Forget The Bogus Republican "Reform": Here's What Real Tax Reform Would Look Like

Authored by Charles Hugh Smith via OfTwoMinds blog,

The point is to end the current system in which billionaires get all the privileges and financial benefits of owning assets in the U.S. but don't pay taxes that are proportional to the benefits they extract.

As has been widely noted, the Republicans' proposed "tax reform" is not only just more BAU (business as usual, i.e. cut taxes for the wealthy), it's also not real reform. At best, it's just another iteration of D.C. policy tweaks packaged for PR purposes as "reform."

You want real tax reform? This is what real tax reform would look like:

1. Shred the entire 2,700 page tax code and replace it with a 25-page code. As I explained in The Fetid Swamp of Tax Reform (November 10, 2017), the 2,700 page current tax code is a complexity thicket designed to hide tax breaks and subsidies for big political donors.

Politicos give lip service to simplifying the tax code for PR purposes, but no politico actually wants radical simplification because this would eliminate the biggest grab-bag of political favors available to pass out to big donors.

Though radical simplification is politically impossible, it's the first and most important real reform.

2. Replace the entire convoluted mess of income tax for the bottom 99.5% with transaction taxes collected at the point of transaction. A transaction tax is similar to a value-added tax (VAT) or sales tax, but it's radically different in key ways: a transaction tax is levied on financial transactions, not just sales.

A transaction tax would be levied on every high-frequency stock trade, every loan that was sold, every financial transaction anywhere in the U.S. or any transaction anywhere in the world involving a U.S.-based entity or asset.

Since the vast majority of financial transactions are executed on behalf of banks, corporations and wealthy individuals, a transaction tax would naturally collect more taxes from those at the top of the wealth-power pyramid. The transaction tax could be very modest because it would be collected on billions of transactions--everything from stock trades to purchases to loan payments.

A transaction tax couldn't be dodged by moving assets to offshore tax havens or renouncing citizenship. The model here is property taxes, which are collected regardless of who owns the property, where they do their banking, their citizenship, etc. The entity that owns the property must pay the tax, or forfeit ownership via an eventual auctioning off of the property to pay the tax liens.

Nobody cares if the owner banks in a tax haven, or declares taxes in another country; either they pay the property tax due or they forfeit their ownership.

A transaction tax eliminates all tax returns, all accounting for income, deductions and expenses, and correlates to wealth/income. The working-poor household would pay a transaction fee when they buy something at a dollar store, but the fee would be much less than current state sales taxes. The point of the transaction tax is that it includes all the transactions of the wealthy class that aren't simple purchases of goods and services.

To insure a progressive tax structure, financial transactions above certain thresholds of size and frequency would be taxed at a higher rate.

The fundamental idea behind a progressive tax structure is that taxes paid reflect the financial benefits flowing to the top class. In other words, taxes collected should reflect this chart of where the the gains have flowed in recent years:

As I noted last week, the wealthy class already pays most of the taxes. But the chart above makes it painfully clear that most of the financial gains aren't flowing to the top 10%; they're flowing to the top 1/10th of 1%.

3. This reality demands a tax structure that correlates to where the gains in income and wealth are flowing. Once again the model should be property taxes: whatever entity owns assets in the U.S. should pay a slice of those assets in taxes.

It doesn't matter whether the entity is in Timbuktu or the Cayman Islands, or if they have a formidable array of attorneys slaving away for them; if they own an asset in the U.S.-- real property, stocks, bonds, mortgages,etc.--they have to pay the equivalent of a property tax on assets above a high threshold; high enough that the bottom 99.5% are for the most part excluded (for example, above $10 million).

There is no other way to break the injustice of offshore tax havens described in this article: Why have we built a paradise for offshore billionaires?

If an individual or corporation doesn't want to pay any tax in the U.S. in this tax structure, fine, all they have to do is sell all their U.S.-based assets and execute no transactions with any U.S.-based entities or assets.

The point is to end the current system in which billionaires get all the privileges and financial benefits of owning assets in the U.S. but don't pay taxes that are proportional to the benefits they extract. If billionaires want to move all their assets and transactions to some other nation, that's their prerogative. But at least they won't be pillaging the U.S. and its residents and getting away with financial murder.

A transaction-asset-based tax structure would free the bottom 99.5% of an immense burden of complexity and compliance while ensuring that taxes were levied in proportion to one's financial activities and that those benefiting the most from owning U.S. assets would pay taxes that were proportional to their benefits.

A levy of 3% (0.03%) on $1 trillion is $30 billion. Total net worth of U.S. households rose to $95 trillion this year. Excluding pensions, IRAs, and 401K accounts of the bottom 99.5%, total net assets--the majority of which are owned by the super-wealthy--total around $60 trillion.

A 3% tax on all assets above $10 million would bring in around $1.5 trillion, the total amount collected in federal income taxes in 2015. A two-tiered transaction tax would bring in a similar amount, replacing the entire payroll taxes of Social Security and Medicare.

Amount of Federal Revenue by Source (Tax Policy Center)

These two taxes would eliminate income and payroll taxes and all the enormous costs of compliance, and wipe out offshore tax havens. Since both transaction and asset taxes would be low, the motivation to sell all U.S. assets and execute no transactions involving U.S. based assets or entities would be low. Would it really be worth giving up all the enormous income streams flowing from U.S. assets to evade a 3% tax?

Is it worth going to a lot of trouble to evade a 36% corporate income tax and a 39.6% individual income tax? Definitely. Is it worth going to a lot of trouble to evade a 3% tax? To the super-wealthy, that's mere friction.

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pitz Mon, 11/13/2017 - 15:16 Permalink

Even Trump's own "supporters" won't support him if he signs a bill to give tax abusers like Apple and others in the tech sector, ideological enemies of Trump and America, a tax amnesty on "cash" held "overseas" (really held in America, but titled with overseas entities for tax purposes).  Every small business owner who doesn't have access to such tax shifting opportunity will forever be lost as a potential Republican and Trump voter.If anything, Trump would be well advised to increase taxes on "offshore" cash, as a punitive measure towards the tech sector cash hoarders.  To level the playing field.  And to crack down severely on H-1B use/abuse (nearly all use of the H-1B and OPT visas is abusive!).  

AGuy JLee2027 Mon, 11/13/2017 - 19:09 Permalink

"Anything that removes Income tax would be supported overwhemlingly."

Income tax will never go away, but adding a new VAT tax is likely in the future. I don't believe in american history anywhere in the CONUS has a tax been appealed. Some US states/Counties/towns have horse and buggy taxes, even though Horses were removed from streets about 100 years ago.

In reply to by JLee2027

MEAN BUSINESS JLee2027 Mon, 11/13/2017 - 19:36 Permalink

Hay J , yup. Help me out here; when Charles says "financial transactions not just sales" I'm bewildered cuz doesn't a "financial transaction" involve a buyer and a seller? Charles even proceeds to say "every loan that is sold".Now I am aware of a thing called a Tobin Tax which applies to HFT / stock trade type deals but again aren't they in reality sales too and therfore FairTax would apply?A user here named freedomwriter(?) had a link to a site that offered a system similar to Charles is suggesting here but again, FairTax is already in da House in the form of H. R. 25 with VPOTUS Pence a co-sponsor, so I think these other schemes, good as they may be, have a long long way to go if they could ever be taken seriously.I agree with Charles, what's happening right now is bogus, but a Plan B was ready for the ACA repeal setback.This is Plan B. After this crashes and burns (by design? sniffing out Swamp creatures?)  Immigration will be the flavour of the month and come late Spring, FLOTUS will appear...Donald will have her back, and he'll throw down the gauntlet;Omnibus legislation - FairTax, FairCare, FairPath.

In reply to by JLee2027

Singelguy pitz Mon, 11/13/2017 - 20:02 Permalink

It is difficult to tax offshore cash when you don't know how much is being held, where it is being held, or what entity is holding it. The tax returns of the parent company will only show the value of the stock in the offshore entity holding the cash and the IRS has no way of knowing what that stock value consists of, nor does it have the legal authority to demand that information from another sovereign government.
The USA should adopt the same policy of most other countries and stop the double taxation. For example, if Apple makes a profit from its European operations (where the average corporate tax rate is 25%), and if it repatriates the after tax profit, Apple should only have to pay the difference between the US tax rate and the European tax rate which is currently 9%. In effect, Apple would get a tax credit for the taxes already paid in the jurisdiction where the income was originally earned and then pay the US tax rate on any repatriated profit. Until that is done, the offshore cash hoards will just continue to grow.

In reply to by pitz

Dane Bramage Mon, 11/13/2017 - 15:24 Permalink

Don't tinker with an unconstitutional system and just End the FED.  Legalize competing currencies.  The uSA got along pretty well before there was any income tax.  Go figure.

ToSoft4Truth Mon, 11/13/2017 - 15:20 Permalink

Obama had one thing right, "you didn't build that".   Billionaires built everything.  Poor folks can't afford to build stadiums or coffeehouses.  Stadiums and coffeehouses are great places to find jobs.Trickle down works. 

Mini-Me Mon, 11/13/2017 - 15:25 Permalink

Any tax plan that doesn't involve massive spending cuts is simply a future tax increase (or commensurate currency debasement) in disguise.  Deficits must be paid with interest or inflated away in diminished purchasing power.The entire warfare/welfare complex needs to be obliterated.  95% of what is done in Washington is blatantly unconstitutional.  Federal spending needs to reflect that unavoidable fact.  The alternative is a debt jubilee, tax revolt, civil war, or a combination.

adr Mon, 11/13/2017 - 15:34 Permalink

I'd be fine with a 5% transaction tax if all other sales taxes were repealed, along with the gasoline taxes. That includes the unconstitutional Property Tax. Property Tax is the most evil of all taxes.As Americans we are supposed to own our land, a primary reason for independence from Britain. If you have owned your land for 30 years and paid a tax on that land for 30 years, not playing it once should not result in you losing your property.The big problem with tax reform is limiting the size of the federal government. The tax reform posted here by Charles pretty much removes all local and state responsibility and places everything with the Federal Government.Right now a true middle class wage earner pays more in taxes than what 50% of America earns. In turn the bottom feeders take between $25k and $50k in benefits leaving true taxpayers to foot the bill. The cash taken out of every check to fund welfare is enough to pay my mortgage. I DESERVE THAT MONEY BACK.How about this:Eliminate all legislation and constitutional amendments passed after 1885 and return the Federal Government to its original size and responsibility. 1% of a transaction tax goes to fun common defense and general protection of the nation. The United States returns to a country made up of 50 sovereign states that can choose what they will with their share of the transaction tax. No state will pay for a single program run by another state. The Federal Government will be out of the general welfare business entirely. If California wants to pay citizens $70k a year in welfare benefits, fine but it must come out of their own tax revenue. If there isn't the cash to pay for it, fuck them. If states wish to secede from the USA and form their own countries, so be it.

338 The Wizard Mon, 11/13/2017 - 16:19 Permalink

 Article one: Section 8 Clause 1.   The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;  There's your history lesson for the day. As most poeple who ask these kinds of questions should sit down with that document, read it carefully, including the amendments, and learn something new.   Article 1, Section 9, Clause 4  No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census of Enumeration herein before directed to be taken. That may be the most important part of the Constitution, if we even care anymore.Amendment XVIThe Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.

In reply to by The Wizard

Dane Bramage 338 Mon, 11/13/2017 - 16:41 Permalink

"No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census of Enumeration herein before directed to be taken."& that's why the income tax is unconstitutional (it's both direct and unapportioned).  Also, no where in the tax code is income defined.  lol!  Alas, we can leave quaint concepts like rule of law out in the hallway with the coats and dress swords as we're living in post-coup USA where even the currency is unconstituional.  Savvy? Constitution of the United States, Art. I, Sec. X, that no state shall 'emit bills of credit, or make anything but gold and silver coin a tender in payment or debts  

In reply to by 338

Abbie Normal adr Mon, 11/13/2017 - 17:04 Permalink

The main problem with these flat taxes is the bottom 1% pays the SAME TAX AMOUNT as the top 1% for similar purchases.  For example, the poor guy fills his pickup truck for $100 and pays $5 tax.  The rich guy fills his Bentley and also pays the same $5 in tax.  Now if the rich guy were to buy a Gulfstream jet, he would pay a lot more in taxes, but how often does that happen?  On a daily basis, who benefits more from this tax rate?  Perhaps a transaction tax based on% of income, so the poor guy pays 1% and the rich guy pays 20%; and there are absolutely no tax write-offs or shelters.

In reply to by adr

Singelguy Abbie Normal Mon, 11/13/2017 - 19:45 Permalink

That is a ridiculous argument. Why should the rich guy pay 20 times as much tax for the same item as the poor guy? That is just blatant discrimination. And how would a retailer determine what rate of tax to charge? Would everyone have to show their tax return at the check out? It is totally impractical.
Here is something for you to consider. Forget about the Gulfstream jet. Rich people consume much more, and more expensive things than poor people. It just goes with the territory. If the tax rate is the same on everything, the rich people pay 5, 10, 20 times as much actual tax dollars as the poor people because they consume 5, 10, 20 times as much in terms of dollar volume, but that still isn't good enough for you. You want to increase that by another factor of 20 so that the rich guy ends up paying 400 times as much tax as the poor guy. What exactly do you think the reaction of the rich guy will be? He will pack up his family and leave the country and then guess how much tax he pays to the government that is dishing out all the welfare benefits? ZERO!
If you don't believe me, look at what happened in France when Hollande raised the top tax rate to 70% and increased the wealth tax to 8%. The rich people all left. The super rich went to Singapore (flat tax rate of 13%). Isn't it interesting how prosperous Singapore is. The very rich moved to Switzerland and the average rich moved to London. The French government lost billions in tax revenue.
Why is it that the solution to problems is always tax the rich more and have the government spend more? It has been proven time and again that the government can't manage anything, never mind all the corruption. The sad part is that it has never worked but the masses somehow have been brainwashed into thinking, this time it will be different. The more the government taxes (takes money out of the economy), the worse the economy performs. The best solution is to reduce taxes and regulations for everyone, reduce the spending and the size of government and just get the hell out of the way and let the people be free to create and produce what they believe the marketplace wants.

In reply to by Abbie Normal

BetweenThe Coasts BetweenThe Coasts Mon, 11/13/2017 - 17:17 Permalink

And regards the need for taxes:  why not recover the $21 trillion missing from DOD and HUD over the last twenty years first, before screwing with taxes? That is $65 thousand stolen from each man, women and child in the US. 8-10 times the size of those Department budgets was paid to somebody. Not us. And we are left fighting for scraps and why exactly? $21 trillion is missing. More is missing than the National debt.Yes tax the top .0001%. Get the $21 trillion back first.DOD and HUD Missing Money: Supporting Documentation for $21 Trillion of Undocumentable Adjustments

In reply to by BetweenThe Coasts

wisefool Mon, 11/13/2017 - 15:43 Permalink

The U.S. tax code might very well enrich the 99.9% and their politicians. It certainly helps entrench their wealth and power. But that is not the problem with the U.S. tax code specifically.The problem is that it is a war provisioning framework. Which is bad ... but also not rare around the current statist world ... and certainly not rare in the history of humanity.What makes the current U.S. tax code really, really bad is that it conditions the american citizens to be in war with everyone. Against people on the other side of the world (MIC), against your neighbor (hegelian dialectic/501c3s), and most importantly against yourself. You are a failure if you do not understand the 2700 page code. And yes it does apply to you. And yes, your life will be ruined if they decide your personal abject failure to understand it is something they want to selective prosecute.But on the brightside, after the Obamacare mandate, we finally have universal healthcare in the richest, most powerful, debt free nation in the history of earth.... err ... wait ...

rf80412 wisefool Mon, 11/13/2017 - 16:46 Permalink

Isn't all taxation ultimately about war provisioning?  Or else it has its origins in a feudal society's blurring of the boundaries between public and private property and therefore blurring the boundaries between the revenues and expenses of a state and the revenues and expenses of a property owner?  And when the property owners constitute a military aristocracy, the circle is complete.

In reply to by wisefool

RagaMuffin Mon, 11/13/2017 - 15:49 Permalink

CHS can't decide whether to shit or break wind. The property tax is marxism lite. At 3%, the tax would consume the property with in 24 years, faster in a zirp economy . Like rapping Ronnie Reagan, the tax fix doesn't mean much in the face of exploding deficits.Further a sales tax by DEFINITION would include financial transactions.  From a clean slate, a single sales tax, has a chance  

smithmorra Mon, 11/13/2017 - 15:54 Permalink

Even if the system were reformed, the top few percent would have already socked away their ownership of Globe Inc..  A$$holes!!!!!!!!!!!!  Reforms only affect the future profits.  There should be an assessment of total wealth accumulated then tax the ba$tard$!!!!!!!!!!!

surf@jm Mon, 11/13/2017 - 15:59 Permalink

Yeah, well theres a funny little noticed thing that occurs, everytime theres a supposed federal tax decrease......State and local taxes go up, to capture, what you thought you would get to keep and spend........

east of eden Rex Andrus Mon, 11/13/2017 - 18:27 Permalink

Well, not it doesn't. If those people who are able to, but will not contribute, don't appreciate the society they live in, then they can leave, and leave their citizenship behind. Even though the US is going through a very rough patch right now, as the result of 40 odd years of being preached to about the evil of 'taxes', things won't always be this way.The Buffett's and the thing that runs Amazon, as well as Mr. Gates who would rather spend his fortune on Eugenics, will have to realize that if they want the benefits that come from living in one of the greatest countries on earth, then they have to pony up. It is the right thing to do, and eventually they will be brought to realize that.

In reply to by Rex Andrus

PhiBetaZappa Mon, 11/13/2017 - 16:40 Permalink

"no politico actually wants radical simplification because this would eliminate the biggest grab-bag of political favors available to pass out to big donors." - CHSEOS - thanks for playing 'there's no real story here' American tax slave. 

SpinyNorman Mon, 11/13/2017 - 17:58 Permalink

Once again, just more arguments about how to sheer the sheep. REAL income tax reform is only possible with the end the fraudulent IRS muscling evryone to voluntarily comply... or else.

east of eden SpinyNorman Mon, 11/13/2017 - 18:24 Permalink

I'd say not. Real reform is only possibly when the people who benefit the most from the society they operate in, are prepared to support the furtherance of that society with their dollars.The dollars can't come from people who are having trouble putting food on the table, nor can it come from couples raising families with a million and one expenses to pay for. It must come from the most well off.Unfortunately, in America, as with most other things there, the people have been sold a bill of goods that taxation is bad. Taxation is NOT bad, it is absolutely necessary. What it does is provide a pool of financial resources that are beyond the bickering and back biting of town hall meetings, or the greediness of a few individuals who wrongly believe that 'they made themselves'. No one makes themselves. Everyone, whether it came from your parents, or your teachers, or a close friend or even an article someone reads, gets a 'hand up'. The trick of course is ensuring that the 'hands up' that are given are used wisely and productively.

In reply to by SpinyNorman

Ace006 Sudden Debt Tue, 11/14/2017 - 08:50 Permalink

Much mischief is done by people who P&M about "fairness" so I'll reserve my ire for the fact that we're no longer a representative republic. The representative part is all but bleached out. One dollar, one vote!!! The worst development has been the Supreme Court's betrayals finding unheard of federal powers in the Commerce Clause, etc., thus gutting the most important feature of the Constitution. Andthe betrayal of the legislature and presidents and the lawyer and We the People who didn't care as long as they got their share of someone else's paycheck. The sainted FDR just appointed spineless judges - and the spineless senators just voted them in. And we voted for the senators. Now we live in a country where the Constitution is a joke.

In reply to by Sudden Debt

lucyvp Mon, 11/13/2017 - 20:29 Permalink

My rep called up with a tax reform town hall,kept hawking no amt, no death tax ...  again and again.How does this help jane six pack?   Someone who make 80k with kids is probably going to pay more.    Why would you raise the bottom tax rate from 10 to 12%?   People down there are getting crushed, by the rapidly rising rents, food, medicine, transportation etc.  What about increase long term cap gain taxes to 20% and lowering the middle class tax bracket from 25% to 20%.   Why is capital taxes less than labor?  Is holding a piece of paper for 12 months really a capital building activity? or a speculative activity?  

Ace006 lucyvp Tue, 11/14/2017 - 08:34 Permalink

An interesting story about your rep. Issues not without merit but now basically insulting as they represent a determination not to address the core issues. Why did tens of thousands of US factories go to China? What made the US such a place of astonishing hostility to manufacturing? Who wanted to ensure massive wealth transfer to a communist dictatorship and why? Why are we importing third-world primitives to compete with American workers?An ownership interest in any commercial activity is represented by a piece of paper (unless held in street name) regardless of the value of the enterprise or the objective of the owner. I assume there's a lower CG tax rate for holding the paper for a longer time whch was an attempt to "do something" about (((speculators))) (no, not (((rootless cosmopolitans)))).

In reply to by lucyvp