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June 2008
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Filed under: General
Posted by: Jim Gray @ 5:46 pm

                        “ALTERNATIVES TO THE INCOME TAX”  (46)

Last week we basically “shot fish in a barrel” by discussing the failings of our present income tax system.  Not only does this system cost us taxpayers a whopping $200 billion just to keep records for the preparation of our taxes each year, it also costs an additional $194 billion each year to pay the administrative expenses of the Internal Revenue Service.  Two viable alternatives to this complicated and unwieldy system are the Flat Tax (and a variation of it called the “Fair Tax”), and the National Sales Tax. 

The Flat Tax is a greatly simplified income tax reporting and paying system that would reduce the size of our yearly tax reporting form to the size of a post card.  This would be accomplished by taking away all credits, deductions, loopholes, and exemptions, except for one generous family deduction that everyone would receive. 

The amount most often discussed for a deduction for a family of four is $30,000.  That means that a household of four people that earned $30,000 or less would not pay any income taxes at all on their income.  That would address the problems of the poor.  But thereafter, all people would pay the same percentage of their income to the government as taxes, regardless of what the amount of that income might be.  So a family that earned a million dollars per year would pay about ten times the amount of taxes that would be paid by a family that earned a hundred thousand dollars.  To most people, that would be a fair and reasonable result.

What would the tax rate be under this new tax system?  Of course the rate would be subject to change, just like under our present system.  But we can get some hints from the countries of the former Soviet Union that have already implemented the flat tax.  Estonia was the first, and it implemented a flat tax in 1994 of 26 percent.  Then Latvia chose a 25 percent tax rate, and Lithuania picked a 33 percent rate. 

But the tax approach in those countries spurred their economies so successfully that after a few years they became known as the “Baltic Tigers.”  So soon Russia instituted a revolutionary 13 percent flat rate tax of its own, and with that Russia’s economy began to prosper.  Why?  Its businesses flourished from the reduced tax rate, and the government itself realized more revenue both because income tax compliance became easier, and because tax evasion and avoidance became far less profitable. 

And then the flat tax revolution spread.  Serbia adopted a 14 percent rate, Slovakia chose 19 percent, Ukraine 13 percent, Romania 16 percent, and Georgia chose a rate of 12 percent, which currently is the lowest in the world. 

Computing taxes under the flat tax system would be simple.  Each household would report its wage, salary and pension income, subtract the family allowance and then determine the family’s taxable income, which would be taxed at a fixed rate.  That’s pretty much all.  So the tax return could be filled out by a normal ten year-old child in about fifteen minutes.  All businesses would file a similar form, no matter if they were Exxon-Mobil or a mom and pop diner.  The businesses would report their gross revenue, subtract their labor costs, costs of goods sold and investment costs, and from that compute their total net revenue as taxable income.  From that amount would be computed their total tax. 

No more complicated deductions, depreciation calculations, or favorable treatment for politically powerful entities.  And this would result in economic decisions being made for business reasons, instead of tax reasons.

The Fair Tax would be similar to the flat tax, except that it would add a provision for tax rebates every month to lower income people.  This would keep those people from having to wait until the end of the year for their tax refunds.

The second alternative would be a National Sales Tax.  Whenever people purchase any goods or services they would pay a sales tax to the federal government, just like the sales taxes that are levied today by most cities.  As a result, there would be no reporting of income to the government at all, which would result in an enormous savings to virtually everyone before one even considers what their taxes would be.

Concerns about this system falling too heavily upon the shoulders of the poor would be addressed by allowing everyone to have a tax-free allowance of rental or mortgage payments up to a certain amount, as well as an exemption for some of the staples of life, such as the purchase of non-processed foods.  This latter provision would also have the side benefit of encouraging people to consume healthier foods, since such things as milk, fresh fruits and vegetables, eggs, and non-processed meats, fish, poultry, beans, and rice would have no sales tax at all.  But sodas, canned goods, sugar snacks, and other processed foods, which are far less healthy or nutritious, would be taxed.

All money that people earn as income would stay in their own pockets.  This also means that we could actually eliminate the Internal Revenue Service!  But to satisfy people’s concerns that Congress would first adopt a national sales tax, and then subsequently bring back an income tax on top of that, we would probably have to repeal the 16th Amendment to the U.S. Constitution, which gives the federal government the power to implement a federal income tax.   

Otherwise, the main fears for the national sales tax would come from the potential loss of deductions for charitable donations for religious organizations and other charities.  But to the degree that these are considered to be overriding concerns, they could always be addressed by providing additional deductions or rebates for these payments.

So please take a reflexive moment and contemplate what life would be like under either of these alternative tax systems.  We would probably end up paying about the same amount of taxes, but along the way the monstrous “hidden taxes” of complying with our present income tax system would be eliminated, as would the unfairness of many politically and economically powerful groups receiving favorable tax treatment that is not available to the rest of us.  In addition, people would be encouraged to invest and otherwise save their money because savings and investments would not be taxed at all.  This would appreciably stimulate our economy.   In addition, our merchants would also be able to compete more fairly both domestically and abroad with the products of other countries because they would not be paying taxes to our government that foreign merchants are not required to pay. 

Finally, when we pay taxes we will at least be able to see what those taxes are.  Today our tax system is so complex that increases in taxes can mostly be hidden from us.  But under both of these systems, if taxes were to be raised or lowered it will be plain for all to see.  That refreshing development might be enough to warrant a change all by itself.

James P. Gray is a judge of the Orange County Superior Court, the author of Wearing the Robe - the Art and Responsibilities of Judging in Today’s Courts (Square One Press, 2008), and can be contacted at JimPGray@sbcglobal.net or at his blog at JudgeJimGray.JudgeJimGray.com.

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Filed under: General
Posted by: Jim Gray @ 7:43 pm

                        IT’S TIME TO SCRAP THE TAX CODE”  (45)

            One of the best ways we could reduce the complexity of life, generally increase fairness in our society, and save virtually everybody an appreciable amount of money would be to scrap our nation’s income tax code and move to a different tax system.  In fact, our present income tax system simply cries out for change!

            Each year Americans spend about $200 billion just to keep records and fill out the paperwork for their income tax returns.  And along the way, they also spend about 5.8 billion hours keeping tax records and helping to prepare their tax forms.  This is enough to keep the equivalent of 2.7 million people doing nothing but tax-related paperwork all year long.

            To bring some additional perspective to the issue, average business owners each spend more than 100 hours every year in this same activity.  If that burden were to be lifted, each business owner could take a full two-week vacation from work with the time that would be saved.  And the situation is worse for larger businesses, because most of them actually have a tax agent physically stationed in their offices every working day.

Today the federal Tax Code is comprised of about 5 million words, and they fill 3,387 published pages.  And the code is so complicated that 56 percent of Americans pay someone else to prepare their taxes.  But that does not always help because many tax issues are so complicated that even tax experts working on identical problems routinely arrive at different results.

As a personal example, I believe that I am perhaps modestly intelligent, and I work for the government and simply receive a W-2 form at the end of each year, although I do have some investments.  But I feel lost in attempting to prepare my own tax forms, and have paid an accountant to do so for years.  You are probably in the same position.

At the other end of the process, the costs for the Internal Revenue Service in 2007 for administration, record keeping, tax filing, advice, collections, and enforcement was about $194 billion.  To put this into perspective, this was approximately the same amount of money as the entire federal budget in the year 1970!

And none of this is productive work, or, as economists say, this work does not produce wealth.  Instead it is a complete drain on our resources.  Wouldn’t it be helpful if we had a better, less complicated and less expensive system? 

Well, we do.  We could easily make our system more straightforward and fair by utilizing a Flat Tax,” or a variation of it which is known as the Fair Tax.”  Both of these approaches would severely reduce the complexity of the system as well as the involvement of the IRS.  A second option would be to phase in a National Sales Tax, which would have the benefit of abolishing the IRS completely!  In addition, if either of these options were utilized effectively, we should also be able to abolish the alternative minimum tax and also the death tax,” which taxes families on the savings they have accumulated after paying income taxes for years. 

So both of these changes would have an enormously beneficial change upon us individually, as well as upon our nation’s economy as a whole.  Just think of it, each of us would save all of the time, expense and frustration of the record keeping and other costs associated with the present system.  So even if we ended up paying the same amount of taxes, which when it came down to it we probably would, all of the accounting and preparation expenses would be saved, and our lives would also be much less complicated and fair.  In addition, the government would save most of the $194 billion yearly costs of the IRS.

Under our present system, the issues regarding taxes make such a huge financial difference to some taxpayers, that they frequently pay a tax specialist $50,000 so that they can save $150,000 in taxes.  For the taxpayer that makes perfect economic sense.  But for the nation at large, it is truly wasteful.  And along the way the financial reward to the specialist is so substantial that now some of the brightest minds in our country work on nothing but tax issues.  Wouldn’t it be more productive for our country as a whole for these intelligent minds to be addressing issues of free enterprise?

Of course if we follow our present course to its ultimate conclusion we may end up changing our tax return form to only two short items: 1) How much did you earn last year? and 2) Send it in.  (And congratulations, you even get to pay the postage!) 

So who is happy with the status quo?  Basically there are two influential groups that are profiting from our present system.  The first is tax accountants, tax attorneys and tax preparation companies like H & R Block.  They are making a good living under our present system and certainly do not want to change it. 

But the second group, which is by far the most adamant, is comprised of the members of Congress.  Providing special legislative tax breaks to their wealthy constituents brings these politicians major contributions for their re-election campaigns.  And this is a powerful stimulus to combat and thwart any change.  In fact, in my view that is the only major reason why the call for income tax reform has not been heard consistently all across the land.  In other words, taxation with representation isn’t all that wonderful either!

Those of you who would like to investigate some options to our present tax policy are invited to join us in this column next week.  At that time we will more fully explore both the flat tax and the national sales tax.  So stay tuned.

James P. Gray is a judge of the Orange County Superior Court, the author of Wearing the Robe - the Art and Responsibilities of Judging in Today’s Courts (Square One Press, 2008), and can be contacted at JimPGray@sbcglobal.net or at his blog at JudgeJimGray.JudgeJimGray.com.

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Filed under: General
Posted by: Jim Gray @ 10:53 pm

                             “OUR DEMOCRACY IS IN PERIL”  (44)

Our democracy, as bequeathed and entrusted to us by our Founding Fathers, is in peril on several different fronts. 

In the first place, it simply takes much too much money to establish a credible electoral campaign today.  Even for judicial campaigns, it takes more than $20,000 for a candidate to publish a 200-word statement in the voters’ ballot statement.  That is silly!  And harmful!  How do we expect voters to gather the information they need in judicial or other elections if these statements costs so much money?  In my view, we would all benefit if the statements would be furnished for free to the candidates.

The next best way to get a candidate’s name in front of the voters is to have it included in one of the many “slate mailers.”  Unfortunately, although most people do not know this, the “endorsements” on almost all of the mailers are simply available to the first candidate that pays the required fee.  Mostly there are no such organizations as are shown as sponsors of the slate mailers.  In fact, you or I could make up a name such as the “Firefighters for Justice,” or “Parents for the American Way,” and then offer our mailers for hire to the first candidates that come up with the money.  Seldom do these mailers have anything to do with a political philosophy, instead they are money-making tools, pure and simple. 

Another major threat to our democracy is the process of gerrymandering that has been addressed in a prior column.  Both parties in Congress have manipulated the voting districts expressly to keep the seats they hold from being subject to competition from the other party.  As a result, there is more competition for seats in the Russian Politburo than we have today in our Congress.

But the biggest threat to our democracy was highlighted by Alexis de Tocqueville when he was traveling through our country in the early 1800s.  He said that “The American Republic will endure until the day Congress discovers that it can bribe the public with the public’s money.”  In my view, we are getting perilously close to that situation.

Today there are numerous programs voted into existence by our “representatives” both in Sacramento and in Washington D.C. that simply buy votes for themselves by giving our taxpayer money away.  That is fine in a vacuum, since most of us want the poor and downtrodden to be better off.  But we must understand that this activity is not free - someone must pay the freight.  And as soon as we go too far down this path and taxes get too high, the people with money will simply decide to leave our country and take their assets with them, or at least hide their assets somewhere offshore.  We have already seen this happen with companies that used to employ many of our workers, and the same thing will start happening on a large scale for individuals as well.

What can we do about this problem?  The best place to start is to control government spending.  That is the key.  People must realize that although governments certainly serve a necessary but limited function, governments do not create wealth.  Instead they are actually a drain on wealth. 

So when governments borrow money in order to pay it back to the economically deprived, which is what we have done in Washington with our recent “tax cuts,” that is a direct threat to our way of life.  And when Sacramento pays off its deficits by borrowing money by issuing bonds or borrowing from such programs as the lottery, we are going down the same dangerous path.

Actions like this will be our great country’s undoing.  But to be frank, this will not be a particular problem for me or my generation.  We are doing just fine, thank you very much, because we will not be called upon to pay these borrowed monies back.  Instead, that will be the responsibility we will visit upon our children and our grandchildren.  So it is they who will suffer the consequences of our irresponsibility.  But that is not a legacy that makes me proud - and it should not make you proud either.

So how do we begin to reduce government spending?  Maybe we could start by reducing the money we pay for the staffing of the offices of our legislators.  In fact, maybe we should go a step further and follow the lead of the State of Texas by having our legislature and even our Congress meet only every other year.  We have plenty of laws; we really do not need any more. 

Mark Twain said it best when he announced: “Good news from Washington - Congress is deadlocked and unable to act.”  In my view, that really would be good news.

Reducing the size and influence of government will spur the economy like nothing else can.  Now don’t worry, that does not mean that we will abandon our environmental or antitrust laws.  But it does mean that we could allow our businesses to do what they do best, which is to produce goods and services that generate wealth, without being required continually to look over their shoulders to see what new laws and regulations they must now comply with.  And that will result in more jobs for productive workers, which will, in turn, generate more wealth for everyone.

My final thought in this matter is that simply getting people to come out and vote in our elections, without more, is not a victory.  What we need is voters that are educated about the candidates and all sides of the issues.  Originally I greeted the coming of cable television with its large number of stations to choose from as a blessing.  I thought that this would result in more diversity and more exposure to alternative points of view for everyone.  But I was mistaken.  Because what has happened is that people have now been able to find a television station that caters almost exclusively to their own predisposed points of view. 

As a result, most voters’ political philosophies have hardened, and our country has become more polarized on both the extreme right and the extreme left.  That means that there are fewer and fewer people in the moderate and non-committed center from which the political candidates must seek support.  This in turn makes the candidates more polarized as well. 

Does any of this matter?  Only if we care about our country and our way of life, and want to pass them along to our children.  Because, like I have said before, it is our government, and if it is not working, we have only ourselves to blame.  And our way of life is in peril.

James P. Gray is a judge of the Orange County Superior Court, the author of Wearing the Robe - the Art and Responsibilities of Judging in Today’s Courts (Square One Press, 2008), and can be contacted at JimPGray@sbcglobal.net or at his blog at JudgeJimGray.JudgeJimGray.com.


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