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Tax Plan Proposal For an “Innovation Economy”


After reviewing the tax plans of each of the GOP Presidential Candidates, I decided to try to craft a plan which I think will accomplish five major objectives:

  1. Create an “Innovation Economy”
    1. Economy which rewards Entrepreneurs, Landowners & Businesses who invest in the U.S.
  2. Maximize U.S. economic growth
    1. GDP Growth, Capital Investment Growth, Wage Growth, & New Job Creation
  3. Cut taxes for every single income class
    1. Focusing the largest cuts on those who are most likely to pump it back into the economy
  4. Reduce the size of the Internal Revenue Service
    1. Make it so that every single individual can do taxes on just one form
  5. Incentives for Top Earners to drive extra money into the economy in the most productive way
    1. Make it more profitable to start small businesses, and invest in real estate

I, of course, also have the advantage of not needing to craft a plan that can get me elected, so I am simply trying to build a tax plan that will accomplish those five goals, regardless of how the ideas would play on the campaign trail.

Highlights of the Innovation Economy Tax Plan

Eliminates Corporate Income Tax

Creates a two-tier “Business Transfer Tax” or Value-Added Tax (VAT):  16% and 25%

Enacts a one-time deemed Repatriation tax of 5% on all foreign profits currently deferred

Rental Property, and commercial property, Income would no longer be taxable

Reduces seven Individual Income Tax Brackets down to two:  10% and 25% (Progressive Tax)

Increases Standard Deduction to $25,000

Eliminates all Itemized Deductions and Tax Credits

Eliminates payroll tax

Eliminates Alternative Minimum Tax

Eliminates 3.8% Net Investment Income Tax

Eliminates 0.9% Medicare Surtax

Eliminates Estate Tax

 

 

Replace Corporate Income Tax with Two-Tiered Business Transfer Tax (VAT)

In order to boost GDP, Increase wage growth, and drive new incremental job growth, the United States must lower the tax burden on our nation’s businesses.  At the same time, we must discourage businesses from moving operations overseas, and try to drive as much of the enhanced economic benefit back to people within our borders.  For this reason, I am proposing a two-tier tax Business Transfer Tax.  Businesses who adhere to two simple rules, outlined below, will qualify for the 16% Tax Bracket, those who don’t will qualify for the 25% Tax Bracket:

  1. 90% of employees must be based in the United States
  2. 90% of Capital Investment must be spent inside of the United States

Companies would put in an application every three years, which would examine the past three years.  If they have met the requirements for the past three years, they would be pre-approved for the next three years.  If they are determined to have not met the requirements for the past three years, their pre-approval application would be declined.  If they had been pre-approved in the past, and it is determined that they did not meet the requirements over that 3-year span, they would be given a tax bill for the three years worth of tax breaks which they did not earn.

This is a unique proposal, which will drive specific behaviors among businesses in the United States.  This proposal would do a number of things to jumpstart the Innovation Economy inside the USA:

  1. Heavy Capital Investment Industries would benefit
    1. Tooling Companies, and even U.S. Based Software Outsourcing companies
  2. Less Outsourcing across every industry
    1. Companies near the 90% mark will pull back employees, or outsource less in the future
  3. This will create thousands of small businesses
    1. Lower tax rates for entrepreneurs will lead to more new small business start-ups
  4. Top-Earners will turn towards creating businesses to shield taxes
    1. Higher Capital Gains rates for top earners, so they will invest in business start-ups
  5. This move will boost GDP and create a maximum number of Net Incremental Jobs
    1. Important metric increases by incenting companies, & top earners, to invest in America

Enacts a one-time deemed Repatriation tax of 5% on all foreign profits currently deferred

There are $2.1 Trillion dollars of profits currently being held offshore.  If all of those profits came back to the U.S. today, it would result in several hundreds of billions of dollars in tax revenue, and make investment in the U.S. much easier to accomplish for many companies.  Since it is so expensive to repatriate these profits, that will never happen.  This plan is simple, earning $50 – $100 Billion now, and causing a massive influx of dollars into the American Economy, is better than continuing to incent companies to keep their profits overseas by making it cost-prohibitive to bring the dollars back to America.

This plan advocates a one-time 5% Repatriation fee, that will be good for a period of two years, so that companies can repatriate their profits in an orderly fashion.  Most companies will take advantage of this, because it is such a steal of a deal from a tax perspective.  The two-year timeframe will allow companies to plan out the additional tax expense, and the plan will result in a huge influx of dollars into the U.S. economy. This influx, in conjunction with the tax incentives for investing in U.S. CapEx, will cause unprecedented GDP and Job Growth at the very beginning of this plan, which will make it easy to surpass current Presidential Plans in the traditional 10-year view that the Tax Foundation takes when analyzing the plans.

Rental Property, and commercial property, Income would no longer be taxable

This is one of the most controversial portions of the plan.  The idea here is that by taking away the Mortgage Interest exemption (explained later), the housing market could suffer.  This part of the plan will eliminate that concern, along with making it easier for ordinary Americans to prosper in Real Estate, while also making taxes simpler (and therefore, be able to shrink the IRS), all while giving the top earners a place to invest their money which will benefit everyone in the American Economy.

Here is how it would work.  There would be no taxes on any income made through rental property, or commercial property ownership.  This, of course, will increase the ownership of rental property across America.  It will also likely lower the average rent paid (through more competition, and less need for higher profits to offset the tax burden).  This, in conjunction with the removal of the Mortgage Interest Tax Deduction, will drive a disparity between the cost of renting a home, and the cost of owning a home.  Some will say that this is just another way to drive a wedge between the lower class, and the upper class, but the actual effect would be that both classes prosper (along with the middle class).  The lower class benefits from lower rents through increased competition, and less need to offset the tax burden.  The middle class benefits because entry-level housing will need to become cheaper to compete with the new lower top tier of rental prices (along with less need to offset the tax burden.  The upper class benefits because they can participate in the rental market by making a tax-free profit, while helping the lower class live cheaper than they do today.  It is literally a win-win-win.

How will this affect the overall economy?  The lower class will have more money to spend (due to lower rent).  They tend to spend their excess dollars, so this will instantly pump back into GDP, which will be good for businesses.  The middle class will benefit the most from the Net Incremental Jobs which will be created through the higher GDP.  The upper class will try to avoid the higher tax rate on Capital Gains, and will dump lots of excess money into real estate, which will cause a real estate boom throughout the country.  This will directly help the middle class, as studies have shown that in suburbs over 100,000 people (where most of the middle class resides), cities still have between 19% and 25% of the land sits vacant.  This is land that the top earners can purchase to expand the city’s population, or invest in commercial real estate to bring new jobs to the city, but will likely result in very strong momentum on both fronts.

Individual Income Tax Brackets

Consolidate the 7 current individual tax brackets into two brackets:  10% and 25%.  Everyone making under $200,000/year would fall into the 10%.  Once you have exceeded the $200,000 income level, you would be taxed at 25% thereafter (so, this would be a progressive tax bracket).  All income will be taxed the same, whether it is payroll income, short term capital gains, or long term capital gains.  This plan will result in an overall tax rate drop for every single one of the 7 current tax brackets, which we will discuss later.

Standard Deduction

Increase the current standard deduction from $6,300/person to $25,000/person.  This increase will affect all taxpayers, but will the largest positive affect in the lowest tax bracket.  This is important, as we have discussed, because these folks are the most likely to pump the money directly back into the economy the quickest.

Itemized Deductions & Tax Credits

All Itemized Deductions and Tax Credits would be eliminated.  It is important to note that this includes the Child Tax Credit, and the Earned Income Tax Credit, the Mortgage Interest Tax Deduction, and the Charitable Giving Tax Deduction, all of which most candidates keep in their tax plans.  These Tax Credits and Deductions, which the candidates have kept in their plans, cost taxpayers nearly $250B/year in lost tax revenue.

Earned Income Tax Credit

With the proposed increase in the standard deduction, the lowest income brackets are already receiving drastic tax decreases, and the EITC would only reduce tax liability for couples earning $50,000 or more (right around where the EITC phases out today anyway).  For this reason, there is no real reason to keep the EITC in place, as we have already brought their Federal Tax Burden down to 0%.

Child Tax Credit

Again, after the Standard Deduction increase, this tax break would affect mostly the middle and upper income tiers, and the argument for this Tax Credit is typically the lower-income individuals/families.  Since we are lowering the tax burden for every income bracket, we should take advantage of that to eliminate all tax credits, so that we may move to a much more simple tax process, and thereby shrink the size of the IRS significantly.  The folks who are losing this benefit would be paying dramatically less taxes than they are today, and will not miss its effects.

Mortgage Interest Tax Deduction

This is probably the most controversial Tax Deduction omission.  Many Americans would balk at the thought of eliminating this Tax Break.  However, most people think they get a lot more benefit than they do.  Take a family of four, who is in the 15% tax bracket with a $200,000 home, and a 5% loan.  This family only pays $10,000 in Mortgage Interest per year, and their 15% tax bracket means that the entire benefit from this deduction is only $1,500.  Meanwhile, the drastic increase in the Standard Deduction more than offsets any benefit this family will get from the Mortgage Interest Tax Deduction.  In fact, in this plan, the folks at the highest tax brackets would benefit the most from this deduction, and therefore, it is deemed unnecessary.  Some people will argue that removing this deduction will have a negative effect on the housing market.  I would argue that it will bring the housing market to equilibrium, especially in conjunction with the new tax treatment of rental properties, proposed earlier in the plan.

Folks who probably should not be purchasing a house, but do so because they are told the tax credit is worth it, will now make smarter decisions.  Folks who don’t need a mortgage, but take one out to utilize the tax deduction, will now be less leveraged.  Folks who buy a house just a little beyond their means, using the tax deduction as their reason, will now make better budgetary decisions.  In addition, the new tax treatment of rentals will make renting much more affordable, and will shift people from the fence between buying and renting, making it a much easier decision for the majority of families.

After a few years, the market will completely stabilize, and people will be smarter when it comes to home purchases.  The removal of this deduction will likely stabilize the market, making huge ebbs and flows in prices less likely to occur, as Congress will be less likely to use this deduction as a tool in order to drive artificial dollars into the economy.  Also, with the rental property tax exemption, mentioned earlier, the housing market is more likely to surge, than it is to dip.  The balance between renters and homeowners will just shift accordingly, and appropriately.

Charitable Giving Tax Deduction

This is another tax break that people think is bigger than it really is.  Take the same family, except that they are earning more income (making $100,000/year), and tithing 10% of their income.  This family is giving away $10,000/year, and is now in the 25% tax bracket.  They would get a tax benefit of $2,500.  Again, the lofty standard deduction increase would more than make up for any lost income from this tax credit.  Once again, this tax credit primarily benefits the rich.  The argument can be made that charitable giving will go down if this deduction is removed, but I would argue that the economic benefits from this plan will put more money in people’s pockets, and charitable giving will go up as a result.  After all, giving away $10,000 to save $2,500 in taxes is not a fantastic financial move, it is clear that the motivation for giving stretches beyond the tax break.

Eliminate The Estate Tax

This plan is designed to pump as much money into the economy as possible, resulting in more jobs, higher GDP, more corporate investment, and higher wage growth.  All of that should result in people passing away with larger nest eggs than we have seen in previous generations.  The Estate Tax has been a hot button issue for politicians for years, and one which they like to manipulate (or demonize) in order to get votes during election years.  The idea here is simple:  Your debt has already been paid.  This plan already has the wealthy folks paying a lot more than the everyday folks, and has eliminated every way that the rich folks can get out of paying their fair share.  Waiving the Estate Tax gives people a reason to continue to try to build wealth, which is a key component of the Innovation Economy.  Removing this tax keeps incentives in place for people to work harder, and longer, and will ultimately pay for itself in the form of the economy creating more jobs due to the American Spirit of Innovation.  Also, it is just dirty to have someone work hard to save money all their life, and have their kids watch as the government steals their parent’s hard-earned money before the body is even cold.  That should not be the role of Government in the greatest country in the world.

Summary

In the end, it is clear that this would be a drastic change from today’s tax code, but it would accomplish the five goals we set out to at the beginning of the argument:

  1. Create an “Innovation Economy”
    1. Economy which rewards Entrepreneurs, Landowners & Businesses who invest in the U.S.
  2. Maximize U.S. economic growth
    1. GDP Growth, Capital Investment Growth, Wage Growth, & New Job Creation
  3. Cut taxes for every single income class
    1. Focusing the largest cuts on those who are most likely to pump it back into the economy
  4. Reduce the size of the Internal Revenue Service
    1. Make it so that every single individual can do taxes on just one form
  5. Incentives for Top Earners to drive extra money into the economy in the most productive way
    1. Make it more profitable to start small businesses, and invest in real estate

Reason To Believe

While the Tax Foundation would have to run this plan through one of its massive analysis tools to determine the economic effects over the next 10 years, I decided to include some reasons to believe.

The plan was based off of Ted Cruz’s Flat Tax proposal, then altered from there.  I am going to try to value some puts/takes to see how the final financials would play out.

  1. Eliminating all Tax Credits and Tax Deductions: +$250B/year positive vs. Ted Cruz’s Plan
    1. Adding up the approx. costs of EITC, Mortgage, Child Tax Credit, Charitable Deductions
  2. 2ndIncome Tax Bracket of 25% (5,000 HH in the U.S.): +$175B/year positive vs. Ted Cruz’s Plan
    1. + $125B/year for higher income earners (top 3% of HH in the country)
    2. + $50B/year for higher Capital Gains Tax Rates for higher earners
  3. Higher 25% Business Transfer Tax Income Tier: + $300B/year positive vs. Ted Cruz’s Plan
  4. Lower 16% Business Transfer Tax Income Tier: $0B/year equal vs. Ted Cruz’s Plan
  5. Repeal Estate Tax: $0B/year equal vs. Ted Cruz’s Plan
  6. No Rental Income Taxes: – $25B/year negative vs. Ted Cruz’s Plan
  7. 5% Repatriation Tax: 1-time + $50B Was not factored into the Tax Foundation’s analysis
  8. Increase the Standard Deduction: – $700B/year negative vs. Ted Cruz’s Plan

In total, using these rough calculations, this plan would cost approximately the same as Ted Cruz’s plan, which was estimated to create 4.2M jobs, but still costs around $700B over the next ten years.  However, the enhanced Repatriation benefit (which was not even valued in the Tax Foundation’s analysis of the Cruz plan), the US-Investment based lower Business Transfer Tax incentive, the Rental Income Tax Repeal, and the higher Standard Deduction will all drive economic growth at the very beginning of this plan, and should make up more than the $700B deficit over the next ten years.  As with any tax plan, this would need to be implemented in conjunction with spending cuts to offset any potential cost of the plan, if it were found not to be overall neutral.

This is the type of innovative tax plan that will allow us to boost Innovation, drive U.S. Economic Growth, reduce the size of the IRS, and lower taxes across the board for every citizen.  It would be hard to implement, but the benefits would be felt for years to come.

 

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Socratic Method & The US Federal Income Tax


Cropped image of a Socrates bust for use in ph...

Cropped image of a Socrates bust for use in philosophy-related templates etc. Bust carved by by Victor Wager from a model by Paul Montford, University of Western Australia, Crawley, Western Australia. (Photo credit: Wikipedia)

John:  “Rich people should pay more in taxes and poor people should pay less.”

Socrates:  “How much more should the rich people pay?”

John:  “They should pay their fair share, since they are making so much more than us.”

Socrates:  “Define their fair share for me.”

John:  “Well, if someone makes ten times as much as me, they should pay ten times as much in taxes.”

Socrates:  “How much money do you make John?”

John:  “My wife and I make $45,000 a year.”

Socrates:  “So, if you two paid $10,000 in taxes, someone who makes $450,000 a year should pay $100,000 in taxes?”

John:  “Yes, that sounds about right.”

Socrates:  “Okay, so what I am hearing you say is that people should pay their fair share?”

John:  “Exactly!  I honestly don’t know how anyone could really argue against that point!”

Socrates:  “So, someone who makes $45,000 should not be allowed to pay zero in taxes?”

John:  “Of course not!  Following our logic, they would be paying way less than their fair share.”

Socrates:  “So, if a group of people make 45% of the total income, they should not have to pay over 70% of the taxes?”

John:  “Obviously not.  Following our logic, they would be paying way more than their fair share.

Socrates:  “So, if there was a tax code that forced people who make up 45% of the total income pay over 70% of the taxes AND allows 47% of income-earners to pay zero taxes, that would not be a fair system?”

John:  “Of course not!  That would be way too far in the other direction, you are trying to make me look like a Radical Communist!”

Socrates:  “So, in that system, you would actually want the rich to pay less and the poor to pay more?”

John:  “I guess, if that system was actually in place, I would be arguing for the rich to pay less and the poor to pay more.”

Socrates:  “But John, the system I just described is the current system in the United States.  I thought you said the rich don’t pay enough today?”

John:  “Well…uh…I…hmmm…”

Socrates:  “True wisdom comes to each of us as we realize how little we understand about life, ourselves, and the world around us.”

It Is Time For America To Relearn The ABC’s – Always Be Cutting!


Tax

Tax (Photo credit: 401(K) 2013)

In the wake of a $16 Trillion dollar debt that is growing every day, a congress who refuses to say no to spending, and a tide of politicians who want to increase taxes so that they can justify going even deeper into debt….it is time for a change!

Americans need to embrace a new view of government…a much smaller view.

Politicians need to revolutionize how they look at our government, and it all starts by re-learning the ABC’s.

A – Always

B – Be

C – Cutting

We need to take this mantra to the Federal Government, every State Government, all the way down to our Local Governments.

We need to CUT the size of Government!

We need to CUT taxes!

We need to CUT the debt!

We need to CUT spending!

We need to CUT needless regulations!

We need to CUT Foreign Aid during our recession!

If we replace our elected officials with legislators with this mindset, we will soon see this tide of irresponsibility begin to turn.

Balancing our budget will no longer be considered “extreme” politics.

Our paychecks will start going towards helping our families, rather than paying China back for the interest on our National Debt.

Government will be relegated to serving and protecting the people, rather than participating in the race to bring home the bacon to their own states.

Businesses will be free to use their hard-earned money to drive new innovation, new products, at better costs….rather than using that same money to comply with regulations that add no value to the consumer or the economy.

If you believe in this message, please share it with EVERY single one of your friends and family.  This is that important.  America is at a key crossroads in our history.  We can either relearn our ABC’s, or we will very soon find out that it is too late to turn this ship around.

SHARE this article TODAY!

We Don’t Want Your Social Security $, Give Us Education Instead – Gen Y Petition


We, Generation Y, are offering up a solution to the Social Security Crisis that is gripping this country.  While our legislators continue to ignore the issue, my Generation Y brethren are busy coming up with innovative solutions to how we can get out of this mess.  We are offering to give up our “right” to our social security benefits in exchange for a free/subsidized education and the promise that our taxes will not be drastically raised to support a failing public policy which has rightfully been called a Ponzi Scheme.  While Social Security was once a great institution, powered by the pay-as-you-go methodology, where an equal number of people are paying into a system as the number who are being paid out.  It is now a Ponzi Scheme where a certain number of people are paying into the system and an exaggerated number of people are taking money out.  This system will collapse when the revenue cannot match the income payouts, which is the definition of a Ponzi Scheme.

In this article:  https://toddhagopian.wordpress.com/2011/09/29/gen-y-social-security-proposal/  I have laid out a possible plan for how to get out of Social Security once and for all, and I am asking Gen Y to sign this petition by commenting on this blog post (or the one under the attached article).   In exchange for continuing to help fund the Baby Boomer’s retirement, Gen Y is asking for subsidized advanced education and an easing of the retirement savings regulation, which will both allow us to be the first generation in a 100 years to fully fund our retirement without the support of the Federal Government.  We are also asking that the Baby Boomers make some sacrifices of their own, however small, so that we can put an end to this system before it has disastrous consequences on the nation’s economy.

Please sign the attached petition by offering a comment in support of the petition below.  We are also very open to hearing your other ideas, if you are willing to offer them for public consumption.  This petition is an effort to change the conversation from “How to fix Social Security?”, to “How to end the losing battle that we are fighting with Social Security?”  If the politicians will not act, then we need to put our ideas on the table and force them to discuss them.  I hope you participate in what I anticipate will be an extremely animated discussion on this board.  Thanks!

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