The Tax Reform We Need and Want, Part II – There Is Hope

As I said yesterday... we really need tax reform, and we really want tax cuts.

But... in order to have a balanced budget, we also really need at least $3.6 trillion in federal government revenue.

Can it be done? I say it can. But how?

First, let's take a look at the tax system we have. And a look is all that's required to see that we have to get rid of it. The federal tax code is 4 million words long – five times the length of the Bible. You can swear on the Bible. You can only swear at the federal tax code.

So we need a different process for collecting government revenue.

There are only a certain number of ways to tax people.

The simplest levy is a "head tax." Everyone is charged an equal fee. This has ancient precedents. The Roman Empire placed a head tax on its subject peoples. Mary and Joseph were on their way to Bethlehem to be counted – and hence taxed.

This would lead to some problems for the Roman Empire, such as Christians who would rather be eaten by lions than bow down to it.

A head tax would also lead to some problems for America. There are 319 million people in the U.S. In order to get $3.6 trillion, we'd have to charge them $11,285 each – a good deal for people in the upper tax brackets. A family of three would only pay the IRS $33,855 – less than the tuition for keeping its rich kid in his seventh undergraduate year at Brown.

Ooooh, but for a family of three with the U.S. median household income of about $52,000... Not such a good deal.

A $33,855 tax bill would put them below the poverty line, and the federal budget would go berserk because we would be paying welfare benefits to half the nation.

As for people who are truly poor, it would take quite a shakedown racket to extract nearly $12,000 apiece from them. We'd have to scrap the IRS, get all the old mafia guys out of the witness protection program, and put them back to work as strong-arm debt collectors.

Meanwhile, let's just forget about corporate income taxes. The U.S. corporate tax rate is 35%, which makes us about as competitive in the global business world as the one-win Cleveland Browns were in the NFL last year.

And why should we tax corporations at all when we tax the investors who profit from corporate dividends? This is like giving your child an ice cream cone, but taking a bite out of it first and then, when she begins to cry, taking a larger bite.

Besides, as high as corporate taxes are, they bring in only $300 billion a year to the U.S. Treasury.

Next, there's a consumption tax, or "value-added tax" (VAT). You can think of this like a state's sales tax. For a VAT to raise $3.6 trillion, it would have to be applied to the entire U.S. GDP of $18.6 trillion at a rate of about 19% on every good or service you purchase.

Except the situation is worse than that... We devote 13.2% of our GDP to mandatory government entitlement spending. We're not about to take nearly one-fifth of impoverished old peoples' Social Security checks or charge wounded veterans a 19% tax on their wheelchairs. This leaves us with an approximately $15 trillion GDP requiring a VAT of almost 25%.

That will be inflationary.

Or we could fund the U.S. federal government the way it was traditionally funded in the 18th and 19th centuries – with import taxes. U.S. customs duties currently average 3%. Our annual imports are valued at about $2.8 trillion. In order to get the $3.6 trillion we want, we'd have to impose an across-the-board tariff of nearly 130%.

Of course, this would set off a trade war. (Although, I've always sort of liked the idea of a trade war, at least as opposed to a real war. The French would throw bottles of wine at us, and we'd heave big chunks of Velveeta at them.)

Another traditional method of extracting cash from a nation's citizens is a property tax levied on net worth. The Federal Reserve estimates the full U.S. total net worth to be $86.8 trillion. A 4% tax on all our property would suffice.

Average Americans will be pleased. U.S. median net worth is $44,900. A tax bill of $1,796, including all payroll and social insurance charges, is a bargain.

But too bad about Mom and Dad who paid off their mortgage and stayed in the shabby old neighborhood... which has now gentrified and made their house worth $1 million. They'll be paying $40,000 a year plus $200 for the $5,000 they have left in their IRAs.

A flat tax, with absolutely no deductions, seems nearly as simple as a head tax. According to the Fed, total U.S. annual personal income is about $16 trillion. We could get our $3.6 trillion with a 22% flat tax.

This still clobbers the poor and the middle class, even if it looks good to people making more than $100,000 and currently paying marginal tax rates of between 28% and 39.6%.

Except, like a lot of things that look good, it doesn't look quite as good if you look closer. American democracy would never let us get away with applying a 22% income tax without any deductions to the majority of people who can vote.

And high-income Americans aren't the majority. Americans with an adjusted gross income of more than $100,000 file only 16% of income tax returns, while paying nearly 80% of all income tax.

Using a rough estimate based on those income-tax returns, high-income Americans account for about $13.2 trillion of the nation's roughly $16 trillion in personal income.

To push a flat tax through congress, the flat tax would have to be applied almost exclusively to the $13.2 trillion earned by high-income Americans. This means a 27% flat tax rate.

It's better than 28% to 39.6%. Or not. The nonpartisan Pew Research Center calculates that people who make $250,000 a year or more, in fact, pay an average income tax rate – after deductions, capital gains allowances, etc. – of 25.7%.

Still, a flat tax brings us closer to what we need and want than any other type of taxation. Let's fiddle around the other taxation methods and see if we can get that flat tax down a little...

Surely it's worth $1,000 a year to live in the United States. That's only $83.33 a month. We're talking the price of cable TV. And what could be more American than watching television?... A head tax brings in $319 billion.

A national VAT does violate the "Don't Feed the Beast Rule." We should never, ever let the government invent a new tax. It will never go away, and all other taxes will remain in place at equal or higher rates. But that's in the real world. We're dreaming here. A consumption tax of 5% won't break the bank... VAT brings in $750 billion.

We raise customs duties to 10%. That's not prohibitive. And if the French want to throw a bottle of wine at me, make that a 2009 Château Lafite Rothschild... Tariffs bring in $280 billion.

A 0.5% net-worth tax finally convinces Mom and Dad to sell out, get away from the noisy hipsters, and move to Sarasota... Property tax brings in $434 billion.

Let's add it up...

We only have $1.783 trillion to go to reach $3.6 trillion. And we can get that with a 14% flat tax on high-income earners.

Now – as soon as Americans vote me in as president, elect me to every seat in the House of Representatives and the Senate, and appoint me to the Supreme Court so that it has an extra-conservative majority to quash any lawsuits against the above proposals – we'll have the tax reform we need and want.

Regards,

P.J. O'Rourke

Editor's note: If President Trump's tax-reform proposal passes, all of the power that has been consolidated in D.C. over the past 40 years will evaporate. In essence, Trump has put a metaphorical gun to the head of the "Deep State." And now, the Deep State is fighting back...

Porter and his team of analysts have put together a list of 12 companies that stand to win and lose based on Trump's proposals. If they're right, you could pocket gains like 1,110%... 1,370%... 2,650%... 4,980%... 6,760%... and more. But you have to act quickly because as soon as these laws go into effect, the opportunities won't last long. Click here to learn more.