….. and counting. That’s
the number of pages in the current tax code. The tax code
coupled with IRS regulations now exceeds eleven million words
or twelve times the entire works of Shakespeare and fifteen
times the length of the King James Bible. It is time for some
kind of reform. A national sales tax or VAT (value added tax)
structure has been bandied about lately. Even Alan Greenspan
has come out in favor of a consumption tax. His argument (and
others) is that a consumption tax would promote economic growth
because it would encourage saving and capital formation. That
would seem to be what capitalism is all about. Greenspan further
stated that a consumption tax would allow households and businesses
a more predictable look into the future when making saving
and investment decisions. However, Greenspan favors a gradual
move to a consumption tax by maintaining some form of income
tax. Not a good idea.
France started using a VAT in 1954, and other European nations
have followed suit. However, all have also maintained some
form of income tax. This allows politicians to keep raising
the level of income tax. Taxes as a percent of GDP in the
European Union (EU) now exceed 40%, while taxes on a percent
of GDP in the US are now about 25%. GDP growth in the US has
exceeded GDP growth in the EU by 27% since 1990. We also have
a lower rate of inflation and a lower unemployment rate. High
taxes have pushed the economy in old Europe into stagnation.
The newer eastern European countries have introduced VAT or
a flat tax rate, and their economics are growing. In sum,
taxing consumption would eliminate tax loopholes, would save
the government billions of dollars in tax fraud, would raise
more revenue for government projects and would heighten savings
and investing which would create more jobs. Unfortunately,
this has become a political issue when it is really an economic
issue. Politicians of all stripes need to set aside their
own personal agendas and do what is right for the country
as a whole.
That brings up another issue that should be economic but
is a highly charged political issue – social security.
This is another program that needs reform. Established in
1936 by FDR and Congress, social security was a “promise,”
not a guarantee. In 1936, the government promised that employer
and employee would pay into the system 1.5 cents for each
dollar earned up to $3000. This “tax” would increase
to 2 cents per dollar earned in 1943 and rise to 3 cents in
1949. The promise was that that would be the most we would
ever have to pay. We now pay much more. In 1936 the government
said they would set up a social security account, and checks
would come to retirees as a “right.” A “trust
fund” was supposedly established. Turns out that trust
fund was all trust and no fund, as it is full of government
IOUs that can be redeemed only by taxes on us, our children
and our grandchildren. It was a great idea in 1936 when there
were sixteen workers for every retiree. Today there are three
and shortly there will be two workers for every retiree. Would
you continue to drive a 1936 auto or listen to a 1936 radio?
Face it, the system is broke. Why are politicians stalling?
Just a note on our burgeoning debt. Greenspan has been speaking
on many subjects lately, and most recently he had this to
say about our record level of foreign indebtedness. “The
resolution of our current account deficit and household debt
burdens does not strike me as overly worrisome. The world
is undergoing a one time shift in the degree of globalization
and innovation that has temporarily altered the specific calibrations
for evaluating economic imbalances.” Rest easy.
On the lighter side, it appears that a stay in prison is good
for your physical and financial health. Martha Stewart just
emerged from five months in prison twenty pounds lighter and
$600 million richer (due to appreciation of her stock).
Random thought for March 2005:
“A government which robs Peter to pay Paul can always
depend on the support of Paul.”
~ George Bernard Shaw
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