What would be the result of such a system? The American economy would enjoy faster growth, reduced income inequality, greater stability, less unemployment, and more efficient government. Let's examine the reasons.
First, working people would have more money to spend, and they would actually spend it. The marginal propensity to spend is much greater for the less entitled among us. Economic growth and income equality are promoted at the same time.
Second, corporations would enjoy higher profits from payroll tax savings, accounting complexities, and SEC compliance costs. These gains would be partly offset by the loss of federal subsidies. They would also enjoy much lower tax rates from paying their vast pools of money out to shareholders in the form of dividends, thus releasing funds into the economy for spending or reinvestment.
Third, unemployment would decline because eliminating payroll taxes reduces the price of labor. Employers would be more inclined to hire workers instead of spending their capital on automation projects. The resulting reduction in fixed costs makes the entire economy less vulnerable to cyclical reductions in demand volume, thus minimizing business failures and economic crises.
What about wealthy individuals? Their income would increase with corporate dividends and those with income from their work -- doctors and lawyers and such -- would enjoy the elimination of payroll and/or self-employment tax. Many of their partnerships and Sub-S corporations, along with their attendant complexity, could be dissolved into conventional corporate structures without any additional taxation. The modestly wealthy would be largely unaffected by the estate tax, but the wealthiest of the wealthy would give back a modest portion of their estates posthumously.
WATCH OUT FOR FALSE FLAGS
In February, the House Ways and Means Committee released its tax reform proposal. Although it professed to offer a flatter, less complicated, and fairer tax system, it instead guarantees continued subsidies for capital investment and fails to significantly address the regressive nature of payroll taxes. And its 1,100 pages expose the initial complexity that would grow exponentially if it were to work its way through the legislative process. This proposal is anything but real reform.
We need real reform, and real reform must start with the basics. A tax system that subsidizes capital and taxes labor utilization is very deeply flawed and must be scrapped in its entirety. Now.
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