'..my proposals amount to a major shift in the tax and incentive structure of the United States..' - John Mauldin

'..It is only politically impossible if everyone doesn’t get something they want. What I have proposed is so politically delicious to all sides that it becomes possible.'

<blockquote>'An Open Letter to the President, Part Five

Let’s summarize where we are. <a href="[www.mauldineconomics.com] week</a> I showed you where to find $2 trillion for infrastructure development by repurposing the Federal Reserve’s balance sheet. What I didn’t mention was that, while the whole trillion obviously cannot be put to work the first year (given the nature of infrastructure timelines), it is not unreasonable to expect that $400 billion in annual expenditures could be reached within three years. There are 122 million people working in the US today, in an economy of roughly $20 trillion. We could easily expect that our $400 billion a year to translate into more than two million jobs and perhaps even more, as infrastructure development is generally more labor-intensive than many other activities are. And these jobs would generally be higher paying than most service jobs, so this initiative could deliver a serious stimulus for the economy, helping us steer clear of recession.

..

Here is the basic political reality you’re dealing with. Republicans want supply-side tax cuts and flat taxes, spending cuts, and a balanced budget, or some combination of all of them. Democrats want more spending for healthcare and other consumer-related items, an agenda that means higher taxes; and many, if not most, would at least give a nod to balancing the budget. Everyone is for “the little guy.”

So let’s start with the easy part. You’re going to want the Republicans to go along with an increase in the total tax revenue. If you forget for a moment where you want to extract that revenue from (by taxing the rich, for instance) and just say that your goal is to get more tax revenue, then you will have a lot more flexibility. And the reality is that you could significantly raise taxes on the rich (and by “the rich” I mean the top 20% in income) and still get nothing close to the amount you need. The sad reality is that you would have to raise taxes not only on the rich but on the middle class in order to make a difference. And I’m going to assume that raising taxes on the beleaguered and shrinking middle class is a nonstarter for pretty much everyone.

So to get what you want, give the Republicans a tax cut that will get every one of their little supply-side hearts absolutely quivering in anticipation. Give them so much of what they want that it becomes almost impossible for them to say no. That means you can’t be halfhearted; you’re going to have to go the whole hog.

Offer a 20% flat tax on income over $100,000. Period. No deductions for anything. Dividends, interest income, municipal income tax revenues, all are taxed at 20% above the total $100,000 income level. Every sacred cow goes. No mortgage deductions, no charitable contribution deductions, no child tax credit, no nothing. Every penny over $100,000 is taxed at 20%. Now, you can make an argument that income from say $50,000–$100,000 should be taxed at 10%, but that’s not going to give you enough money to do what you need to do in order to be able to get the support of the Democrats. There is, on the other hand, a case to be made that people making over $50,000 should contribute something to the overall general welfare of the economy.

That still gives everyone up and down the ladder a major tax cut. There is not a supply sider in America who is not going to like that tax structure. Your income tax filing is done on a 3”x5” card. If you made between $50,000 and $100,000, you pay 10%. If you made more than that, you pay $10,000 plus 20% of everything you made above $100,000. This is going to be surprisingly popular with millennials: survey after survey shows that one of their big fears is dealing with the IRS. In a world where 40% of America is now getting some form of non-salaried income, dealing with the IRS is becoming more complicated. Millennials are increasingly part of the gig economy, and a flat tax will make their lives easier. You are going to be surprised at the level of support this tax proposal will get from young people.

Now, this tax structure is, of course, going to make people who want to soak the rich unhappy, as they don’t see how the little guy benefits. So here is where we have to get really creative. And this is why you are giving the Republicans something that’s going to be very difficult for them to walk away from: you’re going to combine their tax cut with two additional items.

To the Democrats, offer to abolish the Social Security tax on both sides of the equation, both business and personal. That means an individual making $30,000 a year gets an approximately $2000 pay raise immediately. Every working man and woman gets a pay increase in the form of no deductions for Social Security taxes from their wages.

So where do you get the money? You’re certainly not going to get the support of senior citizens or anyone else for that matter if you start messing around with the ability to pay Social Security benefits. So that means we have to find another revenue source.

And for that revenue source you need to turn to the tax that is the most efficient in economic terms: a consumption tax. But not one that looks like a sales tax. Rather, it should be a version of what almost every other country in the world uses, and that is a value-added tax, or VAT. I would modify it to look more like a business transfer tax (BTT).

Basically, with a BTT, a company pays tax on the revenue it receives net of what it pays for the services and products it is selling. Netflix pays on the revenue it receives after deducting the money it sends to television and movie producers for the rights to show their products. This is all transparent to the end user.

You can tinker around the margins to make this tax more politically acceptable. You can exempt groceries, but then you’re going to have to charge a higher rate on everything else. You can exempt nonprofits, but I wouldn’t: they pay Social Security tax on their employees now. But that may be the price of getting the deal done.

A BTT in the low teens (12-14%) will get you all the revenue that you need. You look the Republicans square in the eye and say I want to get 2% of GDP more tax revenue in the form of the BTT in return for the income flat tax on individuals. By the way, the BTT is legally deductible by US corporations under WTO rules when they ship products overseas – which is what every other country does to us, and why they have a tax advantage over us when shipping products to us. The BTT is going to be a huge boon to US producers. Talk about a cheap way to boost the economy – this is it.

Now, Republicans are going to push back and say, yeah, sure, you want to start this BTT at a low rate today, but the day will come when you want to raise that rate, just as every European and other country around the world has done. And you’re going to want to raise those income tax rates again. Why should we give an inch when you may take a mile in 10 years?

And your counter to that is to offer to sign a constitutional amendment that will require a balanced budget and a supermajority of 60% to raise taxes. In theory, everyone is for a balanced budget (well, almost everyone), and the political reality is that it takes 60% of the Senate to approve any major new tax revenue source anyway. You’re not giving up a lot. Enough Democrats will be willing to go along, because they’re going to get the extra revenue they need for the programs they desperately want, and they get a major boost to lower-income America in the form of no Social Security taxes.

Now, the hard part for Republicans is that they have to get 38 states to approve that constitutional amendment. But they’ll just need to fight it out in about five states (getting 33 more or less red states to approve it shouldn’t be too hard) in order to get what they really want: certainty about the future of taxes and the budget deficit in America. You also need to get everybody to hold hands and sign a pledge to not raise taxes under any circumstances for 10 years. Now, we all know that inside the room a pledge like that is only worth so much, but it’s at least a start.

Oh, and for a sweetener, offer to sign a bill to sunset every government regulation over the next 10 years. Do it in an orderly fashion. Maybe even something like eliminating 20% of government regulations across the board during your first term and not letting the absolute number of new regulations increase after that? If you want a new regulation, get rid of an old one. Force the various bureaucracies to clean out their attics and stop hoarding regulations that are way out of date.

And since I’m from the financial services industry, maybe include one little item to help the gig economy and the upcoming generation. Make retirement plans portable from one job to the next so that a young person has an actual opportunity to build a tax-deferred nest egg.

Be Radical, but Phase It in Slowly

Taken together, my proposals amount to a major shift in the tax and incentive structure of the United States. You won’t be able to implement them all overnight. I would start with the infrastructure project and the reduction of corporate taxes, because the former starts to stimulate the economy, the latter is more or less revenue-neutral, and both boost employment. If part of the compromise on the reduction of corporate taxes is some kind of lower-tax-rate amnesty on the $2 trillion sitting outside the United States, that provision could result in a nice one- or two-year revenue boost. If that tax rate was the 10% I proposed above, there would be $200 billion coming in, which would sure put a dent in the deficit during the following 12 months.

But lowering income taxes, introducing a VAT, and reducing the Social Security burden on businesses and individuals are measures that should probably be phased in over four years. It would take at least a year just for the various agencies involved to change their revenue models and infrastructure.

Set a time limit for balancing the budget. The Clinton/Gingrich budgets did not balance the budget the first year. It took time. Figure out how much actual infrastructure can be worked on to boost the economy in the first year, and then begin to project how those projects will affect growth and how long it will actually take to balance the budget. My back-of-the-napkin guess is that 4–5 years is reasonable. There is nothing like 5% nominal growth to speed the process, and holding spending to the level of inflation will bring the budget under control over time. It will work almost like magic. All you have to do is make sure that the total budget doesn’t rise faster than inflation. The economy can then take care of the rest.

The general objection to the introduction of a VAT in the US is the political impossibility of getting it done. It is only politically impossible if everyone doesn’t get something they want. What I have proposed is so politically delicious to all sides that it becomes possible.

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For those under a certain age, the Social Security rules have to be changed. There needs to be a change in the law so that the age of retirement is automatically adjusted upward if the mortality tables show that lifespans are continuing to increase. (You would be exempt if you were within 15 years of retirement.) This would eliminate a political hot potato. When Roosevelt first proposed Social Security, the average person lived only to age 58, and benefits didn’t start until retirees were 65. Now the average person is living into his or her 80s, and the average lifespan of those with above-average income is in the high 80s. (Yes, there are differences in life expectancy depending on income.) Social Security needs to be means tested.

There are scores of other ways that savings can be found. There are over 100 agencies with their own very expensive bureaucracies that do some type of job training. If this were the private sector, the markets would be screaming for consolidation.'

- John Mauldin, Open Letter to the President, Part Five, April 10, 2016</blockquote>


Context

<blockquote>'America must lead, but mainly by example .. Most importantly, invest the savings to build a secure, dynamic, and prosperous America that others want to emulate.'</blockquote>