Time To "86" The Federal Tax Code

The federal tax code has become increasingly Byzantine in its complexity, and the very rich easily get away with paying next to nothing due to the loopholes that they themselves write into the code.  The TSAP believes it is best to overhaul it entirely. 

That's why any serious tax reform idea needs to begin with, "The Internal Revenue Code of 1986 is hereby repealed".  And then replace it with something much, much simpler and more efficient:

The Universal Exchange Tax (UET) is one potential thing to replace it with.  A tax of typically 0.1% or less on (practically) all electronic transactions, and only on the destination or deposit side.

Another similar idea is the Automated Payment Transaction Tax (APT), from Dr. Edgar Feige.  This one taxes both sides of each transaction, and posit a higher rate than the UET due to less optimistic assumptions about the tax base, among other subtle differences.

Another similar idea is the Automated Deposit Tax (ADT, aka the "Tiny Tax"), from Dr. William J. Hermann, Jr.  Formerly one of the largest supporters of the APT above, he later came up with an even simpler idea, that only taxes the deposits into financial institutions.  Given a smaller base, as "within account" transactions would not be taxed, the revenue neutral rate is expected to be around 1% to replace all federal taxes and 1.2% to replace all federal, state and local taxes.  A more optimistic assumption would of course put the tax base much higher, and thus put the tax rate even lower still.

Keep in mind that, unlike the UET and APT, the ADT (Tiny Tax) would be unlikely to result in any significant shrinkage of the theoretical tax base in practice, since most if not all of the predicted shrinkage in the former, would result from fewer high-frequency stock, bond, and derivative trades within accounts (which are far more sensitive to that).  That is, what the latter lacks somewhat in the relative size of the tax base, it largely or entirely makes up for in relative lack of shrinkage. And switching to any of the three of course removes all of the compliance costs, distortions, finagling, and deadweight losses from the status quo, resulting in significant savings right there.

All of the above are the logical conclusion of the "lowest possible rate on the broadest possible base" with the latter idea adding "with the least complexity" as well.  All of these taxes are also surprisingly progressive, since the rich transact disproportionately more money than the non-rich, thus they pay disproportionately more in practice.  And yet it is not a particularly heavy burden on anyone, rich, poor, or anyone in between for that matter.  In fact, it's equivalent to everyone getting a raise, we can still afford to have a robust social safety net (if not the entire progressive wish list), AND America still becomes a global tax haven nonetheless.

It's a win-win-win situation for everyone but the oligarchs at the top that benefit from the status quo at the expense of the rest of us, in other words.

Some plans aim for revenue neutrality, while others aim for a balanced budget or even a surplus.  But what if there was a way to make the concerns about balanced budgets completely obsolete and irrelevant?

PAGING DR. FIRESTONE!

Enter Dr. Joseph M. Firestone, a proponent of one flavor of Modern Monetary Theory (MMT).  He argues that Congress can simply pay off the entire fictitious "National Debt" in one fell swoop and simply create the money ad hoc to pay all of its expenses, without needing to raise revenue at all.  He calls it "Overt Congressional Financing" (OCF), and can be done by a simple Act of Congress and/or the Treasury minting a high value platinum coin (i.e. valued in the trillions).  As does Rodger Malcolm Mitchell (of Monetary Sovereignty fame) and Ellen Brown as well.

That's not to say that taxes are completely useless.  There in fact are a number of reasons for them.  They 1) create demand for the currency, 2) help control inflation to some extent as an automatic stabilizer, and 3) control the economy to one degree or another to encourage and discourage various things (also known as social engineering).  And they can also be used for less than lofty motives as well to rig the game for the oligarchy, of course.  But for a government that can issue it's own currency, like our own federal government (but unlike our state and local governments), simply raising revenue is NOT of them.

So how do we retain the desirable features of taxes without the drawbacks?  Pigouvian taxes, such as vice taxes and eco taxes, for example, can then be added (back) in after repealing the old outmoded tax code.  Ditto for perhaps a limited "rich-only" or "very rich-only" individual income tax like the sort that prevailed prior to World War II, or alternatively an excise tax on executive compensation (like Bernie Sanders advocates) exceeding a maximum pay ratio between executives and their average or lowest-paid employees, in order to reduce the yawning chasm of inequality these days.  And perhaps a "too big to fail" tax on any bank or corporation that is so large and interconnected that it poses the externalities of systemic risk as well.

So what are we waiting for?

UPDATE:  One mild criticism right off the bat is that jettisoning the income tax entirely would also inherently jettison the proven poverty-fighting Earned Income Tax Credit and Child Tax Credit as well.  The answer?  Until we implement a Universal Basic Income (UBI), we can and should implement a "Reverse Payroll Tax" that tops up wages by matching wages in each paycheck dollar for dollar up to a point (say, the first $200 per week), which is actually much simpler than the EITC and CTC.  As for the criticism that tax-free municipal bonds will lose their luster in terms of investment incentives, and municipalities will suffer as a result, the Monetarily Sovereign federal government can simply provide more federal aid to municipalities so they don't have to borrow at high interest rates.  And regardless of what the feds do, municipalities and states can also set up their own public banks (like the famous Bank of North Dakota) as well and borrow money interest-free, of course.

UPDATE 2:  Even if the Tiny Tax is implemented, there is nothing to prohibit maintaining (and increasing and harmonizing) the SEC Fee on Wall Street transactions, if one wishes to implement a sort of "gaming tax" on speculation as well.  

Raise The Floor, And Also Trim The Top

It is well known that excessive inequality is very harmful to both the economy and society at large.  Even before we learned the truth about Monetary Sovereignty (MS) and Modern Monetary Theory (MMT) in 2018, the TSAP has long supported both a Universal Basic Income for all, and has also supported hiking taxes on the rich as well.  And even after learning about MS and MMT, we still support hiking taxes on the ultra-rich, and for good reason.

Some may be scratching their heads.  Why do we even need federal taxes at all, if our Monetarily Sovereign federal government has infinite money?  They clearly don't need taxes to pay their bills.  But taxes also have other useful functions as well:

• Taxes compel the use of the official currency, thereby giving it value in the first place.  
• Taxes automatically "claw back" excess liquidity in the money supply due to the "velocity of money", thus to an extent crudely preventing demand-pull inflation before it happens.
• Taxes can be used for social engineering (think vice taxes and Pigouvian taxes) in ways that are otherwise difficult, impossible, illiberal, illegal, and/or unethical to do by other means.
• And finally, progressive taxes can be used to "trim the top" when levied on the top 0.1%, thus reducing inequality without leading to runaway inflation.  Rodger Malcolm Mitchell compares this to a "trophic cascade", such as when wolves (i.e. the federal government) keep elk populations (i.e. the oligarchs) from getting out of control and devouring everything in sight.

So what sort of federal taxes would be suitable for this purpose, knowing what we know now?

• A rich-only, steeply progressive income tax like the kind that prevailed before WWII.  At least the first $100,000 to $500,000 would be exempt, and the new brackets would include marginal rates of 50% above the first $1 million, 70% above the first $10 million, and perhaps 90% above the first $100 million.  With NO LOOPHOLES this time. 
• Tax dividends and capital gains the exact same as ordinary income, but index the basis to inflation for capital gains.
• For the largest corporations, especially those who are "too big to fail", a top tax rate of at least 50%, with NO LOOPHOLES this time.  Tax only retained earnings.  Smaller corporations should not be taxed at all.
• The Universal Exchange Tax, i.e. a tiny tax of 0.1% or less on all electronic transactions.  It would actually be highly progressive in practice since the rich make a disproportionately high amount and number of transactions compared to the non-rich.  "The more you play, the more you pay."
• Various vice taxes (alcohol, tobacco, cannabis, etc.) and Pigouvian taxes (pollution and resource depletion).
• Land value taxes and severance taxes on natural resources such as oil and gas.
• And, of course, the estate tax needs to be made more progressive as well.

State and local governments, of course, are not Monetarily Sovereign, and thus need to raise revenue to pay their bills.  And they can piggyback on the aforementioned federal taxes and levy their own, especially the Universal Exchange Tax and the land value tax and severance taxes, and thus reduce or eliminate their currently regressive sales and property taxes.  Additionally, federal aid to the states should be increased for precisesly the same reason.

A UBI would indeed abolish absolute poverty, no doubt about that.  And that alone would have numerous individual and social benefits.  But without progressive taxation of the top 1% and 0.1%, it would do nothing to reduce relative poverty, and may paradoxically increase inequality.  And inequality in itself is harmful, over and above the effects of poverty.  Thus, it is not enough to either raise the floor or trim the top, we need to do both.  Yesterday.

Thus, Rep. Alexandria Ocasio-Cortez essentially has the right idea as far as taxes go.  And of course, the oligarchs and their sycophantic lackeys are coming down hard on her, but that just goes to show how effective her ideas are in terms of reducing the Gap between the haves and have-nots, which the oligarchs utterly depend on.  All the more reason to do it.

UPDATE:  Elizabeth Warren recently proposed a wealth tax of 2% on the assets of those with a net worth of $50 million and up (that is, on the top 0.1%), and up to 3% above the first billion.  Only the amount over the first $50 million would be taxed.  Controversial as it is, it actually makes a lot of sense, and the TSAP would certainly not oppose it. 

America's Going Out of Business Sale Has Begun

Well, it's official now.  The Republican Tax Scam has now been signed into law on December 22, 2017.   The TL;DR version:  It is basically reverse Robin Hood economics--rob from the poor, give to the rich, and torpedo what's left of the middle class.  In other words, it's Reaganomics on steroids.

The lion's share of the tax cuts will go to the rich and mega-corporations, while the bottom 99% will get little or nothing, or even a tax hike depending on the exact vicissitudes of where one falls in the tax code.  Small businesses, or at least many of them, will likely get a swift kick in the margins, while large corporations make out like bandits.  And the price tag?  Over $1 TRILLION added to the national debt over the next ten years.   So much for the GOP being the party of fiscal responsibility, right?  Which will trigger automatic spending cuts to Medicare among other programs, unless Congress chooses to waive such cuts.  And it will also provide the perfect cover for Paul Ryan and his buddies pushing further cuts to the programs that they have had in their sights since forever, most notably Social Security, Medicare, and Medicaid, among several others as well.

If that wasn't bad enough, the Tax Scam also contains a bit of chaos manufacture in regards to Obamacare.  It effectively repeals the individual mandate for Obamacare, without replacing it with anything or doing anything whatsoever to stabilize the markets. Granted, the TSAP has long advocated (until we get single-payer healthcare) replacing the mandate with more positive incentives (such as increased subsidies), more stringent rules for special enrollment, and perhaps a surcharge as well for those try to game the system by dropping coverage and getting back in later.  Even the greedy insurance industry would be fine with such a replacement mechanism to prevent adverse selection.  But this bill contains no such mechanism, so unless something else is done soon, the result will indeed be chaos.

Oh, and to top it off, the bill also opens up the Arctic National Wildlife Refuge for "Drill, baby, drill!"  Because we really, really need to rape and plunder one of the very few remaining pristine areas of the Earth, because GROOOOWWWWTH!  Or something.

So overall, this is a very bad deal, and is essentially America's going out of business sale.  But hey, at least we will all get cheaper booze from this, right?

Bernie's Tax Plan Is Good, But The TSAP Can Do Much Better

Bernie Sanders' tax proposals have recently been published and analyzed by the Tax Policy Center.  You can read about it here.  It happens to be a rather biased analysis that has some glaring omissions downplaying the value of public investment, and a more accurate one can be found here.  While the TSAP continues to wholeheartedly endorse Bernie, we feel we can come up with a tax plan that is even better still.   So here is the latest version of our own:

Universal Exchange Tax (UET)

Implement a tiny Universal Exchange Tax of between 0.05% (50 cents per $1000) and 0.1% (1 dollar per $1000) on all automated financial transactions of any kind.  With a tax base estimated to be in excess of $4 quadrillion, this tax should raise between $2 trillion (half the federal budget) and $4 trillion (the entire federal budget).

Not only would it eliminate the deficit, it would create a surplus large enough to eliminate or dramatically cut all other forms of taxation at both the federal and state levels.

NOTE: We do NOT take credit for coming up with this idea; it was found posted on an anonymous website.  Also, economist Dr. Edgar Feige apparently thought of a similar idea back in 2005.

Individual Income Tax

Overhaul and simplify the federal tax code by repealing the regular income tax while retaining and tweaking the AMT to reflect the following:

Absolutely no income tax on those making less than $20,000 per year, period.

Ideally, no income tax on those making less than $50,000 per year.

With preferably the following marginal income tax brackets for individuals:

Below $20,000 -- no income tax
$20,000 to $50,000 -- 5%
$50,000 to $90,000 -- 10%
$90,000 to $150,000 -- 20%
$150,000 to $250,000 -- 30%
$250,000 to $1,000,000 -- 40%
$1,000,000 to $10,000,000 -- 50%
Over $10,000,000 -- 70%

With no loopholes and no deductions other than state/local taxes and a limited amount of charitable donations.

All forms of income would be taxed equally at the normal rates, including dividends and capital gains.  For capital gains, the basis will be indexed to inflation (which is currently not the case).  The exclusion for capital gains below $250,000 from home sales will remain as is.

NOTE:  If the Universal Exchange Tax (UET) is implemented and set at a high enough rate, we could theoretically reduce the income tax to only 10% on each dollar above $100,000 and 50% on each dollar above $1 million.  We propose a UET rate between 0.05% (50 cents per $1000) and 0.1% (1 dollar per $1000) on all transactions, which would most likely be high enough to do so. 

Corporate Income Tax


Overhaul the tax code to eliminate all loopholes and favoritism of any kind.  Then implement the following tax brackets for corporations:

Below $100,000 -- no income tax
$100,000 to $1,000,000 -- 10%
$1,000,000 to $10,000,000 -- 20%
$10,000,000 to $100,000,000 -- 35%
Over $100,000,000 -- 50%

Unlike the current law, only undistributed profits would be taxed.  Amounts distributed as dividends would not be taxed at the corporate level, but would be taxed at the normal rate for the individual shareholders.

Tax US corporate foreign income as it is earned, rather than when the income is repatriated.

Payroll/FICA Taxes

Remove entirely the wage cap for Social Security portion of FICA tax, or raise it to a very high value (i.e. $10 million) for as long as we still have a FICA tax.

Reduce FICA tax rates to the lowest possible level needed for long-term solvency, or better yet eliminate FICA entirely (if an alternative funding source such as the UET is implemented).  If no alternative source is present, then raise the FICA tax by an additional 0.2%.

Create a tiny, fixed "Occupational Privilege Tax (OPT)" of about $50 per year at the federal level, similar to what many states and localities do.  Use it for general revenue.

Luxury Tax

Similar to a sales tax, 2% on all new items priced at $1000 or more, and only on the amount over $1000.  For vehicles of any kind, the exemption amount would be $30,000.  For new homes, the exemption amount would be $1 million.  Items purchased overseas would be considered "new" and taxable upon entering the country if purchased within the past year or two.

Estate Tax

Resurrect the estate tax ("death tax"), this time as a progressive one.  The exemption amount would be $3.5 million, then 45% up to $50 million, 55% up to $500 million, 65% up to $1 billion, and 75% for $1 billion and above.

Excise, Vice, and Other Taxes


Bring back the Superfund taxes that expired in 1995, and expand it to cover ALL harmful and toxic chemicals.

Increase and equalize the federal alcohol excise taxes to $22 per proof-gallon for all alcoholic beverages, equal to the liquor tax in 1991 adjusted for inflation.  Microbrewers (those who produce less than 6 million barrels) would continue to pay the current rate of $0.58 per gallon ($18 per barrel) on the first 2 million barrels.

Equalize the federal tax for all tobacco products by weight to $1.55 per ounce, and tax the tobacco itself at the producer level.  Set a national price floor for cigarettes of at least $5.00/pack to encourage low-tax states like Virginia to hike their own tobacco taxes. 

If and when cannabis and/or any other currently illegal drugs are legalized, tax them as well.  For example, cannabis could be taxed at a flat rate of $10-$50 per ounce, or perhaps set proportionally to potency (e.g. $5 per ounce, multiplied by percentage of THC).

Raise the gas tax by 1 cent/gal each week until it is $0.50/gal higher than it is today.  "A Penny for Progress."

Enact the following "menu" of new taxes:

• coffee beans or grounds ($0.10/lb) 
• pure caffeine ($1.00/lb)
• refined sugars ($0.10/lb)
• salt ($0.10/lb)
• hydrogenated fats ($1.00/lb)

Enact a tax on bullets and other ammunition at a rate of at least $0.10 per round for long guns and at least $0.25 per handgun round.

Enact a financial crisis responsibility fee (leverage tax) of 0.15% of covered liabilities of so-called "too big to fail" banks with more than $50 billion in assets.

Enact a Wall Street Gaming Tax of 0.5% specifically on derivatives and any other exotic financial products designed primarily for the purpose of speculation or gambling.


Carbon Tax and Dividend

Additionally, implement a "carbon tax and dividend" on all fossil fuels similar to what Steve Stoft proposes in Carbonomics. Start it at $10/ton in the first year, and double it every year until it reaches $160/ton, then increase it further by 5% each year or the rate of inflation, whichever is greater.  Refund 100% of the proceeds directly to We the People.


Do these things and we can easily pay for all of what Bernie proposes and then some.  Especially if we also nationalize the Feral Reserve and make our currency interest-free and inflation-free, as well as zero-out the national debt via money creation as discussed in a previous post.  And our proposal would be even simpler and more progressive than his proposals currently are.

And yes, progressive taxation is indeed the fairest method and best for the economy as a whole. History has shown that "trickle-down" voodoo economics does NOT work, period.   Cutting taxes at the top tends to create short-term "sugar highs" in the economy, followed by painful crashes. All while worsening inequality, and too much inequality ultimately kills growth in the long run.  As Robert Reich famously said, the economy exists to make our lives better. We don't exist to make the economy better.