The 2-4-8 tax blend is a
proposed comprehensive tax reform plan for the U.S. that
combines net wealth, sales/consumption (VAT), and income tax
bases to produce the mathematically lowest rates possible.
The annual $1.2 trillion in tax expenditures (credits,
deductions, deferrals, special rates and exemptions) are
replaced by more attractive target tax rates of
approximately 2, 4 and 8 percent.[1]
Individual tax
reform replaces the payroll taxes with a 2% tax on
net wealth (excluding $15,000 cash and $500,000 in
retirement savings) and reduces the income tax rate to a
flat 8%. Because the net wealth tax base attributes value to
imputed income from capital it serves as a replacement for
capital gains, estate and gift taxes.
Corporate tax
reform imposes a 4% value added tax (VAT) on all
businesses and reduces the corporate income tax rate to 8%.
As this submission
is being written a video posted on You Tube titled
Wealth Inequality
in America
is going viral (with almost 4,000,000 views). The video
professionally illustrates the results of a survey conducted
by Harvard University researchers showing how the public
thought wealth was distributed, how it is actually
distributed and what an ideal distribution might look like.[2]
The video does not show the change in wealth (see chart
above) and does not connect the dots to explain how tax
policy provides the primary set of legal contingencies which
alter the gross distribution of net wealth over time.
Nevertheless, the seeds of once-in-a-generation tax reform
are being planted as the public obtains accurate information
about wealth and income.
Simplified Comparison with 2010 Tax Revenue
(in billions of U.S. dollars)
|
What is taxed?
|
Tax Base
|
Revenue
|
% Actual
|
2-4-8 Tax Blend[3]
|
% Proposed
|
Net Wealth
|
53,000[4]
|
0
|
0
|
1,060
|
2
|
Consumption/(VAT)
|
10,300
|
208
|
2
|
424
|
4
|
Payroll
|
12,500
|
865
|
7
|
0
|
0
|
Individual Income
|
12,500
|
898
|
7
|
1,000
|
8
|
Corporate Income
|
1,100
|
191
|
17
|
88
|
8
|
TOTAL
|
N/A
|
2,163
|
N/A
|
2,572
|
N/A
|
Extremely low tax
rates are made possible by eliminating tax expenditures
which inflate the nominal tax rates by 7.5% of GDP. It helps
to view these tax programs as part of the budget.
|
The chart
at left combines the U.S. Treasury's projections
through 2016 with tax expenditure spending estimates
for the same time frame. Short term projections
suggest that budget and tax reform may not be quite
as urgent as some in the "fix the debt" crowd claim.
There is time to study and score all options before
finalizing consensus on much needed tax reform. If
tax reform is done right it will reverse the long
term decline of the poor and middle class that has
been an unintended consequence of current tax
policy. It will also minimize reductions to future
entitlements - (targeted because half the population
has no other assets left to give).
|
A Net Wealth Tax Will Coerce
Productive Business Investment
Harvard Psychologist, B. F. Skinner
taught that incentives (“contingencies of reinforcement”)
may take the form of positive reinforcement, negative
reinforcement or punishment. In taxes most tax expenditures
(loopholes, deductions, credits, exemptions, special rates,
etc.) are associated with positive reinforcement because
they reduce the tax burden. The United States Supreme Court
has held that the Affordable Care Act health insurance
penalty is really a tax. It may be understood as negative
reinforcement which shapes behavior by reducing the threat
or application of punishment. Psychologically, one can
escape or minimize the tax penalty by obtaining health
insurance. A net wealth tax also serves as a negative
reinforcer (as in “use it or lose it”). People don’t like
negative reinforcers because they include a threat of
punishment and that is exactly why they work. A person who
properly invests in business can expect a return in excess
of 2% and thereby avoid a net loss in wealth. In other
words, a net wealth tax is a coercive but effective way of
getting people to invest. The negative reinforcement of the
net wealth tax is complemented by the incentive of a reduced
income tax rate and elimination of the capital gains and
estate taxes. This gives a taxpayer both the incentive (92%
return of profit) and the freedom to trade or reinvest
without tax consequences. The President's Advisory Panel for
Federal Tax Reform described the issue in terms of
efficiency costs:
...the income tax imposes efficiency
costs on the economy. These costs arise when high tax rates
discourage work, savings, and investment; distort economic
decisions of individuals and businesses; and divert
resources from productive uses in our economy. Our tax code
contains all kinds of incentives for taxpayers to favor
activities or goods that are taxed less than others.
Provisions for the taxation of wages, of gains on the sale
of securities and homes, or of other economic activities
influence how much people work and save. As one small
business owner explained to the Panel, the tax code affects
almost every business decision he makes: where to invest,
when to invest, how much to invest, what kinds of machines
and equipment to use in production, how to finance
investment, etc. When taxpayers change their behavior to
minimize their tax liability, they often make inefficient
choices that they would not make in the absence of tax
considerations. These tax-motivated behaviors divert
resources from their most productive use and reduce the
productive capacity of our economy. Economic growth suffers
as taxpayers respond to the tax laws rather than to
underlying economic fundamentals. These distortions waste
economic resources, reduce productivity, and, ultimately
lower living standards for all.
The elimination of tax expenditures
under the 2-4-8 Tax Blend means that an investor will focus
only on the bottom line without the distortion caused by the
current tax code. A taxpayer who reinvests in his or her own
business (not taking salary or dividends) will also avoid
income taxes (as they do now). The growth in the value of
the business that comes from reinvesting the profits is
captured in subsequent years as part of net wealth taxation.
The tax blend effectively creates a powerful carrot (low
income tax rate) and stick (net wealth tax) approach to
reinforce maximum productive investment.
Millions of New Jobs Created with No
Government Spending
The "carrot and stick" incentives to
invest noted above may be sufficient to encourage some job
creation, but replacing the business payroll tax on labor is
a more direct incentive by specifically eliminating the 7
1/2% tax on labor. University of Chicago Economics
Professor, Casey Mulligan, estimated in September 2011 that
each, “percentage-point reduction in employers’ [payroll]
costs raises employment by about a percentage point and real
gross domestic product by about 0.7 percentage points”. A
literal 7 1/2% reduction in the unemployment rate (i.e. to
0.5%) according to Mulligan's calculation may be unlikely,
but even a reduction to a 4% unemployment rate is generally
considered as full employment. Elimination of the employee
share of the payroll tax also results in a 7 1/2% increase
in take home pay for workers. The employee share is over
$400 billion and will boost the economy through increased
consumer spending.
Reduce Tax Avoidance by Eliminating
the Capital Gains Tax
A net wealth tax is a better way to tax
and estimate gains because it ends the unfair delay and
avoidance of tax payments. The current tax code permits many
types of lawful tax deferrals for both individuals and
corporations[5].
Many in the investment class do not rely on earned income
and use capital gains (and other tax loopholes) to grow
their wealth. The growth in value of certain assets (i.e.
stock, real estate, gold, etc.) is taxed as capital gains
only when the assets are sold (and at reduced tax rates).
The taxation of capital gains began as an effort to have the
investment class pay a fair share because their wealth was
high but their earned income could be low. If assets are not
sold for 10, 20 or more years the tax is deferred and often
never paid at all. In 2005 The President's Advisory Panel
for Federal Tax Reform analyzed the issue of tax fairness in
the context of how all forms of income are measured:
A comprehensive income tax base, which
is perhaps the broadest tax base, would include all forms of
income. Most people think of income strictly in terms of
wages. But a comprehensive measure of income also includes
anything that allows you to spend more, either now or in the
future. Capital gains and losses, dividends, rental income,
and royalties all represent income that does not come in the
form wages.
Income can also include noncash
increases to wealth, such as health care insurance or other
fringe benefits provided by an employer. Some components of
income are accruals that do not involve any current cash
flows. For example, a stock that has risen in value allows
its owner to spend more in the future, and so the increase
in value every year should be considered income even if the
asset has not been sold. In a comprehensive income tax base,
the increase in value of all assets, including homes, would
be subject to taxation. In the case of housing, homeowners
would also have to declare as income the value they receive
by living in their houses rather than renting them out –
something economists call “imputed rental income.”
To illustrate, consider that Warren
Buffett reportedly increased his wealth by $3 billion in
2011 and if “he had to realize those gains, even at 17.4%,
he would have had to pay $522,000,000”[6].
If he had to pay the proposed 30% “Buffet Rule” rate the tab
would be $900,000,000. The net wealth tax approach does not
tax the capital gain but would assess 2% against the average
principle of $41.5 billion (beginning with $40 billion and
ending with $43 billion for the year). This computes to
$830,000,000 – (an amount less than the “Buffet Rule”
computation if deferral was eliminated and the capital
appreciation was taxed as income). In fact Mr. Buffet only
paid $7 million in taxes on income of $40 million. The $522
million in tax on the appreciation of $3 billion is deferred
just as similar tax deferrals have accrued year after year.
Mr. Buffet may owe more than $10 billion to the U.S. but he
doesn't owe it yet, and the deferral process gives him the
opportunity to give most of it away to charity to avoid
taxes.
Tax fairness of capital gains looks at
what, how and when the capital appreciation is measured. A
capital gain tax measures the gain of specified capital
assets only when (and if) the asset is sold. It computes the
difference between the amount paid for the asset (known as
tax basis) and the market price realized when the asset is
sold. No adjustment is made for inflation or deflation in
computing the appreciation. The gain might be taxed at the
same rate as ordinary income (e.g. up to 35%) or at a
reduced rate (e.g. up to 17.4%).
According to University of Pennsylvania
Law School Professors David Shakow and Reed Shuldiner, “A
wealth tax also taxes capital that is not productively
employed. Thus, a wealth tax can be viewed as a tax on
potential income from capital.” Supra. Under the 2-4-8 Tax
Blend the net wealth tax provides both fairness and a better
measure of value. It taxes the imputed income from all
capital assets regardless of type. A 2% net wealth tax rate
is the equivalent of a 33% income tax rate on a 6% return of
investment (or a 25% income tax rate on an 8% return of
investment, etc.). It is also important to keep in mind that
while a one to twelve rate of return on investment may be a
typical long term average, higher rates of return can be
expected with a flat 8% income tax rate. By taxing the
imputed income from net wealth on an annual basis, the
unfair deferral and avoidance of tax payments by the
investment class ends. As noted in the section on Business
Investment above, the elimination of capital gains taxes
also encourages productive trade which might otherwise be
prevented by tax considerations.
Wealth redistribution
Any tax code redistributes income and
over time it redistributes wealth. In 2005 some members of
the President's Advisory Panel for Federal Tax Reform were
"concern[ed] about substantial inequality of wealth in the
country that has grown in the last decades. In the end, the
Panel concluded that the appropriate burden of taxation was
an issue that elected officials should resolve – and so the
Panel decided to design reform options that would remain
relatively close to the current distribution of tax
burdens.”
According to a July 2012 report from
the Congressional Research Service, in 1995 the top 10% of
the country had 67.8% of the country’s wealth while the
bottom 50% shared only 3.6% ($1,912 billion [in 2010
dollars]). The bottom share eroded to 2.5% before the Great
Recession of 2007 and by 2010 it had tumbled to 1.1% ($584
billion) – (a 70% loss of $1,333 billion over 15 years). The
loss of wealth to the bottom half the country was offset by
a 6.7% gain ($3,558 billion) for the top 10%. America has
prospered over the last 15 to 20 years but the prosperity
has not been shared by most of the country as can be seen in
the table below.
Share of Wealth by Percentile Wealth Group
1995-2010
|
Wealth Group
|
1995
|
1998
|
2001
|
2004
|
2007
|
2010
|
Billions
|
Top 10%
|
67.8
|
68.6
|
69.8
|
69.5
|
71.5
|
74.5
|
39,560
|
50% to 90%
|
28.6
|
28.4
|
27.4
|
27.9
|
26.0
|
24.3
|
12,903
|
Bottom 50%
|
3.6
|
3.0
|
2.8
|
2.5
|
2.5
|
1.1
|
584
|
Total[7]
|
100%
|
100%
|
100%
|
100%
|
100%
|
100%
|
53,100
|
Economists do not know for sure if
there is a causal relation between income inequality and
economic recession but there is a correlation. Paul Krugman
wrote that before the crisis of 2008 he often spoke about
the concentration of income at the top and responded to
questions about whether the country might be on the verge of
a depression by saying it was not necessarily so. After the
crisis this winner of the Nobel Prize in Economics revised
his opinion to, "Well, whaddya know?". If there is an,
"arrow of causation running directly from income inequality
to financial crisis ... maybe, but it’s a harder case to
make". Id. Krugman also speculated about
potential common causes of income concentration and the
economic crisis such as low tax rates and deregulation.
Half of America has $3 today for every
$10 they had in 1995. An extended period of income
inequality will lead to wealth inequality and the
accompanying loss of consumer spending and economic
resilience. To put tax transfers and wealth in perspective,
consider that the $1.3 trillion in tax expenditures which
the tax code redistributes each year is twice the $584
billion owned by half of America. The 2-4-8 Tax Blend avoids
most of the income and wealth redistribution effects of the
current tax code by levying the same rates on all taxpayers
and eliminating the need for tax expenditures.
Notes for Specific Working
Groups
Charitable/Exempt
Organizations Workgroup
David Reichert
(R-WA)
John Lewis (D-GA)
The 2-4-8 Tax Blend would impact
nonprofits by eliminating the approximately $40 billion tax
subsidy for charitable giving. Although more than two thirds
of Americans give generously without itemizing deductions
some modest reduction in charitable giving can be expected
from those who itemize. Tax policy has resulted in a 70%
loss of wealth for 50% of the population (the poor and lower
middle class) between 1995 and 2010. Between 2000 and 2010
the nonprofits (excluding churches which do not report to
the IRS) had a 75% gain in wealth. These nonprofits now have
seven times the wealth of the poorer half of the country.
The larger public charities such as universities and
hospitals experienced enormous gains but did not reduce
fees. They were also further subsidized by additional
taxpayer funded health and education benefits.
Considering the interplay between
poverty and high unemployment it is difficult to justify
taxpayer support via the charitable deduction for removing
investment in private job creating business and giving it to
nonprofits which do not pay taxes. The shifting of $2
trillion over the last 10 years has the unintended
consequence of eliminating millions of private sector jobs
and adds to the cost of safety net programs.
At the risk of restoring hope in the
American dream it may be worth considering government paid
part time internships with local government, school
districts and nonprofits willing to train and mentor any
adult in need of a job. Consider that the $40 billion saved
by the elimination of the charitable deduction could fund
2,000,000 jobs at $350 a week. A PhD in need of work might
work only one day for the $350 and a telephone receptionist
might need to work 4 days for the same $350. The salary and
benefits for the positions would be adjusted sufficiently
below private salaries to encourage a shift from public
support to private sector. Most nonprofits would gain from
the free labor and continued participation would require a
showing of helping workers transition into private jobs.
This of course would tend to disadvantage nonprofits with
political agendas and interests in foreign causes.
Debt, Equity and
Capital Workgroup
Kenny Marchant
(R-TX)
Jim McDermott (D-WA)
The 2-4-8 Tax Blend imposes a 2% net
wealth tax on the average value of all assets (excluding
$15,000 cash and up to $500,000 in retirement savings). The
proposal is the first time that such a tax has been
suggested for the entire population rather than used to
"soak the rich" on top of already progressive income tax
rates. The tax coerces productive investment without
directing any particular business investments as is done
with the existing 250 tax expenditure programs. This broad
based coercion insures that there will be sufficient capital
available for both long term and risky investments. The
elimination of both short and long term capital gains will
also increase the availability of capital for reinvestment
and the velocity of trade.
It is worth noting that while the 2-4-8
tax blend eliminates tax deductions and credits such as
interest on mortgages and student loans, the net wealth
computation reduces total assets by total debt which is the
equivalent of a 2% tax subsidy for debt - but only to the
extent there are offsetting taxable assets. Thus there is no
incentive to incur debt beyond one's means.
Education and Family
Benefits Workgroup
Diane Black (R-TN)
Danny Davis (D-IL)
The 2-4-8 Tax Blend provides an
expanded tax base and replaces the payroll taxes as the
nominal source for funding Social Security and Medicare.
This enables entitlements to be evaluated based upon need
rather than by the strained saturation point of the income
tax base. The addition of a net wealth component also
enables the government to design need based programs on a
combination of net wealth and income. This has the potential
to exclude unnecessary tax subsidy and benefits to high
wealth, low income persons.
The future of education appears to be
internet based and recognizes that those with elementary
skills are capable of educating themselves with digital
textbooks, courses and tests. This leads to the obvious cost
effective role for the federal government to supply
copyright free materials to take advantage of the economy of
scale and to reduce or eliminate support for teachers and
schools which can be better met at the state and local
levels.
The part time jobs program discussed
above is the best replacement for most safety net programs.
With two adults working even on a part time basis, there
would be a real opportunity to raise a family and increase
mobility into the middle class.
It is also worth mentioning that the
elimination of the payroll taxes offsets the flat 8% income
tax rate and eliminates the need for earned income and child
care tax credits. A guaranteed job, even if it is of the
work from home variety, is better than a handout.
Energy Workgroup
Kevin Brady (R-TX)
Mike Thompson (D-CA)
The 2-4-8 Tax Blend eliminates tax
expenditures for all types of energy producers in exchange
for a low corporate tax rate of 8% and a 4% VAT (and
adjustment for any existing energy taxes). The 2-4-8 Tax
Blend does not encourage or discourage any type of energy.
To the extent energy policy may be accomplished through
regulation and direct spending and leasing programs, there
is no need for energy related tax expenditures.
Financial Services
Workgroup
Adrian Smith (R-NE)
John Larson (D-CT)
Because the 2% wealth and 8% income tax
rates would be uniform for rich and poor it would be cost
effective for banks and similar financial services companies
to withhold taxes. This simple automated procedure, combined
with payroll reporting, would provide the IRS with the
ability to automatically prepare most non-business tax
returns.
Income and Tax
Distribution Workgroup
Lynn Jenkins (R-KS)
Joseph Crowley (D-NY)
Tax policy has redistributed wealth to
the top 10% at what appears to be an escalating rate. The
problem, of course, is not the growth at the top but the
devastating loss of net wealth at the bottom. The 2-4-8 Tax
Blend achieves a fair balance of tax liability across the
economic spectrum by measuring the tax burden with both
income and net wealth. The low rates are intended to
encourage rapid economic mobility for those at the bottom
who have suffered as a result of current tax policy. A
proportionately linier greater tax liability is imposed as
disposable wealth and income increase. The tax liability is
progressive even though rich and poor would pay the same tax
rates because the top 10% hold 75% of the wealth while the
poorer half of the country only has 1% of the net wealth.
International
Workgroup
Devin Nunes (R-CA)
Earl Blumenauer (D-OR)
The U.S. is the only developed country
which does not use a value added tax (VAT) to reduce the
corporate tax rate. A previous suggestion to replace the
corporate tax rate with an 8 1/2% VAT failed to consider the
interplay with pass through business. The 2-4-8 Tax Blend
calls for a 4% VAT on all business and a reduction in the
corporate rate to 8%. This minimizes the tax distinction
between C corporations and other taxable entities.
The deferral of foreign subsidiary
corporate profits is an issue with a 35% marginal tax rate
but the problem goes away if the C corporation rate is
reduced to 8%.
It also follows that there is no need
to switch to a territorial tax system. Moreover the
worldwide jurisdiction over both income and wealth will
eliminate any temptation for U.S. taxpayers to avoid taxes.
Manufacturing
Workgroup
Jim Gerlach (R-PA)
Linda Sanchez (D-CA)
By eliminating the payroll taxes the
cost of U.S. labor is reduced. Since the VAT would apply
only within the U.S. exports would be encouraged.
Pensions/Retirement
Workgroup
Pat Tiberi (R-OH)
Ron Kind (D-WI)
Because of the 40 year reliance on 401k
and similar retirement plans, the 2-4-8 Tax Blend maintains
the tax free retirement savings but would limit the tax
subsidy to savings of $500,000 ($1,000,000 for two people).
While many want to save more, there is no right to be a
millionaire and other taxpayers should not have to
sacrifice.
Real Estate
Workgroup
Sam Johnson (R-TX)
Bill Pascrell, Jr. (D-NJ)
The 2-4-8 Tax Blend eliminates the
deduction for mortgage interest but the net wealth tax
computation effectively gives a tax credit equal to 2% of
the mortgage principal. Arguably, this is a better incentive
to home ownership.
Small Business/Pass
Throughs Workgroup
Vern Buchanan (R-FL)
Allyson Schwartz (D-PA)
The 2-4-8 Tax Blend imposes a 2% tax on
net wealth and Warren Buffet has suggested that the
valuation of private business may be the most difficult
challenge for wealth tax administrators. Small businesses
which rely largely upon the value of owner/managers might be
valued entirely on the liquidation value of assets.
Established businesses can also be valued based upon a
comparison of sales, profits, payroll and assets of similar
businesses. At present, locating valuation data may be
difficult but an automated data base assembled from the
first year or two of wealth tax returns would make a
reasonable estimate of business value to be a relatively
easy task. Mandatory digital filing of tax returns could
fully automate the process.
-30-
Date:
March 8, 2013
Contact:
Eugene Patrick Devany
Email:
EugenePatrickDevany@gmail.com
Web:
http://www.TaxNetWealth.com
Plan:
Scoring Outline
[1] Rates lower
than 2, 4 and 8 percent may be needed to make the
plan revenue neutral.
[3] The tax blend
was first suggested to the President's Advisory
Panel for Federal Tax Reform on August 28, 2005 with
the title, "2-4-8 you may appreciate".
[4] Individual
wealth has increased by 25% to $66 trillion in just
two years as of 2012 Q4 (this excludes the continued
rise in stock value in 2013 Q1). Most of the
population has not shared the enormous prosperity.
[5] The issue of
corporate deferral of foreign profits is resolved by
lowering the corporate income tax to 8%.
[6] Reilly, Peter
J., "Warren Buffett Benefits More From Deferral Than
a Low Rate", Forbes.com, August 15, 2012
[7] Krugman,
Paul, "End This Depression Now!", pages 82-85, W. W.
Norton & Company 2012