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Expanding the Tax Base to Obtain the Lowest Possible Rates

by Eugene Patrick Devany


The wealthy expect the federal government to defend their wealth, both at home and abroad, but a few are apt to cry “socialism” at the suggestion that the cost of defending accumulated wealth (and maintaining the infrastructure that makes it grow), should be borne in proportion to wealth itself. It is almost as if some believe that wealth, once accumulated, should be beyond the taxing powers of the government.[1] In truth, there is absolutely nothing socialistic about using net wealth (along with consumption and income) to determine of the amount of taxes an individual pays.

Sales and Income Taxes Disappear with Flat Rates

In August of 2006, I made the following suggestion to the President’s Advisory Panel on Tax Reform: tax Net Individual Wealth at 2%, Consumption/Sales at 4% and Income at 8%. I have subsequently come to realize that the flat rate nature of the taxes provides the remarkable ability to simplify the tax proposal and make most of it disappear from view. I consider it the flat rate miracle.

Sales taxes are typically added to the posted price of taxable items after the goods have been subtotaled. Consumers feel the pinch when they see the sales tax on the receipt. The same tax revenue can also be achieved by including the tax in the listed price (as in gasoline sales). When the retail tax is already included in the posted price, the consumer sees more accurately what will be paid and is less apt to feel the pinch of the tax (4% under the 2-4-8 plan).

A flat rate income tax with no deductions can also work in the background. Unlike the current complicated income tax form (with so many rates, adjustments, credits and deductions) the 2-4-8 plan would rely upon a payroll tax (8% under the 2-4-8 plan). Because the rate applies to income from all sources (including dividends and interest on bank accounts) the financial institutions would pay the 8% tax so the stockholders and depositors would not have to. Thus, for the vast majority of taxpayers with income only from employment, dividends and interest; the tax would be prepaid and the filing of the return would be nothing more than confirming an online summary prepared automatically by the IRS computers from data supplied by the employers and financial institutions. A more detailed income tax return would generally be necessary only for businesses (corporations, partnerships, self-employed individuals and landlords) where the computation of taxable income requires an accounting of business expenses to reduce gross revenue.

Under 2-4-8 most individual taxpayers would not perceive any sales tax or income tax at all. The perception and the reality is that the taxes would be paid by business. The rates are extremely low but still sufficient to produce more than 60% of the revenue needed by the federal government. Of course, even a streamlined federal government needs a little more than a mere $1.5 trillion to get by. The 2% Individual Net Wealth Tax would produce another trillion dollars which would be more than enough to start paying down the national debt. A comparison of the 2-4-8 plan with the plans of the 2012 presidential contenders offers solid proof of the financial soundness of this approach and why it has appeal to people of all political spectrums.

Simplified Tax Plan Comparisons

What is taxed?

2010 Actual Revenue[2]

Cane[3]

9-9-9

2-4-8

Fair Tax[4]

Perry[5]

20%

(data in billions of dollars)

Revenue as a %

$

%

$

%

$

%

$

%

 

Individual Wealth

53,100[6]

 

0

0

0

0

2

1,062

0

0

0

0

Consumption

10,300

Sales/Other

2

208

9

927

4

412

23

2,369

0

0

Personal Income

12,500

Payroll

7

865

9

1,125

8

1,000

0

0

7

865

Individual

7

898

0-20

<898

Corporate Income

1,100

Corporate

17

191

9

100

8

88

0

0

0-20

<191

Total Revenue

2,163

2,152

2,562

2,369

<2,720

Less New Adjustments

New Individual Deduction

 

 

 

-?

 

No tax on Social Security

 

 

 

-?

Monthly Poverty Rebates

 

 

-489

 

New Total Federal Revenue

2,152

2,562

1,880

?

 

[1] Even Ralph Nader dared not suggest more than a one percent wealth tax back in 2004. A smaller 0.3% net wealth tax was recommended in a 1996 Boston Review article by Edward N. Wolf and Miami Law Professor, Michael Froomkin has recently endorsed a similar idea. Obviously a larger rate of 2% would be warranted only with the simultaneous flat tax reforms that significantly lower the income tax rate for the high earners. Dr. Pete Gloor, founder of FairShareTaxes.org has endorsed a sliding wealth tax up to 2% along with a major overhaul of the federal and state tax and spending program. In 2009-10 Douglas Hopkins wrote “A Citizen’s 2% Solution …” which recommended a 2% wealth tax that retained simplified federal income tax rates and had no value added tax. Economics Professor Ronald McKinnon of Stanford University supported a 3% Net Wealth Tax (with $3,000,000 deduction) in his January 9, 2012 Wall Street Journal article, "The Conservative Case for a Wealth Tax". [See also Wealth Tax Pioneers].

[2] The revenue data is from US Government Revenue.

[3] Estimates for Herman Cane’s plan are from Dick Morris.

[4] The Fair Tax Plan is described in Wikipedia. The tax rate and revenue estimates above are likely under estimated for reasons noted in the article.

[5] The Perry Plan, (like the lower rate Gingrich plan), lacks many details and is not a true flat rate tax.

[6] The estimate of net individual wealth comes from Politifact based upon research into claims by Michael Moor that the wealthiest 1 percent in the US have more financial wealth than the bottom 95 percent; and that the top 400 Americans have more wealth than half the country. The wealth tax might also properly be applied to the domestic assets of foreign corporations. See wealth tax notes.

 

 

 
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Spread the word: Let Congress know you want them to consider the 2-4-8 Tax Blend by simply tweeting "TaxNetWealth.com" or by copying any basic description and sending, faxing, or emailing it to at least one representative from each political party. [Many representatives will only accept email through their individual websites].

Copyright 1985 to 2013 by Eugene Patrick Devany