Tax burden management (2-15-09)

Tax burden management (Balancing government drag -w- economic growth) "The 18/10 rule"

O.K., let's start with a well accepted fact that politicians do not voice during times of economic hardship. "Government can not control economic growth. Government can only control the conditions in which the economy operates." That be said. What has it done? Why has it done so? and What must it continue to do? First, some background information. The amount of money flowing through the economy and the speed at which it flows are key. For the most part these very important indicators are measured and adjusted through the Federal Reserve Bank policies. And, they are not the topic of today's blog. Just let it be known that the Fed is the largest factor in controlling economic conditions. The second most important factor related to economic growth is the topic of today's blog and has to do with government taxation policy. Over-taxation acts as a brake and drags like an anchor on the economy. For this reason, it's necessary to make periodic adjustments in taxes as they relate to the nations gross national product. (GDP=the size of the economy) Historically, the federal government has removed, on average, 18% of the nations GDP to pay for cost of operations. This will be termed the overall tax burden from this point on. The amount of money collected from the economy in the form of income taxes, again historically, has been equal to just under 10% of GDP. This will be termed the income tax burden from this point on. (the other 8% is various other types of taxation) As the economy grows over time, it has been found that government revenues tend to grow at a faster rate. Because of this the overall tax burden tends to creep up towards 19 and 20 percent of GDP. When this occurs it is important to adjust tax policy to bring the burden back within historical norms to prevent an excessive drag on our economy. The government revenues tend to grow faster than the economy due to the growth of income causing more people to be taxed at the highest tax bracket and, at the same time, less people (as a percentage of the population) qualifying for earned income tax credits. This overall tax burden creep has been successfully managed over the last several decades through tax cuts. Kennedy in the 60's, Reagan in the 80's, and Bush in the 2000's. Each time the burden required adjustment, the economy was being strangled by it. Each time an adjustment was made, the economy grew like mad. The adjustments made have been different each time, but always involved income tax cuts. Kennedy cut the top tax bracket from 90% to 70%. Reagan cut the top tax bracket from 70% to 50% and again from 50% to 30%. Bush cut all tax brackets, including the top tax bracket. There were more involved in these tax adjustments but the point I want to make is this. "Even as these tax cuts lowered the upper tax rate dramatically, the income tax burden paid to the government still held steady and just below 10% of GDP." All that money the government did not take from upper income Americans, and they still got their 10%. So, after each adjustment. The overall tax burden was returned to the 18% mark and the income tax burden held steady at 10%. The economy grew at such a rate, that revenue collected during the economic growth, met or exceeded pre-tax cut levels in a very short period of time. (pretty cool, I know) The choice to make the periodic adjustments and prevent the excessive economic drag on our economy is vital to ensure that a healthy, strong, economic growth continues. Simply allowing government to take 19% or 20% of GDP through taxation would impose too heavy a drag resulting in slower growth or possible recession. As it is now, the Bush tax correction is only expected to hold off the 19-20% overall tax burden until 2011 or 2012. If the Bush tax cuts were made to be permanent, it wouldn't have been an issue until the year 2020.(the usual 20 year fix Kennedy and Reagan had) As these dates and the accompanied economic drag they bring approach, we need to devise a plan as to how we will address it. Since Obama has expressed a willingness to allow the Bush upper tax bracket cuts to expire, The fix will need to be implemented the second he leaves in 2012. We really only have a few different choices as to how we reduce the overall tax burden. Either we lower tax brackets again, institute long overdue corporate taxes or we finally fix the poorly implemented alternative minimum tax by indexing it for inflation. Personally, if we must have income taxes. I'm a pretty large fan of the three tier tax brackets being at 10, 20 & 30% but believe it should be a stepped system where you pay your way through each bracket. Your first 20k @ 0%, your next 20K @ 10%, the next 20k @ 20% and all your money above 60k is taxed @ 30%. With this stepped system, someone making 40k pays 5%, someone making 60k pays 10% you would need to make about 200,000 before your actually paying 20%. More important than that, all Americans would be treated equally by our tax structure. Finally, equal rights under the tax code!!! This is a substantial tax cut that probably needs to be accompanied by a "3-5% per million" tax over and above the stepped system. (amount to be determined at later date) No dependants or exemptions are allowed in the above "stepped" tax brackets. If your determined to claim dependants or itemize your tax exemptions, you will have to pay an additional 5% on top of each bracket. Hey, I've made the first 20k non-taxable, what more do you want. Paying the added 10% would not pay off for most Americans. It is meant to discourage complicated tax forms, decrease filing costs and decrease I.R.S. audits.