Taxing the rich – fallacious argument from the right

The White House and mostly left leaning pundits argue to raise taxes on the rich as a means of closing the budget deficit. And while my experience as an observer suggests in general that all tax increases do is feed the next spending frenzy, the right’s counter argument to this policy initiative is simply stupid.

The right is arguing that if we taxed 100% of the income of the rich we’d barely scratch the surface of deficit reduction and destroy the economy’s ability to create jobs as well. Now this may be a factual statement, but it is ridiculous as an argument since no one serious is proposing 100% tax rates.

The argument reminds me of the Arizona “bottle bill” debate 20 some years ago on whether to impose a 5 cent deposit on all bottles and cans, redeemable when returned, as a means of reducing litter. Any kid who grew up in the 1960’s knows that a bottle deposit reduces the amount of trash on the street, but the argument went “since it will not result in the clean up of 100% of the trash the bill was without merit.”

The left’s approach however is destructive.  By taxing the rich and giving to all we set up a twisted incentive system whereby increasing majorities of citizens and businesses seek to contribute nothing (evade taxes), and strive to get ever increasing handouts.  Republicans have been complicit in this vicious cycle.

We don’t need fallacious arguments to fight this intuitive insanity, we need to put forth and push a logical path forward.  Here’s mine…

First, get the principles correct:

1. Tax everyone, and give us all a stake in supporting this great nation.

2. Fund first the responsibilities set forth in the Constitution.

3. Narrowly apply transfer payments as a safety net to those in need.

Two, reduce spending and rein in future growth:

1. Use the CBO’s wasteful spending analysis and eliminate all duplicate programs and all those that do not work, use some of the savings to increase funding to the remaining programs that do (~5% more since too much money too fast would put the effective programs at risk), and then pocket the rest.

2. Drop the FICA and Medicare tax rates and apply to all income (wages, cap gains, etc.).  Keep this revenue neutral 

3. Raise the retirement age to life expectancy at birth for everyone 55 years and younger. Apply to both Social Security and to Medicare. If the retirement age adjustment does not bring these into fiscal balance means test and phase out benefits for the wealthier.

4. Eliminate baseline budgeting. The baseline for the 2012 budget should be the 2011 budget not the 2011 budget plus 5% (or whatever inflator is being assumed).

Three, rationalize the tax code:

1. Count all income as income. No special treatment for capital gains, etc..

2. Eliminate every single deduction. All of them, personal, business, you name it.

3. Recalculate and set a single flat income tax rate that applies to 100% of all income.

4. The combination of the above must be revenue neutral.

5. Implement a national sales tax with the following constraint: use the sales tax to offset deductions to the income tax.

a. For example, want a personal deduction to drop low earners off the income tax rolls? Then set a personal deduction, say $10,000 per (indexed to inflation) and offset this revenue with a sales tax.

b. Want a mortgage deduction? Offset with a sales tax.

Fourth, balance inflows and outflows:

1. Don’t add any new programs, just tally the balance sheet.

2. If still running a deficit decide whether to close the gap via an income tax rate increase.   Bottom line, we have to pay for the government services we want.

Fifth, start paying down the debt:

1. Add an income tax and/or sales tax surcharge, 100% of which will go to paying down the national debt. If we are still in recession, maybe push the trigger for this out a couple years, but before long we have to get to this.

The challenge will be fleshing out the detail and constructing an orderly transition from today’s system, but the above provides a broad outline for getting things back on track. It is time to drop the false arguments and get to work.

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