Hedgehog Party

Corporate Tax Reform - Rangel

Charles Rangel, to his credit, has initiated the discussion of tax reform.  In this article, http://www.washingtonpost.com/wp-dyn/content/article/2007/10/26/AR2007102601860.html critics discuss his ideas for corporate tax reform.  This coupled with his additions to individual tax rates is supposed to be the "mother of all tax reforms."  All of these schemes have the same political requirement.  Shield the taxpayers from the perception that they are, in fact going to have to pay the taxes to support the current level of spending.

Soothing as it is, that is exactly the wrong approach.  Taxpayers MUST understand the cost of government.  Without that understanding, there is never spending reform.  The great unspoken truth is that middle class taxpayers always pay for federal spending. 

We will have a lot more to say about the Rangel proposals.  For now, try to develop a clear understanding that all of these proposals are a continuation of the old shell game.  A little reminder of history always helps.  Did you know that the original conception of the Alternative Minimum Tax was aimed at 155 individuals?  Without reform, next year AMT will affect 23 million returns.  Did you know that the original Income Tax Amendment would have been defeated in the Senate if "anybody believed that the income tax would consume as much as 10% of anybody's income?"  Now, the middle class pays a marginal rate of 39%.

Think of the current proposed surcharges on taxes.  Does a surcharge on incomes over $200,000 really tax the rich if we have high inflation for a few years?  I suggest that this is a future tax on the middle class.

The Hedge Tax is a graduated tax...more steeply graduated than our current system...but it raises everybody's taxes when spending goes up.  Then we all get to vote on whether this is a good idea.

Tax Reform Needed - in India!

I’m working in India this week.  So, you’re surely wondering, what do the good folks in India think about their own tax system? Do they have concerns similar to ours?  What tax reform would they like to see?

To answer these questions, I pulled together an after-hours focus group at my employer’s Finance & Accounting center in Chennai.  I asked a single question – what do you think about the tax system in India?  I’ve never seen a group of people go from calm and cool to agitated and outraged faster that these 12 individuals did. Here is a sampling of what I heard:

"The Salaried Class in India (analogous to W-2 wage earners in the U.S.) is getting fleeced.  They can’t avoid high taxes.  Businesses, on the other hand, can manipulate their taxable income and pay much lower taxes."

"Raising taxes means extracting more from the Salaried Class; businesses and rich people always seem to avoid higher taxes."

"High tax rates drive a lot of tax evasion.  When the government once offered tax amnesty to get evaders to pay taxes, many people literally showed up at the tax office in trucks filled with currency - untaxed black market income."

"Tax reform that eliminates loopholes and ensures that everyone pays their fair share is imperative (I found a Times of India editorial expressing similar views here)."

And finally, a joke:

"One day, God spoke to Indira Ghandi and offered to answer her three most pressing questions. She paused thoughtfully, then asked the following:

“God, when will my son, Sanjay, become Prime Minister?”

God answered, “Not in his lifetime.”

Mrs. Ghandi continued. “When will my son, Rajiv, become Prime Minister?”

God answered, “Not in your lifetime.”

Finally, she asked her last question. “When will India see a tax system that is fair and equitable?”

God replied, “Not in my lifetime!”

Does all this sound familiar? It does to me!  My takeaway from the focus group is that the yearning for a fair and equitable tax system knows no borders.  Ordinary people everywhere want tax fairness, but can’t seem to get it. The Hedge Tax offers a unique way forward that might just bring us the tax reform we need.  Who knows, if we pass it in the U.S., maybe it will help the people in India one day!

Who Pays the Most Taxes

This article a a good overview of who pays taxes.  As usual, our confusing tax structure creates the usual response.."Huh?"  Bottom line is that our tax system is unfair and does economic harm.  http://www.outsidethebeltway.com/archives/2007/10/who_pays_the_most_taxes/

Left out of this discussion is the near impossibility of piecemeal reform of this tax system.  Also left out is one of the favorite themes of the Hedge Tax...wealthy asset holders' ability to avoid the tax system entirely.  Most agree that high income earners pay most of the taxes.  But some studies suggest that wealthy asset holders owning 40% of the nations assets pay only 13% of the taxes.

A More Sophisticated View of Sub-prime Bailout

This article is a good follow-up to our previous post on Sept 3 - "Fire Sale."  One of the great weaknesses of our system of tax and spend is that powerful individuals, corporations and banks are largely indifferent to the results of bad policies.  They profit from them both coming and going.

In this case, the banks earn hefty fees making the loans, selling the loans, refurbishing the loans, and rebuying/reselling the loans.

  http://www.theconglomerate.org/2007/10/a-fiendishly-in.html

The economics of these activities are largely hidden from the electorate in the form of future inflation.  When inflation occurs, it usually happens in spurts unidentifiable to long festering causes.

The Toll of the Demands of Tax and Spend

This piece by David Brooks chronicles the toll of holding public office.  He emphasizes the demands of the national parties on candidates for local elections.  My own belief is that this a reflection of the demands of Tax and Spend.  There is so much money and power at stake, that everything and everyone is held hostage to it.  http://www.nytimes.com/2007/10/16/opinion/16brooks.html?_r=1&ref=opinion&oref=slogin.

Taxing Social Security

The complexity of the tax code extends to Social Security...taxing here, taxing there, taxing everywhere.  The Hedge tax does away with this.  One tax, one deduction.  When the voter is focused on tax and spend...the voter can balance what is best.  http://www.smartmoney.com/taxmatters/index.cfm?story=20071016

Raising Taxes

Take a look at this article entitled "Look Who's Raising Taxes" from the May 21, 2007 issue of The Nation.  Let's explore a few points made in the article:

"But telling people you're going to raise taxes to reduce the deficit is like telling them you're going to garnish their wages to pay off the gambling debts of their crazy vagabond uncle. It's no fun."

Of course it's no fun.  But ask yourself - how will we ever control spending if voters are never directly asked to foot the bill? 

"People seem ready to accept higher taxes, but only if those taxes are sold to them as paying for services they want the government to provide."

Maybe.  But let's make sure we put the question to them clearly.  "As your elected representatives, we have decided to increase spending on what you've told us are desirable programs.  The resulting increase in the tax rate that all but the poorest  people pay is 'X'.  Do you approve?" 

"Now everybody wants the programs, but one group is unwilling to pay for them and the other group is unable to pay for them."

This is a slippery point.   Politicians play with the definitions of these terms to our collective disadvantage.  We should define the "group that can pay" consistently, and we should tax the group so that anytime spending increases, everyone in the group feel the pain of higher taxes. 

Radio Interview - Walton & Johnson show

This past Wednesday, October 10, 2007, I had an opportunity to discuss our book, The Rats are in the Cheese, on the Walton & Johnson Radio program.  You can listen to the broadcast here.

It was the first of what I hope will be many more interviews to come.  As such interviews are scheduled, I'll post dates and times on this site.  Don't be shy - comments on my comments are welcome!

Empowering voters

George Will starts his October 7, 2007 column with a quote from The Wealth of Nations by Adam Smith: 

"Were the expense of war to be defrayed always by a revenue raised within the year . . . wars would in general be more speedily concluded, and less wantonly undertaken."

This concept is a central theme in the tax reform proposals contained in The Rats are in the Cheese.  If most voters shared in the cost of incremental governmental spending, the spending decisions themselves would be more carefully made.  Why?  Because voters, who always like more spending, would also have to decide whether they were willing to pay for such spending.  Eventually, overall spending would be limited by the amount of taxation voters were willing to support. 

Democrats Feel the Flat Tax Heat

A new flat tax proposal from the least likely source...Rahm Emanuel and Bruce Reed.   http://www.ideasprimary.com/?p=335.  It is election silly season, so everybody is entitled to name their baby whatever they want.  But this proposal is not in the same league with the Hedge Tax.  It carves out a plateau for middle class taxpayers, but it leaves every other tax in place.  And, of course, like all other tax proposals, it leaves the asset class largely untouched. 

Social Security and Medical taxes escape reform, and the under $100,000 taxpayers this plan purports to protect could face big increases in those taxes.  The new wealth creators; the hard working professional class and small business get thrown under the bus.  No effort is made to attach accountability to tax and spend. 

Add several years of high inflation, and this proposal moves the shell game to a higher level.  I think Tim the Tool Man re-wired their Vegamatic to give it a lot more power. 

Still, it is a good sign that traditional pols that have been raised on slice and dice taxation recognize that the debate is shifting.   The Hedge Tax plan makes it harder and harder to sell these schemes.