Bottom up government

Why do we pay federal taxes? Well, that’s a pretty easy question, isn’t it? We pay taxes to fund the functions of the federal government.

But that's not all. Some of this revenue is passed down to states and localities, usually in return for doing something the feds want done, but do not have the jurisdiction to do on their own. It's a type of bribery, or worse, reverse extortion. It's an abusive overreach of federal power over the states, and their citizens, and it's an end run around the 10th amendment of the constitution, which was written with the purpose of limiting the power of the federal government over the people, by leaving domestic or internal government functions to the states and localities.

Worse yet, the federal government has been corrupted by private sector lobbyist and special interest money, given to support the campaigns of politician’s, but with the end goal of getting tax policy or subsidy changes that favor those interests.

Both issues above are just quick examples of what is wrong -w- federal government. Internal and external pressures to overreach, either with goals of merit or not, fly in the face of the original intent of our founders when they established the greatest democratic republic in all of human history.

For far too long, policymakers in Washington have taken the path of least resistance – a path that has, unsurprisingly, led our nation deep into debt, and that without drastic action, aims us toward certain bankruptcy. The empty, unfinanced promises made by Washington over the years have resulted in the economic hardships we face today and the increased pessimism toward our future.

Below is a, slight radical, but necessary solution that, while admittedly causing secondary issues, it at least moves those issues down to a more local level. It is a 10 point outline of removing revenue collection from the federal government and placing a 50 state check against federal budget deficits, and more importantly, the accumulation massive of debt.

Funding the Federal government

1)Federal government revenue
Is to be provided by the individual states. They would collect taxes, which are first collected by their individual counties. (it’s a whole bottom up approach)

2) 16th Amendment
Is repealed by a new constitutional amendment. This same amendment will forbid the federal government from any other sources of income, except from the limited sale of treasury bonds, specific fees for services, and where tariffs are found necessary in international trade policy.

3) States impose taxes
A nationwide, constitutionally fixed, 33% value-added tax on goods, and a 33% national sales tax on services, in place of all federal and state income taxes, corporate taxes, the capital gains tax, the estate tax, payroll taxes and all federal excise taxes. States and localities may impose further taxation, on an individual basis, as they deem it necessary, but without I.R.S. income data, they would have a difficult time imposing an income tax, business tax, or payroll taxes. The states, however, are not allowed to impose tariffs, tolls or fees on each other, unless in return for government services.

4) Revenue flow
Beginning at the local level. The localities get a certain percentage of revenue for the collection, enforcement, and data processing. States pay the feds their portion of the collected revenue, and split the remaining funds -w- localities as they see fit.

5) Equal contribution
Federal tax revenue, from the states is set as a "per capita" payment to the federal treasury. (not including unemployed, disabled, or poverty-stricken citizens)

6) Tax adjustments
Allow the federal government to pass legislation requesting a per capita increase from the states, but the bill would require approval by 3/4 of the states, before becoming law. (much like constitutional amendments)

7) Delegated powers
Act ensures the federal government uses it’s funds to deal -w- national security and international issues such as trade and treaties (external affairs). The individual states are responsible for domestic concerns (internal affairs), unless they decide certain issues are better managed at the federal level. (10th amendment "balance of power" lives again!)

8) 17th amendment is repealed
Returning a state government voice to the federal legislature.

9) Debt
Is still not allowed by the individual states, and they must pass balanced budget bills. Feds are allowed to incur debt, but no more than 15% above the previous years revenue without 3/4 of states approving.

10) Tax cuts (economic stimulus)
Allow the federal government to pass legislation requesting a temporary per capita decrease from the states. The bill would require each state to proportionally reduce the sales taxes on their people for the same period of time. This can be done without requiring the bill receive 3/4 passage by the states, unless it were to violate the 15% of revenue deficit limitation.

O.K., I know what your thinking. Good idea, but a 33% sales tax? That’s just nuts!! Well, hear me out on this.

•First: Housing and securities are exempt. Plus, a rebate feature makes this proposal non regressive. In my plan, based on each states determined poverty level for a family of four, a family of four would pay no tax on its first $24,000 of purchases each year. This is the equivalent of a zero bracket under the income tax. Assuming that the sales tax were set at 33 percent, a family of four would be entitled to a rebate of $7920($24,000 x 33 percent) for the year. The state government would send a monthly rebate check of $660 to every family of four; a $330 check to every family of two; $690 to a family of six; and so on. So, it’s mainly just your, non-essential, expendible income that comes under this tax.

Second: it is 33% over the base cost of a product or service. As a percentage of the total cost of a product or service, it is really only 25.

Third: this tax replaces all federal, state, and local income taxes, payroll taxes, and capital gains taxes. So, your going to get all your earnings, to help you overcome the sales tax. I favor a national sales tax because I believe that the income tax is incompatible with a free society. The IRS routinely intrudes on our basic civil liberties and privacy rights–and it’s intrusions are getting worse all the time. I want an America where it is no longer the government’s business how much money you make and what you do with it.

Adding to that, the base cost of every product and service would be less, because business will not have "built-in" the costs of their taxes and the cost of processing, collecting, avoiding and/or complying with the tax code. Plus, federal excise taxes, already applied to several products (gas, booze, cigs, etc.) will be eliminated. And, just because it is wrong morally, the double taxation nightmare of the estate tax is finally over.

If it doesn't work, should't we fix it?

The U.S. government’s fiscal gap is widening by the hour. The deficits are growing, and will continue to grow, even after the best efforts of congress to cut the size and cost of government. As Bruce Bartlett, a former Reagan economic advisor who supported the VAT, puts it, "The U.S. needs a money machine" A VAT, because it touches every transaction, is just that: The Congressional Research Service estimates that each one percent of a value-added tax would raise $50 billion.

Despite long-standing political opposition, the VAT is starting to get attention for the simple reason that it may be the best, among several bad options. A useful rule of economics is that if something can not go on forever, it will stop. Current U.S. fiscal trends are unsustainable. At some point, even members of Congress will recognize this fact and be forced to act. They have three options.

Taxing the rich or big business:
Always a popular idea, but the math doesn't add up. Top income tax rates are already likely to go up to almost 40 percent. An increase much above that is counterproductive, reducing incentives to work and invest while creating further incentive to find tax shelters and other ways to avoid paying. And the income tax well is neither wide nor deep enough to fill more than a small piece of the $14 trillion hole were in. Ditto for taxing big business more heavily. The U.S. corporate tax rate(35 percent) is already among the highest in the world. Raising that is an excellent way to reduce competitiveness. Any adjustments to either the top income tax rates, or the corporate tax structure, would have include an elimination of some deductions and/or exemptions, accompanied by a reduction of the tax rate itself. While simplifying the taxes would be welcomed by all, the net result amounts to little more than rearranging the deck chairs on the Titanic, while it is sinking.

Cut spending:
If government spending were brought into line with revenues, new taxes wouldn't be needed. But that isn’t happening any time soon. Even if federal tax revenues return to their 40-year average of 18 to 20 percent of GDP, the spending promises on the books start at some 25 percent of GDP. That number is hard to knock down because the majority of federal spending is for Medicare, Medicaid, and Social Security, all of which are set to grow briskly as baby boomer retirements continue to grow. Without taming these leviathans, it is almost impossible to close the gap on spending alone.

Find new sources of revenues:
If more juice cannot be squeezed from the income and corporate tax code, the logical alternative is to tap a wider base. And the logical way to do that is to pass a VAT. Alan Greenspan, for one, considers the VAT "the least worst way" to narrow the budget gap.

Most Republicans flinch at the "T" word in any form. (Interestingly, though, many GOP economists favored a VAT in the 1980s, and it was Margaret Thatcher who introduced one to the U.K.). But crisis can create opportunities for reform, and America’s fiscal position is close to crisis. This may be the opportunity to take another real crack at our complicated and inefficient tax code, something last done in 1986.

For example, in recent years the federal government has collected an average revenue somewhere near 300 billion dollars from the corporate taxes. And the states, collectively, have brought in another 50 billion. This same 350 billion dollars has been added into just about everything we buy, along -w- all of the additional business costs related to processing, collecting, avoiding and/or complying with the tax code. You pay the taxes levied on every company that makes any part of any product you buy. Your income taxes are actually quite small compared to the taxes you pay when you simply purchase things.

It has been estimated that, most products we buy have an embedded tax, or hidden tax, of between 22-30%, due to corporate taxes and tax related compliance costs. The point is, when a tax is levied against a corporation, that corporation just includes the cost of that tax (and the cost of complying with it) in the price of its product or service. So, corporations are simply collecting taxes for the state and federal government. They don’t actually pay taxes, they pass it on to you. So a 33% V.A.T. tax, in place of the corporate tax, would change little at the department store, in terms of cost, while at the same time multiplying revenues by a factor of three or four. (1.25-1.5 trillion dollars!! And that’s just from goods, roughly 20% of our economy, services are 65% of our economy)

Blows you mind, doesn’t it. I had to check the numbers three times! But wait, there’s more.

If you have read this far, you are showing interest. That’s good! Now let me address a concern you may have. First, you ask "Aren't sales taxes a larger burden on the poor and lower middle class". The answer, of course is yes, but they have been forced to pay the embedded costs of the business tax all along, plus the added business costs involved with processing, collecting, avoiding and/or complying with the tax code. It is, without a doubt, the most inefficient, regressive tax of them all. Mine is no worse. In fact it is better. Even though I've allowed few exemptions to the sales taxes. The rebate feature of the national sales tax makes this proposal non regressive. Remember, a family of four would pay no tax on its first $24,000(poverty level) of purchases each year. That’s a $165 per person monthly check for every American man, woman, and child! This is more than equivalent to the zero bracket of the income tax, because it is a full refund for taxes paid on necessities, and housing is made exempt from taxation. This more than makes up for any regressivity of the plan for the working poor, and the rebate makes safety net costs for those below poverty, that much less expensive. Plus, the basic and necessary costs in our economy, that are currently inflated, due to an embedded tax, will now have no inflated costs. So in fact, they will be cheaper!

A VAT is also relatively simple to administer, so its "dead weight" — the distortion it imposes on the economy above and beyond the price of the tax itself — is minimal. The VAT is assessed on a good at each stage of production and distribution — when the raw material is sold, when the product is manufactured, when a store stocks up, and when the consumer buys it. Each stage does not add 33% to their cost, they just add 33% to the amount they add(their mark up). When a business calculates its VAT payment to the government, it calculates 33% of all goods sold, before taxes, then deducts the taxes they paid to the previous stage(their suppliers), based on sales records every company along the chain already keeps. That’s one reason the VAT is considered highly efficient – it’s easy to comply with – and it’s hard to dodge since each link in the VAT chain keeps an eye on the rest.

Your supplier charges you $0.75 for something, after tax you final cost is $1.00. You decide to mark up the product $0.75, to sell it for $1.75+tax. You have to tax your mark up (0.75 x .33=0.25) ($1.75 + 0.25) The final sell price is $2.00

Of the $2.00 product, your supplier gets $0.75, you get $0.75, and the state gets $0.50 (33% of $1.50 exclusive)(25% of $2.00 inclusive)

At the end of a month, you calculate your total sales, before taxes (lets say that was all you sold that month) ($1.75), you deduct your total costs ($0.75), and your total taxes paid to your supplier/s ($0.25), and pay 33% of the remainder. ($1.75 – $0.75 – $0.25=$0.75 x .33=$0.25) You owe $0.25.

The national sales tax on services is even more simple, since there are no raw materials, steps of production, etc. (Service charges + 33%=final sale price)

And while all goods and services imported into the United States would be taxed at the 33 percent rate, all exports(products not sold within the United States), would not. This provides the added benefit of making American products more competitive, both here and abroad. Shifting to a business consumption tax would bring jobs home to America, and help to rebuild our manufacturing base.

The state and federal individual and corporate income taxes, the capital gains tax, the estate tax, payroll taxes and all federal excise taxes could be replaced with a value-added tax on products and a national sales tax on services. (VAT/NST).

•A 33 percent exclusive (25% inclusive) sales tax on the purchase of goods and services. (goods via V.A.T) The NST would be similar to state sales taxes.
•It would eliminate the federal and state income tax, corporate tax, the capital gains tax, the estate tax, payroll tax and all federal excise taxes.
•The states will bear the primary responsibility for administering the national sales tax. It would be administered much like current state sales taxes. All taxes would be collected by retail businesses as they sell goods and services.
•The cost of compliance is estimated at only $1-5 billion per year for businesses, as much as 500 times less than the current system.
•It would save rest the country an estimated $600 billion a year spent in complicated tax compliance.
•The IRS would be abolished, and the treasury would manage the funds sent to them by the individual states.
•Federal government is constitutionally prevented from imposing taxes and must be funded, almost entirely by the individual states.
•There would be no tax forms for citizens to fill out. And business taxes could be figured by an elementary school student.
•It would tax all citizens at the same rate so that only those who spent more would pay more taxes.
•It would collect taxes from everyone living in this country, including aliens and illegal aliens- adding billions of dollars to the nation’s treasury.
•It would tax the underground cash economy in the U.S. because people who currently evade taxes would be taxed equally when they bought goods and services.
•It would encourage savings and investment.
•It completely eliminates the ability of political groups to interfere with economic issues of taxation for special political interests.
•Analysts say it could dramatically increase the tax revenue collected while reducing the impact on individual citizens. Can you say "win-win"?

I call for a new dealer, and a reshuffle

Federal, state, and local government revenues totaled nearly $5.2 trillion in 2007. Federal revenue made up almost half of that total, states collected about 30 percent, and local governments brought in 20 percent.

•- The federal government transferred nearly one-fifth of its revenue to state and local governments, leaving it with 41 percent of total revenue, about $2.1 trillion
•- Almost all of the federal transfer went to the states, which in turn passed the equivalent of 110 percent of this revenue to local governments. States retained 29 percent of total revenue, about $1.52 trillion
•- Local governments received transfers from both the federal and state governments equal to about one-tenth of total revenue, giving them a total of just under 30 percent of all government revenue, about $1.54 trillion, slightly more than state governments.

All of government in this country currently cost us about 5.5 trillion dollars, only 40% of which is used by the Feds, even though they currently collect 50%, then dole out 10% to states and localities. I believe the states should be the tax collector who doles out the funds. States will no longer be held over a barrel for the 20% of federal money sent down, with mandates, from D.C., and the federal government would be constitutionally prevented from imposing taxes, of any kind. The feds will get what they need to fund their business, but they will not be allowed to hold the purse, preventing them from unconstitutional influence over state and local issues. Initially, the states would be reponsible for giving the feds 40% of revenue, and then split the remaining funds between their needs and the needs of their localities. (probably 50/50, if the localities are prevented from taxation)

Eventually, states will have to work together and decide which domestic programs, currently funded by the feds, are to be reclaimed by the states, and be administered individually, in the various ways of each states choosing. They may even choose that some programs should continue to be operated as one, collective policy, administered by the feds. As some programs are moved to their rightful jurisdiction, so too will the funds needed to provide for them. These programs can only be the domestic provisions of government that were specifically meant for the states, according to the original intent of the constitution. They can not take control of programs listed in the emumerated powers of the federal government.

It has been estimated that, as the federal governments domestic role and responsibilities are diminished, its share of total tax revenue will be reduced to approx 20-25%. Individual state governments will grow to approx 45-50%, and the localities would still take a 30% share. (unless more programs are furthered to local control)(23/43/33 seems about right)

It is possible that states governments will find themselves somewhat overwhelmed. It does make them responsible for the delivery of a lot more services and management. Responsibility and flexibility that they have been screaming for, for years. Be careful what you wish for, I guess. Hell, they might want to rethink the whole state government thing, and redirect some of their programs to a more local level of responsibility.

5.5 trillion dollars is a huge amount. That’s roughly 110 billion dollars per state, on average, with 6 million people per state, on average, equals a personall tax burden of $18,333 per person, again, on average. A 33% value-added tax on goods and a 33% sales tax on services would be set on a national scale (3.0 – 4.0 trillion), but collected by each individual state. This should be enough to fund all of the federal government functions, and have enough left over to, at least, prevent the need for state and local income taxes or business taxes.

Now, if you like the idea of never having to report you income to the government, any government, at any level, then this is the way to go. If you hate complicated tax forms and having the cost of everything you buy inefficiently inflated. If you want to rid the country of tax loopholes and special treatments, allowing some to stand by, while you fund the government. This is the plan!
Implementation

If you like the idea, but don’t trust the numbers, well o.k., I've never trusted others peoples calculations either. So, I offer this deal. The implementation of the plan is carried out slowly, over a five year period. A 7% per year VAT & NST is traded for a 20% per year reduction of all taxes ment to be replaced. Everyone calculates their taxes as they usually do, but then deduct the percentage of that years discount, from the bottom line.

At the end of the 3rd year, if the 21% VAT & NST is not meeting the revenues lost from the other taxes, the fourth year, or 28% VAT & NST, will not be accompanied by tax reductions on income, payroll, excise, estate, and capitol gains taxes.

This would amount to a 28% sales tax, a second year of the 60% reduction of the income, payroll, excise, estate, and capitol gains taxes, but business taxes would continue down to the 80% reduction level.
At the end of the 4th year, if the 28% VAT & NST is still not meeting revenue expectations, the fifth year, or 33% VAT & NST, will not be accompanied by tax reductions on income, payroll, excise, estate, and capitol gains taxes, but business taxes come to an end.

This would amount to a 33% sales tax, only a 60% reduction of income, payroll, excise, estate, and capitol gains taxes, but at least the most inefficient tax known to man, will have been put out of it’s misery.

Then, as the economy grows, and revenues increase even faster, the VAT & NST will strengthen to the point where delayed tax reductions can continue to their completion. The repeal of taxes and elimination of the IRS will not occur until VAT & NST revenues are sufficient to replace all of the taxes for which it was intended.

While all that is going on, the states will begin to reclaim their rightful responsibilities. Federal government will shrink and each state government will grow in it’s own way. Revenue shifting from the "top – down" will finally come to an end.