The National Tax System Is Failing

Falling tax revenues, sharply rising costs of Social Security, Medicaid, as well as the impending huge increase in federal spending for ObamaCare, the present recession has begun to expose the major weaknesses the American system of taxation. The millstone of entitlement programs will eventually strangle our government and cause our government to fall into bankruptcy. Several states are already on the verge of the abyss, California, New Jersey, New York, Massachusetts and Illinois are those nearest to the edge.
What all these states, as well as the federal government have in common are a "progressive" income tax system wherein the wealthy pay much, much higher rates than those in lower income brackets. In the instance of the federal tax system, almost half pays no income tax at all...what's fair about that? The Democratic Party has been demanding dramatic increases in the tax structure with the Mr. Obama making increasingly strident calls that the wealthy pay "their fair share." At the present time, the Republican Party in particular and conservatives in general have vehemently opposed any possible hikes in taxes, but that hasn't prevented them from supporting increased spending...something that must be accomplished in order to balance the budget and end deficit spending.

In the case of those states that have, in the past several years, significantly raised their higher rates, or have instituted "millionaire's" taxes, those who can afford to do so, fled the states in droves. Maryland past such a tax that would cover roughly 300,000 people. In the very next year, 100,000 people fewer reported incomes in the requisite income bracket. California and New Jersey have passed similar taxes and are experiencing similar flight of higher income populations.

There are two possible solutions to this dilemma, both would require a massive overhaul of the present tax system. The first alternative would be to pass a flat income tax rate applicable to ALL people and businesses, such as that which then candidate Steve Forbes proposed ten years ago during the 2000 presidential campaign. If that route is chosen, then almost certainly an exception would have to be made for those below the poverty level...but then, no other possible exceptions should then be made. This would dramatically raise the funds available to the federal government.

The other alternative would be to institute a Value Added Tax. A VAT works like this

A farmer grows wheat and sells it to the miller. A tax is paid by the farmer on the sale price of the wheat and is included in the price. When the miller sells the flour made from the wheat, a tax is assessed on that sale as well. But the miller subtracts the tax he paid when he bought the wheat. When the baker buys the flour, he pays the tax included by the miller, which also includes the tax paid by the farmer. When the baker sells bread made from the flour, the tax is assessed once again. But as in earlier cases, the baker gets credit for all the previous taxes paid.

In each case, an invoice trail shows the taxes paid at each step. Those at each stage of production and distribution have an incentive to pay the tax so that they will get credit for the taxes they paid when they purchased goods from other businesses. Thus the tax is only assessed on value added--the difference between what a producer paid for inputs and what he was able to sell that was made from those inputs.

However, that wouldn't balance the budget, nor would it end the hemorrhaging of deficit spending. The only possible solution to that would be to seriously cut spending that isn't necessary to the maintenance of the government. Only by reigning in spending will we be able to begin to reduce the monumental size of our debt. One way to control that would be a constitutional amendment that requires spending cuts in one area, spending rises in other areas. There are even some novel ideas being bandied about how to do this, 

There are even more new ideas (and political and economic benefits) to go along with this new (and superior) tax policy.

Why aren’t we talking about increasingly popular ideas like constitutional spending caps? Why aren’t we lauding the replacement of the the bureaucratic entitlement state with a yearly stipend for every American (see Fair Tax rebate or Charles Murray)?

Instead of fighting against a welfare state that most Americans still support (Soc. Sec., “health care reform,” and public education), why aren’t we framing our ideas as the “individualization” of government assistance through retirement accounts, health savings accounts, and scholarships and education savings accounts?

The real worry is that, as a nation, we are too far gone to recover from the stupidity of our politicians of the past 80 or so years. Our government cannot continue to spend money that we don't have. If I write a check, and don't have the necessary funds in my account, I can go to jail...so we are sentencing our children to several generations of severe austerity in order to pay for our lifestyle. The time has come to pay the bills, and not leave them for the future.