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Tuesday, August 7, 2012

Time to Refocus the Tax Debate

If you have paid attention to the "debate" between president Obama and Mitt Romney, you know that Obama wants to raise taxes on the wealthy and Romney wants to cut tax rates by 20% for everyone while doing away with deductions. It is a seemingly endless discussion. Two years ago when the economy was stronger than it is now, Obama took the opposite position and told the country that it was bad policy to raise taxes on anyone when the economy was shaky. Now with the economy worse, Obama has flipped his view. On the other hand, Romney has adopted the view that tax cuts will stimulate the economy, so he is pushing for another decrease in the rates.

I think that the time has come to change the focus of this discussion. Obama may want to demonize the rich and attack them for not paying "their fair share" of taxes, but this is crap. The 20% of folks with the highest income pay over two thirds of all taxes already. That is clearly a fair share. And Romney has to have a way to fund the government even with a tax cut; his "loophole" closing plan sounds more like a tax rearrangement than a tax cut. My suggestion is that the debate focus on two other groups: first, the tax cheats who earn money "off the books" but pay no tax and second, the companies who earn billions selling their foreign made products to Americans but who are not taxed on those profits here in America.

The Underground Economy -- Current estimates are that about 1.5 trillion dollars of economic activity takes place in the USA without its being reported to the IRS. How many people have unreported investments which bring in big bucks? How many people "forget" to report all of their capital gains each year? How many people work off the books with the result that payroll taxes for social security and Medicare are not paid? I am sure that nearly everyone in the country knows someone who is not paying all their taxes and many who are paying none of their taxes. One strategy to collect these taxes would be better enforcement measures. A national e-verify system that required employers to only hire folks who show up with valid social security numbers would probably result in something in the area of one hundred billion dollars of additional tax revenue just from the people who are sneaking around that system. Another strategy would be the imposition of a value added tax with a reduction in the income tax as well. Someone who makes money selling drugs will not report that money to the IRS, but that same person would still have to pay this national sales tax were he to buy a car or other goods. If the federal government only taxed the currently unreported funds at 15%, the increase in revenue to the government would be two and a quarter trillion dollars over ten years.

Foreign Companies: American companies that make products here in the USA pay taxes on their profits at a rate of 35%. Foreign companies whose products are made abroad pay no such tax. Their taxation is limited to the profits made here. For example, let's assume that Ford makes a car in Michigan which costs 25,000 and sells to the dealer for $30,000. Volkswagen makes a similar car in Germany which costs 25,000 and sells to the dealer for $30,000. Ford pays tax on the $5000 profit which means Ford pays $1750 in taxes on that sale. VW pays no tax when it sells to the dealer. That means that even though the cars cost the same to manufacture, VW makes a much higher profit on its vehicles. Over time, these higher profits give VW an advatage over Ford and make it more likely that cars sold in the USA will come from abroad.

A value added tax on manufactured goods coupled with a reduction in the corporate income tax rate would close this gap. This would mean that domestic manufacturers would no longer have to overcome the tax structure in order to compete. There would be a level playing field (to use the old cliche.)

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