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
*
What is
described above is nothing short of a revolution that starts with a change in
the way
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