Monday, April 24, 2017

Best selling textbook author describes principles for tax reform

In a NY Times article, Greg Mankiw demonstrates the ability that has made him a best-selling-econ-textbook author by simplifying a confusing debate down to four principles:

  • WORLDWIDE VS. TERRITORIAL: Most nations aim to impose taxes on economic activity that takes place within their borders 
  •  INCOME VS. CONSUMPTION: Many economists have argued that taxes should be levied based on consumption rather than income. 
  •  ORIGIN-BASED VS. DESTINATION-BASED TAXATION: The corporate tax system is now origin-based. 
  •  DEBT VS. EQUITY: Now, firms can deduct interest payments to bondholders, but they cannot deduct dividend payments to equity holders.
Mankiw thinks that Congress is moving in the right direction in all four dimensions.  

1 comment:

  1. Mr. Mankiw makes a statement at the end of his article that "Any large tax change creates winners and losers, and the losers are sure to make their voices heard. But what matters most is whether the changes are better for the United States over all, not for special-interest groups." I have thought about an answer to the tax debate question for years and while I respect and evaluate the different plans that are proposed I am not necessarily a fan of a particular one. I always come back to the idea of a flat tax with no deductions so everyone pays their fair share on a personal income level with a lower corporate tax rate to spark economic growth.

    I have complied the following data through multiple websites to come up with a tax plan that in my opinion is equally fair while balancing the federal and state budgets. It may not be perfect because there will be people who are unhappy but on paper it covers all our current government programs and our federal and state expenditures.

    From this information the total expenditures on the federal level accounted for $3,540,000,000,000 while on a state level they accounted for $1,325,468,000,000 for a total of $4,865,468,000,000. To balance the federal and state budgets without cutting any areas such as social security, Medicare / Medicare, Defense, Education, ETC, we would need to generate $4,865,468,000,000 in our collection of taxes. Under this plan all of the money collected would be distributed to the federal government and the state branches to cover their expenditures.

    My suggestion would be a flat tax with no deductions on an income level, a flat tax on all goods and services which make up the annual GDP which would replace individual states sales taxes and a flat tax on cooperate income. With individual income totaling $16,011,600,000,000.00 in 2016 if we were to establish 1 tax bracket at 20% with no deductions this would generate $3,202,320,000,000 in tax revenue. This 20% tax bracket would eliminate the federal and state taxes which are currently taken out of our paychecks in addition to the other deductions such as social security and Medicare. From this first component we would need to generate an additional $1,663,148,000,000 to balance our budget’s.

    In 2016 the national GDP was $16,546,000,000,000 which is comprised from all goods and services sold in the country. How this area of the economy is taxed has always been an issue for me because when you think about how many people try to manipulate the tax code to come out ahead or how some people try to take jobs that pay in cash to avoid paying taxes this is one area which can’t be escaped. Every person needs to spend money to live and taxing the GDP accordingly ensures that everyone is putting into the system. I would purpose eliminating the current sales tax on goods and services and replacing it with a 10% flat tax. If this was to be implemented we would collect $1,654,600,000,000 in taxes from the 10% flat tax on goods and services.

    When we add the $3,202,320,000,000 collected from the 20% flat tax on income and the $1,654,600,000,000 collected from the 10% flat tax on goods and services we come to a total of $4,856,920,000,000 which when we deduct from the annual federal and state allocations of $4,865,468,000,000 we are left with $8,548,000,000 remaining. With $8,548,000,000 left to cover all of our expenses I would purpose a 15% flat tax on businesses with no deductions. In 2016 Apple profited $45.7 billion and JP Morgan profited $24.7 billion dollars. Under this 15% flat tax on businesses all of our national and state expenditures would be covered leaving a surplus to either pay down the national debt or increase social programs such as Medicaid / Medicare.