The Mel Tax Plan

With the Presidential election only a few months away, there's a lot of talk about tax policy.  What's fair?  How can you get the rich to pay more?  How can you lessen the burdens on the poor?  Who deserves to get tax cuts?  What about corporations?

In talking it over with several actuarial types via an online forum, I have put together this summary of ideas, which I believe to be a fairer tax system.  It doesn't incorporate too many changes to the current system.  It causes the rich to pay more and the poor to pay less.  It considers corporations.  It brings jobs back into the US, and it even helps to save Social Security.

This can be accomplished by a simple three-point plan.

• Lower the corporate tax rate.
• Increase capital gains taxes to be equal to or more than the standard income tax rates.
• Abolish the Social Security payroll tax (employee portion) and replace it with an uncapped income tax rate increase across the board.

I'll leave it to the tax experts to work out the fine details, but let me explain the thoughts behind the plan, and why these simple changes would benefit everyone.

Problem #1) The current tax system is so COMPLEX.  There's no way to predict how many taxes a person will pay in a year unless you consider countless variables.  One poor person may benefit from a tax credit that another poor person is ineligible for.  There may even be a filthy rich person eligible for that same tax credit.  A well-meaning tax expert may intend to close the rich guy's loophole and eliminate his benefit, but in the same vein he'd be hurting the poor person who currently depends on that same benefit.

With the economy as it is now, it would be a bad idea to remove ANY of these tax cuts.  All three changes that I've listed above are ACROSS THE BOARD changes while the poor and middle class continue to enjoy their child and mortgage interest credits and what have you.

Problem #2) The current tax system rewards and encourages speculation while at the same time penalizing those who actually work for their money. 

When you earn capital gains, you didn't work for those gains.  You invested money.  Someone else took that money, ran with it, took on the risks, and made money FOR YOU.  It makes no sense to charge a higher tax rate on income that is actually gained through HARD WORK than on income earned by speculation.

Here I turn to the concepts of Ayn Rand: One should be rewarded for their hard work.  If you work long hours for your company, or if you build an awesome product, or if your work provides jobs for hundreds of people, then you DESERVE to earn profits up the wazoo.

Investing money in a venture is all good, and should be encouraged, but to charge a lower tax rate on earnings gained by mere speculation is UNFAIR.  It provides no real incentive to make most people want to invest more money, and even provides an incentive for one to "leave their day job" for the more lucrative hobby of playing the stock market.

Reagan, one of our favorite Republicans, understood this concept.  Democrats are currently calling for higher capital gains taxes.  I say, "LET THEM HAVE IT."  It's fairer and better matches proper incentives.

Some of you may say, "But what about double taxation?"  Well, keep on reading.  I'll get to that.

Problem #3) The US corporate tax rate is WAY too high, and for no good reason.  It pushes US jobs away to other countries and gives incentives for foreign entrepreneurs to stay out as well.  It introduces double taxation and slows corporate growth.

Some complain that GE paid next to nothing in taxes last year.  If you realized how taxes affect corporations, you wouldn't care.  The reason?  Because corporations are NOT people.  If you tax a corporation, you're not lowering the profits that line the president's pockets.  Rather you are lowering the revenue available to the corporation to use for its own purposes.  This can manifest itself in several different ways...

• In order to maintain a level of profit, a corporation may RAISE PRICES to compensate. 
• A corporation may CUT EXPENSES to maintain that level of profit.  This most likely results in LOST JOBS.
• A corporation may send JOBS OVERSEAS to take advantage of foreign corporate tax rates that are much lower.
• A corporation may PRODUCE LESS, as the higher costs of doing business may make it not worth it to pursue certain ventures.

In short, if you really want to hurt corporations by raising their taxes, they're not going to be hurt.  Rather, they're going to pass on the hurt to the rest of us through one of those four tactics listed above.  It's not because they are evil and selfish, but only because every corporation has an obligation to make as much money as possible for the shareholders.  If they don't perform in this duty, the shareholders will remove their money and invest in someone else who can.  It's only game theory.

Corporate taxes are also a form of double taxation.  Corporate gains are taxed, and then the capital gains that are passed on to investors are taxed.  The costs of this double taxation are also passed on to the consumers.  To avoid this double taxation, we must choose which party should be taxed more.  I say, REWARD THE PRODUCERS and TAX THE SPECULATORS.

If you lower the corporate tax rate, corporations will compensate and pass on the savings through one of the following four tactics.  Remember that each corporation will try to maintain the same level of profits...

• A corporation may LOWER PRICES, as now they can afford to and competitive pressures kick in.
• They may INCREASE EXPENSES, which mainly means JOB GROWTH.
• They may BRING JOBS BACK TO THE US--especially if the new US tax rate is lower than our foreign neighbors. There would no longer be incentives to set up shop overseas for tax benefits.  Plus, foreign entrepreneurs would have incentives to ADD EVEN MORE JOBS IN THE US.
• They may PRODUCE MORE, as now they have more money to invest in R&D and the like, and benefit both themselves and the consumers.

Either way you look at it, lowering the corporate tax rate is win/win/win/win for us, the consumers.  In contrast, lowering the capital gains tax benefits no one but the rich guys.

By the way, this is a concept our favorite Democrat, President Obama, is in favor of.  The Republicans are calling for lower corporate taxes, so I say, "LET THEM HAVE IT."

Problem #4) Social Security is by far the largest tax burden placed on the lower and middle classes.  Including the employer-paid portion and ignoring the current 2% tax holiday, Social Security eats up a whopping 12.4% of your earnings, unless, that is, you happen to be RICH.  And to add to the hurt, Social Security pretends to be some kind of savings plan.  But it is a terrible plan that returns only 1% back to you, and perhaps 2% if you're lucky.  (Click here for a more detailed analysis.)  It returns income under what is currently consider to be the poverty level.

Further, it behaves as a "pittance tax," such as those described in the Bible.  If you're poor, a "pittance" is a lot of money that could break the family budget.  If you're dirt rich, then the same "pittance" is just a drop in the hat.  Since Social Security is capped, the most you (and your employer) can pay in a year is around $13,000.  If you're making millions of dollars, this really is a "pittance."

Most of you reading this are paying 12.4% (well--10.4% with the tax holiday, but how long will that last?).  Presidential hopeful Romney, on the other hand paid less than a FRACTION OF A PERCENT to Social Security, as that $13,000 is nothing to him.  Romney paid a lot higher "income" tax rate than the rest of us (which does not include payroll taxes), but if you throw in Social Security, we come close to the same rate if not more as Romney.

Is it fair for the rich to be taxed so little for a benefit they won't need when they retire, while at the same time the poor get taxed so much for a benefit that won't keep them above the poverty line when they retire at 72?  I'd much rather revoke this highly ineffective "savings" program.

But a more viable option would be to stop treating it as a "savings" program, and rather treating it as the socialist program it is.  Finance Social Security through income taxes instead of payroll taxes.  Employers would keep paying their share (which I'd leave capped for now), because there would be no immediate guarantee that employers would increase everyone's salaries to compensate.  But take that 6.2% (or 4.2% with the tax holiday) that the employees are paying and move it into the income tax.  This would have two major impacts.

• It would REMOVE the cap on contributions that the rich pay toward Social Security.  In other words, they'd be paying 6.2% instead of 0.1%.
• It would actually DECREASE the overall tax burden on the poor, as the higher "income" tax liability would allow more tax credits to kick in.  That is, the higher "income" taxes the poor people pay would be offset by the savings from not having to pay the payroll taxes.

Let's look again at the overall effect of the three proposed changes.  The lower corporate taxes would benefit everyone through job creation and "true" economic stimulus.

The dirt poor people would see lower tax rates through the Social Security change.

The filthy rich people would see higher taxes come out of their capital gains taxes, and to help fund Social Security.  Romney would see his tax bill go from 13.9% to something more along the lines of 30%.  This happens to provide similar results as Obama's ridiculous Buffett Rule, except I believe that the tax burdens in this modified plan are more fairly matched with where the burdens should lie and preserve the appropriate incentives to produce.

There you have it ... this plan leaves a few details to be worked out (we wouldn't want to raise capital gains too high or lower the corporate tax rate too low), but I believe this three point plan would be easy to implement and nudge us all in the right direction.