By Richard L. Kesner, President
The CommonWealth Group
May 2005
“A Government that robs Peter to Pay Paul
can Always Rely on the Support of Paul”- George Bernard Shaw
The current tax code contains 17,000 pages and is growing. Can anyone really expect efficiencies with such a monster? Coupled with IRS regulations the tax code now exceeds eleven million words or twelve times the entire works of Shakespeare and fifteen times the length of the King James Bible. It is clearly time for some reform.
There have been a lot of different solutions proposed to our current taxing system, most recently a national sales tax or VAT (Value Added Tax). This is a consumption tax which taxes people who spend rather than save. Thus, savings is encouraged and spending is taxed. It is a fair and objective way for a government to raise funds. This type of tax has been in Europe for a long time. The problem in Europe, however, is that the government maintained some form of income tax allowing politicians to continue raising this level. Because of this loophole, taxes as a percent of GDP in the European Union now exceed 40%, while taxes on a percent of GDP in the US are not about 25%. We also have a lower rate of inflation and a lower unemployment rate. The higher taxes have pushed the Old European Country economies into stagnation. The new Eastern European Countries have introduced a VAT (Value Added Tax) or a flat tax rate, and their economics are growing.
To summarize, it is time to get rid of the 17,000 page monster and start fresh. Taxing consumption would eliminate tax loopholes, would save the government billions of dollars in tax fraud, would raise more revenue for government projects and would heighten savings and investing which would create more jobs. As usual, this has become a political issue, and not an economic issue. It amazes me that whenever politics are in play the opposing party does whatever it can to defeat the measure even if it is good.
SOCIAL SECURITY
That brings us to Social Security reform. I really believe that almost every American knows that the system is in trouble. Both parties have reluctantly admitted it, but only when they are in power. The Bush Administration has made a good step toward preserving the benefits of all Americans by recommending some minor changes and they are minor changes.
However, all of the Democrats and all of the lobby groups, especially the AARP, are against the change and are using false scare tactics to defeat the changes. Last night I saw an ad by AARP that depicted an individual who needed their sink repaired. Rather than repair the sink the builder stated they had to demolish the house. Then the caption read that this is what the government intends to do to social security. Thank you AARP for continuing to provide false and misleading advertising to the country. Ridiculous.
This is another area that is economic but has become political. The social security system was established in 1936 by FDR and Congress. Social Security was a “promise” not a guarantee. In 1936 the government promised that employer and employee would pay into the system 1.5 cents for each dollar earned up to $3000. The tax would increase to 2 cents in 1943 and 3 cents in 1949. THE PROMISE WAS THAT THAT WOULD BE THE MOST WE WOULD EVER HAVE TO PAY. We now pay much much more. In 1936 the government said they would set up a social security account, and checks would come to retirees as a “right.” A “trust fund” was supposedly established. Turns out that the trust fund was all trust and no fund as there is no money. Any normal trustee handling money in such an imprudent way would be charged with a crime. Right now all that we have is a full government IOU that can be redeemed only by taxes on us, our children and our grandchildren. It was a fabulous idea in 1936 when there were sixteen workers for every one retiree. Today there are only three workers per retiree and that number will drop to two very shortly. THERE JUST WILL NOT BE ENOUGH WORKERS TO CARRY THE SYSTEM AS IT NOW IS STRUCTURED.
Can someone please explain to me what is so difficult about changing this system so it is more rewarding for our children and grandchildren? It is time we contacted all politicians and put it on the record that we want a change. ENOUGH OF POLITICS.
Social Security reform can be broken down into two parts. First is revision or change in the present system. Second is the plan for separate investment accounts.
The separate investment accounts will allow an individual less than 55 years of age to take a small percentage of the payroll social security contributions and invest those dollars into his or her private stock investment account. The amount is proposed to be between 2% and 4% or whatever can be agreed upon. It is entirely voluntary. Those individuals who do not wish to participate do not have to. The amount of money that will not go into the social security trust fund will be very small; as there is no money in the fund anyway it is meaningless. This could mean a lot for young Americans in their 20’s and 30’s. It will not affect anyone that is currently older than 55. For some reason the AARP is vehemently apposed to the individual savings accounts plan even though most of their members are above age 55. It is very disappointing.
Currently we have an administration that is trying to fix something before it becomes a national emergency. We wonder why Congress doesn’t act in advance; the reason is politics. Congress needs to have the issues of the people come before the issues of votes.
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