Over the past few weeks, various new tax schemes have been proposed in other newspapers. I have read ideas from Keynesian economists about how to broaden the tax base in places as liberal as The New York Times and as mainstream conservative as The Wall Street Journal.
The ideas that have been presented in each publication will do nothing to broaden the tax base or pay down the deficit.
First, understand what the deficit means. The $33 trillion deficit is a tax on all future income of every single American citizen. Importantly, it’s not a tax on American corporations, because corporations don’t pay taxes. Corporations aggregate taxes, and their customers pay through higher prices, which fall to American citizens also in the form of higher prices. But, as you will see in this article, $33 trillion isn’t the correct number to cite when calculating American debt.
American gross domestic product (GDP) in 2021 was $23.32 trillion. If we take the Hauser rate of taxation, the most that the IRS could expect to take out of GDP is 19 percent, or $4.43 trillion. Because the government is too large and tries to do way too much, it always operates at a deficit. So, there’s no catch-up using the current system of taxation.
Besides, we know that there are plenty of loopholes in the current tax code. The code isn’t at all objective; it’s highly subjective. Lobbyists work hard with legislators to make it look like everyone is taxed “fairly,” but in effect, no one is taxed fairly. That’s why Warren Buffett’s secretary pays a higher income tax rate than the Oracle of Omaha himself.
- The U.S. “public debt outstanding” of $33.2 trillion often cited by media is largely misleading, because it includes $6.8 trillion that the federal government “owes itself” due to trust fund and other accounting.
- The economics profession has long focused on “debt held by the public,” currently equal to about 98 percent of GDP, at $26.3 trillion, for assessing its effects on the economy.
- We estimate that the U.S. debt held by the public can’t exceed about 200 percent of GDP even under today’s generally favorable market conditions.
- Larger ratios in countries such as Japan, for example, aren’t relevant for the United States, because Japan has a much larger household savings rate, which more than absorbs the larger government debt.
- Under current policy, the United States has about 20 years for corrective action, after which no amount of future tax increases or spending cuts could avoid the government defaulting on its debt, whether explicitly or implicitly (i.e., debt monetization producing significant inflation).
If instead, we instituted an entirely different way of thinking about how taxes are collected and assessed, we might have a chance to get out of the mess without taking down the world economy or reaching further into the pockets of every American.
Everyone in Washington knows there’s a freight train coming down the track to run over the country. Policymakers have the information they need to derail the train, but instead of implanting a solid plan, they’re counting on the process to be so complex and convoluted that their constituents’ eyes glaze over and the “smart consultants” in Washington take over.
- In fiscal year 2023, the federal government is estimated to spend $6.3 trillion, amounting to 24.2 percent of the nation’s GDP.
- Of that $6.3 trillion, more than $4.8 trillion is estimated to be financed by federal revenues.
- Of that amount, $1.5 trillion will be financed by net borrowing.
The so-called fair tax is calculated each year, and in 2023, the rate of 23 percent inclusive would have collected $4.4 trillion for the fiscal year 2023. The math is easy. Every 1 percent of the fair tax rate collects $191.3 billion in tax. If you reduce spending by $191.3 billion, you can reduce the 23 percent rate to 22 percent.
For the first time with every retail purchase, Americans will see how government debt affects the taxes they pay.
However, there are other benefits not included in the above calculation. The current federal and state income tax schemes don’t tax the underground economy. They don’t tax illegal aliens. The wealthy are able to pay tax attorneys to avoid taxes.
Under the fair tax, everyone will pay. That means the fair tax will almost certainly collect more than the projected revenue number, and be progressive at the same time. Not only that, but also you wouldn’t have to file a federal tax return, and you’d see more money in your paycheck since the payroll tax would go away. Only retail businesses would collect the tax and remit it to the federal government. They already do this today with state sales taxes.
The fair tax solution is simple, objective, elegant, and returns power to the American citizens and away from lobbyists and politicians in Washington.
