Two tax solutions that would actually “Make America Great Again”

Senate Majority Leader Mitch McConnell, R-Ky., center, joining Speaker of the House Paul Ryan, R-Wis., and other GOP lawmakers to talk about the Republicans' proposed rewrite of the tax code for individuals and corporations, at the Capitol in Washington. (AP Photo/J. Scott Applewhite, file)

Congress is about to pass a major change in our federal taxes, which President Trump will surely sign as part of his plan to “Make America Great Again.” Sadly there has been little debate about what the tax bill entails, even by the lawmakers voting on the bill.

Rather than parse the details of the final tax bill, I will suggest two much-needed tax reforms that indeed can make America better.

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1. A Federal Consumption Tax

The savings rate in the United States is very low relative to our major trade partners. For example, China’s savings rate is close to 50 percent of its G.D.P. while that of the United States is less than 20 percent. Even with differences in accounting procedures and measurement error, that is an extremely large imbalance. The way to rebalance global trade (and thus create a favorable net-export position and more jobs at home) is to increase the savings rate in the United States.

One way to do that is to tax individuals for the resources they take out of society (in the form of consumption) and not on the basis of the resources they contribute to society (in the form of work and investment). Americans visiting European countries, especially in Scandinavia, experience the shock of 20- to 30-percent sales taxes, called V.A.T. (value-added tax) or G.S.T. (general sales tax). Some consumer items like alcohol, tobacco and gasoline are taxed at even higher rates, for health or environmental reasons.

Certainly higher consumption taxes would go a long way toward simplifying the tax code and promoting more saving in the United States. Higher taxes on consumption coupled with lower taxes on income would also increase labor force participation. One of the great drawbacks of the progressive income tax code is that it penalizes families when a spouse enters the work force, since part of the family’s income is pushed into a higher tax bracket. When two-income families factor in the increased cost of day care for children, the tax code acts as a disincentive for spouses to enter the work force until much later, when children no longer need day care.

With today’s low gasoline prices, it would be an optimal time for higher taxes at the pump, both to fund public transportation infrastructure and to spur the development of affordable and efficient electric cars.

The most compelling argument against consumption taxes rests on equity. Lower- and middle- income families spend a higher proportion of their budget on consumption goods than do high-income families. The consumption tax is effectively a regressive tax, which means that the lower-income groups pay a higher percentage of their income in taxes than do high-income groups.

But a consumption-based tax can be made progressive, as Japan has taught us. The consumption tax is not levied at the time of purchase of goods and services but levied in the same way as income taxes. Simply put, households deduct their savings from their gross income when filing their tax returns. The tax rate can be made progressive in the sense that lower-income groups have a lower tax rate on their savings-adjusted net income than higher-income groups.

The key to long-term American prosperity is a rebalancing of the trade account. This means increasing saving rates, full stop, and one way to do that is to make consumption more expensive.

2. Incentivize Long-term Investing

There was a time in the United States when families actually held stocks in firms for life and even passed on these stocks to their children. They prided themselves on having ownership of thriving companies and took interest in reading reports of company performance, if not participating in shareholder votes. Such households held shares for the long term. Day-to-day fluctuations were of minor concern.

Such a time, for most investors, is long gone. Companies pay out only a small proportion of their profits in dividend payments, since such payments are highly taxed. Investors buy shares based on expectations of increases in the price over short intervals in order to sell the shares and capture profits through capital gains.

The taxation of dividends contributes greatly to the growth of speculative investment and with it the ongoing cycle of stock market bubbles and crashes. The horizon for these investments is decidedly short-term, even ultra-short-term. Sophisticated algorithms based on machine learning or neural networks are used for forecasting short-term increases in any company’s share price. Little attention is paid to the longer-term growth potential or added social value of particular companies.

One way to undercut the growth of this speculative sector is to cut or even eliminate taxes on dividends. Give households incentives to hold shares for the long term and give firms incentives to pay out higher dividends to attract such shareholders. Such a tax reform would go a long way toward promoting overall stability in the financial sector.

The Political Reality

We are about to get another tax change; some will pay more, others less. There are going to be winners and losers and debates about fairness and equity. But this tax bill, like so many others, does little to address the nagging questions of the savings-trade imbalance and the need to promote financial stability in the United States. As such, it will do little to make America great again.

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Stuart Meisenzahl
10 months 1 week ago

Father Paul
Excellent analysis.... but we both know it will be a non starter as soon as the labels "National sales tax" and "tax cut for the rich " are attached to your fine proposal. The sales tax will be deemed "regressive" and the dividend relief will be "just another deal for the wealthy"

Lisa Weber
10 months 1 week ago

These are good ideas, but they have little chance of being implemented at this point. Thanks for bringing them up anyway.

Vincent Gaglione
10 months 1 week ago

I would be interested in reading Father McNelis’ commentary and response to Kevin Clarke’s article, “A U.N. mission offers a sobering assessment of poverty in America.” How does he see his tax working to help the USA poor who have no money to save?

Chuck Kotlarz
9 months 4 weeks ago

Vince, a Father McNelis’ commentary and response to Kevin Clarke’s article sounds great.

Saving the soul of the republic perhaps might also merit a Father McNelis’ commentary and response to Lance Compa’s article “In the fight against oligarchy, our best weapon is the Constitution”

J Cosgrove
10 months 1 week ago

I would not use China or Japan as examples we should follow.

China has high savings rates because there is little from the government for their care in old age and with the lack of children in recent years this means that younger family will not be able to help much either. So they have to save their money for their old age. Not as much a factor in the US but still a factor.

Japan had two decades of economic stagnation but has had some rebounds in the last few years under different leadership. It has not been the economic powerhouse it was from 1960-1990.

It is also difficult to estimate just what each income group receives in assistance from governments. How will this be used to affect the calculations to offset the high penalties the poor will be taxed by the proposed VAT system.

I love the the concept of reducing or eliminating taxes on dividends but the Democrats would never go for it. It would definitely drive the price of stocks higher as they became more valuable for their dividends. These dividends would be more available with the proposed reduction on business taxes. It would help pension funds as well as individuals in their retirement.

Reduce the business taxes as is currently proposed which will get more business investment and jobs and also allow higher dividends. Seems like a winner for all. But the Democrats will say it will be a disaster for everyone and a sop for the rich (who actually overwhelmingly vote for Democrats.) And the media will parrot this nonsense with fake news narratives which will be repeated by commenters on America.

Tim Donovan
10 months 1 week ago

I think the proposal to significantly increase taxes on alcohol and tobacco are excellent ideas, both to (hopefully) discourage people from engaging in these unhealthy habits and to raise revenue to fund important government programs. I realize that such taxes would be unpopular, but perhaps the money raised could be used for medical programs to encourage non-smoking (nicotine patches and the like) as well as alcohol and drug rehabilitation programs. Since gasoline prices are relatively reasonable, it may be a good time to increase such taxes. Again, unpopular? Absolutely. However, Father McNelis' idea of encouraging less driving by individuals by putting more funds into public transportation is worthwhile.

Joseph J Dunn
10 months 1 week ago

Refreshing to see some 'out of the box' thinking on the tax issue!

Tim O'Leary
10 months 1 week ago

Very good analysis - IF economics is the sole marker for making America Great Again. But, good to get economics right. While it is very difficult to predict what this new Tax law will do, I tend to be on the very optimistic side.
1. US Companies are said to have $2.5 trillion cash abroad. The repatriation relief (Assets held by U.S. corporations overseas would face a one-time "deemed repatriation" tax of 8% on fixed assets and 15.5% on cash.) could result in a large GDP uptick, spur the economy (even if they give out as dividend, those recipients will reinvest rather than lose it in low interest bearing accounts) and increase Fed revenue (15% of $2.5 Trillion is $375 billion!).
2. The 21% Corp tax rate will permit the same reinvestment (by the company or the dividend recipients).
3. The Estate Tax change is an OK middle-ground compromise (it still seems ethically wrong to tax death). Farms and family businesses will be able to stay in the family more easily.
4. The Pass-through mainly helps LLC companies, and is capped. This should help store and small business owners the most.
5. State and Local deduction and mortgage caps will hurt the wealthy
6. Standard deductions, child tax credits and end of ACA tax will all help the middle class.

Michael Barberi
10 months ago

The two suggestions by Fr. Paul make sense especially number 2. However, a consumption tax (# 1) and its justification by reference to Japan, et al, is a good text book solution but unrealistic. The U.S. is not Japan, China or Scandinavia. These countries are socialistic in nature with high personal tax rates needed to fund, in part, very generous social programs.

As for the current tax bill making its way through the House and Senate today, it is not perfect. However, I believe it will spur the economy, create more jobs and give needed tax relief for the middle class. Given the politics in Washington, this is a significant accomplishment for Trump and the Republicans....and most Americans.

Having said that, I would have preferred to see a higher incremental tax rate on the rich with some tax savings for those making up more than $500,000 (e.g., 37% for those filing jointly making more than $500,000, 50% for those making $750,000 - $1 million, and 60% for those making more than $5 million). Under this scenario, taxing the very rich is primarily taxing their abundance, not their need. With the extra revenue, the marginal income tax rates for the middle class could have been reduced further. Some may argue that everyone should get a tax break including the rich. However, the very rich do not need a tax break as much as the middle class. In other words, if you are making more than $1 million a year, you can afford not to get a tax break but pay more.

Tim O'Leary
10 months ago

Michael - while I could experience some schadenfreude by seeing the really rich (mostly ardent secularists) get crushed by very high marginal tax rates, I actually think that would hurt the lower income people more. It is those who have abundant funds who are most likely to take a risk on financing new companies, start-ups and the really rich companies who are likely to expand their workforce (at risk, so to speak). They really have nothing else to do with the money. If they save it, then it is up to the banks to make loans. Even if they all spent it on a mythical massive party, they would only be transferring it to all those working on the party (the cooks, the caterers, the singers, the waiters, the landscapers, the limo drivers, etc), who all could do with a boost in employment opportunities.

The crux in considering how best to enact a preferential option for the poor is to see how new money best improves their lives. We have 3 choices: the government, 2) private companies or rich people and 3) private individuals (middle and lower income people). Since I believe the government wastes most of what it collects, the second group seem to me to offer the best chance of creating jobs and opportunities (needed by the third group more than hand-outs), I think we get the best return for the poor by facilitating the incentives for them to invest and spend. If I am right, the economy will grow nicely in 2018 and wages will rise as demand for new employees rise.

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