Monday, March 04, 2013

Tax Strategy to Attack the Democrat Barbell

It has been five years since the financial meltdown began, and there is no end in sight. Bank reform, breaking up the big banks, and other anti-Wall St. ideas are discussed on thrown around even in Obama's speeches, but nothing happens. Tax changes get floated out to the public, but they often center around the top bracket or top two brackets and the capital gains rate. These income tax policy adjustments never collect enough taxes to make a dent in our deficits, and both parties sound like elves in Tolkien's universe taking the Oath of Feanor (top marginal must be raised/protected at all costs). It's stupid, quixotic and distracting. Changes will have to come though when the bowl of punch is removed by our creditors. Spending cuts will have to happen then, but it won't fix everything. We do need more tax dollars coming into federal coffers. Perception is everything in modern America. As I stated before on breaking up the banks, the right needs to trick the left into thinking the right is sacrificing and the left is winning but really they hurting. Here's a two step process to raise tax revenue, broaden the tax base, appear to be sacrificing but go after the Democrat barbell coalition of voters.
Nixon Goes to China: Tax Edition

The common perception is that the conservative answer to anything is lower taxes. It's a punchline for mindless liberal comedians and the talking heads on MSNBC. In our current predicament, we have income inequality that rivals the 1920s that has grown under Obama, an economy that can't have money taken out of it as it is so fragile, and a massive population that pays no taxes at all. With two moves, let us broaden the base.

1. Install a wealth tax. Set the number at a high wealth line, and tax it at 2%. This tax does not pull earned income out of the economic loop, and has the effect of pushing some money into entrepreneurial outlets for people just above the line you create, spurring investment. It also has a great effect of screwing over Dem voters due to the dirty secret that the wealthy actually vote Democrat.

The only alternative is a wealth tax. Anyone who has a net worth over $5m (or $20m, or chose a number) has to pay 1% (or 2%) of that amount, every year. It would be like a death tax, except you paid it while you were alive. Think – pre-paid estate taxes. Warren Buffett is always complaining that he doesn’t pay enough in taxes. The guy has a net worth of about $40b. If there was a 2% wealth tax he would have to cough up an extra $800m a year. If a 2% wealth tax was applied to everyone who had a net worth in excess of $5m it would add up to about $700B a year. That’s just about the right amount to get the budget to where it starts to make sense. This tax increase would not come out of current income, therefore the consequences to the economy would be muted versus a similar sized income tax increase.

Per Half Sigma's link above, let's set the line at $30 mil since 2/3 of them supported Obama in '08. Who do you think is funding the cathedral?

2. Install a two tiered national VAT. Let us tax consumption, but in a 'progressive' manner because libs will be up in arms about a sales tax that they will say is regressive. We could set a low VAT % (3%) for purchases under say $100,000, and then a higher VAT % (6%) for purchases over that number. Good old Warren Buffet has supported this in the past. Does this suck, yes it sucks that we have to do this. We have many Americans paying nothing for taxes right now. With a small VAT, we suddenly collect some money from them. They keep buying diapers because we can't slow down their procreating, at least we collect 2-3% on it. On the opposite end of the barbell, we tax large purchases that are not business investments or homes, and suddenly, the wealthy are chipping in an extra bit to the national kitty. We hit both ends of the barbell here. You get the proles and underclass to buy into this because the 'rich' are paying more than them. You get the middle class to buy into this because suddenly the underclass is kicking in something to the budget. The idea of 47% not paying any taxes really does resonate with the middle class, even if they don't pay much more in taxes. The difference is: the middle class works 30+ hours a week. On the flip side, we would be taxing something that we do too much of, so if there is any slight reduction in consumption, it might be a good thing. The downside is if this pushed activity off the books into the black market economy, so we'd have to set it low to discourage that. The tax has to be low enough to encourage people to pay it rather than run the fines and jail time risk of not paying it for their transactions. This will hurt high taxation states the most, which surprise surprise are blue. Stop subsidizing bad blue state governance.

These are pipe dreams, and no one will install these systems. At least, no one right now. I do think these approaches will be attractive in the future (and now if someone had balls). They would be far more attractive than an anti-cathedral idea like taxing college endowments, which will go nowhere and is a harder sell to the public. Implementing these two systems, both ends of the progressive voting coalition's barbell would be whacked. When the great dollar dislocation and treasury market blow up happens, we will have to find a balance of spending cuts and increased revenues to appease the world. If the USA is lucky enough to avoid a dollar and TSY blow up in the short term, we still have to find a way to fund our entitlement programs without cutting them to bare bones systems that act like jobs programs more than protecting the sick + old. We will have to be creative with tax changes in order to still encourage productivity. I would also add this, whether Rome, Byzantium, England or France, when wealth inequality reached a high level, tax laws or a monarch's decree changed in order to alter the wealth holdings. This happened before in America in the early 20th century. Modern America is no different.

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