The third in a series describing how critical thinking, as a national value, could be applied to re-imagining public policies. The payoff of this very long process is to simplify and rationalize such policies as taxation.

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Part 3 -- Simplify and Rationalize Public Policy

by Email address removed" target="_blank">Larry Butler
 

   The first installment of An Impractical Guide established that critical thinking, as a national value and widespread among an enlightened populace, is necessary to bring about positive change in America. http://www.opednews.com/articles/An-Impractical-Guide-To-Sm-by-Larry-Butler-Children_Culture_Economic_Economics-131021-896.html   The second installment suggested that critical thinking be applied to a fundamental evalutation of public policies such as taxation.   <> But all this effort means nothing without action; we must create new solutions that replace today's inefficient and inequitable public policies.

   To have arrived at this point in our revolution, critical thinking must have been restored as a national value, and critical thinkers must have actively evaluated public policies.   A democratic society that has not progressed this far will be vulnerable to the influence and propaganda of traditional vested interests.

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   Let's see where we already agree.   First of all, consider the valid roles of the federal government.   I believe that they include:   (1) Champion and protector of individual rights; (2) Champion and protector of equal opportunity; and (3) Champion and protector of the common good.

   If you agree, please continue reading.   Feel free to add any other categories that you feel may fall outside the three listed above, but remember to keep it simple.

   This phase reminds us that critical thinking is not necessarily an end to itself.   Our founding fathers took the ideas of the best thinkers of their day and set them in motion.   They created a new nation and the public policies that defined it.   We desperately need to do the same today, and you can be sure that it will be the hardest element of our own revolution.

   Within the context of critical thought, the process of simplifying a system will also serve to rationalize it.   By carefully and critically analyzing the fundamentals of an issue, we can devise solutions in the form of new structures and processes that are more direct, compact, and rational.   Government becomes more practical, more equitable, more effective, and more efficient.   And smaller.

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   By now, you may be tempted to dismiss this whole idea as impractical ranting about things that are too big to change.   Let's test by example.

   Our rational examination of taxation in Part Two carried with it some profound implications.   If you were surprised to consider the possibility that taxing labor is irrational, you can guess where my solutions are headed.   For generations, we've lived with this tax on labor, pretty much without question.   Oh, occasionally somebody will ask why those who earn very high wages and salaries are exempt, but that's about as far as our critical thinking has gone on this matter.   In order to get to real solutions, new solutions, we need to start with fundamentals; we can't just build on accepted conventional wisdom.   After all, accepted conventional wisdom has gotten us to where we are today.

   So taxing labor -- a commodity we want to be in strong demand -- is irrational.   Irrational public policies need to be changed -- rationalized, made reasonable.   If our governments need money to function, it should be raised by processes that don't wreak harm to the economy.   Makes sense, no?   Public policies that make sense may also make for good, efficient government.   Public policies that do not make sense beg to be eliminated, further simplifying the whole system of government.

   If income or wealth is taxed, it has no effect upon the demand for income or wealth.   Since neither is a commodity that can be bought or sold, neither has a price associated with it.   Since neither has a price, tax changes cannot affect a market price.   The argument that higher income taxes will discourage income loses a leg of support.   The argument that taxes on wealth will discourage people from getting rich loses another leg of support.

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   To carry this line of critical thinking into actionable solutions, create a new system of taxation and evaluate its expected effects.

   Begin by eliminating the tax on labor.   The immediate effects of this change would be to raise the income of everybody earning less than $110,000 by nearly 7%, and to eliminate direct taxes on business payrolls by a similar amount.   This in turn will stimulate the economy by reducing unemployment and placing more money into the hands of workers to spend, thus further increasing aggregate demand and inviting additional capital investment to satisfy that demand.   All of these consequences generate additional personal and corporate income, a part of which would be converted to tax revenue!

   Now look at personal income taxes.   Simplify the whole system by treating every person as a taxpaying entity and eliminating all exemptions and deductions from the code.   Provide a schedule of rates that starts at zero and adds 5% for each $10,000 of income, to a maximum rate of 35%.   Eliminate distinctions among types and sources of income to level the playing field.   The immediate effects of this change would be to generate more tax revenue among high earners and to provide significant relief to those in the lower 4/5 of earners, thus further stimulating demand and further capital investment throughout the economy.   High earners will get an infusion of income from changes in corporate tax policy -- read on.

   Simplify corporate taxes by eliminating all incentives and penalties in the code, instead taxing at a flat rate of 35% on income based upon generally accepted accounting principles -- GAAP.   One exemption from GAAP income, an allowance for dividends paid, will eliminate double taxation.   The immediate effects of this change would be to unlock trillions of dollars in hoarded cash, which could now be paid out to shareholders to reduce corporate tax liabilities.   This will in turn stimulate spending and investment by shareholders and further increase aggregate demand throughout the economy.

   So far, we've done little to reduce the deficit.   I estimate that a deficit of just over $800 billion would result from these changes without factoring in growth stimulus.   With expected economic growth resulting from the above changes, I estimate a remaining annual deficit of less than $250 billion.   Note that these estimates are more favorable than the baseline scenario, but they do not address the very real threat of a large and growing national debt.   In order to begin to pay down the debt without harming the economy, we need additional revenue that doesn't threaten growth.

   Our understanding of microeconomics -- especially the law of supply and demand -- shows that this additional revenue ought to come from either income or wealth rather than a tax on commodities such as labor.   A temporary surcharge on either would be effective.   For example, a 1% tax upon wealth, excluding equity in a primary residence, would generate enough revenue to begin to reduce our national debt within a few years.   Doing so would also demonstrate our national financial responsibility and thereby discourage future increases in the cost of borrowing in the form of higher interest payments.   After just a few years, the tax on wealth could be phased out entirely without creating a budgetary deficit.

   This plan would generate changes in federal expenses as well.   An effective increase of 7% in the minimum wage would change the number of people living in poverty, and in the long run, how many receive public assistance.   An increase in labor demand and a corresponding decline in the unemployment rate would cause a reduction in the cost of unemployment benefits.   Lower rates of structural unemployment would restore a level of effectiveness to both fiscal policy and monetary policy, mitigating the need for stimulative government spending, and reducing federal deficits even further.   A simple tax code would free up thousands of IRS agents who could pursue tax cheats and the money they owe, further reducing deficits and the national debt.   Eliminating the favorable treatment of capital gains and dividend income would slow the concentration of wealth, further stimulating the economy with increased aggregate demand among wage earners.

   This is only one theoretical tax structure that would yield huge benefits to America's economy and its citizens; a wide variety of simple and rational plans could be conceived within the discipline of sound economic theory that would yield similarly favorable results.

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   What is described above is nothing short of a revolution that starts with a change in the way America thinks.   Pervasive critical thought would itself bring about an awareness of just how manipulated we are by those using established tradition for their own ends. How perversely ironic it is that the documentary legacy of the greatest critical thinking revolution in world history is used today by moneyed interests to defend their tradition of concentrating wealth and power for themselves.

   That's why universal instruction in critical thinking techniques in public schools is so critical.   Given the powerful interests arrayed against revolutionary thought, we can expect a long conflict on the battleground of curricula.   But the stakes are high, and the rewards could be enormous.   We need to begin immediately, vigorously advocating -   demanding -- universal instruction in critical thinking techniques.   Years may pass before we accomplish this, and generations may pass before critical thinking becomes, once again, a national value.

   But imagine a well-equipped populace willing to ask questions and demand answers to challenge inane public policies.   Why are corporations afforded the same rights and privileges as their human counter parts?   Why should US armed forces be committed to defend the interests of American multinational corporations abroad?   Why do economic bubbles keep happening?   Why has the concentration of wealth accelerated in recent decades?   What purpose does the electoral college serve today?   Why does Congress create a budget only to have to approve any borrowing needed to fund it?   Why are so many Americans behind bars?

   Imagine -- America could change the world.   Again.

Authors Bio:

Thirty five years as a small business consultant, CFO, and university educator specializing in quantitative business and economic modeling - a suite of experience now focused on economic inequality. Carefully attributed data, thoughtful analysis, and tangible policy proposals are offered for your consideration.