Reforming federal income taxes

President Obama is currently engaged in a 2012 election campaign that bottom-feeds into his left-wing base by charging wealthy Americans with free-riding on their country by paying unfairly low federal income taxes. Ironically, in the  midst of  this knee-jerk, anti-rich campaign, the president halted his journey to reward the biggest tax  free-loader of them all – Warren Buffet – with the Presidential Medal of Honor for out-free-loading all his billionaire peers, and thus, by Obamanic criteria, for dis-honoring the nation that he professes to love.

Warren Buffet, despite a request from The Wall Street Journal  (See WSJ, September 27, 2011) refuses to make public the federal income tax forms on which he rests his case. So, most likely, the Berkshire man has crept his way into presidential favor by understating  the level of his federal income taxes.  Or alternatively, he has engaged not just in efficient tax avoidance, but in effective tax evasion, that might come to light should some sharp Wall Street Journal eyes light upon discrepancies in his 1040 submissions to the I.R.S.

Nevertheless, as I have suggested in earlier columns, some overall increase in federal tax revenues is required, given the magnitude of the federal debt and the aging of a United States population that unfortunately has been weaned onto a system of retirement entitlement programs that can be scaled back, but only slowly. Efficient tax reform can achieve a modest increase in federal tax revenues, while returning the U.S. economy to a higher rate of economic growth than is currently achievable.

First, let it be emphasized that President Obama speaks in terminological inexactitudes  when he charges the wealthy with  tax freeloading.  The facts expose his lack of truthfulness. The richest 1 per cent of all Americans pay more than a quarter of all federal taxes and 40 cent of all federal income taxes, while making less than 20 per cent of pre-tax income. By any measure of proportionality, their contribution is more than ‘fair’. The President’s campaign trail rhetoric is simply out of line.

Efficient tax reform, neverthless, may result in the wealthy paying more taxes, just as other Americans will also pay more, in order to elevate the federal revenues from 15.5 to 20 per cent of gross domestic product.  The route to that goal should be the elimination of all tax exemptions – without exception –  for all individuals in society, and by imposing a flat rate percentage income tax across the board, irrespective of household income. Payroll taxes would disappear, as would corporate taxes, in order to eliminate double-taxation.  Capital gains and dividends would be taxed flat rate exactly the same as earned income.

Because the flat rate would be low, excess burdens would fall. Tax avoidance would no longer be meaningful and tax evasion incentives would fall significantly. Dynamism would be restored to the United States economy.

Now there is a campaign promise that you could take to the people, Mr. President. It would be an election winner. But you will not take that route, for sure, because, sadly, you are an ideologue and not a statesman – not even an efficient vote-maximising  politician.