As we saw in “A
More Just Tax, I: Monetary and Credit Reform,” last week’s posting on the
subject of a more just tax, there are four essential steps in achieving a more
just tax. The first of these is monetary
and credit reform. This is crucial, not
simply because how much someone actually pays in taxes depends on having a
stable means in terms of which taxes are measured, but for a host of other
reasons as well.
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| Inflated currency good for debtors, bad for creditors and savers. |
It is pretty
obvious that if the currency in which taxes are payable is not uniform and
stable, problems are going to crop up. If
there is inflation, the amount someone pays in taxes must keep going up because
the amount of money the government needs keeps going up. If there is deflation, then the amount
someone pays may go down, but becomes harder to get.
For example, if
taxes last year were $100 and you saved $100 for this year, but because of
inflation taxes were doubled to $200, then you need to come up with another
$100 just to break even. The $100 you
saved inflated to half its value in terms of when you earned it, which means if
you saved money you are worse off than if you had not saved money.
 |
| Deflated currency good for creditors and savers, bad for debtors. |
If, however, the
price level went down to half due to deflation, you have to work twice as hard
to pay your $100 tax bill . . . unless the government lowers taxes by half,
which usually doesn’t happen. The $100
you owe deflated to twice its value in terms of when you incurred it, which
means if you didn’t save money you are worse off than if you had.
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| Federal Reserve policy was supposed to avoid both inflation and deflation. |
In other words,
both deflation and inflation are bad depending on whether people owe you money,
or you owe other people money. The only
way to make it fair is for the value of the currency to be stable in value. That way you are neither cheated nor cheating
due to a change in the unit of measuring value.
But what about
the taxes themselves? After all, no one
would say that today’s tax system is just or even marginally coherent. That is why Capital Homestead reforms would simplify today’s overly
complex and unfair tax system by substituting a single-rate tax on non-exempt
personal incomes from all sources, while:
·
paying
from general revenues
all entitlements and other government spending at present levels,
·
eliminating
the payroll tax
on workers and employers,
·
making
dividend payouts deductible to corporations, and
·
balancing
the budget.
A Capital Homestead Act would
re-write and radically simplify the existing federal tax system to balance the
budget automatically. Its tax reforms would keep more money in the pockets of taxpayers
from their initial earnings to cover their own health, education, housing, and
other basic household living expenses. Tax reforms under a Capital Homestead
Act would make Congress more directly accountable and responsive to all
taxpayers.
While encouraging
corporations to issue new shares to finance their growth and pay out all
dividends on their shares, the Capital Homestead Act would eliminate all tax
provisions, personal deductions, tax credits, and exemptions (except for the
front-end exemptions for adults and dependents) that unjustly discriminate
against or discourage property accumulations and investment incomes for poor
and non-rich families.
A single tax rate on all
sources of labor or capital income over exemptions would be automatically set
to meet all federal entitlement and other programs, and to pay down past deficits.
For example, to meet personal living costs the basic incomes of all taxpayers
up to $30,000 per adult and $20,000 per dependent (or $100,000 for a family of
four) could be free from any income or payroll taxes. To increase taxable
income incomes for all citizens, corporations could escape from the multiple
tax on corporate incomes by deducting dividend payouts.
Under the reforms proposed
here, a “typical” family of two adults and two children would pay no tax of
any kind until aggregate income exceeded $100,000 ($30,000 of exempt
incomes per adult and $20,000 per dependent). This family would pay a single
rate tentatively estimated at 48% of any income over its $100,000 exemption.
The 48% rate on incomes above exemption levels would apply to all forms of
income — whether from wages, dividends, capital gains, etc. This is less than
what dividend and capital gains income would be taxed currently under the
“double (sometimes triple) tax” of up to 50% (35% corporate tax rate plus 15%
on dividends and capital gains).
In contrast to the present
system, a single tax covering incomes from dividends, interest, rents, and
inflation-indexed capital gains would enable the over-burdened Medicare and
Social Security systems to be funded out of general revenues. The single tax
rate would drop significantly with a broadening of the tax base, as all
citizens begin to receive substantial dividend incomes through their Capital
Homestead accounts and as entitlements (constituting two-thirds of the current
budget) can be radically reduced after keeping all current entitlement
promises.
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| Eliminate all gift and inheritance taxes. |
Under a Capital
Homestead Act, special gift and inheritance taxes would be eliminated
altogether. Instead, recipients would be
taxed on inheritance and gifts as ordinary income . . . and even that tax could
be avoided altogether simply by putting any amount received by a single
individual as a gift or inheritance up to $1 million in a Capital Homestead
Account to purchase income-generating assets.
(A discussion on
the difference between a tax exemption and a tax deferral here is
unnecessary. The bottom line is that money
could be inherited or received as a gift up to $1 million without paying any
taxes. All taxes, even on amounts over
$1 million left to a single recipient could be avoided if the recipient were a
tax-free entity such as a foundation or a church.)
The income from
those assets would be taxed, but not the principal used to purchase the assets,
which would be “tax free.” A “typical”
family of four could thereby inherit up to $4 million “tax free.” In this way the wealthy would be encouraged
to break up the estates they leave to their heirs, so that wealth would not
keep concentrating from generation to generation.
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