In 1933 President Roosevelt took office at the depths of the Great Depression. The stock market had crashed down almost 90 per cent and 25 per cent of American workers were unemployed. Did FDR build a huge federal bureaucracy to supply free housing, food stamps and welfare checks to the people struggling to survive the hard times? No, he created an alphabet soup of new federal agencies to provide government jobs to the millions of unemployed Americans. It did not end the Depression, but it helped the nation's poor and unemployed to get through the worst economic crisis in our nation's history.
Fast-forward to the 1960s and the country reacts angrily to the findings about our nation's poor in Michael Harrington's "The Other America". Politicians, pundits, and media alike voice their outrage and demand action to ameliorate the plight of our nation's poor people. This time our leaders commit the blunder that is destined to divide Americans for the next six decades. They do not create federal jobs for the poor. Instead, they create a welfare system that attempts to provide the poor with everything they lack: housing, food, medical care, school lunches, tax credits, and a dozen other related programs to assist them. This approach has failed miserably because it required tens of thousands of bureaucrats to administer and much of the funds allocated went to the bureaucrats, rather than the poor. We spend over 2 trillion dollars on this welfare system, yet hiring the 35 million adults on welfare with $30,000 a year jobs would only cost 1 trillion dollars.
It will take a coordinated effort by federal, state, and municipal governments to create jobs for the poor but huge cost savings will accrue to each level. Private-public partnerships can be launched to fund urban renewal projects in our cities, child care centers can be created to free up single mothers to work jobs. A skeletal form of welfare will remain to serve people over the age of 50 who can not or will not work. All the other welfare recipients will work for a living like everyone else. Like the 1930s, a tremendous amount of public work will get done that would have been ignored. Cities will flourish, roads and infrastructure will vastly improve, crime will plummet, and the economy will improve. Most importantly, the federal deficit will shrink substantially.
The U.S. tax code, like our government, is treated by many groups of people like it is their personal piggy bank. Investors get capital gains, realtors use 1031 exchanges, oil companies use their depletion allowances. Everyone gets special treatment and preferences, so special interests are the rule rather than the exception. We run the best government that money can buy. Ironically, we don't have enough money to keep running the world's largest piggy bank. That is why we are 36 trillion dollars in debt.
To replace our corrupt tax code with one that is fair and also help balance the budget we need to follow 3 fundamental principles: 1) Everyone must be treated the same, no preferences for anyone or any group. 2) All money that people make is considered income and gets taxed the same way. 3) Individuals and corporations all pay according to the same tax tables.
We should stick with an income tax because a wealth tax punishes people for being successful and a Value-Added Tax overly taxes the lower and middle classes. If a person or corporation has a bad year and does not earn any income, then no tax need be paid. But even if you only earn $100 for the year, then you should pay the lowest rate of 2% and send in a check for $2. Our biggest problem with funding the government is that nearly half of American adults pay no federal tax each year. For that reason they always favor more and more government spending. That is the primary reason our government is 7 times larger than it was in 1960. All that extra money that went into government came out of the economy. To shrink the government and grow the economy, we need to ensure that EVERYONE pays taxes each year. We do this by eliminating the standard deduction, exemptions, and credits that allow so many of us to show no income for the year.
At the other end of the income spectrum, the millionaires and billioaires need to pay taxes each year. Over the years, wealthy people and corporations have bought thousands of tax writeoffs from their Congressmen and Senators in exchange for funds to finance their election campaigns. The tax code is more than 75,000 pages long and about 70,000 of those pages are for various tax dodges so the wealthy and corporation actually end up paying lower effective tax rates than the middle class workers. This favoritism for the rich is criminally wrong and must be corrected.
The current tax system has rates of 10%, 12%, 22%, 24%, 32%, 35%, and 37%. You pay the 37% above $578,126. The problem with these rates is almost nobody pays them. The Tax Foundation has calculated that the lower 50% of taxpayers average only a 3.4% rate and the top 50% average out at 14.6%. The top 50% pay over 97% of the taxes collected. The rate for the bottom half is so low because deductions, exemptions, and allowances enable most of them to pay no tax at all. Indeed, 47% of taxpayers don't pay any federal income tax. The top half of taxpayers are more sophisticated and reduce their tax exposure with shelters, allowances, incentives, and a panoply of clever tax dodges that greatly reduce their tax bills. It is these tax dodges that have stretched the tax code to over 78,000 pages long!
A new fair code should have lower rates but without all the special interest dodges. For example:
With a top rate of only 25% and no tax dodges allowed, we can expect our corporations, wealthy investors, and entrepreneurs to work hard to make as much money as possible. This is just the opposite of the current tax structure with too high rates that allow taxpayers and companies to play games with those 78,000 pages of shelters, deductions, exemptions, allowances etc. The result of these two proposals would be a maximum of Americans working and earning a livable wage while everyone pays taxes each year. In this scenario, the U.S. might even become united again. We can have a reasonable, objective, non-political discussion of what we want the government to do and what we are willing to pay for. Once we balance the budget, then the way for all of us to pay less tax is to eliminate more of those special interest spending items. As we continue to excise the old "favors" for special groups, then the government will shrink. As the government shrinks, the economy expands and all of us share in the increased prosperity.