Wednesday's Web: State of the Union

NOTE: Today's piece is by guest writer Tho Bishop, Economic Consultant, Bishop & Associates

During the State of the Union last night President Obama told America “We have to make America the best place on Earth to do business. We need to take responsibility for our deficit, and reform our government. That’s how our people will prosper. That’s how we’ll win the future. And tonight, I’d like to talk about how we get there.” While a lot of people will be focused on attacking the President’s proposals from last night, and often rightfully so, I will instead focus on presenting my own proposal to “win the future”. 

The economic situation in America today is dire: unemployment remains around 10%, the stimulus failed and a series of failed government regulatory ventures has left the American public with a woeful distrust of the competency of government and, more unfortunately, distrust in the very system that created the unprecedented wealth America has enjoyed – capitalism.

It will require more, however, than expressing a love of capitalism to turnaround the economy. The key to boosting the private sector is not to allow the Federal Government to spend more of the wealth generated by Americans, as the President proposed, but instead by getting the government out of the way so they can create more. In the following I will address the two most vital steps the government can take: Tax Reform and Currency Stabilization.

There is no greater source of tyranny in American today than the Internal Revenue Service and no greater source of confusion than attempting to comprehend the American tax code. As Will Rodgers said, “The income tax has made more liars out of the American people than golf has.  Even when you make a tax form out on the level, you don't know when it's through if you are a crook or a martyr.” While it is unnecessary for these purposes to go into the long dark history of the American income tax, it is appropriate to identify it as an inherently Progressive reform and one of the greatest burdens on our economy.

    The Tax Foundation estimates that in 2005 Americans spent over 6 billion hours, and over $265.1 billion dollars complying with the tax code . This is the equivalent to a 22 cent surcharge for every dollar of tax collected. Of that $265.1 billion, $148 billion is paid for by business – 56% of the total cost of compliance! And these figures only take into account the time and money spent on tax record keeping, completing tax forms and filing for returns without figuring the time businesses and individuals spend looking for ways to limit their tax burden or the costs involved with tax auditing and litigation. The number becomes greater still if you factor in opportunity costs involved through the withholding process.

    These are the burdens caused by an overcomplicated, overbearing tax system. The practical result is jobs being outsourced overseas, increases in prices and decreases in real income. 

    The system I would propose to replace the IRS would be the National Sales Tax proposal called “The FairTax”. Since I acknowledge the process of replacing the IRS would be even more difficult and convoluted than removing it in the first place, I will spend little time here going into great detail involving this system and instead point out what I believe to be the three most important aspects of it:

•    Removal of Corporate Taxes
•    Simplifying the tax code
•    Increase the number of tax payers

The most important benefit to moving to a FairTax would be the repeal of all corporate taxes, turning America into the most attractive country in the world to build a business. As the number one economic issue before the inadequately labeled “Great Recession” was Job Outsourcing, this simple concept reverses one of the greatest economic burdens America has faced this decade. More businesses in America means more jobs for America and more jobs for America means more revenue for the government, greater stability for the economy and more power for whatever political party responsible.

“We might hope to see the finances of the Union as clear and intelligible as a merchant’s books, so that every member of Congress and every man of any mind in the Union should be able to comprehend them, to investigate abuses, and consequently to control them. Our predecessors have endeavored by intricacies of system and shuffling the investigation over from one office to another, to cover everything from detection. I hope we shall go in the contrary direction, and that, by our honest and judicious reformation, we may be able…to bring things back to that simple and intelligible system on which they should have been organized at first.”

These were the words written by Thomas Jefferson to his Treasury Secretary Albert Gallatin in 1802 in regards to the finical programs of Alexander Hamilton and his Federalist Party.  The words are remarkable relevant today in regards to taxation. Thanks to accounting tricks like withholding, most Americans have a vague idea on how much they should be taxed and how much they actually pay in taxes. This, in many ways, is an immoral form of governance.

The FairTax fixes this moral system using the simplification of the sales tax. Just as every state and local sales tax figure is noted on your average receipt, so would the FairTax – as such every citizen would be able to see how much of his money went to government simply by recording the number printed black and white on his receipt. No muss, no fuss.

Perhaps the greatest benefactor from such reform is the American worker. With the end of the income tax comes the end of income tax withholding, leading to every American receiving 100% of their paycheck instead of the depleted one he receives now on payday. A reform in government that would positively impact almost every working American man and woman.

Another important advantage of the FairTax that other proposed reforms, such as a Flat Tax, lack is the increase in taxpayer base. Since taxes are extracted on sales and not on government accounting of income, individuals who currently don’t pay federal taxes would do so; people like: illegal immigrants, tourists and those who deal in black markets. While, for example, your average dope dealer avoids paying much in taxes while making significant income in today’s America, in the one I am proposing he will be doing his “patriotic” duty every time he buys a Mountain Dew or Doritos. More tax payers mean less of the burden is placed on the backs of Middle Class and Lower Income Americans.

While these are three of the most important revelations the FairTax would bring, the benefits are not limited to the above. Since I cannot do due diligence to a proposed piece of legislation years in the making with simply a few paragraphs let me finish this point with identifying the benefits of the FairTax as figured by The Beacon Hill Institute which figured that implementation of the FairTax would, in five years, increase Real GDP by over 10%, domestic investment (a crucial factor in ensuring economic stability) by over 86%, capital stock by 9.3%, employment by almost 10%, consumption by 1.8% and real wages by 10.2%.

I give you Economic Stimulus. And a reduction in government. And a return to Constitutional principles.

While I believe that Tax Reform must be the all important trunk of the tree of economic growth, there are other efforts that should be undertaken in Washington in order to strengthen both economic and political gains.

The benefits of tax reform will be undermined, however, if we allow the government to destroy the worth of the dollar. Ever since FDR has taken America off the gold standard, America has faced ever-increasing inflation. Since 2008 this problem has only been exacerbated with the trillions of dollars in government spending stemming from taxpayer bailouts and other ill-advised measures. Without the ability to generate wealth itself, the Federal Government relies upon one of its most dangerous powers: the ability to legally counterfeit. Every dollar the Federal Reserve generates out of thin air is another dollar that dilutes the purchasing power of American savings.

We must have current stabilization. For this I would point to Nobel Economist James Buchanan’s solution of Constitutionalizing the Currency. While this is historically connected with the Gold Standard, it does not necessarily have to be so as the theory does not stress basing the dollar on Gold – only the depoliticization of the dollar. As Buchanan explains: “In application to money, the requirement is that the value of the monetary unit be made one of the rules of the game, within which economic interaction takes place, rather than being used as a counter in the strategy of play within the rules. In Hayekian parlance, the value of money must be part of the ‘higher law,’ as opposed to ordinary legislation that takes place within such law.”

Money Constitutionalization would prevent the Federal Reserve to use the printing press to rob average Americans the value of their hard earned American dollar. Buchanan goes on to point out that this goes hand in hand with the basic principles the Constitution placed for us, noting that the power to coin and regulate currency was provided in the same sentence that provided Congress with the ability to establish other units of measure. Just as it would be chaos for Congress to be able to manipulate the length of a yard for political purposes, we have chaos with the Fed’s ability to manipulate the value of the dollar with every new one printed.

By placing the value of the dollar in this “higher law”, we would necessarily have currency stabilization. As anyone with ears to the global financial situation can recognize growing international fears about our dollar, it should be easy to recognize the benefits of a more sound and secure currency.

We as Americans have always been a resilient group that has definitely overcome the hurdles fate has placed in front of us. In today’s world, that hurdle is often the unforeseen consequence of well-intentioned government policy. It is time for a change. We must end the failed policies of government economic intervention and advocate for America to be the easiest country in the world to start and operate a business. If we look for government to solve the problems of today, we will find ourselves facing only prolonged suffering. It is Americans, not our government, that makes us great – and it is time Washington remembers that.

Comments

[Mark]

Its true that our tax code should be thrown out -- every word. And we need an entirely new tax code, one that is a few pages long, one that is simple.

And there are ways to do that.

But sadly, Fairtax is not it. Oh it sounds great! I was a big fan at first.

I wish it were true.

I was a big fairtax supporter at first.

That is, until I read the fine print AND asked Fairtax leaders about it.

Until I looked behind the curtain and saw it was not only bogus, it was deceptive and dishonest.

A few years ago, Senator Bill Bradley had what he called "a Fairtax" -- and maybe it was.

Everyone calls their plans "Fair". Fairtax was clever, and actually named their plan Fair.

Not only is it not fair, it's not even rational.

For the first ten years, the Fairtax books, videos, and speeches said nothing about a massive new tax, a trillion dollar tax, that city and state governments must pay to the federal government.

The only thing the Fairtax books/videos/speeches said, for ten years, was about the sales tax people would pay.

But ten years into it, Fairtax leader Boortz, in one sentence, mentions that besides people paying this tax, city, counties and state governments will all pay this too.

Kinda odd.

No explanation -- no list of states and how much they would pay. No indication HOW they would pay it, or to whom, or if that was even rational.

They mayor I talked to laughed at it. He never heard of such a thing.

So I contacted Fairtax spokesman about it.

A massive tax on city and state government -- only mentioned in one sentence?

Surely that was a misprint, or taken out of context.

Nope -- it was their plan. In fact, this massive tax is CENTRAL to Fairtax, mathmatically.

Why then was it not mentioned for 10 years? WHy is this central aspect of Fairtax only mentioned in ONE sentence?

Why was this huge aspect apparenty covered up?

Wasn't Fairtax going to be transparent?

I got some really goofy answers.

You decide. Is a plan that hides a trillion dollar tax, really transparent?

Fairtax knows it can't tax city and states -- for one thing, it's unconstitutional.

That's right, the federal government can not tax city and states directly. The federal government can tax people, but the federal government can not tax city and state governments.

For another thing, taxing city and state governments is not possible -- city and states will just say NO.

For another reason, Fairtax can't tax city and state governments, because those cities and states would have to pass the taxes along to the people.

Remember -- Fairtax said only people pay taxes?

They can't tax corporations, they said, because corporations just pass the tax on.

Okay. Fine. Sounds reasonable.

But here, Fairtax has a trillion dollar tax on city and state governments -- mentioned in one sentence -- and those taxes must be passed on.

CIty and states can't just send in an IOU. Or print money to send it in.

What gives?

Bottom line is, you can't get this revenue from city and states.

YOu are not going to force the state of Texas or anyonenn else to pay the federal government massive revenue.

You don't have any way to enforce this.

And that is exactly why Fairtax didn't mention this in their first ten years. That is exactly why they didn't explain it.

That is exactly why this trillion dollar tax is not mentioned in their videoes, in their speeches, in their books (except for one sentence).

http://fairtaxfineprint.blogspot.com/

[rashlanutrefuit]

The key to increasing the confidential segment is not to allow the government administration to invest more of the success created by People as the Leader offered.