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Tax Reform – The Real Stimulus

Posted by Steve Markowitz on April 16, 2010

Today we have a guest-posting from Jim Mahoney that is a really good read.  Jim, a CPA, offers an alternative to the failed Obama Stimulus Plan.  While we cannot turn back the clock, about half of the Stimulus remains unspent.  Jim’s approach for that $500 billion would better serve the country and our economy.  But don’t expect logic from the Progressives in Washington whose motto seems to be: “If a governmental program fails, double-down on the bet.”

Tax Reform – The Real Stimulus, by Jim Mahoney

Ever since the “Financial Meltdown” occurred in October of 2008, there has been a concerted government effort to frighten the American people about the urgency of passing the Stimulus Bill in order to head off economic collapse.  Early in the spring of 2009, when the unemployment rate was 7%, Obama ominously told the American public that if Congress did not pass the stimulus bill immediately the economy was in danger of imminent collapse and the unemployment rate could go as high as 9%.  Well, the Bill passed and the national unemployment rate is now hovering at 10% and climbing.  If you factor in discouraged workers who are either underemployed or have given up looking for work entirely, that figure rises to over17%.  The economy remains in the doldrums and the Administration keeps telling us that the Stimulus is working, even as they move to extend jobless benefits for a total of 99 weeks.  As of now, about half of the $1 trillion allocated to the Stimulus has been spent, with very little of it being used for its original stated purpose.  Any funds that have been repaid by the financial industry have been illegally reallocated into a political slush fund, instead of being returned to the Treasury, and billions of dollars of Stimulus funds have simply vanished.  By any measure the Stimulus has been a complete failure.  You can expect the Administration to tap into the remaining $500 billion to sprinkle additional funding around in 2010 to provide a short lived economic sugar rush just in time for the mid term elections.

Now suppose that when the “crisis” was first identified, instead of shuffling money like a Three Card Monte through a maze of federal agencies headed by faceless unaccountable Czars and bureaucrats, the federal government had responded by cutting the individual income tax rates in half.  According to IRS data, the revenues received by the federal government from personal income taxes in 2008 totaled a little over $1 trillion.  By the way, this was a record level of tax revenue that was the direct result of the George Bush tax cuts for the “wealthy”, but that’s a topic for another article.

Since we’ve all just recently filed our income tax returns, let’s bring this discussion closer to home.  Take out your 2009 Tax Return and look at your total federal income tax liability.  This is Line 46 on Form 1040 (Line 28 on Form 1040-A).  More Americans need to focus on this number.  Because of employer income tax withholding and quarterly estimated payments, many Americans are oblivious as to how much they actually pay in income taxes.  Pay no attention to the relatively lower amount of any taxes due with your return or to the amount you “got back” as a refund.  Look at your total gross income tax liability before any payments or credits.  It’s a pretty eye opening amount, isn’t it?

Now imagine you had half of this amount available as cash in your pocket to use in whatever way you pleased.  You might invest it, use it to pay down debt, make additional donations to your favorite charities, start your own business, or buy the kind of new car you actually wanted, instead of some politically correct, government approved, roller skate in a Cash for Clunkers program.  In fact, how you decide to use it is irrelevant since it is your own money after all.  You would patronize businesses, restaurants and other services of your choice and inject capital into the system in the process.  These companies in turn would hire more employees to handle the increased business.  The employees hired would then begin paying taxes themselves instead of being idle workers living on unemployment benefits.  Well-run companies that provide good customer service would be rewarded and poorly run companies would go out of business.  This is how capitalism works when it is freed from government interference.  This would create a true economic stimulus because the money would have been voluntarily spent and invested by you in your local community, not confiscated by a government that seeks to create winners and losers based upon their political ideology and campaign contributions.

Now multiply this effect with taxpayers all across the country.  Giving taxpayers more of their money means that the funds would have been distributed to local communities throughout the county quickly and efficiently with no opportunity for fraud.  Cutting the personal tax rate in half would have instantly injected $500 billion into the economy without the need to establish a single federal agency, focus group, or suffer through a presidential speech.  Tax cuts have worked every time they have been tried.  Why is the government so fearful of letting the productive segment of society have control over our own money?

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One Response to “Tax Reform – The Real Stimulus”

  1. Carl Hackert said

    Dr. Arthur Laffer’s 2011 predictions not a “laughing matter” …

    Below is an article which should make anyone in private business, in college or retired very, very nervous. The week ending June 4th’s disappointing private jobs numbers (going into the summer vacation hiring period) indicates a reluctance by business owners to take a gamble by hiring and investing. What the Progressive Euro-phyles in our leftwing Congress and Mr. Obama’s appointees don’t seem to understand is the market’s uncertainty caused by the increased costs of hiring and regulations, a VAT tax, Cap & Trade, Obamacare implementation, removal of Reagan/Bush tax incentives and changing or threatening to change other Rules of the Game – all of which was part of their 2008 election strategy called Demonizing the Rich and Wealth Redistribution – thank God for “Joe the Plumber”.

    It appears that the Obama Administration has invented a theory of Economics and a stimulus which would make FDR blush. My gut predicts that this theory will be ridiculed in the History of the 21st Century. Perhaps it will be called “Trickle Up Socialism” or “Pervasive Poverty Percolation”. It would be defined more of as a doctrine rather than factually supported theory of economics. It is based on a false yet politically correct notion: that poor people, made dependent upon and enabled by an agnostic redistributive centrally controlled socialist government will, over time, create a strong economy from the bottom up and, in spite of the debt and evidence to the contrary, will even balance the government budget simply because popular politically correct environmentally and socially sensitive intellectual ruling elite will make decisions for everyone. Under this theory, the Rich, Pennsylvanians possessing firearms and Bibles, and a dwindling Middle Class will be taught by educators and a cooperative media not to object and will refrain from taking any actions that would protect their private holdings from taxes or regulations.

    HERE’s THE ARTICLE (thanks to Newsmax):

    Laffer: 2011 ‘Tax’ Collapse Coming
    Monday, 07 Jun 2010 09:54 AM

    By: Julie Crawshaw

    Tax hikes expected to hit after the expiration of the Bush tax cuts will cause today’s corporate profits to tumble next year — probably right after a stock market collapse, says economist Arthur Laffer, chairman of Laffer Associates and inventor of the Laffer Curve.

    “My best guess is that the train goes off the tracks and we get our worst nightmare of a severe ‘double dip’ recession,” Laffer says.

    Laffer, head of the Office of Management and Budget under President Ronald Reagan.warns of these coming tax hikes:

    — the highest federal personal income tax rate will go to 39.6 percent from 35 percent;

    — the highest federal dividend tax rate pops up to 39.6 percent from 15 percent;

    — the capital gains tax rate will hit 20 percent from 15 percent;

    — the estate tax rate soars to 55 percent from zero.

    “Lots and lots of other changes will also occur as a result of the sunset provision in the Bush tax cuts,” he wrote in the Wall Street Journal. “Tax rate increases next year are everywhere.”

    Laffer says the coming hikes — coupled with the prospect of rising prices, higher interest rates and more regulations next year — are causing businesses to shift production and income from 2011 to 2010 to the greatest extent possible.

    “As a result, income this year has already been inflated above where it otherwise should be and next year, 2011, income will be lower than it otherwise should be,” Laffer says.

    “It shouldn’t surprise anyone that the nine states without an income tax are growing far faster and attracting more people than are the nine states with the highest income tax rates,” he says.

    “Likewise, who is gobsmacked when they are told that the two wealthiest Americans — Bill Gates and Warren Buffett — hold the bulk of their wealth in the nontaxed form of unrealized capital gains?”

    Laffer notes that, according to a 2004 U.S. Treasury report, high income taxpayers accelerated the receipt of wages and year-end bonuses from 1993 to 1992 — more than $15 billion — in order to avoid the effects of the anticipated increase in the top rate from 31 percent to 39.6 percent.

    At the end of 1993, taxpayers shifted wages and bonuses yet again to avoid the increase in Medicare taxes that went into effect beginning 1994.

    Reagan’s delayed tax cuts, Laffer observes — which were passed under the Economic Recovery Tax Act in 1981 but didn’t take effect until 1983 — were the mirror image of President Barack Obama’s delayed tax rate increases.

    “For 1981 and 1982 people deferred so much economic activity that real GDP was basically flat (i.e., no growth), and the unemployment rate rose to well over 10 percent,” he points out.

    However, in 1983, the economy took off like a rocket, with average real growth reaching 7.5 percent in 1983 and 5.5 percent in 1984. Mr. Obama’s experience with deferred tax rate increases will be the reverse.

    The economy will collapse in 2011.

    In 2010, Laffer points out, people can cash in their Individual Retirement Accounts (IRAs), Keough deferred income accounts and 401(k) deferred income accounts without prepayment penalties.

    After paying their taxes, these deferred income accounts can be rolled into Roth IRAs that provide after-tax income to their owners into the future.

    The result will be a crash in tax receipts once the surge is past, Laffer says.

    “Incentives matter,” Laffer says. “If you thought deficits and unemployment have been bad lately, you ain’t seen nothing yet,” adding that if the government taxes people who work and pays people not to work, the result will be that fewer people will work.

    According to a survey from the National Association for the Self-Employed, businesses will experience a 1,250 percent increase in the amount of tax-related paperwork required of small-business owners come 2012, making economic progress even more difficult.

    “To the mom and pop shop, time is money, and this new regulation is going to require plenty of both,” NASE Kristie Arslan told the Earth Times.

    “The bottom line is that the Form 1099 expanded reporting requirement affects companies small and large, increasing the number of forms issued and received many times over.”

    © Moneynews. All rights reserved.

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