Two Modest Proposals for Tax and Electoral Reform Dave Shafran 71702,3713@compuserve.com There are two propositions that all people who criticize government can agree on. We need tax reform. Radical tax reform. And Campaign Finance reform. We need to be able to pick and control our elected officials with our votes, not our dollars. With our votes, we the people can be triumphant. In a contest of dollars, it is always the shadowy rich who triumph. Proponents of the Left and Right disagree about where government- collected money goes, but we all agree that those who spend it and those who collect it have run amuck. These are the two most crucial areas of government, because a money/advertising campaign process determines who gets elected to collect and spend the money, and who determines from whom it gets collected. I would like to present two proposals, one for Campaign Finance Reform and the other for Income Tax Reform; which could make the phrase `freedom and justice for all' meaningful again. Campaign Finance Reform Since the advent of television campaigning, the entire way in which we Americans conduct political campaigns has changed. Before the War, campaigns were largely conducted in person and in print. Candidates traveled around their electoral districts making speeches and meeting voters. Their doings were reported and speeches reprinted in local and national newspapers, which were read as the only source of news. News stories, editorials and the campaigns themselves were no less scurrilous than are our campaigns today. However, they were much less expensive, and the voters saw their candidates unfiltered by TV editing. Now we see five-second news-bites and artfully structured commercials (which cost more than most Americans earn in a decade) where all we `learn' is that the other candidate is worse. And campaigns have grown longer. Under pressure of the media, the next presidential campaign and speculation begins soon after the election is over. With campaign financing, we have two issues: the cost of campaigning and the source of the funds. One drives the other in an ever-escalating spiral that shows no sign of ending. As TV advertising becomes more the way campaigns are run, and as campaigns get longer, it becomes more necessary for candidates to develop long- term relationships with wealthy contributors, or else have access to large private fortunes. Therefore, far more than 99% of Americans are denied the chance to stand for office. Yet when we consider public financing of elections, no-one wants to take hundreds of millions of dollars of tax money and throw it at spin-doctors and TV stations. And these TV stations collect their millions because they are licensees - in trust - of the public airwaves. However, consider what could happen were we to change the rules for licensing broadcasters. Instead of simply granting these corporations government-protected monopolies, why not make them meet some requirements? Why not require them to broadcast debates and speeches by the candidates. Require a specified number of hours per station during a specified, limited period before the election. Create local, public agencies to monitor broadcasters, with legal authority to instantly suspend the license of any station which doesn't fulfill its requirements. Suspension will be followed by forfeiture unless the station can document that it met the requirement. Specifying the time period for stations to air the debates and speeches gives us control of the length of the campaign. While we're at it, why not make it a requirement for candidates that they have to meet each other in a specified number of hours of debate. If they don't, they forfeit the election. No argument. If there are only two candidates, if neither one debates, they both forfeit. Now that we've got them talking to us and each other, why not just eliminate those pesky paid political ads? By mandating debates between the candidates we have created a better forum in which we can evaluate them. If we just make the ads illegal, with one stroke we eliminate a major source of disinformation and drastically reduce the cost of campaigning. Now we have reached a place where we can realistically talk about publicly funding political campaigns. I believe that publicly funded political campaigns (wholly publicly funded - no private money allowed at all) are the only way we can move to a new, higher form of democracy. The Nineteenth Amendment and the Voting Rights Acts have extended the vote to more and more Americans, while modern campaign financing has restricted candidacy to fewer and fewer Americans. American democracy has become the right to choose between two candidates whom we have had almost no choice in choosing. To be a real democracy, any of us, all of us, have to have the same ability to stand up for election as the millionaires and party functionaries. And the same ability means the same chance to be on the ballot, the same chance to get our message out to the electorate. As all `men' are created equal, so should all candidates be equal. Today, almost all candidates for local and national offices are nominated by one of the two institutionalized parties. Most third- party or independent candidates are either woefully underfunded or, like Perot/Huffington/Forbes, personally wealthy. The average engineer, nurse, plumber or office-worker has hardly any chance of being elected and even less of being nominated. I propose that we have just two requirements for candidacy (other than constitutional age and citizency requirements). First, that the candidate be a resident of the electoral district in which she/he wishes to run. Second, that he/she present to the registrar of voters a petition signed by at least ten percent of the registered voters of the same electoral district, supporting her/his candidacy. Once the signatures are verified, the individual will be a duly registered candidate, presented an amount of money for campaign expense exactly equal the amounts presented to other candidates and granted the same access to media speech and debate time as all the other candidates. With paid political advertising and all private money removed from the campaign process, we, the electorate, will be free to evaluate the candidates one against the other and for their ideas, not their ads. The nominating process will be open to all, not to just political parties and millionaires. Tax Reform The air is full of new tax proposals these days. We hear about the flat tax, the VAT tax, a federal sales tax, etc. There is one thing we never hear mentioned. The difference between the tax rates on labor and investment. Oh, we think we hear about it when politicians and economists talk about capital gains, but they don't say anything but the ritual formula `cutting capital gains is good'. Why? A Capital Gain is the increase in value of an investment. When a stock or a piece of real estate increases in value, that is a Capital Gain. Politicians tell us that we have to reduce capital gains taxes to get our economy working. A low rate, they tell us, allows investors to reinvest their money in new businesses. In truth, all they do is trade stocks on existing business back and forth. This brings no money back to the business, just to the stock-holder. The ratio of old trading to new issues in the stock market is something like 150 to 1. This doesn't put more money in our paychecks, it doesn't create any new jobs, it doesn't do anything to improve our economy. An investment is full or part ownership of property. Income Producing Property is any property that returns an income to its owner. It includes stocks and bonds (which earn dividends), rental and commercial real estate (which earn rents), mortgages and loans (which earn regular interest payments) and savings accounts (which earn interest). Income Producing Property does not include owner- occupied real estate, automobiles or other properties which do not earn a return. Property which does not produce income may still appreciate in value, as in the art market, where art, like everything else, is bought low and sold high. The difference in value between the owner's buying and selling price is the Capital Gain, which gets a lower tax rate than the labor of the artist who created the work. Of course, the best property both returns an income and appreciates in value. Property has certain advantages over labor in the tax game. Stock and Bond traders do not pay sales taxes when they trade their shares back and forth. We do when we buy clothes, cars or anything but food. Stock/Bond/Property owners do not pay social security taxes on their dividend or rent income. People who work for a living do. And when the owners sell the property at a profit, they pay tax on the capital gain at a lower rate than their income tax bracket would usually claim. On which again, they pay no social security taxes. And if they sell the property at a loss, they get to deduct the loss. The American dream has always been the accumulation of property. Since the end of World War Two working people have been told that the goal has been to own a `home of one's own.' [Before that, the goal was just a job of one's own - sort of like these days.] In reality, the goal has been to accumulate enough property to be able to live off the income. To that end, the American economic system has been designed to protect property as much as possible. There are two immortals in America. They are not the Constitution and the Bill of Rights. The Constitution can be amended, even superseded, as the Constitution superseded the Articles of Confederation. The Bill of Rights is itself just a series of Amendments. The two immortals are property and corporations. In America we have been told that the deed to a piece of property or the ownership of a share of stock is forever. The deed or the share can be transferred from one owner to another, but the land never reverts to itself, the stock ownership is forever, even if the company fails, until the corporation itself buys back all the stock and retires it. And a corporation is also legally immortal. What is the purpose of this immortal entity? In full, it is known as a `limited liability corporation', because the function of a corporation is to limit the liability of the owners - the stockholders. By law, once a dividend is paid to a stockholder, even if it is later determined that the corporation earned that money through fraud, deceit or outright theft, the dividend cannot be recovered from the stockholder. If the corporation is sued, loses and is driven into bankruptcy by the decision, the value of the stock may drop to zero (in which case the stock-holder is entitled to deduct the losses from his/her taxes), but all the money that the stockholder has received from dividends and stock appreciation is untouchable. His/her liability is limited, but her/his profit is not. This is why corporations have become the major economic entities of our world. They insulate the real owners from liability. And not just liability, but identification. In the days of the `robber barons', we knew who the powerful were. They had names; Astor, Morgan, Rockefeller, etc. But now do we know who owns Goldman Sachs, General Motors, Boeing, Martin Marietta? We do know that far less than ten percent of Americans own almost the whole of this country, but who are they? They are, for the most part, invisible. When a corporation pays income tax, it pays only on its profits (after deducting rent, labor, cost of materials, advertising, legal expenses, insurance, etc.; the `cost of doing business'). When a family pays income tax, it pays on its gross receipts (total income; with no deductions for rent, home labor, materials, food, etc.). If families paid taxes the same way businesses pay taxes, we would only pay tax on the amount we had been able to save and/or invest at the end of the year. For most working families in the U. S., that would mean no taxes at all! Between 1960 and 1983 corporate income taxes fell from 23.2% of federal tax revenues to 6.2%, down to almost 1/4 of what it was twenty-three years before. Yet businessmen and their paid politicians continue to call for more cuts on business taxes. During this same two decades, the wages of workers employed by these businesses have either remained constant or fallen. And these same businesses have not been creating new jobs for American workers with the tax money they have saved. They have been cutting jobs at home and exporting jobs overseas. Does giving them tax breaks for this make any sense? Let's do a small thought experiment. If business taxes had not been reduced so much since 1960, federal tax revenues would have been higher. If federal tax revenues had been higher, would we have the same giant federal debt that businessmen spend so much time complaining about? I don't have the answer to this in real figures, but I'm willing to bet that this country would be solvent today if American businesses had been carrying their share of the load these last twenty-three years. Another interesting fact about the federal debt - it is financed by selling government bonds. Who buys these bonds? People with money to invest. High-income people whose taxes have been cut drastically since the `Reagan Revolution'. In essence, this means that we have given these people tax breaks, then borrowed from them the money we would have collected in taxes. And when we borrow this money from them, we are obligated to pay them interest over the life of the bonds. Does this make any sense? Not to me. Yet our legislators continue to tell us that this is the way we should be doing things. Since families, not corporations, make up the citizenry of this country, shouldn't they be given equal tax rates to business? Why shouldn't we get to deduct our costs of doing business? Or, if we have to pay taxes on our total income, why shouldn't corporations? The argument is usually made that business creates jobs and needs incentives, but anybody who has been reading the newspapers knows that corporations have been doing everything they can to cut jobs. We continue to give them incentives while they dump their workers into the garbage. Let me suggest a simple tax proposal that should benefit all Americans. Eliminate the differences between business and single/family tax rates. At first I thought of applying business rules to families, allowing us to deduct rent, food, clothing, etc. as our `costs of doing business', but it was pointed out to me that the book-keeping would be enormous. I also remembered that business people complain about the cost of compliance right after they finish complaining about the tax-paying itself. It costs time and money to document deductions and exemptions. So why not apply family rules to corporations? They can save money on compliance. The advantage of a larger tax base is that you can reduce the tax rate on the income being taxed. And include ALL income at the same tax rate. Eliminate the advantages of `unearned income' over `earned'. The tax advantage of property over labor. If we do this, we can create a flat tax (one tax rate for all taxpayers) that is fair to all. The charts below, from the 1994 Form 1040 Tax Rate Tables, show, the actual Federal Income Tax and percentage of income that all taxpayers would pay with no deductions. The range is from 30% to not quite 40%, less than ten percent. This from the poorest to the richest in this country. Of course these figures do not reflect reality. Larger income-earners have generous tax deductions, capital gains is taxed a lower rate than higher income-tax rates and the earned-income credit lowered tax payments on the low end. Still, a lower-income earner is more likely to pay his/her full percentage of taxes than the high income earner. ----------------------------------------------------------------------------- Tax Rates for Single Taxpayer, no Deductions -------------------------------------------- Tax Income Inc. Tax FICA Total Total Income Rate Tax Percent Tax Percentage ----------------------------------------------------------------------------- $22,750 15.0% $3,413 15.0% $3,413 $6,825 30.0% $55,100 28.0% $12,470 22.6% $8,265 $20,735 37.6% $115,000 31.0% $30,970 26.9% $9,272 $40,241 35.0% $250,000 36.0% $79,640 31.9% $9,272 $88,911 35.6% $500,000 39.6% $178,640 35.7% $9,272 $187,911 37.6% $1,000,000 39.6% $376,640 37.7% $9,272 $385,911 38.6% $10,000,000 39.6% $3,940,640 39.4% $9,272 $3,949,911 39.5% ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- Tax Rates for Married Filing Jointly Taxpayers, no Deductions ------------------------------------------------------------- Tax Income Inc. Tax FICA Total Total Income Rate Tax Percent Tax Percentage ----------------------------------------------------------------------------- $38,000 15.0% $5,700 15.0% $5,700 $11,400 30.0% $91,850 28.0% $20,778 22.6% $9,272 $30,050 32.7% $140,000 31.0% $35,705 25.5% $9,272 $44,976 32.1% $250,000 36.0% $75,305 30.1% $9,272 $84,576 33.8% $500,000 39.6% $172,305 34.5% $9,272 $181,576 36.3% $1,000,000 39.6% $370,305 37.0% $9,272 $379,576 38.0% $10,000,000 39.6% $3,934,305 39.3% $9,272 $3,943,576 39.4% ----------------------------------------------------------------------------- I have included Social Security (FICA - the full 15.3% `contribution') for two reasons. First, because it is a major component of the taxes most working people pay and second, since FICA tax is not collected on income over $60,600, it very strongly changes the actual tax rate range. And FICA is not collected on dividend income or capital gains. If our Social Security taxes are rolled into the total tax rate, and paid on all income, from bottom to the very top, the whole system becomes very simple, very fair and, not surprisingly, most of us end up paying a whole lot less. Now for the good news. We can lower taxes for almost all Americans and eliminate the deficit with a flat tax. The Gross Domestic Product for 1992 was $5.96 trillion. Federal expenditures - including deficit, were $1.38 trillion. If ALL domestic income were taxed at one flat rate, enough for income to match expenses, with no deductions, that tax rate would be 23%! That means that if we all were taxed equally, it would go down greatly for those of us who pay our fair share and even the ones who've been skating will get the benefit of the lower rate. We could, most of us, pay less and still not be financing debt! Instead, actual Federal Revenue was $1.09 trillion, leaving us with a $290 billion deficit. It also means the actual national tax rate was only 18%. So who was getting by for ten percent, while the rest of us were paying thirty or more?