Freer Markets Within the Usa: Tax Changes That Make Trade Freer Within the Usa. Phasing-Out Supply-Side Subsidies and Leveling the Playing Field for the Working Person.

By Doug Seger

In Freer Markets within the USA, the author evaluates present tax system and other tax proposals. He suggests gradual, practical, free-market changes that reduce specialized tax breaks and level the playing field for the working person. Instead of having specialized tax breaks for nearly every type of income in which actual work is not involved, a free-market approach suggests moving toward taxing different types of income the same.

The author suggests ways to make social security and Medicare more solvent, health care more affordable, the federal government more financially sound, and the economy more stable and efficient. Topics such as monetary policy, market bubbles, trade agreements, immigration, unions, employment, national debt, spending, and voting are also discussed.

• Language: English
• Publisher: AuthorHouse
• Release date: Sep 14, 2012
• ISBN: 9781477262160

Doug Seger

The author, born in 1958, is a registered Democrat. He points out how deficiencies in the tax code increase income inequities. His straightforward approach of moving toward taxing different types of income the same is sure to be of interest to the general public and to many economists as well.

Book preview

© 2012 Doug Seger

Quotes from this book are encouraged. Quotes should be in context and credit should be given.

Published by AuthorHouse 9/11/2012

ISBN: 978-1-4772-6218-4 (sc)

ISBN: 978-1-4772-6217-7 (hc)

ISBN: 978-1-4772-6216-0 (e)

Library of Congress Control Number: 2012915560

Because of the dynamic nature of the Internet, any web addresses or links contained in this book may have changed since publication and may no longer be valid. The views expressed in this work are solely those of the author and do not necessarily reflect the views of the publisher, and the publisher hereby disclaims any responsibility for them.

Second Edition

Freer Markets within the USA is the second edition, the first edition being Free Markets at Home

Contents

Introduction

1  Markets

2  Democracy—Heart Of The Usa

3  Taxation Influences Behavior

4  The Current Federal Tax System

Taxable Regular Income

Home Buying And Selling

Capital Gains

Dividends

Business And Corporate Income

Gifts And Estates

Social Security And Medicare

5  Federal Sales Taxes And Flat Tax Proposals

National Sales Taxes

National Retail Sales Taxes

The Fair Tax

Business Sales Taxes

Business Total Sales Tax

Value-Added Tax

Flat Income Tax

6  Suggested Gradual Tax Changes

Regular Income Tax Rates

Housing Markets And Tax Deductions

Capital Gains And Dividends

Gifts And Inheritances

National Sales Taxes

Temporary Economic Sales Tax Adjustments

Businesses And Corporations

7  Social Security

8  Medicare And New Health Care Structure

New Health Care Structure

9  Change Review

10  Other Taxation And Related Issues

User Fees

Market Bubbles

Trade Agreements

Immigration

Unions And Union Structure

Union Structure

Employment

National Debt And Spending

Voting

11  Balances

Looking Back

Looking Forward

Figure Notes

Notes

Introduction

Over the centuries, the world has made great progress in technology and in the way governments are organized. The United States has been a leading example of how We the People can elect our leaders and influence the laws that are made.

We have seen great progress in many areas, such as technology, transportation, communication, manufacturing, and medicine. Great progress will continue to be made in these areas, leading to more and better products and conveniences. This has also lead to greater productivity, more production per working hour.

Productivity has greatly increased, but are people receiving the benefits of the increased productivity of work? Many people are working many hours, but has their pay increased as much as the gains in productivity would imply? Although profits have increased, wages have seemed to be stagnant.

It may be that the tax system has contributed to more of the benefits of the productivity gains going to profits as compared to wages, by taxing income from work higher than investment income. Moving toward taxing different types of income the same—leveling the economic playing field—would work toward allowing the marketplace to more determine where the benefits of the productivity gains go.

In the following chapters, the current federal tax system is reviewed. Over the years, there have been numerous tax proposals; some of these tax proposals are briefly reviewed. Then suggestions are made to lessen the influences of taxation and to have a more level playing field within the United States. Having a more level playing field and broader-based taxation would allow the economy to be more efficient.

Included in this book are ways to make Social Security and Medicare more solvent, along with a possible health care structure to bring down heath care cost. Topics such as monetary policy, market bubbles, trade agreements, immigration, union structures, employment, national debt, spending, voting, and the ways federal taxation can affect the overall economy are all discussed.

This overview of federal taxation suggests gradual, long-range tax changes that allow freer markets to keep the economy more in balance. The goal of these tax changes would be to have less specialized tax breaks and less taxation based on special interest or political motives.

In the interest of disclosure, these are the views of a person registered as a democrat. If there is a bias, it would probably be toward the working person. It would probably be good for the Democratic Party leaders to get back to the roots of the party and focus more on the working person. The best way to help the working person is to level the playing field; this would allow even greater progress.

Figure1.jpg

1

Markets

The term markets in the context used here refers to buying and selling transactions. This would include all types of buying and selling transactions, such as the buying and selling of food, products, services, labor, stocks, bonds, land, and real estate. The labor market would consist of employers buying labor and employees selling their labor.

Free trade is a phrase that often refers to trade between nations without tariffs. A tariff is a tax that a nation imposes on goods or products coming into that nation. The tariff tax adds to the buyer’s total cost of the affected traded products. The tariff tax influences trade by adding to the cost, and the higher cost may reduce the number of transactions made. There is also trade within our nation, such as trading money for products and trading labor for money. Taxation also influences these trades or transactions.

Free markets usually refers to markets or trading transactions that are free of interference or the influence of taxation. The more that taxation influences markets, the less free the markets are. It is unlikely that all taxation could be done away with anytime soon. However, the influence of taxation could be kept to a minimum. Keeping the influence of taxation as low as possible allows markets to operate more freely.

By taxing all markets the same, the influence of taxation is, for the most part, the same for all the markets. By taxing some markets more than other markets, the influence of taxation is greatly increased, making the markets less free.

In general, taxing all markets the same affects all parts of the economy the same. While uneven taxation between different markets gives advantages to some and disadvantages to others. Uneven taxation between markets distorts the economy as the markets react to the unlevel playing field.

The effects of the market reactions may compound the advantages of some and the disadvantages of others. The advantaged markets will likely attract more transactions, compounding the effects of the tax advantages. The disadvantaged markets will have a higher transaction cost, and the higher cost may reduce the number of trades.

There has been a lot of focus on reducing tariffs and having a more level playing field between nations, however we should be moving toward a more level playing field regarding taxation within the United States. In 1922, capital gains tax rates became lower than regular income tax rates. For the most part, there have been tax advantages for capital gains ever since then.¹

Tax advantages for investment incomes are subsidies in the form of tax concessions.² There is more of a tax burden on regular income as compared to the tax burden on the investment income of capital gains. The investment income is being subsidized by work income. This subsidy or tax advantage for investment income has the effect of penalizing work income and distorting the US economy.

2

Democracy—Heart of the USA

The heart of the US government is that it is a democracy in which the people elect their political leaders.³ The people can influence the policies of the country. Even the constitution can be amended with the right amount of votes in the right areas.

The US economy is largely a free-enterprise system. Free enterprise lets the economy thrive in a productive and efficient way.⁴ However, in a democracy the people can vote in leaders that favor policies that don’t necessarily always reflect the free-enterprise system. Democracy trumps free enterprise.

Democracy allows government policies to evolve. The majority of public opinion may shift one way and then another way. New policies are tried because they are likely to be perceived as being beneficial by the majority. Policies that are perceived as being beneficial are likely to stay in place or be expanded, whereas policies that are perceived to be bad or inefficient are more likely to be reduced or discontinued.

Government policies are likely to evolve most efficiently when the public’s perception of the policies is as accurate as possible. In many cases it may be hard to determine the effects of certain policies, since there may be many variables.

There are many variables that affect the economy, such as new technologies, infrastructure, population growth, product consumption, foreign trade, and tax policy. In some cases, it may be impossible to determine the exact effects of one policy among the numerous other policies in a changing world economy.

In some cases, probable guesses may be the best we can do, and of course there could be a wide range of different guesses or opinions. A well-informed public—informed about our government’s past, present, and possible future policies, along with the different opinions concerning these policies—makes a democracy more efficient.

The most informed people will look at the different sides of the issues. It is good to keep an open mind while forming opinions. It’s good for people to reevaluate their opinions as new information emerges. Hopefully the views expressed here will be informative.

3

Taxation Influences Behavior

Federal taxation is the main way the federal government is financed. Along with bringing in revenue to the federal government, taxation is used in many areas to influence behavior. For example, cigarettes are taxed to discourage smoking, and alcohol taxes may lessen alcohol usage. Federal fuel taxes such as taxes on gasoline and diesel fuel may be considered somewhat as user fees for highways, because this federal tax revenue may go to build and maintain highways. But since these taxes add to the cost of the fuels, the taxes may also somewhat discourage fuel usage.

Tax breaks are also used to influence behavior, such as the tax deduction for the interest on home mortgages. This itemized tax deduction encourages home buying by reducing the buyer’s tax burden.⁵

There are also other types of itemized deductions that may influence behavior, such as the deductions for state and local taxes, interest on money that was borrowed for certain types of investments, and gifts to charity.⁶

There are some deductions that are made in the adjusted gross income section of Form 1040; these deductions can be made with the standard deduction or in addition to itemized deductions, to reduce the taxable income. The IRA deduction is an example of an adjusted gross income deduction that can influence behavior by reducing a person’s taxable federal income.

Employer-sponsored retirement plans can also influence behavior. Participation in 401(k) plans can reduce the employees’ federal taxable income.⁷ Health savings accounts can reduce the taxable amount for Social Security and Medicare as well as reducing the amount of taxable federal income.⁸

Another influencing behavior is the fact that certain types of incomes are taxed lower than other types of incomes. Capital gains and dividends are taxed lower than regular income; this gives income from profits (capital gains or dividends) a tax advantage over income from wages.

Taxing some areas more and some areas less has an effect on buying and selling decisions and how money flows through the economy. Of course people should take advantage of tax laws that benefit them, however we should also look at the overall effects of the tax laws.

4

The Current Federal Tax System

This chapter will look at how different areas are federally taxed and the possible effects of some of that taxation. The taxable regular income section shows how regular income is taxed; other sections discuss home buying and selling, capital gains, dividends, business and corporate incomes, gifts and estates, and Social Security and Medicare.

TAXABLE REGULAR INCOME

The taxable income on Form 1040 is the amount after adjustments to income, deductions, and exemptions are subtracted from income. Tax credits can reduce the amount of tax. Some types of income,