MAKING GOVERNMENT RESPONSIBLE means . . . raising the revenues necessary to fund all necessary functions of government without increasing the federal debt . . . making our system of taxation simple, fair and consistent.

Today, more than ever, candidates are promising a complete overhaul of the income tax system.

Some candidates even propose a replacement of the current progressive income tax with a flat tax or a consumption tax. Some even propose a complete repeal of the Internal Revenue Code. But such proposals only demonstrate the depth of the candidate’s ignorance.

I decided to run for office largely because (1) tax policy is so important to the economy and all Americans and (2) the Politicians responsible for reforming our tax system have so little understanding of tax policy and the Internal Revenue Code.

Tax policy is a complex issue, and the Internal Revenue Code is complex document. Most politicians lack a sufficient understanding of either to do anything but promise to reduce taxes. The issue is so foreign to political candidates that they don’t even know the difference between the “Fair Tax,” a flat tax and a consumption tax—and frequently use the terms interchangeably when they are entirely different.

“Politicians” are not equipped to address an issue as complex as tax policy. And “Politicians” who are indebted to “special interests” cannot do what is necessary to reform our tax system to make it truly fair and equitable.

As a tax attorney, with a post-graduate degree in tax law, I have spent more than a decade studying tax policy and the Internal Revenue Code and the many proposals for changing the income tax system

MYTHS ABOUT TAX REFORM

As a party, the Republicans claim that lower taxes, especially corporate taxes and taxes on the wealthiest Americans, are good for the economy. The arguments made in support of this claim are complete fabrications:

MYTH # 1: Reducing Corporate Taxes Promotes Economic Expansion and Jobs:

Republicans contend that lower corporate income taxes are necessary to expand job opportunities.

Fact: Reducing corporate taxes will only help the economy if businesses use the tax savings to expand their business. They don’t, and they won’t.

Businesses only expand, and create jobs, when there is a demand for their products and services. Without demand, no expansion will occur. And with demand, businesses will expand regardless of the taxes they pay have to pay.

Big corporations are now posting record profits, but they are not expanding and creating jobs because there is insufficient consumer demand.

Big corporations are already holding large amounts of cash, and are able to borrow more. They don’t need the money they may save in reduced taxes in order to expand.

Until consumer demand increases—something that will only happen when workers have more money to spend–businesses will only use their tax savings to increase dividends, pay higher executive bonuses or reduce competition by buying smaller competitors.

Fact: The tax code permits businesses to deduct investments made to build the Factories and buy new equipment. These deductions are most beneficial when business tax rates are high—because the government is effectively “paying” for a larger share of their investment.

MYTH # 2: High Taxes Reduce the Incentive to Increase Income:

Republicans claim that our progressive tax system, with higher tax rates on greater income, reduces the incentive to earn more because taxpayers keep a smaller percentage of any additional income.

Fact: The wealthiest Americans do not create jobs with their own money. The corporations they manage may create jobs, but that has nothing to do with the taxes saved by the executive himself.

And how about actors and athletes who earn millions is salary. Or doctors and lawyers. They don’t create jobs with their personal income. They invest it–and get more tax breaks on the dividends and capital gains income they receive from their investment.

Fact: Throughout the last 100 years, the greatest long-term economic expansions have occurred when tax rates are high.

In the 1960’s, the top income tax rate was over 70 percent, and job growth was robust.

In the 1980’s, President Regan reduced the maximum personal income tax rate to 50 percent. The economy expanded modestly, but we saw the beginning of the greatest disparity between the income of average Americans and the wealthiest Americans we have ever had.

In the decade since President Bush reduced to maximum tax rate, we have had no real expansion in the economy–but the wealthy have become the super-wealthy.

MYTH # 4: Reduced Capital Gains Taxes Promotes Economic Expansion and Jobs:

The Republicans claim that reductions in the rate of capital gains taxes—and, most specifically, those associated with stock market gains—will lead directly to business expansion and new jobs.

Fact: When someone buys stock, when it is issued by a company, his investment promotes business expansion and produces jobs. But this is the only time when the purchase of stock benefits the economy.

People who merely buy and sell stock after it has been issued by a company are not doing anything to promote business expansion or create jobs—except within the investment industry. Gains realized on trades between investors benefit the investor alone—not the company whose stock is being traded. Reducing capital gains taxes on trades of previously issued stock benefits investors—not businesses.

MYTH # 5: U.S. Corporate Income Taxes are the Highest in the World:

Republicans contend that U.S. corporate taxes are the highest in the world.

Fact: U.S. corporate income rates are the highest in the world. But this is not the same as saying that U.S. corporate taxes are the highest in the world. In fact, U.S. corporations pay taxes on a lower percentage of their income than corporations in any other industrialized country.

Unlike the tax systems of most other countries, the Internal Revenue Code contains literally hundreds of deductions and tax credits that enable corporations to avoid taxes on much of their income. These provisions of the Code enable many of our largest corporations to pay nothing in taxes—even when they are increasing their earnings.

The tax systems of other countries do not provide these tax benefits to corporations. Therefore, while U.S. corporate tax rates are high, they apply to a much smaller a fraction of the actual income of U.S. corporations.

MYTH # 6: Increasing Taxes on the Wealthy is “Class Warfare.”

The Republicans argue that shifting more on the national tax burden to the wealthy, while reducing taxes on working Americans, is “Class Warfare.”

Fact: Depending on whose numbers you use, the wealthiest 10% of Americans pay over 50% of all income taxes. That’s only fair since they also earn more than 50% of all income and control close to 70% of all wealth.

Increasing taxes on the wealthy doesn’t deprive them on money needed to support their families and won’t reduce the consumer consumption needed to sustain economic recovery. However, increasing taxes on the average American will result in family hardship and will reduce needed consumption spending.

MYTH # 7: We Can Eliminate the Internal Revenue Code:

Some Republicans contend that we can eliminate the Internal Revenue Code in its entirety and replace it with an alternative form of raising tax revenues (discussed in the next section.) Such proposals only demonstrate a complete ignorance of what is in the Internal Revenue Code.

Fact: The Internal Revenue Code consists of over 6,000 sections. Only 5 of these sections sets tax rates, and less that 100 sections identify permissible tax credits and tax deductions. The remaining provisions relate definitions of “income,” requirements relating the taxation of entities other than businesses and individuals, and the administration of the tax Code. For instance:

No income tax system without a definition of what constitutes “income.” Over 200 sections of the IRC are devoted to this topic.

Income cannot be taxed until it is “recognized” as income. Over 40 sections of the IRC are devoted to this topic.

The American economy would be would be thrown into chaos if employers ceased providing employee benefits—such as retirement plans and life, health of disability plan. These plans would cease to exist if employers did not receive a tax deduction for contributions to these plans. Over 30 sections of the IRC are devoted to requirements to make contributions to these plans tax deductible.

Regardless of how we reform the income tax system, there will be a need to permit charitable institutions and other organizations to operate as “non-profit” entities. Over 30 sections of the IRC are devoted to requirements to qualify as a non-profit organization.

No income tax system can exist without provisions for enforcing its requirements. Over 1,000 sections of the IRC are devoted to this topic.

THE TRUTH ABOUT PROPOSALS FOR TAX REFORM

Over the years, many proposals have been made for reforming our tax system: The “Fair Tax” (which is actually a sales tax); various forms of a “Consumption Tax” (which is a tax on all transfers from the taxpayer, even if it does not involve a purchase); “Value Added Tax” (VAT) (which is a hidden sales tax on transactions as goods move through the production process) and many different variations of a “Flat Tax.

Today, most Republican proposals are based on a combination of a sales tax and a flat tax. While these proposals have simple names that make them sound attractive, implementing them would distort the tax system and raise havoc with the American economy.

Flat Tax:

A Flat Tax Will Not Simplify the Tax Code: In its simplest form, a flat tax would impose the same tax rate on all taxable income, no matter how much an individual earns. However, not all flat tax proposals are not the same.

Even a flat tax system requires a definition of what constitutes “taxable” income, and even a flat tax system would require politicians to determine whether to include or exclude such diverse items as capital gains income, stock options, employee benefits and mortgage deductions. Therefore, while a flat tax system may sound attractively simple, if does nothing to diminish the influence of “special interests” in determining what “taxable income” is.

A Flat Tax Will Increase Taxes on Most Workers: Most experts agree that a personal flat tax rate sufficient to replace all personal and corporate income taxes would have to be at least 21%. If we were to perpetuate the deductions allowed for mortgage interest, state and local taxes, personal exemptions, charitable gifts and employer deductions for health insurance and contributions to retirement plans, the flat tax rate would have to be approximately 30%. [See Gale, Wm., Tax Reform Options in the Real World, in “Toward Fundamental Tax Reform”, American Enterprise Institute, 2005, p-37.]

These tax rates are based on the assumption that taxable income includes the entire amount earned as capital gains—which are now taxed at a lower rate than ordinary income and which many republicans want to be tax-free. If capital gains were excluded from taxable income, the flat tax rate would need to be increased by as much as 5%.

Even if we were to assume that a flat tax rate of 25% was sufficient to finance all proper functions of the federal government, everyone with a taxable income of less than $150,000 would actually pay more under a flat tax that they do now.

National Retail Sales Tax:

As most commonly proposed, a National Retail Sales Tax [NRST] would be a flat tax on all sales by businesses to household. On their surface, proposal to implement a national sales tax sound appealing. Unfortunately, they are bad for the economy.

By most estimates, a NRST rate required to replace all existing income taxes and maintain government spending would have to be at least 40%. [See Gale, Wm. G., the Required Tax Rate in a National Retail Sales Tax, National Tax Journal 52, 3:443-57.] This means that the cost of every item purchased would have to be increased by 40%. Obviously, this would dramatically reduce purchases of goods and services and would be devastating to the economy.

Other proposals call for a NRST to replace only a portion of the revenues lost to reduction in income taxes. However, even a modest NRTS would be devastating to the economy, and largely unworkable.

State and city sales taxes are already over 10%. An additional national sales tax could take this to as much 50%. This effectively raises the cost of goods being purchased by 50%. Such tax will only result in reduced consumption—exactly the opposite of what is need keep the economy growing.

A national sales tax will also shift a disproportionate tax burden to those who can afford it the least. This is so because the average American not spends everything he earns—and all this spending would be subject to a national sales tax. On the other hand, the wealthiest Americans only spend a fraction of what they earn, so only a fraction of their income would be taken by a national sales tax.

A national sales tax would also effectively impose a new tax on those who live on Social Security because (a) Social Security benefits are not now taxed as income, but, with a national sales tax (b) Social Security benefits would be taxed when they are spend.

But perhaps that most significant argument against a national sales tax is that it will simply not work.

Studies throughout the world have shown that when a sales tax exceeds 12-15%, the temptation—on the buyers—to avoid the tax simply becomes too great and “black markets” flourish. Similarly, because a sales tax turns merchants into tax collectors, when the tax revenues to a merchant increase, the temptation to simply keep the money rather than reporting it to the government.

Phil Roe claims to support a “Fair Tax” — which is just another for a National Retail Sales Tax.   Voters — who aren’t be expected to know what the names for different tax reform proposal mean — like the idea of a “Fair Tax” (because it sounds good) even when they oppose a national sales tax. The question is, “Does Phil Roe know the difference? Or is he just another Politician who promises to support whatever sounds good.

MY POSITION ON TAX REFORM:

We cannot change history. We have a huge national debt and growing budget deficits. These trends cannot be permitted to continue.

We must reduce government spending. But this will not be enough.

Even if we eliminate all discretionary government spending we will not be able to balance the federal budget—and we will never reduce the national debt. Therefore, we have no choice. We must increase tax revenues.

I favor a major overhaul of the current corporate and personal income tax system with (a) the elimination of all “special interest” deductions and tax credits, (b) a reduction in the tax rates for low and middle income taxpayers and (c) a reduction in corporate tax rates and (d) an increase in the tax rates for the wealthy.

I also favor amending the Internal Revenue Code to treat all business income the same, regardless of whether the business is operated as a sole-proprietorship, a partnership or a corporation, and extend any rules that give special tax treatment to corporations to all businesses, regardless of form.

I favor the addition for a small (a fraction of 1%) “transaction tax” on the sale of stocks, bonds and similar and related investments.

I also favor treating all income–regardless of its source or form–as ordinary, taxable income—except capital gains on original investments in businesses which should be excluded from taxable income.

The dispute between those who favor immediate tax and spending reductions as a means promoting economic recovery represents a seemingly insurmountable obstacle. As a response, I propose the following:

FIRST: The “Bush” tax cuts for the wealthy be allowed to expire, and a “surtax” imposed on those who earn more than one million dollars.

SECOND: The “Bush” era tax cuts will be automatically reinstated, and the “millionaire surtax” eliminated, in that tax year following the year in which both of the following occur: (a) there is no deficit in the federal budget and (b) unemployment is below six percent.