As the practice of politicking continues its march toward the 2012 Presidential Election I’m reminded of how little the political conversation rarely, if ever, revolves around substantive issues although at the same time I confess that the current cycles has drawn a tad closer to one single issue that has long escaped the discipline of close inspection, deliberate inquiry and truly dedicated offering. This single issue is Taxation and we have Herman Cain to thank for pushing topic to the surface. Let’s hope we can take it the rest of the way!
Whatever one might think of the Cain “9-9-9”Plan one thing is for certain, the Man understands the severity of the problem and set about the task of developing a solution and then delivered his product for open discourse and the inevitable political condemnation. Even more remarkable is that he’s willingly moved beyond the Political Regime-of-the-day’s custom which typically measures relevancy of action based solely on political survivability, concealment or both. He should be commended for his courage, commitment and willingness to risk his ascending capital now aimed squarely at a most specious and institutionalized form of abuse – the U.S. Tax Code.
True there are a few issues with the Cain’s Plan however with consideration to the tone-deaf quality of today’s political arena and accepting for the moment that to engage in any discussion relating to Taxation one must suspend several philosophical and structural routines still this Plan is fairly stout and over the years I’ve seen none as comprehensive with the exception of our own. Setting the methodology aside for the moment the fact remains that reformulating the U.S. Tax Code is integral to any economic revitalization strategy and for those who have read the Blind Vision Series you will recall that fully one-third of Volume III: Valor in Prosperity is dedicated to this very subject. A more immediate companion to the topic of Taxation can be found in one of our many articles on the subject of economic policy; the article was published this past June and titled Bartering With the Morbidly Turgid and like the entire Blind-Vision Three-Volume Series, it is worth your time and study.
So then, what are the philosophical and structural routines that one must suspend? A very good question to lend to the discussion and I will approach it in my normal custom; a few questions with an accompanying comment but first a token tipping of the hat:
“So long as the public has need for the government dispensary of entitlement, there will be a politician willing to pick the pocket of another to pay for it.”
The Philosophical & the Structural:
- Should all people be subject to a tax of one form or another?
Comment: Absolutely. Like it or not there is a demand and need for the functions of government and all benefit from the base attributes which frame our founding documents: “…establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity.”
- Is this Tax, necessarily, one which must or should be based on Income.
Comment: Absolutely not. Successful and durably economies persist on a dominant (percentage of the population), vital and liquid middle-class. Intimate to the viability of the lower and middle-classes is a component which one might think of as ascending-mobility, the ability to earn your way “up” the economic ladder. This is both a choice and an unalienable right however it is not an entitlement. Tax revenues disproportionately drawn from the middle class also yield a disproportionate effect on their economic mobility. For this reason Tax Revenues should be tempered in such a way as to “tease” upward mobility and not suspend it. For this reason our studies long indicate that there should be a hybrid tax system to better treat this population segment so as to promote and instill both vitality and liquidity preserving the economic-mobility component that is essential to a vibrant national economy. See the published materials reference previously for further discourse on the subject however the short version is this: Household Incomes under $350,000 per year should avoid Income tax provided that they contribute to an approved retirement plan and maintain, at the minimum, a “major medical” health care plan. Their share of government funding will be resolved by way of a national sales tax on non-perishable items. It is important to note that in our Plan there is a distinction between “active” (income from your trade, business, benefits and/or direct retirement income) income and “passive” (income from your investments) income. Presently “passive” income is given favorable tax treatment and that goes to a deeper philosophical discussion on or as to income advantage as it relates to tax burden. A person whose “active” income is a solitary source of income should not be disproportionally taxed simply because they have no financial resources capable of generating “passive” income. As to the value of economic purchasing power, it is an abuse of bias to suggest that “passive” income somehow possesses less viable capacity than does “active” income and this is even more relevant when considering the disproportionate amount of “passive” income and dollar-value of benefits corralled by the retirement-age segment of the population.
- Is there a relationship between Corporate Tax Rates and Corporate Productivity?
Comment: Hidden within and about the U.S. Tax Code, specifically as it relates to Businesses, is a never-to-be-discussed component which relates to how taxable revenues are determined though not directly Tax Code specific. I speak of what is known as Generally Accepted Accounting Principles (GAAP) and various other Accounting Standards/Methods which address tax-specific issues. Various methods such as “transfer-pricing”, “market valuations”, “depreciation”, various “operating-loss” rules, “foreign” tax burden, income apportionment and recognition, inventory valuations and so on are used with significant effect in the greater scheme of reducing what is eventually determined to be taxable income. Although it may be true that published Tax Rates for Corporation may be among the highest in the world it is not the case that as a percentage of income (the “effective tax rate”) the U.S. holds that distinction and further still, the methods used in the U.S. to determine Taxable Income are not universally applied outside of the U.S. Beyond this is yet another of the more creative distortions being sold the American Public relates to the issue of “repatriated income.” The prevarication intends to make it appear that U.S. Corporations are somehow surcharged when they bring income back into the U.S. and this is patently untrue; it receives no different tax treatment than any other income and, in point of fact, the entire regime of thought is but pure and perfect evidence of how Corporations use the Tax Code to avoid taxation. Be aware that U.S. Corporations receive direct “credit” for tax revenues paid to Foreign Governments. Using this deceptive argument as valid should then entitle every U.S. Individual Taxpayer to receive a proportionate “tax credit” equal to the monies given in Foreign Aid.
- How then should Corporations be taxed?
Comment: Ideally Corporations should be taxed at a rate based exclusively on Gross Revenue Generation specific to their type of industry and there’s a very good reason for this however time and space herein do not afford the opportunity to pursue the discussion further; for now simply consider that “franchise fees” (e.g., a McDonalds restaurant) or a “sales taxes” are based on Gross Revenues/Sales and this approach would certainly eliminate the Accounting Advantages afforded certain corporations. The second option would simply eliminate all of the creative accounting techniques and cleanse the processes to arrive at a truer form and a more representative display of net-operating income and then simply apply the tax rate to that number.
- How then would you overcome the issue of “repatriated income” and the suggestion that this is why companies do not invest in the U.S.?
Comment: There is no substantive support for the argument which suggests that the reason Companies do not invest in the U.S. is somehow related to the barricade of “repatriation.” If that were true then Corporations would have used their substantial influence to persuade Politicians to address it. The fact of the matter is that a Corporation who is earning income outside of the U.S. via foreign operation disproves the argument by the mere fact that their operational income is sourced overseas. Does anyone really think that the reason for housing operations off-shore is somehow an economic disadvantage? The entire argument is false and deliberately shaped to mischaracterize and deflect the argument which Multi-National’s use to shield foreign sourced income.
- So then the question seems to be: How then do you reasonably shape tax code in favor of a vibrant Domestic Economy?
Comment: The answer revolves around the reason why Corporations exist in the first place: To profit by/from providing or fulfilling a demand. Corporations, it must be remembered, are inanimate entities and are neither an individual nor do they have a household to support, they do not bleed, they do not eat, they require no defense and they possess no unalienable rights under the U.S. Constitution. What rights they do have exist ONLY in or by Statute Codified as Law. If they are not capable of providing or fulfilling a demand than by what purpose would they have need to exist. The argument suggesting they possess a responsibility to Investors is an entirely different argument; Investors do not provide or fulfill a demand and although they (the Investor) my choose to assist in funding the operations various mechanisms I assure you that the Investors motives are profit driven as well and would never, it is fair to assume, be willing to invest in an operation that is not capable of performing profitably. An Investor assumes the risk of investing as a component of their decision making process and it should never be assumed that said risk accompanies an unalienable right which should ever become the burden of a Taxpayer; doing so demeans what should always be a dominant right of the Individual. It is for this reason a Business, particularly a Corporation and most Non-Profits as well, should assume the greater tax burden.
- Would Corporations have greater tax rates than Individuals?
Comments: No, not necessarily. Depending on the tax method chosen, the Gross Revenue vs. the Net Operating Income approach, the tax rates would be different but the compelling motive would be the same; the best approach is to distinguish income similarly to Individual income, i.e., “active” vs. “passive” which is largely distinguishable by assigning “active” to “tradable/durable physical output” vs. “passive” which would trend toward “financial services” and other “service” type industries NOT directly related to domestic “tradable/durable physical output.” The tax rate structure would be tiered at rates of 15%, 25% and 35% and assigned to a Corporations income based on percentages of domestic productive source/generated income. For example, if automobile company produces a vehicle with labor, material and component costs 75% or better of which in the aggregate being sourced domestically then the lower (15%) rate would apply; the middle rate would apply to 50% to 74.9% and the higher rate for all others including all Service Industries NOT directly related to domestic “tradable/durable physical output.” If there is value in the American Market then why should a Company not have to earn it by supporting the environment (market) it profits from? Employ this methodology and watch how quickly Corporation repatriates their income and processes.
Clearly the American approach to taxation is by far the most perverse and destructive form yet devised; it is decidedly punitive as to the Sovereign Individual and overtly specious as to the inanimate object of Multinational Corporate structures. In truth, it actually promotes domestic non-productivity and combined with a Government Theology that revolves around an ever-expanding capacity for exponential spending, we can easily weigh its cumulative costs: Ever-decreasing productive output, plummeting individual disposable income, increases in small business failures and bankruptcies, unemployment, foreclosure and unserviceable debt of various types. Simultaneously accompanying the former is the equally predictable: Massive growth in Government Debt, Government Spending and Multinational Corporate Income and Liquidity.
The great gift of all and one which I find most intriguing is that replacing the current Code is now quite possible; we are at a unique point-in-crisis were this Nation could actually (and quickly) take advantage of the current climate and take comprehensive action. If we were among the willing, quite honestly, the U.S. Tax Code could be simplified into a document that would be no more than twenty-one pages in length requiring (only) two additional pages: One to enable a Constitutional Amendment to enable these new mechanisms which would also include a mandatory vote requiring consent by the Governors of each of the Fifty States to effect any change or the addition of any revenue generating legislation and the Second page serving, concurrently, as the mechanism for repealing the 16thAmendment.
“One of the most pervasive indiscretions of government is the manner by which it self-entitles at the expense of the Public. As it is, Government spends from its assumed ability to tax and borrow in order to meet its fiscal and legislated indiscretions. It has become intoxicated with the privilege of self-licensed abuse and absent conscience. Short of insurrection it will not easily release the elaborately woven noose now resident about the neck of the American Public.”
I’ve read and studied the Cain plan, what there is of the Romney, Perry and Gingrich vehicles and still the Cain plan most closely approaches the fundamentally viable though to be fair to the discussion, I should share what I find to be the Cain Plan’s few weaknesses:
- It does not address nor does it offer a compelling motivation for Corporations to restore U.S. productive capacity.
- I find the 9% tax rate for Corporations far too low particularly if Accounting mechanisms are not sanitized.
- The use of “Opportunity Zones” is an unsalvageable component; it is a feature which is far too easily manipulated not unlike the much used and often abused “community block grants”, “inner-city development grants”, “development zones”, “enterprise zones”, “affordable housing” programs and the many others government-directed blank-checks that seem to endlessly pervert market-based mechanism. It is and will be a political device were economic bias is used not to enable but in fact to disable the torsional-forces that are a necessary component of market-based economic responses.
- National Sales Tax is, in principle, a truly sound and viable idea however a great effort will have to be applied to eliminate all federal government-directed taxes that are equivalent ad-valorem type generators such as “excise” and “use” taxes. As well, States will need to be brought into the dialogue so as to integrate their own ad-valorem tax structures with the hope of encouraging States to void the temptation of simply adding or increasing their present tax rate structures to supplement lost Federal revenues. For those who favor the resurgence of the 10thAmendment, this will be a significant test for those who have become Federal dependents.
- The Plan should be enhanced to include addressing consolidation all Federal and State Sponsored Retirement and Benefits Programs similar to the design we compiled and presented in Valor in Prosperity. Doing so will achieve great cohesion and regard to for addressing the Federal Government Budgets single greatest challenge: Entitlement Spending. Replacement of the Tax Code must accompany a reformulating of the funding mechanisms for numerous Government Entitlement Programs otherwise the “creep” of Government Funding Demands will defeat any effort aimed toward a comprehensive remedy.
As is always the case with Government, it exceeds prohibitions and under-delivers on purposed and principled action. Representative Government can and will only every function as intended when the ability to impose its will is held in-check by the greater will of a People standing in committed opposition to Governments tendency toward excess in all imagined and unimagined forms.
Curtis C. Greco, Founder