Thursday, December 13, 2007

A revolution of thought…

Do Americans need more money in their pockets (i.e. a tax cut) or do we just need to stop buying so much crap. This country faces serious challenges in the next decade. We face declining revenue due in part to reckless tax cuts as well as increased interest payments on all our outstanding debt to foreign creditors. As a nation, we have failed to offset this decline in revenue. This is primarily because our political leaders lack the courage to stand up to the various interest groups who fight tooth and nail for their piece of the pie (AARP, NEA, and Chamber of Commerce, I am looking at you). This is all occurring at a time when we face an increasing demand for our social safety net programs. Programs like Medicare, which will be placed under incredible financial strain with the impending baby boomer mass retirement. Other programs like Medicaid and SCHIP will also feel the squeeze due to the swelling ranks of Americans who lack health insurance. All of this reckless finance is occurring while the United States is pouring grotesque sums of money into the black hole that is the United States military. All so that we can prop up a dysfunctional regime in Baghdad under the guise of security.

This incredibly myopic view completely ignores that for the [false] perception of physical security (from those crazy Jihadists) we have triple mortgaged and then refinanced our economic security. The United States used to be the largest creditor in the world, but we are now the largest debtor. We borrow $800 million annually from Japan, South Korea, and even more disturbingly, China.

What is the solution? Well, Rudy Giuliani would tell you that everything could be solved with a few well placed corporate tax cuts. I am dubious. Fred Thompson would say that the solution is to simply tell baby boomers that the Medicare benefit that they had banked on will be unavailable because we can’t afford it (everyone burn your bras!). Ron Paul would say that the United States needs to close all bases around the world, adopt an isolationist foreign policy and then with the savings we will be able to shore up domestic programs. As ridiculous as all those solutions are, and they are, it is nothing compared to what is coming from the donkeys. Arguably this election cycle is idiot-proof for the Democrats. There has almost never been a more sure bet then 2008. Anyone who has watched any of the Republican debates knows that this crew of mental midgets doesn’t stand a chance on policy mostly because they willfully and proudly disdain public policy. Public policy, to the Republican presidential candidates, as synonymous with “Washington insiders thinking they know how to use your hard earned money better than you.”

This brings me to the point of this blog posting. Perhaps the Republicans are right! No, I have not fallen down and hit my head. I am quite alright. I am standing on one foot, touching my nose and saying the alphabet backwards. What I mean is, maybe Americans hate the idea of working hard only to turn around and pay a tax for that hard work. The taxation of income was first enacted in the United States in July 1861. Congress passed a 3% tax on all net income above $600 a year (about USD 10,000 today). In 1894 a tax act was found to be unconstitutional and the collection of income taxes was halted. This event led to the ratification of the 16th Amendment to the Constitution in 1913. But I digress.

It has become the stated practice to place the largest portion of our taxation on production. Perhaps we should shift away from that paradigm. Why do we tax something like hard work that we want to promote? Perhaps in a time when our planet faces serious challenges from over consumption of goods and production it is time to instead place the tax burden on consumers. There are a number of ways to do this and they should all be discussed out in the open without fear of hateful vitriol and assertions of being a “tax and spend pinko.”

One potential shift would be to implement a Value Added Tax (or VAT) like many European countries successfully have. The VAT is levied on the added value that results from each exchange. A traditional sales tax is levied on the total value of the exchange. A VAT is neutral with respect to the number of passages that there are between the producer and the final consumer. This would be very effective in making the supply chain of many products more efficient (eliminating endlessly inefficient layers and middlemen). It is an indirect tax, in that the tax is collected from someone other than the person who actually bears the cost of the tax (namely the seller rather than the consumer).

Another approach is the much hyped carbon tax. A carbon tax is a tax on sources of carbon dioxide emissions. It is an example of a pollution tax. This type of consumption tax has two key aspects that make it an attractive alternative. First it creates an incentive for consumers to purchase products or utilities which are carbon neutral. Second, this tax targets a "bad" rather than a "good" (such as income).

The solution that I envision would probably include both. We could either severely cut the income tax and implement these tax alternatives to offset the revenue loss, or we could eliminate the income tax altogether and make the consumption tax the major method of collecting revenue for government services. It should be said that Mike Huckabee has proposed eliminating the federal income tax with a national sales tax and has been laughed out of the room. The press coverage has portrayed this idea as a sign of insanity.

This isn’t a perfect solution there should be debate about whether this approach is too regressive, but in the end the goal of these taxes is to bring to light the amount of consumption we engage in as a society and the extent to which that consumption is destroying our environment.

Our leaders need to have the courage to speak truthfully and openly about the very serious economic challenges that we face. That will not happen until the American people realize that we are collectively (rich and poor alike) sitting in a boat, drifting towards a huge waterfall and our reticence about even discussing tax policy is akin to throwing the oars overboard. If we don’t, at the very least, have the conversation we are doomed to second tier status. Then this country, which has for over a century stood as an example of entrepreneurial “can-do” spirit will cease to exist and will be replaced by a nation that panders to the lowest common denominator, debates triviality, and preys on fear to achieve power.

I am not optimistic.

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