Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

My Thoughts

Philosophy of Taxation

My philosophy of taxation is actually simple. It rests on the basic principle that those with the most money should pay most of the taxes.

The obvious rationale for that is taxes are for raising revenue, and not social engineering. This favors progressive income taxes that target the rich, and sales taxes.

There is a political rationale for such a system; a rational level of taxation will be easier if the majority of people are not affected by it. Politicians will not be able to run against high taxes.

This is why I favor a progressive income tax system that exempts individual and households that make less than $100,000. The majority of Americans would not pay the progressive income tax, which would destroy the political support for extreme anti-tax Republicans.

Note: people that make less than $100,000 a year would still have to pay Social Security and Medicare taxes. We would make those taxes more equitable by removing the caps that effectively exempt the wealthy from those levies.

The Tax System Teddy Roosevelt Wanted

Such a system would return the income tax to what its creators like Theodore Roosevelt (R-New York) and Woodrow Wilson (D-New Jersey) envisioned. That is a system that only taxes the rich.

Teddy Roosevelt, in particular, realized that huge concentrations of wealth do great harm to the country’s social and political fabric. The very wealthy use their money like a club to force their values on everybody else.

Even when such individuals do “good” with their money they affect society. Bill Gates is obviously a decent and honorable man. Yet Gates has vast influence over science, education, and other fields simply because of his checkbook.

Should Gates, Jeff Bezos, the Koch brothers, George Soros, or Michael Bloomberg have the right to force their values on the rest of us? If Gates, Bezos, Bloomberg, the Koch brothers, or Soros were using guns to force values on us they would be arrested.

The income tax envisioned by the creators of the 16th Amendment was never envisioned to affect factory workers, waitresses, or truck drivers. Yet today it does. The salaries of the working class have become a primary source of government funds – that must stop.

Tax the Wealth Hoarders not the Creators

The major goal of an income tax system in a capitalist economy such as ours should be to get as much wealth as possible in circulation to stimulate growth. Therefore we must tax those who hoard wealth, not those who create it.

The United States had such a system between 1940 and 1980. Incredibly, the top tax marginal income rate during the 1950s was 91%-92%. Such tax rates helped drive the Great Economic Boom of the 1940s, 50s, and 60s by forcing money into circulation.

The United States experienced its highest economic growth rate of 16.9% back in 1950; when the highest income tax rate was 92%, Trading Economics calculated. By January 2018; after decades of tax cuts intended to “stimulate the economy,” the growth rate was 2%.

Therefore an obvious way to stimulate economic growth is with high personal income taxes and low corporate income taxes. This means the Republicans got it half right with their 2018 Tax act; which cut corporate income taxes to 15%. Unfortunately, the same legislation cut the individual income tax rates.

This is why I favor abolishing corporate income taxes, or cutting them to the bone, and high personal income taxes for the rich. Personally, I would like to see corporate income taxes replaced with a very low corporate revenue tax on large companies only.

Other ways to tax the hoarders are with financial transaction (Robin Hood) taxes, taxes on certain classes of investments, wealth taxes, luxury taxes, real estate taxes, and estate taxes. Targeting wealth hoarders is vital because they do a lot of damage to society.

Hoarding causes Economic Stagnation

“Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.” – Warren Buffett on “gold investment,” it can also be applied to hoarders in general.

Hoarders take money out of circulation, which limits economic growth. Money sitting in a CD, savings account, IRA, bond, mutual fund, precious metals, cryptocurrency, cash, etc. often does little to encourage economic growth.

That money often stagnates because hoarders have a tendency to place it in low-risk investments with tiny returns. This problem may get worse as the hoarders age and become more conservative with their money.

It is particularly dangerous in America where a large percentage of the nation’s cash is in the hands of aging Baby Boomers. There is evidence that rich retirees in the US are hoarding cash.

That lowers the economic growth rate because the cash is not in circulation. It does long term damage because inflation eats up the value of the money. By the time the cash is taken out it is often worth far less.

To make the situation worse, hoarders vote for; and write checks, to those political candidates most likely to pass legislation designed to encourage more hoarding. This is part of the reason why Republicans with their “all taxes are evil mantra” have done so well in recent elections.

An obvious solution to this problem is a 5% or 10% tax on retirement or savings accounts in excess of $250,000. That tax should go up to 25% for retirement or savings accounts in excess of $1 million. The proceeds would go to fund Social Security.

Everybody Must Benefit from the Tax System

There will be no political support for a tax system in which all the revenue disappears into the black hole known as Congress.

To succeed, the tax system must offer the average person a direct benefit. That benefit must be something people can easily understand, see, and use on a regular basis.

The best way to achieve that would be to pay a basic income to every person with an individual income level that is at or below or the national average. That would be around $58,000 a year which is the average individual income in the United States.

My suggestion is to pay every individual that makes less than $58,000 a year – a $500 a month basic income. Everybody with an individual income under that amount would receive the basic income; including children, senior citizens, stay-at-home moms, the retired, and most workers.

Kids’ basic income payments would obviously go to their parents’ or guardians’ bank accounts. Thus, a family of four with a household income of $57,000 a year would receive $2,000 a month in basic income.

Such a system would obviously put a vast amount of money in circulation because it would be in the hands of the people who would spend it. Yes, there would be some hoarding but most families would spend the basic income on vehicles, consumer goods, or better housing.

Basic Income as the Basis of Equitable Taxation

This would give average people a strong incentive to support the tax system, and politicians a tremendous incentive to preserve it. There is strong evidence that voters will back an equitable tax system – if they benefit from it.

Around 71% of Alaska’s residents supported raising taxes to save the Permanent Fund Dividend, Quartz reported. The Permanent Fund Dividend is a $2,072 per person basic income payment financed by taxes on oil and mineral leases.

Therefore my suggestion would be a high progressive income tax on the wealthy. Half that money would go to a Sovereign Wealth Fund to finance basic income and half to the federal government.

The idea here is to create a tax system that encourages wealth generation, not wealth hoarding. Basic income is an obvious mechanism to spread the wealth, and encourage economic activity.

One of the great challenges of the 21st Century will be to create a sustainable economic system that is capable of permanent growth that benefits everybody. Progressive taxation and basic income can be the cornerstones of that system – if they are done right.