NEW TAX SCHEME ON THE HORIZON

 

 

 

By Joan Veon
November 1, 2005
NewsWithViews.com

For several years now, there have been moves to reform the �Byzantine U.S. Tax Code�. Three years ago this month, the Washington Post ran an article entitled, �Inching Away from Income Tax-�Value-Added� Levy Would Turn System Upside Down� by Jonathan Weisman. In January, 2003 Bush unveiled his 10-year $674B tax plan which would give stock investors huge breaks and basically create a feudalistic system in the U.S. by shifting the tax burden to the middle class while giving huge tax breaks and the abolishment of estate taxes to the extremely wealthy. At the time, The Post chided Bush by saying he should call the dramatic reshaping of the federal tax system by its right name: �radical tax reform�.

Recently the President�s Advisory Panel on Federal Tax Reform gave a pre-release press briefing on the new recommendations they will unveil on November 1. In this regard, it is time to revisit the whole concept of income tax, and the state of the U.S. taxpayer, and tax reform, again. First, the �Byzantine U.S. Tax Code� was created by Congress. Some of the reasons for changing the tax code include the cost and time needed to prepare the yearly tax, the fact that there are tax loop holes that encourage unhealthy consumer behavior, tax fraud, and the need to stimulate the economy. Our 46,000 page Byzantine tax code with its 600 different tax forms was created by Congress. The following tax laws, which added tremendous complexity, are abbreviated only by year they were passed: 1981, 1982, 1984, 1985, 1986, 1988, 1993, 1996, 1997, 1998 and 2001.

Secondly, those concerned with our welfare are now worried about the big houses and the corresponding increase in consumer debt that Americans have taken on. I would like to address this concern. How did this all happen? Let us go back to the crash of the NASDAQ in 2000 when over $7T vanished from the stock market. In order to make people feel better about the economy and to keep it moving, the Federal Reserve dropped interest rates over a two year period to 45 year lows. The housing market capitalized on the idea that Americans could now �afford� to mortgage more for less interest and buy their dream home. What great marketing! That is exactly what some did while others decided to do what many tycoons do and maximize their profits by taking huge tax deductions on improvements and �flipping houses�. At the same time, The Fed never complained that the economy was being supported by this activity since 4 out of 5 jobs come from the building industry. The Federal Reserve then termed the consequences of our actions as creating �the housing bubble.� The Fed and the Bank for International Settlements have warned over the past two years that the bubble could burst at any time with adverse affects. In fact, a week before Hurricane Katrina Federal Reserve Chairman Alan Greenspan said in a major speech that Americans needed to reduce their spending and save. Since then he has warned about the housing bubble. Now our government is coming to the rescue. They are looking to make order out of the chaos they have created! If we were talking family dynamics, we would call it �dysfunctional behavior.�

There were a number of news reports on the pre-release press briefing. The October 19 Financial Times gave this report about the proposed changes, �[T]he panel also proposed a more radical solution to replace the current scheme with a progressive consumption-based tax� while USAToday said that the advisory panel �made clear that it has rejected [radical changes] including replacing the income tax system with a national retail sales tax or combining income taxes with a European-style value-added tax.�

It appears, however, that the Advisory Panel is proposing two plans. According to CNN, the first plan is a �simplified and heavily modified version of the current income tax code, while the second plan introduces a consumption tax into the system, according to reports from Reuters and Dow Jones Newswires� (money.cnn.com, 10/18/05). In other words, the government will modify the current tax on income system by making the following changes: cut the number of tax brackets from six to four (15%, 25%, 30% and 33%), eliminate the marriage penalty, revamp capital gains taxes so that stocks and dividends are only taxed at the individual level and not at the corporate level as well, eliminate the deductions for state and local taxes, limit the home mortgage deduction to $312,895, cap the amount of tax-free money an employer could pay for a worker�s health insurance plan to $11,500 for families, and abolish the Alternative Minimum Tax which would cost the government $1.2T over 10 years.

Interestingly enough, the Dow Jones reports that taxpayers would pay no more or no less than they do under the current system, and that the amount of tax paid will be distributed about the same as it is now--but with �a lot less hassle� according to former IRS Commissioner and panel member Charles Rossotti.

The second recommendation is that a consumption tax of 15% be added to the system. This is considered a �hybrid tax code� with a tax on income and a type of sales tax known as a value-added tax-VAT. A VAT is a tax that is charged at each level of the manufacturing process. Because of the added tax, it increases the price of the item being manufactured and it reduces �hoodwinking� the government because of the complexity of the number of participants involved in the VAT system. It also is suppose to encourage savings and reduce consumption, all at a time when Americans are up to their eyeballs in debt.

Furthermore, for a number of years, Americans have borne the brunt of many criticisms about our lack of savings. Again, this is part of creating the problem so it can be solved by �new and innovative solutions.� In 1980 our democratic government passed The Monetary De-Regulation Act which removed ceilings and floors on interest banks had to pay and charge on savings and certificates of deposit. It allowed them to pay the market rate versus a specified amount. Up until then, savers could be guaranteed of a reasonable amount of interest on their savings. Today, savers are getting market rates which range from �% to 1%. Most Americans no longer save in the banking system but save in the stock market which does not count, according to the Federal Reserve. The VAT is supposed to change this.

I am not surprised at the dual taxing system as I predicted that our government would piggyback a VAT to the current income tax system in an economic newsletter I wrote a year ago. You see, in a globalized world, that is a world where there are no barriers between the nation-states, the next step after tearing down the economic, political, trade, legal, military and intelligence barriers�would be the harmonization of tax schemes and governmental systems.

Out of the Group of Eight countries, the U.S. is the only country not to have a VAT. Out of the 30 countries that are members of the OECD, the U.S. is the only country not to have a VAT. Several years ago when Bush first recommended a VAT, the only two countries in the world not to have a VAT were the U.S. and India. However, India just passed a VAT amid great dissention. Now it is only the U.S. that does not have a VAT. How are you going to have a harmonized world governmental system if the economic and tax policies are not harmonized?

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What will a VAT do? It will squeeze all those who are not in the upper 1%. In a post-Katrina world, the VAT will give the government greater income at �point of sale� which means that it will not be collected just on April 15 but every time a purchase is made: clothing, a house, or an automobile, having the plumber over to fix the toilet, or having your teeth cleaned. It will reward the rich and punish those who don�t have any savings. It will change the America we once knew.

� 2005 Joan Veon - All Rights Reserved

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