look at each group and compare how much their AGI share increased versus their Tax share increased from 2001 to 2010.

The top 1% saw their AGI share increase by just over 1.5 percentage point from 2001 to 2010 but their share of the Tax revenue increased by over 4 percentage points!  Doesn’t it seem ‘fair’ that when your share of the total more income increases by X percentage points that your share of the income taxes shouldn’t increase by more than X percentage points?  Apparently not for Leftists!

There is no way you can honestly look at this data and tell the American people that the wealthy aren’t paying their fair share.  Any attempt to do so reveals that you are either ignorant of the data or have a more insidious purpose.  Or both.