Let’s talk tax policy and budgeting.

Hey, somebody should be talking about those things because the administration and the leadership in the US Senate certainly aren’t. To their credit, the Republican leadership is trying to address these issues but they’re not getting any more of a response from the administration or the Senate Majority Leader than I expect to.

There are two events coming at us like a slow moving locomotive gathering speed and come end of summer/early fall – right before the election – it’s going to hit.

The first is the expiration of the “Bush tax cuts” or what should be rightfully called the initiation of the Obama tax increases and the end of the 2% payroll tax “holiday”. The second is the automatic spending cuts that are scheduled to kick in at about the same time.

Since the Democrats steadfastly refuse to follow the law and pass a budget, the second is pretty much a fait accompli. The article referenced just below highlights the spending cuts that will kick in, but don’t expect drastic action by Congress to stop them.

On the other hand, the first will be a shooting war. Here’s a summary from the Christian Science Monitor.

Eighty-three percent [of American tax payers] would see their taxes rise, and among those making about $60,000 or more, just about everyone would face a tax hike. Those making between $50,000 and $75,000 would pay about $2,200 more, while those making more than $1 million would pay $175,000 more. The top 0.1 percent, whose income averages nearly $7 million, would pay a whopping $480,000 more.


There are a couple points here. The first is related to what Congress will do about these “tax cuts” expiring. The President is making noises about wanting to reduce the tax burden for the “middle class”. Who knows what that means. I rate that question right up with “When will the President close Gitmo?”

Here’s the real point of this article. Just exactly what is the purpose of collecting taxes. The founders would have answered the question along the lines of “taxes are a shared burden of every American to pay for government”. I suspect they would have made that statement within the context of the enumerated powers delineated specifically by the Constitution.

In fact, today, taxation couldn’t be farther from that vision if it tried. Politicians – primarily Democrats, but enabled and supported by Republicans – have turned taxation into an exercise in “fairness”. In other words, it’s an income transfer mechanism that takes money from the “rich” and gives it to the “poor”. Conveniently, the poor don’t pay taxes either, currently about 47% of Americans do not pay federal income tax and the US tax system is widely regarded as the most progressive in the world. A fact this administration and Democrats will argue until hell freezes over saying that the “poor” pay payroll taxes (FICA & Medicare) and those payments are a “burden” on the poor. Blah blah blah.

I’m going to actually propose a tax system that is a radical departure from our current IRS code. All 71,684 pages of it. The Becker Tax Code works like this:

  • The code will be a three tier flat tax based on gross income.
  • Zero deductions. Zero exemptions. Zero rebates.
  • All personal income is taxed as personal income – no capital gains, etc.
  • Inheritance tax: zero.
  • Business tax rate for all businesses: zero.
  • Personal tax rate Tier One: 8% on the first $40,000 of income.
  • Personal tax rate Tier Two: 15% on the next $75,000 of income.
  • Personal tax rate Tier Three: 22% on all income in excess of $125,000.

Let’s talk about the rationale for this.

The most important thing to realize is that businesses do not pay taxes, people do. If a business is going to have a tax liability they simply adjust their pricing to pass the cost along to their customers. Since most politicians have never held a real job, they don’t understand that fundamental fact.

With respect to businesses, there is another bad aspect of the current tax system with respect to how business taxes are calculated. Politicians frequently write rules into the tax code to encourage specific behavior and businesses take advantage of those rules to reduce their tax liability. There is nothing illegal about this, tax avoidance is a perfectly legal and acceptable behavior. The problem is that decisions are made not necessarily to benefit the long term health of the business but to reduce their tax liability. In addition, business employs a literal army of tax lawyers and accountants who spend their time looking for “loopholes”. That is called the “cost of compliance”.

The Center for Freedom and Prosperity has a great video produced in 2010 that speaks to this issue, and they note that the cost of compliance is $410,000,000,000 per year. That’s $410 Billion. Please watch this, it’s an interesting video…

By making business taxes zero, obviously the cost of compliance goes away. Businesses are able to focus their investment dollars on things that will make their products better, research and development for new products, purchasing capital equipment or expanding in ways that make sense for the long term health of the business. They might also lower their prices because they don’t have to play games based on tax liability and they might raise their dividends to their shareholders (mostly pension funds who comprise the largest holders of stock) and that income would be taxed as ordinary income to the shareholder.

The rationale for making sure EVERYONE pays some tax, including the “poor”, is that currently about half the nation have no “skin-in-the-game” with respect to federal government over-reach and spending. It has no bad impact on them – at least not an immediate impact – and in fact since the tax system is an income transfer mechanism they are profiting from it. When every American is paying for a piece of government operations, we’ve actually got the opportunity to reduce the size and reach of government because expanding it will cause their tax bill to increase and their household revenue to go down.