With America in recession, the question facing President-elect Obama and Congress is, how to get out of it.
Their solutions seem invariably to bail out failing businesses, from banks to the car companies. But this would:
- reward poor business decisions, whereas bankruptcy forces companies to reorganize and reform, which is much-needed.
- increase the national debt, meaning higher taxes down the road and the resumption of inflationary boom-and-bust cycles that we have seen with, for example, housing and gas prices.
Nevertheless, the bailout solution is attractive to the Political Class, because it increases their power over our lives. But their mismanagement can't go on forever. Ask the French Ruling Class of 1789, or the Russian Ruling Class of 1917 if, in retrospect, they would have done things differently.
Our own Ruling Class not only do not know what is in the national interest, they don't even know what is in their own best interests. That's why they resist tax reform. Reform the tax system by making it less intrusive, and we could revive the economy. When the economy grows strong, the ruling class will benefit by getting the credit. As a Taoist might say, to increase power, you must give it up.
Likewise, the Ruling Class can only bail itself out by giving up its micro-control of our lives through the Tax Code. I'm not suggesting the Fair Tax, which replaces all taxes with one sales tax, because I'm not wholly persuaded it will work as promised. But I will borrow some ideas from it. For instance, one Fair Tax paper argues that because of current tax law, American cars face an 18% price disadvantage when competing foreign cars. But what if:
- domestic automakers didn't have to pay the corporate income tax, an expense built into the price of the car,
- and they didn't have to pay the FICA tax either, which is also an expense built into the price of the car?
Prices would plummet, both at home and abroad. Customers would "buy American" more often.
Wouldn't this be preferable to the federal government issuing tens of billions of dollars in loans to Ford, GM, and Chrysler, so that they can continue to fail?
Now consider the implications for all domestic industries. America would be the corporate "tax haven" of the world. Employers wouldn't have to pay a tax to employ people. Salaries would rise. Prices would go down.
And there wouldn't be any lost tax revenue either, if taxes on capital gains, dividends, and interest are deducted at the time of payment.
Here is what Congress should do:
- Abolish the FICA taxes. Add that tax rate into the general income tax.
- Create a single, flat income tax rate for wages, interest, dividends, and capital gains, so that tax considerations don't skew business decisions one way or another.
- Abolish the corporate income tax. Taxes on corporate income will be paid via dividends and capital gains.
- Much like the Fair Tax plan which would reimburse retailers for collecting the sales tax, the government should reimburse employers for administering payroll withholding, and financial institutions for withholding tax when they make payments on interest, dividends, and capital gains.
- Allow large deductions for health, education, savings, debt repayments, and charitable giving, as I suggested earlier this year. The more individuals finance these things on their own with tax-free money, the less the government will need to.
Just by simplifying the tax code and getting rid of unnecessary and burdensome layers of taxation, the economy will revive and jobs will be created without any drop-off in tax revenue.
The sooner President Obama and Congress acts, the better off we will be. This issue is not about the proper role of government, or how big it should be, or how high taxes should be. It is only whether our tax structure is helping or hurting the American people. It is clearly hurting them. If the people continue to suffer, the Ruling Class will eventually be punished, one way or another. To save itself, the Ruling Class must do at least this one thing for the people.
A persuasive, pragmatic Democratic President, who values country above party ideology, may be able to liberate the country from the dead weight of corporate tax law. It is hard to imagine anyone else who can. Barack Obama's campaign theme was "Change," and no other change is more urgent and necessary.