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A Just and Fair Tax

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"When there is an income tax, the just man will pay more and the unjust less on the same amount of income." ~Plato (427 BC - 347 BC), The Republic

The United States government is primarily funded by a tax upon the income of all individuals, businesses and corporations. It is a crime to evade the payment of lawful taxes, random audits are used to keep us honest, and the tax is automatically deducted from most of our paychecks; however, the federal income tax primarily depends upon voluntary compliance with the law, particularly self reporting.

Most of us want to believe that the income tax system is fair and equitable; otherwise we would not tolerate it. Once we lose faith in the fairness of the system, widespread cheating becomes the norm, and once our tax system becomes entirely confiscatory for working taxpayers, violent revolution cannot be far behind.

The Present System of Taxation is Unfair To The Average American. When Eisenhower was president, corporations paid approximately a quarter of all federal taxes. Now they only pay about 10 percent.

In 1995, 275 corporations having assets of over $250 million avoided all taxes. Between 1996 and 1998, 50 of our largest corporations received over $55 billion in tax breaks and paid no federal taxes, presumably because they had no "income."

In the 2004 "corporate tax reform bill," 275 large companies and special interest groups were given $140 billion in tax breaks, instead of having their tax loop holes closed.

During five of the six years that Dick Cheney was its CEO, the Haliburton Corporation did not pay any federal income taxes, even though it received more than $2.3 billion in government contracts. Haliburton rewarded Cheney with $36 million in salary, bonuses, and stock options during his last year on its payroll.

The Congressional Budget Office recently concluded that, while tax rates for middle-income earners are going up, rates for those at the very top continues to come down. The rates of those with an average income of $1.25 million dropped 5% between 2000 and 2004, saving them an average of almost $58,000. Those earning more than $10 million saved an average of $500,000 in taxes on their investments.

There's no telling how much the rich really owe. Those earning more than $100,000 have only one chance in 208 of getting a visit from the tax man, while those poor people applying for the Earned Income Tax Credit have a one-in-47 chance of being audited.

A More Equitable Tax. Wouldn't it be more sensible and much fairer to simply tax the movement of money in our economy? Not a sales tax, not a value added tax, not a flat income tax, but rather a simple toll on every financial transaction that occurs within our economic system. Not just every time you buy a pack of chewing gum, but every time stocks and bonds are bought and sold, every time currencies are traded, and every time Haliburton invests in a new oil rig.

Since the working-, middle- and small-business-classes have far fewer and much smaller financial transactions, the wealthy and the multinational corporations, who always have to spend a lot of money to avoid having any "taxable income," would have to share proportionally in paying the toll for their traffic on our economic highway and their use of our courts and institutions to enforce their contracts and to facilitate their profits. Why should so many of our largest corporations completely escape the payment of any taxes?

The Gross Domestic Product (GDP) of the United States in 2005 was almost $12.5 trillion. GDP figures are not available for 2006; however in FY 2006, The government took in $1.2 trillion in estimated receipts and sustained an estimated deficit of $390 billion. 44/4% of the revenues came from individual income taxes, 37.6% from Social Security and other payroll taxes, 10.1% from corporate income taxes, 3.5% from excise taxes, 1.2% from estate and gift taxes, 1.3% from customs duties, and 1.9% from other sources.

GDP is defined as the output of goods and services produced by labor and property located in the United States. However, GDP does not include the value of all financial transactions in our economy, not by a long shot. Based upon our 12.5-trillion-dollar annual economy, it is likely that the federal government could operate on the revenues produced by a simple transaction tax of much less than ten percent on the movement of money. In addition, the payment of taxes would shift from individuals to the corporations that most benefit from the services of our government.

Envision the effect of a slight touch every time money moves, a tiny ka-ching in the U.S. Treasury's cash register, which in the aggregate would add up to trillions of dollars each year. Imagine the debate in Congress as to whether the tax rate should be 6.25 or 6.27 percent for the next year. The difference could produce billions.

Imagine that most of us might only have to pay an annual tax rate of perhaps 6.25 percent on our spending (income). Granted that the transaction tax would result in an increase in the overall cost of the goods and services we purchase; however, the toll would apply to all financial transactions, including the purchase of limousines and spas by the wealthy, who rely on every imaginable scheme to avoid having any "income" upon which to pay taxes. Those who enjoy luxuries would pay more for them, and those who gamble in the money markets would have to pay for their visit to our economic casino.

A tax on all financial transactions would be far more equitable than a "flat" income tax, which would eliminate the progressive tax rates that require a greater contribution from those who most profit from our economy. A flat income tax would further shift the burden of taxation from corporations and the wealthy, who hide their money, to the rest of us who have our taxes withheld from our salaries.

There would, however, be a benefit to the wealthy in that a transaction tax would eliminate the progressive income tax rates. The rich would simply pay their fair share based on what they spend and upon their monetary manipulations.

A transaction tax would be similar in some respects to a value added tax; however, it would apply to all financial transactions, including those involved in the production of all goods and services, not just in manufacturing, and it would be paid at every stage, not just at the end.

A tax on all transactions would also be fairer than a national "sales" tax, which would disproportionately target the poor in their non-discretionary purchases of essential food, clothing, and transportation. Without the ability to save, they would have to pay taxes on a far greater proportion of their incomes than the wealthy.

There should be a fair tax credit for those who choose to privately provide their family with private health and education services, and those taxpayers who are not on welfare (or living with their parents) and who are able to afford basic food and housing should also receive a tax credit for the average value of these necessities.

Money invested in Social Security, federally-insured savings accounts, 401(k)s, IRAs, and the earned interest should not be taxed until it is withdrawn and spent. Capital gains should not be taxed until they are realized and spent, and investments should not be taxed until they are sold and the proceeds are spent. Gifts should not be taxed to the donor, but to the recipient when the gift is spent.

The toll tax would operate much like the income tax wherein individuals and corporations would have to prepare an annual tax report, rather than as a sales tax where the revenue is collected at the time of the transaction. For most individuals, businesses and corporations the preparation of tax returns would be greatly simplified.

Let's say a married couple earns $100,000 of joint income and receives no government support. They could file a return setting forth their income and then deduct tax credits for providing their own housing and medical care, including Medicare payments, and further reduce their income by the amount paid into social security and into federally insured savings accounts. They could claim a tax credit if they sent their children to private schools, and they could further reduce the amount earned by what they gave away. Finally, they would deduct what they had saved during the year in approved accounts. When all the deductions, credits and savings are added up and credited against their income, the difference would be what they had actually spent for the year. That would be the amount taxed ┬ľ at a very low rate!

There would also be great benefits to businesses and corporations. To the extent they are American owned and that salaries are paid to American citizens, businesses, corporations and other organizations should not have to pay a transaction tax on their payroll, as salaries would be directly passed through to their employees to spend (and to be taxed). Thus, if the stock of a corporation is owned 100 percent by American citizens, or other businesses or corporations that are in turn owned entirely by American citizens, the corporation should not have to pay any taxes on the salaries paid to American workers. Or, if there was a 50 percent American ownership, the corporation should only have to pay half of the payroll transaction tax.

The transaction tax paid on payrolls to American workers by foreign owners would be the price of their access to the services of our healthy and well-educated workers and to our free-market economy and system of justice.

Payrolls paid to foreign workers by American corporations would be subject to the transaction tax, as the money would not pass through into our economy. Wouldn't this policy slow down the current trend of outsourcing American jobs offshore to other countries?

Inasmuch as there is a movement of money when foreign imports cross our borders, tariffs could be replaced by the up-front collection of the transaction tax when foreign corporations transfer their products to their American subsidiaries or when they sell to American businesses. Imports in 2005 amounted to more than $2 trillion and exports exceeded $1.3 trillion. The movement of these goods into and out of the United States would represent a taxable transaction.

Foreign registration and ownership of U.S. patents, copyrights, and other legal protections should also carry a toll on all protected transactions, allowing non-citizens to share the cost of our courts to enforce their rights.

While a good case might be made for a few public policy tax deductions or exemptions, the final result should be a very broad-based, simple tax that benefits everyone. A transaction tax should be one that is fair to all, and its toll should be trusted by those who are most burdened by its payment.

Conclusion. Benjamin Franklin said that the only certainties following birth are death and taxes. Nonetheless, we do not have to willing endure corrupt government and unfair taxation. We, the ones who pay the taxes, must make the essential decisions about the methods of taxation and the level of payment. Otherwise, we live in slavery and our freedoms are illusionary.
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William John Cox authored the Policy Manual of the Los Angeles Police Department and the Role of the Police in America for a National Advisory Commission during the Nixon administration. As a public interest, pro bono, attorney, he filed a class action lawsuit in 1979 petitioning the Supreme Court to order a National Policy Referendum; he investigated and successfully sued a group of radical (more...)
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