Does anybody in Washington really want to solve our nation’s problems, or does everybody actually prefer partisan gridlock to their Constitutional duties?
I have this idea for a tax plan that I believe would solve many economic problems. Perhaps somebody can find something inherently wrong with my plan, and it just won’t work. However, I have published versions of this for several groups of readers, and I am still waiting for somebody to tell me what is wrong with it.
My plan is based on the premise that, instead of arguing over which party’s theories will create the best incentives for improving the economy, why not simply put the incentives that everybody says they want right into the tax law itself? Write the tax code change in such a way that the incentives are actually spelled out. This is not designed as a partisan issue that is either left or right; it just takes the issue out of the realm of theory, and clarifies what the incentives are.
At first glance, this may appear to be radical in the sense that it contains something that many on the left are saying would be totally unacceptable, and something that many on the right are saying would be totally unacceptable. It also may appear to be overly simple at first glance. But look at the bullets for what this will do. It is designed, with the incentives actually spelled out, to accomplish what each side says they want in a tax law. The only thing that I see as “radical” in this plan is the removal of partisan theories to justify a specific tax law.
Here is my basic plan, and it is not complicated or filled with legal language:
Make one change to the tax code: Change the corporate tax rate to zero. A zero rate on corporate taxes, but with an important stipulation: the zero rate will only apply to net income up to the amount of payroll expense for U.S. based, non-executive personnel. For net income above that amount, a normal corporate tax rate will be applicable.
I believe this simple change to the tax code will work wonders for the economy, both short term and long term. I have it worded so that the zero tax bracket for corporations applies to 100% of domestic, non-executive payroll expenses. Perhaps studies will show that 100% is not the best percentage to use. Perhaps 50%, or even 150%, or whatever will work better. The main point of my idea is that corporate taxes be based on a percentage of such expenses. The entire idea should not be scrapped if the only thing found wrong with it is the use of 100%, instead of some other percentage, as the cut-off point for corporate taxes.
This plan would…
- Accept different economic philosophies, different political positions. It just doesn’t require faith in any philosophy; it doesn’t require that advocates of a particular philosophy be in power.
- Not raise anybody’s tax rates. There is no violation of any philosophy to not raise taxes. Effective corporate rates would actually decrease.
- Not depend on economic theory or political philosophy that says cutting corporate taxes will create jobs via some “invisible hand.” Instead, the incentive for job creation is an explicit, built-in part of the plan: if a corporation creates jobs, it will get a tax break for those jobs. This is an explicit, rather than theoretical, choice between paying taxes or creating jobs.
- Eliminate two long-standing sources of controversy in the tax code. Are corporate taxes a source of unfair double taxation? Not if the corporations have the option of not paying taxes. Corporate net costs would decrease, so the controversy over how much corporate taxes are passed along to consumers in the form of higher prices would become a moot point.
- Create more buying power for consumers, which would create additional jobs and increase GDP and national income. This would put the economy back in line with the “invisible hand”, which requires that labor be paid according to productivity. For three decades now, there has been a divergence of wages and productivity. The result has been a decrease in consumer buying power (which became painfully obvious when the credit bubble burst), a decrease in demand, and a shrinking middle class.Since this divergence has taken the economy away from the efficiencies of the “invisible hand”, it is a source of market failure. This plan would help to reduce that problem. Notice that it doesn’t give tax breaks for the number of workers hired, because needs vary from industry to industry; rather, it gives tax breaks for the total amount of compensation paid to the working class. This will result in a combination of more workers and higher compensation, with more workers receiving a living wage. Either way, buying power will increase. Corporations will still have profit maximization as their goal.
- Reduce the exporting of jobs and improve the balance of trade. It changes the relative cost of manufacturing in favor of domestic production. Corporations already get a tax write-off for the amount paid to labor. This plan would essentially give them a double write-off for labor that falls in the category of domestic, non-executive labor.
- Make American corporations more American. They will have an incentive to show their commitment to the domestic economy.
- Not tell anybody how to conduct business. The government doesn’t tell private industry what to do, but this plan puts corporate incentives more in line with the national interest.
- Increase government revenue. Corporate taxes currently make up only about 7% of government revenue. That is a lot in terms of dollar amount, but a small portion of the overall economy and federal budget. Even if this plan would change the corporate share of federal revenue to 0%, the difference would be in the form of taxable income paid to individuals who have fewer tax loopholes. Any additional buying power that is created would generate even more taxable income.
- Spread the tax burden around to more segments of the economy, instead of being so top-heavy.
- Decrease government transfer payments as more people earn a living wage.
- Reduce the influence of lobbyists whose jobs are to create more loopholes for corporations. Perhaps, just perhaps, politicians will be a little more accountable to the people and a little less accountable to special interests.
- Not overly complicate the tax code, or include any “social engineering” in terms of target groups. The only target group involved would be the American people in general.
This plan would require a carefully worded definition of what constitutes “non-executive” employee compensation. Otherwise, it could be defeated with widespread use of loopholes.
I have no delusions that such a plan will win universal approval. I am just saying that, with the help of public discussions, I believe that it can gain enough of a consensus to be workable. There is a portion of the population that will oppose any workable plan.
This will not satisfy those whose goal is to “starve the beast”, since it does not reduce government revenue. But it does increase private industry production and the domestic economy. Let the public see the pluses and see how the political debate goes.
If this plan received a commitment to long term stability, instead of frequent changes, it would eliminate much uncertainty in the economy, thus increasing business and consumer confidence. Stability means that the same plan would be in place in times like now, with high unemployment, but also in times when the economy might be overheated. For those situations, other policies can be put into place to go along with this plan. There would be no need for changing this plan if unemployment is no longer a problem. If you want to see a little more detail of my plan, click here.
But back to the question that I asked at the beginning. “Does anybody in Washington really want to solve our nation’s problems, or does everybody actually prefer partisan gridlock to their Constitutional duties?” I mentioned that I have published versions of this plan to various audiences, and haven’t had anybody point out anything that would make it non-workable or do more harm than good. One of these audiences: I have sent the basic plan to both Senators from my home state (one Republican, one Democrat) and to the Senate’s chief tax writer (a Democrat). I tried to send it to the House’s chief tax writer as well (a Republican), but his website doesn’t accept correspondence from people outside of his district. Out of these, not one has responded to my correspondence. No positive or negative comments, they just did not respond at all. Could it be that they found it unworkable? Perhaps, but they didn’t respond and say so.
It makes me wonder if both sides simply want to maintain the atmosphere of partisan gridlock.
