More Jobs, Fewer and Lower Taxes - Applying the KISS Principle

Over the past 30 years Federal Tax receipts (Corporate, Personal, Estate, Excise, Gift, Social Security, Medicare, Medicaid, et al) have averaged less than 20% of Gross Domestic Product (GDP). Read that again, and don't think for a minute that it's not a large number.

But it's not nearly large enough to pay the bills, reduce the national debt, grow the economy, and come to the aid of all of the people in the world who need us. Why, because nearly half of us (some legally, some not so) pay little or no federal income taxes at all--- and because our elected representatives have no financial management skills.

The only taxes that always get paid are those that reduce the amount of spending money in our pockets and which raise the cost of the goods and services we purchase --- thus retarding economic growth.

There is no doubt that a Federal Sales Tax on consumption by final consumers would produce more revenue than all of the other taxes combined --- but how much, and is it OK to single out things like cigarettes and gas guzzlers for extra taxes?

We need to give it a try, and there would be added benefits: (a) we would be collecting taxes from all of those folk who earn incomes that are just not reported at all, (b) the products we try to sell in world markets would be more competitive, and (c) all of us would have more money to spend on stuff that could actually become lower in price.

There are no purely economic problems with making the shift to a consumption tax --- just political ones. The legislation has been "on the hill", and summarily ignored for decades. We need to apply cool economic sense to the elimination of the Internal Revenue Code and the Social Security Ponzi scheme.

First KISS: Create Jobs Right Now

Create jobs immediately by eliminating the corporate income tax (and all other fees, local taxes, assessments, ad nauseum) for any corporation that adds 10% to its permanent workforce and/or 20% to its total workforce.

Corporations are not the bad guys, it's the over-paid greedy dogs at the top that need to be leashed and disciplined by their employers --- the shareholders, theoretically anyway. How about this for a start: all salaries above $1 million are paid in the form of dividends on common stock; all bonuses are "divvied up" dollar for dollar between all employees, full time or part time; there are no stock option programs.

Offset the Federal tax revenue loss by outlawing all forms of "earmarks" on any legislation ever; limiting all lobbying efforts to legitimate industry, employee, and public interest associations; and by enacting a 2% Federal Sales Tax on everything purchased by final consumers--- no exceptions, period.

Create "Green Energy Bonds", sold to investors with full federal guarantees, and used to help start up a Green Energy Investment Bank chartered only to provide low interest loans for developmental private sector projects. While we're at it, bring back the distinctions between, commercial banks, savings and loans, and investment banks.

Second KISS: Lower and Eliminate Taxes

Lower taxes immediately by phasing in a mandated private SSRIA* program for all workers, private and public, from 1st day mailroom clerk to President of the US of A. Reduce Social Security Taxes to 3% over a five-year period and use that money to create a deferred, fixed-income, life-annuity for every worker.

Seventy percent of SSRIA investments would include US Government Bonds, state and local Municipal Securities, with the balance managed in non-derivative, individual equity investments regarded as Investment Grade Value Stocks*. No investment income of any kind would ever be taxable by any government.

SSRIAs would be created and managed by fixed-annuity experienced private sector companies, and the annuity contracts would "travel" with the employee until retirement. All SSRIAs would have identical provisions, no sales commissions or marketing expenses, and slightly below industry level investment management fees.

Employees would be assigned randomly to providor companies, and each contract would include "return of premium" term life insurance until annuitized. Add an additional 3% to the Federal Sales Tax to replace the reduction in Federal tax revenue.

Third KISS: Produce Sustainable Economic Growth

Now that we've become more competitive in world markets, assured retirement benefits for all workers, and helped to save the planet, it's time to provide equal opportunity for all of us to attain the American Dream without big brother's assistance.

Replace the personal income tax side of the Internal Revenue Code with a 5% flat tax and an additional 10% sales tax --- maybe even a mandated 2% insurance premium for universal basic medical coverage. But at the end of the process, all reported income pays a 5% income tax --- no exclusions, deductions, adjustments, minimums, period, and done!

Every purchase for final consumption generates a 15% contribution to support what we hope will become a smaller, less corrupt, more creative group of term-limited politicians. And, once the budget becomes balanced, further tax reductions will ensue.

Hey, write your congressperson, make some noise, Tweet, Digg, whatever. Now this is capital "c" change we can deal with --- or at least dream about.

Steve Selengut

[http://www.kiawahgolfinvestmentseminars.com/]

http://www.sancoservices.com

Professional Portfolio Management since 1979

Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read"

Reducing Middle Class Taxes

"There is only one way to kill capitalism - by taxes, taxes and more taxes." Karl Marx

Every time I sit down to write about taxes I get bored and fall asleep. This is sad because the way a society is taxed is important to the way it consumes and spends. Since the start of the nation, US tax code has changed thousands of times. Yet over this period the percent of GDP consumed by the Federal Government has remained consistent. For any group to point to some distant past as an ideal that is some how the best and fairest tax system is foolish, lacks an understanding of history and only supports a preconceived prejudice.

Since the 1950s the percentage of GDP consumed by the Federal Government has varied from 16% to just over 20%. Such a consistent percentage indicates an efficient US Federal Government, limits to economic growth caused by the size of government and the level at which a society will permit themselves being taxed before revolting.

What has not remained consistent is the complexity of the tax code. With each change there is a dual between tax consultants and the government carving up more and more of the tax dollar in tax avoidance. Worse, attempts to use the tax code to stimulate economic or social sectors often result in bazaar unintended consequences. The greatest burden of complexity falls on middle income earners and small companies.

Since the late 1970s there has been a trend of flattening the tax code. Where the highest tax rates in the 1950s was ~90% the highest is now reduced to a third with advocates for the wealthy arguing they are still over burdened with taxes. The greatest burden shift however occurred in Social Security taxes. The result is a squeezing of the upper middle income producer while those at the extraordinary income levels are encouraged to shift income offshore.

The genius of the 1950-60s tax system, destroyed by Reagan / Bush conservatives, encouraged the wealthy to invest in the US. All investment was directly deductible against ordinary income. Thus upper income earners redirected large portions of income towards investment creating more middle class jobs and causing the economy to boom in a win / win fashion. There was a trend away from encouraging investment and towards encouraging consumption. The boom in demand for luxury goods (often foreign) resulted from dramatic shifts in the tax code since the 1980s. Ironically each shift in the tax code has been labeled tax simplification.

The greatest shift in discouraging investment comes from capital gains tax reduction. By lowering capital gains taxes more money is encouraged out of investment channels and into consumption. This shift has also contributes to volatility in investment markets.

The key to a robust and growing economy is the re-investment of capital. Capital gains tax at any level reduces available capital and discourages capital flowing to the most effective and efficient areas of investment. As governments shave off a portion of the gains from each transaction the economic engine is penalized. Since economic growth is always confined to narrow band (in an industrial economy 4% to 10% has been historic) by taxing capital gains the government defeats the entire concept of economic stimulus. Recognizing this concept the government sets up investment programs such as IRAs and 401Ks that allow investment funds to compound tax free. But why limit capital investment if it is capital investment that causes an economy and the job base to grow. This is much like allowing the Golden Goose only to lay eggs on Sunday.

There are several changes the Federal Government could make to the tax code to encourage immediate investment and stimulate the economy.

1. Radically shift in the tax rate on above median incomes back to 1950s levels while eliminating the Marxist AMT. With the shift allow investment deductions against income with no limits.

2. Eliminate the Capital Gains Tax. As long as capital remains re-investment capital there would be no taxes. As the gains from capital investment are consumed the gains are taxed as ordinary income.

3. Eliminate the withholding for those making below the poverty line incomes.

4. Eliminate all deductions, except medical costs, including personal exemptions and mortgage interest.

Let's look at the impact of each one of these.

The first impact would be to reduce the current snafu over Wall Street bonuses. Granted these are generally excessive for people in a failed industry, but would the public be so upset if 90% of such bonuses were reinvested in America. Here I am not talking about adding another room to a Mc-Mansion, but investment in US infrastructure and industry. Yes, in effect such restrictions on investment to US companies become a de facto currency control, but it is voluntary. Instead of funding the Swiss Rolex factory higher incomes are redirected to domestic stem cell research or PV development. Eventually as the economy recovers investment deductions could be expanded to NAFTA on a reciprocal basis.

By eliminating the Capital Gains Tax all investment capital becomes 401K money. Such has been the case in real estate with the 1031 exchange. The draconian tax of ordinary income on removing capital from investment encourages re-investment while not limiting sales. In the case of stocks there would be no reason to hold a stock because of capital gains. Such would create a more robust market as capital flows to the most efficient companies. Let the investment market place determine value and not the desire to avoid capital gains tax. As long as capital remained invested it would avoid taxes.

Eliminating withholding for lower income wage earners who pay no taxes would encourage companies to hire low income workers. Much of the cost of in employing people in a small business is in withholding, matching Social Security and other costs. By shifting the Social Security burden above the poverty line those working at the lower end would have higher spendable incomes. Since low income workers spend 100% of their income eliminating the 15% Social Security tax provides an immediate boost in spending. Small companies would simply report income on 1099 forms at the end of each year greatly reducing employee costs. Most small companies pay low wages and employ people part time or even pay people under the table. Such barriers to hiring part time and entry level workers would thus be removed, making many more jobs available and making many more small businesses both viable and stable.

Under the current tax code most deductions have already been eliminated. Even mortgage interest on a principal residence now has upper limits. Phasing out the mortgage interest deduction along with charitable contributes would reduce housing costs and stop funding politician's friends and relatives. Since investment deductions are available to all tax payers, investment would substitute for consumption. The one exception is the deducting of medical expenses. A company always deducts its costs of operation to determine profits. Labor should be no different. Medical expenses are a direct cost of income producing labor. The current tax code on medical deductions is a joke at best and not representative to the net income from labor. Allowing medical deductions at 100% including insurance costs encourages people to do preventive care and at the middle income level fund medical insurance.

Here is a synergy that helps the Government save money while contributing to a robust and renewable economy. The current system collage contributes to instability and even corruption. By building a feedback system, the government benefits from a more stable and robust economy. At the same time such changes encourage the lower levels of society to pursue the American Dream.

Eric Von Baranov is the Founder & CEO of the Kondratyev Theory Letter (The Letter). Started in 1974, The Letter follows the 50+ year economic long wave theory as originally developed by the 1920s Russian economist Nicolai Kondratieff. Adherence to this cycle provides Eric with insight on a wide range of topics, including economics, politics, culture and technology. Eric has been published by Minyanville.com and the Psychic Investigator. He sponsors an online conference at http://www.kondratyev.com Please note that a new and improved web site is currently under development.

Roth Conversion, Annuities and Taxes

According to Morningstar, the 10 year trailing total return for the S&P 500 ending September 21, 2010 is negative. The total is (-0.53). A very small loss but a loss just the same. The go-go days of 10% plus annual returns ended with the dotcom stock bubble busting back in 2000. Hundreds of billions of dollars still sit in 401k accounts and IRAs currently invested in mutual funds and stocks by investors over age 50. Is this wise? Also, with the tax favored window of opportunity for Roth Conversions open at this time, is this your opportunity to move funds to an annuity as an option?

Mutual funds and stocks are suitable investments for younger people who can absorb risk with the advantage of time on their side to recoup losses. As folks get older, asset management is critical to protect the nest egg for retirement or to pass it on to children. Unfortunately many people leave their money in bad investments or take on too much risk. If you want to go to Vegas and have fun, great! But you should not get your thrills by betting on the equity markets while taking downside risk with a limited time horizon to recover. On the other hand, one can be too conservative and put 100% of their money in low yielding 12 month CDs earning an average 1-1.5% currently.

One alternative is to invest in annuity products from top rated insurance companies. A popular product is the Equity Indexed Annuity (EIA). If you are thinking about a Roth conversion, consider EIAs as part of your investment strategy. They might not be right for you but are worth consideration. An individual converting in 2010 from a traditional IRA to a Roth can elect to defer the tax and report half of the income on the 2011 tax return and the rest on the 2012 return. Are taxes going up in the future? Almost certainly they are, even if the GOP takes over this fall. The budget deficits have to be addressed and the national debt can't just grow unabated forever. If taxes are going up, converting to a Roth makes sense for those investors who may have a large retirement income. If you expect your income to be less at retirement, then a Roth may not be your best option. You may balance your Roth conversion by having accounts with mutual funds in one, CDs in another, and an annuity.

The Equity Indexed Annuity provides protection of invested principle no matter what the stock market does while offering the potential for superior returns if the market does well. Some insurers offer a "bonus" on the initial investment of up to 10%. Equity Indexed Annuities are based on different indexes like the Dow Jones Industrial Average, the New York Stock Exchange Composite index, the S&P 500 Stock Price and the Nasdaq-100 Index. The guaranteed minimum return rate, if any, depend on how the contract is written. Most of these products afford investors the opportunity to put some of the funds in a bond index, some in a stock index etc. However, keep this in mind, an EIA is not going to match performance of the stock market on the way up. It tracks the market via a complicated formula. In most cases the returns are capped so the upside is limited. This product may provide a better return than non-indexed investments but is not going to produce equivalent gains to equities themselves. Like other traditional fixed rate annuities, you may opt for a lifetime income at retirement or may cash it in once you have met the required holding period to avoid surrender charges.

Annuities may be purchased from various sources. Many advisors have a "turf" and are partial to their products. Brokers like stocks and mutual funds, bankers like CDs, and insurance agents like annuities. If you are considering an annuity, seek out a trained insurance professional who specializes in this area. Make sure they carry Errors and Omissions coverage and have a clean record with the State Insurance Commissioner. Today, agents have to make sure a person seeking an annuity is "suitable" for this investment. Some greedy agents in the past have ignored suitability, but regulatory action now has put in place protections to prevent this kind of abuse. Suitability is very important because a major downside to an Equity Indexed Annuity is that it is a long-term investment with serious penalties for early surrender. Often these surrender charges are on the order of 10% or more. Almost all EIAs require holding periods of 5-10 years to avoid surrender charges. There are also potential tax implications when early withdrawals are taken.

An annuity is not guaranteed by the US government although many states have guarantee funds. During the recent financial meltdown of 2008-09, some major stock brokerage firms did not make it. No major US life insurers failed during the crisis although some like AIG did get government assistance. A person should not lockup all of their investment dollars in an annuity. If someone tries to put all of your investment dollars in any one product, think very carefully about whether they have their best interests or yours at heart. Whether or not a Roth conversion is something that may benefit you is a matter to discuss with your tax advisor.

James Robert Coleman, E.A., A.T.A.
Enrolled Agent & Accredited Tax Advisor
Licensed Insurance Agent in Texas, LA, and VA.
http://www.exirsman.com

Let's Lower Taxes to Get National Health Care, Social Security and Free College!

The key to financing National Health Care, solving Social Security's long term funding problem, and going to college free of charge is to lower taxes. As incredible as this sounds, it's true. This can be accomplished by eliminating tax deductions and a simple restructuring of the tax code.

Eliminating tax deductions is the key to tax reform. This is because tax deductions are the main cause of tax fraud and the inequities associated with our current tax system. It is the tax deduction that allows the tax code to favor some segments of society over others, decrease the amount of revenue the government needs to properly fund the programs our society deems important, and leads directly to waste, fraud and corruption.

No serious attempt at tax reform can take place without addressing this problem. Therefore, abolishing the tax deduction is the first and most important reform that must take place. When combined with a simple restructuring of the tax code, these simple reforms create a tax system that treats everyone equally. And, when everyone is treated equally three things happen: First, the current codes ability to favor some segments of society over others is eliminated. Second, tax fraud will decrease. And third, government revenue will increase.

For example, in order to increase tax revenue from corporations we must first change the tax structure that allows businesses to reduce, delay or eliminate the taxes owed. Currently, corporations subtract from their gross sales those deductions found in the tax code and labels the resulting number the net profit. This figure is then used as the basis for determining the taxes owed. The first $50,000.00 of net profit is taxed at 15% and above $50,000.00 of net profit the tax increases up to 35%. This creates a very strong incentive to add as many deductions to the tax code as possible in order to reduce the net profit so that the corresponding tax liability is lowered.

The solution is to replace the tax on net profits with a small tax on the gross sales. By definition, the tax on gross sales means that there are no deductions. This reform eliminates the ability of corporations to use the deductions found in the tax code to reduce, delay or eliminate the taxes owed, eliminates the corruption associated with the current tax code, and creates the level playing field that requires all corporations to pay their fair share of taxes. And, when all corporations pay their fair share of taxes, government revenue increases.

The small tax on gross sales also produces a very small corporate tax liability. In fact, the business tax corporations will now be required to pay is so small that employer payroll taxes can be expanded to include National Health Care and still produce an overall tax liability lower than what corporations are currently required to pay. This overall lower tax liability will be the basis for corporate acceptance of their expanded payroll obligation.

These same principles apply to individual taxes. When deductions are eliminated, the ability of individuals to reduce, delay or eliminate the taxes owed comes to an end. This means that the scenario that now occurs, where wealthy individuals end up paying less in taxes than poorer individuals, is no longer possible. This translates into increased revenue for the government.

The elimination of personal tax deductions also heralds the end of personal income taxes. The elimination of income taxes presents as a tax reduction and this tax reduction allows for the expansion of payroll taxes to include National Health Care and Public Education. These new payroll taxes will be readily accepted because individuals will still be paying less in overall taxes and yet will receive more in benefits. Most people will simply wonder why these reforms had not been implemented earlier.

The elimination of tax deductions and a simple restructuring of the tax code needs to be implemented as soon as possible. This is because government revenue raised under the current system is inadequate. For example, in fiscal 2007 the government collected $2.4 trillion dollar, however, it spent $2.8 trillion dollars. This created a deficit of $400 billion dollars and this $400 billion dollars was added to the national debt (which is rapidly approaching $10 trillion dollars). Contrast these amounts with the revenue generated by the reforms set forth in my proposal. Based on very conservative numbers, my tax reform plan will increase government revenue from $2.4 trillion dollars to a staggering $3.31 trillion dollars. This means that rather than running a budget deficit we will be running a budget surplus.

This budget surplus allows us to fund all current programs, create and fully fund National Health Care, resolve Social Security's long term funding problem and expand public education to include college, free of charge. And, as incredible as all this sounds, it was accomplished by lowering taxes!

Fishman's Framework for Tax Reform is available to read free of charge at:
http://www.serioustaxreform.com

Contact: mark@serioustaxreform.com