Comment: TO: PRESIDENT'S ADVISORY PANEL ON TAX REFORM FROM: Vincent Jacobs La Quinta, CA 760.342.4277 A PROPOSED SOLUTION FOR SIMPLIFYING THE TAX SYSTEM In order to improve the method of collecting federal taxes it is necessary to throw off the shackles of inside-the-box thinking in terms of "income tax" and think outside-the-box in terms of "collection of federal taxes." When you ask for details such as "what exemptions, credits and deductions would remain in the revamped system" you condemn your tax reform effort to failure. Please consider Einstein's formula: E=mc2. Consider how powerful it is; yet how simple it is. This should be your objective. Making changes to the existing system would be a wasted effort. I believe my approach (actually Rep. Linder's approach) can achieve the end result simply. An enormous amount of energy has gone into our existing horrendous, enervating, wasteful miasma. We must pour the same amount of energy into deep-sixing it and replacing it with an efficient system that collects an equal or better amount of federal tax without the continuing destruction of productivity inherent in our existing "tax code.' Further, we must use our creativity to do this while adhering to President Bush's goals. The national sales tax of Rep. John Linder is the proper solution but, unless we apply a new thought process, it will be shot down for the same reasons voiced against it 50 years ago when I was in college. The new thought process must have two tenets: 1) a tax cannot be based upon "income," and 2) a tax must be easy and inexpensive to collect. Let's examine what I mean. 1) The downfall of our current "tax code" is that it is predicated upon "income." The mere definition of income and the myriad ways of taxing it and/or calculating deductions to it has lead to the current system which drains the productivity of a major portion of our citizenry for the first four months or more in each year. As the general partner of four small limited partnerships I become depressed from Thanksgiving through Christmas knowing what is facing me during January through March. In January 1098's and 1099's must be in the mail by the end of the month. Then comes the preparation of data into a format that the tax preparer can enter into his computer in order to print out K-1's and tax returns. To report $48,000 in income divided among 80 partners most of which are IRA accounts on which no tax is paid, it costs $2,100 to the tax preparer (not a CPA - just someone with a tax program who can print out the returns the way the government wants them - after the government changes the forms each year), postage to mail 8 to 10 pages of K-1's for each person (4 or 5, federal and 4 or 5, state), thousands of printed pages, days of my time - and for what! A small business owned by these partnerships uses a bookkeeping service because it is less expensive than hiring an employee for the small amount of day-to-day accounting. The service charges $700 just to do the income tax return for the business. That's bad enough, but also we don't get up-to-date reports until after April 15 because a big part of our bookkeeper's business is income tax preparation so they are too busy to provide the management reports I need until "tax season" is over. The money, effort, creativity, and productivity squandered because federal tax is based upon "income" is a national disgrace. 2) The tax must be easy and inexpensive to collect. What could be easier and less expensive to collect than a national sales tax. The system is already in place in most states; a simple change in the rate is about all that would be required. The states could remit the difference to the federal government. This should actually smooth out the inflow of funds and, perhaps, reduce the interest cost on borrowed funds. How does a national sales tax satisfy President Bush's goals? I fully realize each of the ideas that follow has disadvantages along with advantages just as each of the other proposed solutions and the existing system has. If we are going to think outside the box, we must first make the decision to replace the existing system and then apply our imagination to mitigating the disadvantages of a national sales tax while fully embracing its clearly superior advantages. Simplifying the code without shedding its progressive nature: Existing sales taxes already exempt food which is a step in this direction. Those with a higher income tend to buy more of everything thereby retaining a somewhat progressive nature. Higher excise taxes on luxury items could also be used to retain a progressive nature. But what about the poor people? Many of these people already receive some type of government assistance. Merely tapping into these programs and providing higher monthly payments to the recipients could easily solve part of the problem. Raising the minimum wage would solve a major portion of the remainder of the problem and would be great for the economy in spite of what the trickle-down proponents say. Finally, consider that the best minds in terms of national productivity are wasted in calculating income and in figuring out ways to avoid paying taxes on it. Consider how much the gross national product would be increased if those efforts were directed toward progressive productivity. On the other hand, those upon whom the regressive nature of a national sales tax may have the greatest impact could prepare "negative" income tax returns without a great loss of national productivity. Recognize the importance of home ownership: Have the states reduce homeowners' property taxes by an amount approximately equivalent to the write-off from deduction of interest and have the government reimburse them. The figures for this equation are available at the IRS because they already have the amounts of property taxes and the amount of interest deductions. If my previous suggestions for retaining the progressive nature in the tax system are not sufficient, the home ownership credit could be reduced because people own homes for reasons other than tax savings (those with higher incomes tend to own more expensive homes and pay higher property taxes thereby gaining a larger tax deduction; reducing the deduction would cause them to pay more in federal taxes). Some would gain a little; some would lose a little but that's true of our existing tax system. Recognize the importance of charity in society: This is more difficult than the home ownership aspect however, a national sales tax would automatically eliminate double taxation on dividends. Create a federal pool of money for charity by withholding (at the company level) a percentage of dividends to be paid. Charities would apply for the money roughly based upon their existing percentage of all money now given to charity. If that does not generate sufficient funds, add a small tax on each stock transaction. Both would be collected by the companies paying the dividends or handling the purchase or sale of stock. Must be revenue neutral: This goal might not be achieved at the outset because the results of a national sales tax paid by everyone - not just those who report income, a higher minimum wage, no double taxation of dividends, elimination of a major portion of the IRS, and added productivity of people who now waste their time dealing with tax returns would generate significantly more revenue than the existing system. Shades of John Maynard Keynes!!! This problem can be solved by reducing the national sales tax rate. I apologize for failing to provide quantitative data to prove the above ideas. I just do not have time. Since first learning of the concept of a national sales tax I have compared every other idea to it and believe none can beat it. I have read time and time again the reasons against it but no one in government has ever said, "the existing system must be replaced by a simple, less wasteful system." Now is the time to make the leap of faith. The Advisory Panel should make the decision and assign tasks to those who can imagine something more than an obsolete "tax code." We can live with any disadvantages caused by a national sales tax; we are already living with the disadvantages of an our-of-control tax code. |