Tuesday, April 17, 2012

Real Tax Reform - America Must Demand It

In ‘the worst economy since the great depression’ (according to President Elect Obama) what position would you as a working American be in if you were able to keep more of your paycheck instead of paying taxes? To be more specific, what financial position would you be in if you as a working American were able to keep more of your paycheck by not paying any federal taxes on your income?

One major problem with the economy right now is that people are not spending money. When people hear the economy is just terrible and government action is needed straight away, they cannot wait. Yet, one $700 billion bailout bill later (one which, according to speaker Pelosi, was urgent for the sake of Americans and their livelihood, but could wait while Congress went on a two day vacation) nothing has changed. Banks are hoarding the money or using it to buy other banks and now, Obama is asking for the remaining $350 billion of the bailout. What does he plan to do with that?

Back to your taxes.

If you had more money come payday (lets say a minimum of 20% more), what would you do with it? Would you save it? Invest it? Put more into your retirement? Spend it?

What if you owned a small business?

What if all federal taxes were removed on employers, savings, investments, capital gains and indeed all income you received?

What would you do with those extra funds?

Save them? Invest more in your business? Expand your business? Hire more people?

What would that do to the economy and the stock market in a short period of time?

Would companies continue to ship jobs overseas to avoid the punishing tax code that no longer exists? Or would companies come to the US to take advantage of the new tax haven?

I know what you’re thinking.

You’re thinking, "Sounds great, but the government needs to be funded somehow!"

And you are right. But isn’t taxing people and businesses on productivity just punishing hard work and success? Correct me if I’m wrong, but isn’t that stifling the US economy? If you punish success, won’t it limit the success people are working towards?

Now, as you may know, businesses do not pay taxes directly. If a business sells an item and pays taxes in the process of manufacturing/selling that item, they include those taxes into the final cost of the item. So really the only people paying taxes are you, the consumers. For example, a loaf of bread during each stage of the manufacturing has a tax bill included. The gasoline tax for the farmer harvesting the wheat. The baker, the bag manufacturer, the shipping company and then the retail store all have to pay taxes during their part of the process, which they all factor into the cost of the item you pay.

Independent research has shown that these ‘embedded taxes’ total approximately 22% of the final cost of an item. So, if that loaf of bread cost you $1.00 then with all these taxes removed you would only have to pay $0.78 for that loaf of bread. So, with all the federal taxes on productivity removed the cost of all items will be reduced by about 22%

Now, let’s get back to funding the government. What if those embedded taxes that have now been removed were replaced with an inclusive sales tax? By inclusive I mean the tax is calculated on the final cost of the item (much like the payroll taxes we all pay every payday). So if that loaf of bread, which originally cost $1.00, had the 22% in embedded taxes removed and replaced with the sales tax, it would still cost $1.00. The only difference is instead of reimbursing the manufacturer for taxes they no longer have to pay, you’re funding the government like you do every payday.

The only problem though is that to fund the government at its ‘current’ level, the sales tax would have to be 23%, so the cost of that loaf of bread would be $1.01. But, since you get to keep all of your paycheck, does that 1% raise bother you that much? I’m sure it will for some people, but to some it's 10 steps forward and only 1 step back.

Now think on this for a second:

-You get to keep a lot more of your paycheck.
-You’re not taxed on what you do with that money, should you want to invest, save or expand your business, if you own one.
-You can even take a second job and not be penalized for it.
-Yet, when you spend the money you’re funding the government the same as you do today.

Sit back and picture this for a moment.

Would we need these planned trillion dollar bailouts by the Obama administration?

Would we need to spend billions (yes its billions) to file our taxes with the IRS each year and fear an audit?

Would this still be ‘the worst economy since the great depression’ for the foreseeable future?

The answer is no. If Americans just save the money, then that beefs up the financial markets, putting more money into the system. If Americans invest, then that helps grow the economy, which is what is needed right now. If Americans spend it, they’re funding the government.

I know there are plenty of people reading this saying, "This is great, but it will never happen." To those people I say, "Of course it won’t, if that’s all you have to say!" But for those people saying ‘This is great, but won’t be an easy task’ I say, "You are right, but it’s not impossible."

Just because a great idea will be tough to pass, doesn’t mean it should be abandoned. This program of replacing all federal taxes on income and productivity with an inclusive national sales tax is called ‘The FairTax’.

The 23% FairTax is only paid on ‘new’ retail items and collected at the point of sale.

So, items are only taxed once, and that’s it. Retail locations already collect state taxes so, the transition will not be terribly difficult.

No matter how you get your money: paid by your employer, capital gains from your business investments, from selling drugs, or being paid under the table as an illegal immigrant, you pay the FairTax when you spend that money. Of course, people will still try and cheat, but its much more difficult when a business with a reputation to uphold is involved.

"But how is that fair?" I hear some people saying, "Rich people and poor people are all paying the same tax rate." Yes, they are. In fact not only do they pay the same tax rate, but neither pays the FairTax on the necessities of life. Each year, the Department of Health reports ‘the poverty level’ which is an estimate on how much income is needed to live in the US at the poverty level. Each month, the government would reimburse each American household the taxes they would pay on that amount, called a ‘prebate’. So, for a family of two, the poverty level is about $16,000 a year. That household of two is reimbursed every month 1/12 of the 23% FairTax they pay. This household would receive approximately $307 a month. The bigger the household, the more money they would receive.

American households will not pay any taxes up to the poverty level, literally un-taxing the poorest households in America yet they still keep more of their paychecks if they are working. So, while everyone (regular tax payers, illegal immigrants, drug dealers, tourists) are paying the FairTax, only those American households receive the prebate.

You can’t get much fairer than that.

You may not have thought of this, but do you know approximately how much money is held offshore by American businesses to avoid the current tax code? You’ve all heard of those banks in the Cayman Islands that are so popular, right? Not sure how much this will shock you, but it’s approximately $10 trillion. Now, imagine that amount coming back into the US economy tax free? Think of it as a privately funded $10 trillion stimulus package.

Don’t get me wrong, the FairTax is not perfect, but when compared to our current system it’s amazingly better for America and Americans as a whole. The only trouble is it takes the power of the tax code away from politicians and lobbyists in Washington and puts it squarely back in the hands of Americans. And that is the main hurdle of the FairTax, as it would be the biggest transfer of power since the birth of this great country.

For this bill to pass politicians need to be hounded by their constituents, so they know their job is to do what’s best for you and not what’s best for them and their special interest groups. Too many politicians have forgotten who put them in office and need to be reminded.

Also, as this is such a troubling issue for politicians and people who profit from the current tax code, misconceptions and lies have been put out about the FairTax. To help educate Americans I’ve explained a few here:

Let’s go back to the inclusive sales tax. Bear with me as mathematics are involved:

Inclusive tax or exclusive tax?

22% of that $1.00 loaf of bread is $0.22. Yet with the taxes removed the cost of the item will be $0.78, so that $0.22 is actually 30% of the cost. This calculation is known as ‘exclusive sales tax’. The amount is calculated from the original cost of the item.

The final cost you as a consumer pay has not changed, but 30% seems a lot ‘scarier’ to most people than 23%. However, payroll taxes which we all already pay are calculated ‘inclusively’, so, for example, when you’re told you only pay 7% of your check in payroll taxes, you’re really paying almost 10% when calculated exclusively. The FairTax is calculated inclusively because it is replacing a tax calculated the same way. So, be it 23% inclusively or 30% exclusively the price of items remain unchanged.

Along similar lines, many people also say the FairTax will just add 23% to the cost of items. So, again that $1.00 loaf of bread now costs $1.23. Of course these people have not factored in the removal of the 22% embedded taxes.

What about a flat tax?

People will tell you a flat tax is better for the country. What they won’t tell you is that our current bloated tax code started out as a simple flat tax on the rich. Yes, it would be better for America than the current system, but can you trust our politicians to not evolve it slowly back into the system we have? My simple answer to that is ‘no’.

Government will have to pay the 23% FairTax!

This is correct. If government were exempt from paying the FairTax, this would give them a great advantage over private business. With the current tax code, government and politicians are able to pick winners and losers in the market by manipulating the tax code. Besides, the government still pays the embedded taxes so the issue is a moot point. The only difference is the taxes are known and not just embedded in the final cost they pay. With the FairTax, it levels the playing field so there are no winners and losers. Many misconceptions about the FairTax are easily explained with some simple research and details are readily available out there.

I highly recommend you do some reading, because this new system of taxation will help in resolving the economic crisis, will not require trillions of dollars of bailouts, and will put more money back in the pockets of Americans.

April 15th will just be another spring day and the IRS will be out of business.

If you like the plan, all we ask is that you spread the word.

If people have heard about it but are scared of the 30% rate or the cost of all items going up 23%, tell them the truth and correct them on the misconceptions they’ve heard.

Government will not pass this bill without Americans demanding it.

You can contact your state representative in Washington and ask them to co-sponsor the FairTax bill (House Bill HR.25 and Senate Bill S.1025).

The Lilly Ledbetter Sue-For-Anything Act

Obama's first signed bill was the sickly named Lilly Ledbetter Fair Pay Act. Instead of actually accomplishing something for fair pay, the act says "that the 180-day statute of limitations for pay discrimination resets with each new discriminatory paycheck".

Basically, as long as you think you're being discriminated against through pay, your lawyers have all the time in the world to harass and sue your employer.

What hasn't got out in the media is this (from Stuart Taylor Jr. of National Journal Magazine):

First, Ledbetter waited more than five years after learning that she was paid substantially less than most male co-workers to file her Title VII claim for back pay, compensatory, and punitive damages. Second, by that time a key supervisor -- whom she belatedly accused of holding down her pay raises after she rejected his sexual advances -- had died. Third, Ledbetter chose not to pursue a claim under the Equal Pay Act of 1963, which has a much longer time limit (three years) than Title VII but does not (yet) provide for big-bucks damage awards.

Fourth, her years of poor performance evaluations, plus repeated layoffs that affected her eligibility for raises, convinced a federal magistrate judge (although not the jury) that her relatively low pay did not prove sex discrimination. Maybe Ledbetter was a victim of discrimination, as the jury found. Maybe not. The evidence is too stale to allow for a confident conclusion -- which is one reason the justices ruled against her.

Goes to show that if you cry hard enough, you'll get what you want. Though such a tactic is usually saved for infants.