A
Citizen’s 2% Solution
A Conversation with Author, S. Douglas Hopkins
Introduction
This page is a dialogue with S. Douglas Hopkins, author of
A
Citizen’s 2% Solution How to Repeal Investment Income Taxes, avoid a
Value-Added Tax, and Still Balance the Budget. There are several
important differences between the 2% Solution and the 2-4-8 Plan. The
dialog below outlines some of our differences and simalarities in the
details of our
approaches.
October 30, 2011
To: S. Douglas Hopkins
From: Eugene Patrick Devany
Subject: 2-4-8 Tax Plan
I did not know someone else supported a 2% tax on individual net wealth. I
suggested this 5 years ago and have a new website called TaxNetWealth.com.
Please let me know what you think.
To: Eugene Patrick Devany
From: S. Douglas Hopkins
I confess I have not yet absorbed the full scope of your proposals - … I
will get back to you with a more substantial reaction in a day or two.
But I have a couple of preliminary administrative questions. Are you having
any luck or generating any traffic through your website?
And where/how did you run across mine?
For what it's worth one of the first reactions I received was from an
economist with a background in international tax law who advised "No one
will talk about it because they can't refute it". At the time I thought that
was unduly cynical. But now it seems prescient. Over the past nine months I
have received repeated private affirmation of my facts and logic, combined
with a total unwillingness to talk about it in public.
To: S. Douglas Hopkins
From: Eugene Patrick Devany
Thank you for your thoughts.
Q. Are you having any luck or generating any traffic through your website?
A. My website is a week old with just a few pages. When I have 20 or 30
pages (and a better idea about what I want to do) I will index the website
with Google, etc. and see what happens.
Q. And where/how did you run across mine?
A. I was doing a Google search for "individual net wealth tax" and came
across the FairShareTaxes.org which has a link in bold to your website. See
http://fairsharetaxes.org/TaxLinks.aspx
I enjoyed your article about, "conservative and liberal economic dogma" but
it was a bit too academic for me. I understand rich and poor, but when an
argument turns on, "liberals believe ..." and "conservatives believe ..."
the stereotyping can be counterproductive. When I think about political and
other social groups I like to think about the rewards and punishments that
keep people from accepting new points of view.
I hope this is a good transition to your brilliant observation, "Over the
past nine months I have received repeated private affirmation of my facts
and logic, combined with a total unwillingness to talk about it in public."
From a professional point of view I can see why one might shun any "wealth
tax" since, high wealth taxes have been used for a century in
so-called "liberal" countries (generally just to soak a little more
from high wealth individuals, on top of other high taxes, for the benefit of
the underclass). The experience has not been good in Germany and Spain
(although there are serious proposals to bring back their "high wealth"
taxes).
The 2-4-8 Plan does not hurt the productive wealthy because of the
significant reduction in the corporate and individual income tax rates. The
2-4-8 Plan is not unfair to the rich because everyone pays the same rate.
The 2-4-8 Plan does not harm the middle class because it makes it
financially easier to accumulate wealth.
What is remarkable about 2011 is that the Republican Presidential Candidates
have made "fundamental tax change" and "starting with a blank slate"
acceptable topics for discussion. God bless Herman Cane and his 9-9-9 Plan
for opening the intellectual door and Gov. Perry and Speaker Gingrich for
backing some very different approaches. Perhaps now the "wealth tax people"
will feel safe coming out of the closet and others will like the show.
I have spent most of the day sending faxes to Congress and did not think it
was going to be as slow and difficult as it has been. I will get back to
building my website soon.
Thanks again for your preliminary thoughts. I look forward to any comments,
suggestions, or questions.
To: Eugene Patrick Devany
From: S. Douglas Hopkins
Kind thanks for you note this morning.
I have a few thoughts about your 2-4-8 Plan.
Potentially more than you really wanted – but…
since you asked.
First, good luck. I am
supportive of anything that might expand the debate in a more productive
direction – and I think the blind spot we’ve developed toward wealth is a
serious obstacle to a more productive discussion.
I also rather like the fact that you’ve tried to present a simplified
comparison of your plan and the key alternatives.
I have focused more on principle and theory, in recognition that the
details are so much in flux that scoring the impact at this stage is
unreliable. But one of the key
critiques I have heard is aimed directly at my failure to give people a
number to quote. However, your
$2.6 trillion revenue forecast doesn’t do a lot to close the deficit when we
are spending over $3.6 trillion.
[For what it’s worth, the FED publishes data on accumulated wealth at
roughly $72 Trillion, inclusive of non-profits.
You might consider applying your wealth tax to non-profits.]
I wish I could share your optimism about Cain and Perry’s influence on the
debate. But both of their
proposals are deeply regressive and I fear that because Obama a) has shown
no inclination to lead in the matter of ideas, and b) is up for reelection
and won’t be challenged from the left, the important debate on tax reform
that will dominate this coming election cycle will be dominated by Cain,
Perry and Bachman – pushing the failed supply-side economics of lower tax
rates.
As to the substance of your proposal, a couple of brief observations:
First, you note in your overnight comments the problem of Europe’s largely
unsuccessful history with wealth taxes and observe (I think accurately,
though I’m not an international tax expert) the fact that they have
generally been perceived as wealth transfer mechanisms and used as
incremental overlays to other taxes on investment income.
But as I understand your proposal, you then you walk right into the
same trap. You tax corporate
income, dividends and capital gains as income, and then a second time as
wealth. I believe that element alone will marshal an enormous conservative
backlash against the “double taxationâ€.
I’ve tried to attack it differently, attempting to reconcile opposing
principles and focus on how existing policies distort investment decisions
and subsidize unproductive capital with preferential tax treatment.
My justification for the structural shift expands beyond mere
“equity†of differential rates to an efficiency argument – a belief that
Adam Smith’s Invisible Hand is a better driver of growth than government
intervention – but only if we remove the cronyism of preferential protection
to wealth.
In fact I believe the equity argument is a proven loser – see
http://www.2pctsolution.com/wp-content/uploads/2011/11/Re-Framing-the-Tax-Policy-Debate.pdf.
I note you found Flawed Dogma less than convincing, but nearly every
economist I’ve talked to on this has immediately wanted to focus upon the
perception that “savings and investment require subsidyâ€.
Thus my focus is shifting more and more to defending the increased
efficiency of removing
subsidies for unproductive capital…. but it’s an uphill battle against
common knowledge; which surprises me, because it seems so plainly obvious to
me that our preferential policies are penalizing productive investment and
subsidizing low return and loss investment.
See http://www.2pctsolution.com/?p=411
Second, at 4% your proposed sales tax is less offensive than most.
But I am strongly opposed to consumption taxes on the basis that they
are deeply regressive. While
I’ve argued above for the need to focus on efficiency of capital incentives
(or at least defend against attacks), one on my very specific goals is to
return to the level playing field of equalized rates between earned income
and investments. My intended
target and theory is that a max 25% rate on earned income is directly
comparable to a 2% assessment against assets – based on a long-term targeted
8% potential investment return. One can argue the assumptions, but that’s my
rationale.
In comparison, from a high-level overview, your 2-4-8 Plan taxes most earned
income (all of the lower/middle earners who of necessity consume all their
income) at 8% plus 4%, or 12% overall.
But investment earnings potential (under my same 8% return
assumption) is taxed at 25%, plus re-taxed both as income and consumption.
You should expect a pretty serious backlash reaction from the folks
who already think investment returns require subsidy.
And finally, for what it’s worth, you start your argument by saying that
“sales and income taxes disappearâ€, expanding to state “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.â€
I personally believe that one of the greatest flaws in our existing system
is its intellectual dishonesty; it appears to have been willfully designed
to obscure the facts. I
certainly do not perceive that to be your intention, but I’m an advocate of
clarity. I am incensed by the
intellectual dishonesty of an existing debate that claims nearly 50% of the
population pays no tax (because our leadership claims employment taxes are
“contributions†and pretend that the employer portion doesn’t come directly
out of the value of the employee services provided) and I believe that
misperception has largely derailed productive debate.
The reality is – businesses don’t pay taxes.
Employees do. And
consumers do.
It is extraordinarily unusual to see sound decisions built upon erroneous or
distorted facts. Thus I would
urge focusing upon a clear and accurate understanding of the distribution of
the tax burden, rather than falling into the trap of trying to manage a
false perception.
Frankly, that is largely what drove me to the analysis I prepared.
I perceive the Tea Party as the most positive political development
in the last 40 years (since the anti-war demonstrations of the 60’s).
It is citizen activism based largely upon principles.
Unfortunately, it is grounded in highly distorted facts.
A large portion of the population is now arguing against both their
own principles of equal treatment and their personal self-interest because
the facts are so distorted.
I believe (perhaps wrongly) that only by bringing factual clarity to
the debate can we expect to find a better path.
Again, I wish you the best of luck.
Please keep me posted on your progress.
I do hope you accept the comments above in the positive spirit in
which they are offered.
To: S. Douglas Hopkins
From: Eugene Patrick Devany
I can't thank you enough for your very intelligent and thoughtful response.
It has given me the much needed push to better formulate my own thoughts.
Q. ... your $2.6 trillion revenue forecast ... spending over $3.6 trillion?
A. I did not know the federal government was spending that much. Do you have
a good source? In any event, no one can say if the federal revenue should be
$2 trillion or $4 trillion since it depends upon not just what a government
should do but also upon whether it should be done by the federal government
or at the state (or even local) level. The equitable heart of the 2-4-8 Plan
is the ratio of total tax revenue derived from sales - 16% (inherently
regressive), individual income - 39% (neutral), corporate income - 3.5%, and
wealth (41.5% - inherently progressive). In the real world, the 2-4-8
percentages need to be tweaked depending upon the amount of revenue needed.
Q. ... FED ... $72 Trillion, inclusive of non-profits
A. I do not think this accounts for individual liabilities, but it does
include not-for-profit assets. I would not tax the "non-profits" on
principal, and because it would be the ultimate one-two punch. By this I
mean that my proposed 8% flat rate income tax already eliminates the
deduction for charity and taxing wealth on top of that would be a great
burden to the not-for-profit sector.
Q. ... failed supply-side economics of lower tax rates ... won’t be
challenged from the left ...
A. You may be correct about the inability of the so-called left to agree on
alternatives. The stealth non-partisan Tea Party movement has done quite
well reminding people about the good old days of small(er) government with
balanced budgets. Our Democratic President is not likely to lead beyond his
questionable Jobs Program. (I am old enough to remember Jimmy Carter and the
political "success" of the Comprehensive Employment and Training Act). As
you know, things like a balanced budget properly find considerable support
from all sides. The 2-4-8 Plan is simply the best way to produce the
revenue.
Q. You tax corporate income, dividends and capital gains as income, and then
a second time as wealth. I believe that element alone will marshal an
enormous conservative backlash against the “double taxationâ€.
A. With an 8% income tax (as opposed to 20%, 45% or more) there is a
trade-off that says the government will tax you at a much lower rate when
you earn it and will later tax an additional 4% (retail) when you consume it
or 2% each year (if not offset by debt) if you hold on to it. Whenever you
tax corporate income there is "double taxation". No one seriously thinks
that all corporations should be treated like Subchapter S or partnerships
with the income tax burden only being paid by the individual owners.
Dividends are not a problem since dividends should be taxed as income to the
stockholders and are similar to a business expense for the corporation in so
far as they are deducted from gross revenue in computing taxable income.
Capital gains are a different issue and are not directly related to
corporate income tax liability. They represent the increase in the value of
an asset which may (or may not) be taxed as a form of income at the time of
sale. An individual net wealth tax takes 2% of the value of the asset each
year and I do not see any reason why an individual should pay a further tax
on the full asset appreciation at the time of sale. Moreover, a wealth tax
treats the gradual appreciation (or depreciation) of all types of assets the
same based upon market value.
Q. ... a belief that Adam Smith’s Invisible Hand is a better driver of
growth than government intervention – but only if we remove the cronyism of
preferential protection to wealth.
A. I believe in .... (it should not matter). The "Hand" is not invisible
when one examines the rewards and punishments (a/k/a contingencies of
reinforcement). Bad tax policy (poor "contingencies of reinforcement" a/k/a
"preferential tax policies" a/k/a defined as "cronyism" in your Re-Framing
the Tax Reform Debate article) causes a lot of bad business decision making
and a lot of unintended consequences.
Q. ... penalizing productive investment and subsidizing low return and loss
investment
A. The flat rate, no deduction approach in the 2-4-8 Plan provides the
neutrality for the market to work. The low income tax rate combined with a
retail sales tax, works together to enable an individual to have more to
save and a disincentive to consume. In addition, the wealth tax (and the
yearly task of producing an accounting of ones assets and liabilities) will
serve as an individual reminder that his or her wealth may be used in
productive or less-productive ways.
Q. ... equity argument is a proven loser
A. While "equity" (and other wonderful principals from the Jewish -
Christian - Muslim - etc. traditions) may help to convince some, I fully
agree that improving efficiency of the existing tax policies should be a
major focus of the debate. I do not fully agree with the mathematics in your
article in regard to the 3% of $72 trillion. It is deceptive because it
fails to identify what portion of the $72 trillion (or $53 trillion) is
currently not being used in productive ways. Your example of, "Charlie took
$2 million out of economic circulation" in your Re-thinking Investment
Income Taxes article suggests that an investment in art would not be
considered as productive. If this is so, we can agree to disagree. In your
article about Alan, Bob and Charlie, I was more concerned about your concept
of "investment income". I think the real issue is whether one is in the
business of investing or just a passive investor. A business should be
permitted to deduct expenses from investment income (or any income) but a
passive investor has only nominal expenses. If someone wants to be a
business (and deduct expenses from revenue in order to compute income) than
the business should be required to pay the 8% income tax - (a lot less than
Alan has to pay in your example).
Q. I personally believe that one of the greatest flaws in our existing
system is its intellectual dishonesty; it appears to have been willfully
designed to obscure the facts.
I certainly do not perceive that to be your intention, but I’m an advocate
of clarity.
A. Perception is important. The rates are what they are. A true, "advocate
of clarity" might always be sure to state that the true effective income tax
rate is 13% higher for the working man because it includes both the
employer's and the employees share of Social Security. [The
issue is illustrated in Hopkin's article regarding
the Myth of
Progressive Taxes.]
Perhaps I might be more clear if I said that there is no non-business
income tax and only an 8% payroll-interest-dividend tax and an 8% business
income tax. I submit that this is part of the details (which need to be
explained) but are not essential to a concise proposal.
Q. ... consumption taxes ... are deeply regressive
A. I think the 4% rate is not only low, but that the typical person living
near the poverty level would pay less than they do now (with reduced
gasoline and other taxes). In the unlikely event that a social correction is
needed (as for example, an increase in the food stamp program) this can be
done on the spending side but should not be a factor in optimum revenue
balance.
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