Friday, June 7, 2013

Taxes and eliminating the IRS

Let’s talk about taxes baby...
Let’s talk about what we pay...
            Okay, Salt-n-Pepa I’m not, but you try to come up with an intro for taxes.  I guess I could just write about the situation and the problems with the solution proposed by many.  The problem is obvious today; the Internal Revenue Service has grown too big and powerful for its own good.  The IRS strikes fear into Americans like no other government agency.  The Federal Bureau of Investigations could knock on your door and your pulse would go higher if it was an IRS agent.  This power is being abused by the present administration (and past administrations) as a political tool in their arsenal to attack opponents.  If you are against the party in power, you have to fear the IRS.  The IRS has become so conceited in its own power that they ask what books you read and the content of your prayers!  This is a slap in the face to the US Constitution and the Founding Fathers!  In 2014 the IRS will be in charge of making sure that the Affordable Healthcare Act (Obamacare) is being complied with by business and citizens of this country.  It is bad enough that the government is instituting regulations upon a section of the economy to such a degree of control that it makes the entire industry a part of the government by proxy.  The additional power that this gives the IRS puts them on par with the combined branches of the military, but who does the IRS protect us from?  Ask the average American and the only protection they want is from the IRS!

            Dissolve the IRS has become the battle cry!  The problem is of course that the Federal Government actually does some good and they need money to operate.  So how do we accomplish this feat?  I have heard talk about a fair tax, that a citizen would only need to fill out something the size of a postcard and send in.  This sounds a little too good to be true and I am willing to bet will become a system that is easy to abuse by those who will not pay their “fair tax” share.  I have even heard people say that all we need is tariffs to support the Federal Government.  The only problem with that is that many of those same people are the ones that jump up and down about fair trade.  Fair trade by definition is one that is free of tariffs.  This creates a conflict of ideology, you cannot have both.

            Which brings us to Herman Cain’s 999 plan; now I must admit that when I first heard it, I did not like it.  I just knew that if we had a Federal sales tax, when you combined it with state and in some cases city sales taxes, it would kill the economy.  I have thought about it for a year now and the plan has grown on me as I weighed the pros and cons.  First off, everyone would have more money in their pockets without Federal withholding.  The question becomes would the increased sales tax stop people from making purchases?  My conclusion is that it does not matter.  It does not matter because if people do not make purchases they still have to do something with the money.  If they choose to put it into savings or investment it, they will still be helping the economy.  I also believe there is a segment of the population who will always be consumers and spend all of their money, no matter what the sales tax rate is.

            There are a few things that are needed to make sure that the system is fair.  First off no cap for luxury goods, many states have limits on how much you have to pay in sales tax.  For instance, if you buy a car they will put a cap on how much you pay for a purchase (or maybe my information is just a decade old).  So if someone were to buy a $50k car, but the limit maxed out at $20k, they will pay the same taxes as someone that buys the cheaper car.  That is simple enough and I am sure few people would have a problem with it.  Now for the more controversial aspects; first there will be no tax exempt status for any organization.  Without a small army to do investigations I say just keep it simple and eliminate tax exempt status.  I do not care if you are a charity, a religion or a political organization.  If you make the purchase, you pay like everyone else.  When you start exempting different organizations it will become like a drug and every special interest group will try to gain that status for itself.  Yes it will hurt some organizations, but their donors should have more money to give.  Normal people will no longer be able to take tax breaks for donations, so why add complexity by giving such status to any organization.  Next any sale will be taxed.  This sale can be business to business or business to consumer, even business to government.  There will be no loopholes to allow businesses to get out of this.  If you buy and import goods from overseas, as soon as they cross the border the tax must be paid.  Yes that will work similar to a tariff, but if you bought the goods within the USA it would bring about the same result.  There is a way for companies to get around this.  They would have to build their products from start to finish keeping cost down, rather than spreading subcontracts around.  Companies contract over pennies per piece all the time, because not only can someone else make the product cheaper, but they can use their resources on more profitable endeavors.  This will step onto the toes of middlemen.  Some middlemen are honest businessmen, but there are others who use their power in similar ways as the IRS.  This will help to shorten the steps between manufacture and final sale, but this process is already taking place in business.  There is one more process that should be mentioned/taxed.  When money is sent outside of this country, it should be taxed.  You made it and you were not taxed (consumer or business), but before you send it overseas, we are going to tax you for sending our money elsewhere.

            Even with all of this we still cannot completely get rid of the IRS.  You have to have agents investigate these organizations to make sure that they are properly paying the taxes.  Even Texas has these agents that do such investigations.  I know this for a fact; my cousin is in Dallas, has his own business and was audited.  No exemption from taxes does mean less need for agents though, because they will be concentrating on a single specialized purpose and not spread out over many different responsibilities.  

            Still there is one tax that needs to be kept in place.  The reason for this is the problem that is created without it.  What is the purpose of the stock exchange?  Basically it is to provide capital to companies to they can expand or improve their product/service.  When you own stock, you own a part of that company.  It is in your best interest that the company has long term profitability.  The problem is that the stock market too often resembles a Las Vegas craps table.  Throw in the fact that board members and upper management will cannibalize a company (or mutual fund) for a short term gain.  This could be in the form of their bonus or stock options (which are basically the same thing).  So we keep the capital gains tax, but we have to remember that our goal is to eliminate income tax and capital gains is a form of income.  By the same token we want to encourage the stock market to fulfill its actual purpose, one of long term investment.  The solution is a dropping tax rate depending upon how long you have the stock.  For instance, if you sell it the first year you own it you pay 75% tax on your profit.  I know, that sounds insane!  Well it is and that is the point!  However each year you own the tax your liability drops 15% to 60%, then 45%, etc, until you owe no tax on your sale. For stock options the term is longer, because these people actually control the direction and future of the organization.  If you sell the stock in the first year 100% of your profit is taxed and that drops 10% per year until you owe no taxes on the sale.  Once again with no exceptions for any organization, no matter what they are.  It could be a pension, a trust fund, a charity or religious organization.  There is no need to give unfair trading advantage to any such organization, since they already control billions of dollars in the market.  This will encourage our investment markets to think years down the road, instead of worrying about the next quarter.

            From the length of this, you can tell I have been playing with the idea in my mind for a while now.  I do not claim this is the perfect solution or that my limited knowledge gives me the right to make any such claim.  All I am saying is that it is an idea which maybe someone with greater knowledge can take and run with.  Fixing my errors along the way and adapting it in a way that it can work.  That is if this seed is a good one and can grow into something beautiful.  I also realize this maybe the most controversial thing I have ever written.  If you believe I am wrong and foolish, then I ask you this.  Is your body of knowledge of the subject so great that you can come up with the start of a solution on your own?  Or are you merely accepting at face value what others promise you?  To accept something like that in such a way without questioning it or gaining greater knowledge, is that not just like drinking the kool aid we accuse liberals of doing?  We live in a marvelous society and it is even more complex.  There are many variables that must be taken into account and many problems that need to be fixed.  Play with the problems in your head, maybe you are the person that can come up with the perfect solution.  However you never waste any time or effort by exercising your mind!