Taxes, Employment, Entitlements and Welfare

Taxes, Employment, Entitlements and Welfare

A Sustainable Solution


Every country seems to have a problem creating a tax code that treats all taxpayers fairly, provides adequate income for unskilled workers yet maximizes employment, and addresses the dual problems of Entitlement Benefits and Costs (Healthcare and Retirement) adequately.  Among the developed nations the U.S. is not only notoriously poor at this, it is arguably one of the worst.  Our Tax Code with 75,000 pages of Special Interest exceptions, exemptions and loopholes ought to be the prime example of ‘How Not To Do Taxes’.

One of the more obvious changes should be to minimize the overhead cost per employee that must be paid by all employers.  Unnecessary regulations and mandates that increase these costs should be eliminated, or at least kept to an absolute minimum.  The heated dialog we have witnessed recently about ‘Minimum Wage’ is a misdirection that some politicians are using to garner votes; a higher Minimum Wage has the consistently negative effect of destroying jobs.  Getting everyone who is willing and able to work actually employed is far more important than forcing employers to pay their newer unskilled and inexperienced workers a wage that is greater than those employees can justify in terms of productivity.

The purpose of this article is to present a system which does address all of these problems. It has the following features:

  • A Minimum Wage that provides a tax deferred and adequately funded account for the two most critical needs, or ‘Entitlements’, of every full-time employee: Healthcare and Retirement.
  • A Supplemental Income Fund that guarantees a modest but adequate Living Income for those whose skills, experience and productivity do not justify an ‘Earned Income’ sufficiently above the Minimum Wage, available only to those who are willing to work.
  • A mandated and enforceable contract between Federal, State and Local governments to hire all otherwise unemployable unskilled workers, who are willing to work, at the minimum wage referred to above.
  • Elimination of virtually all Federal obligations for welfare, entitlement or employment costs.
  • Elimination of almost all mandated expenses to businesses which increase the cost of hiring, other than the Minimum Wage, above, and real ‘Earned Income’; note that this wage floor is lower in cost to employers, but higher in value to workers, than today’s Minimum Wage.
  • Automatic adjustment of costs and revenues to ongoing debasement of the Dollar over time.
  • Guaranteed permanent sustainability of the overall system.
  • A workable procedure for shifting from our ‘Defined Benefit’ system (Social Security) to a ‘Defined Contribution’ system without incurring a massive short-term debt problem.

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Figure 1, below, is an approximate picture of how our current system in this country is designed.  It is similar to what we see in other countries with similar problems.

Employer Cost of Low-Wage Workers

Today’s Employer Cost of Low-Wage Workers

Figure 1- Approximation of Today’s System*

(*Click on Figures to enlarge, improve resolution)

The labeling (outside the borders) is expressed in units of Median Income (MI).  Our MI was $50,000 back in late 2007, then fell back below $48,000 through 2010 and then gradually climbed back up to about $54,000 today (mid-2014).  I have included labeling in 2007 dollars inside the borders for easier comparison.  The Federal Minimum Wage value at the time of this writing is still $7.25 per hour, or just over $15,000 per year (based on a 40 hour weekly work schedule).  That $15,000 is the pre-tax (and pre-‘Payroll Tax’) amount actually paid to an employee, but does not include other expenses an employer must cover, such as medical insurance, unemployment insurance, costly regulations governing workplace facilities, Union Fees and other union costs, or general overhead costs associated with any business that has a reasonable number of employees.  As a percentage of Median Income, our Minimum Wage of $15,000 per year was about 30% in 2007; today it is just under 28%.  The corresponding cost to employers is at least 45% of MI!

I have packaged a rough estimate of the ‘fixed costs’ employers must pay just to hire any employee into the gray zone at the top of the sequence in Figure 1.  Although not truly ‘fixed’, my estimate of at least $5000 per employee (about 10% of MI) is almost certainly far too conservative; an investment expert friend tells me the true cost is closer to 20% of MI.  The pale green zone is a constant percentage (approximately 9%) of the Gross Income (GI) paid to the government ‘on behalf of the employee’, the employer share of the Payroll Tax; it is not taxed as income.  The portion paid by the employee (beige) is the same percentage and comes out of the employee’s paycheck before assessing his income tax.  The employer’s total cost relative to the employee’s GI and Spendable Income is significantly increased by both portions.

The conclusion to be drawn from all of this is that, to hire a Minimum Wage (unskilled) worker, an employer will incur a total cost which is at least 160% of the employee’s spendable take-home pay!  It should come as no surprise to anyone that both the employee and employer are dissatisfied with this.  Employers are reluctant to hire unskilled workers at such a cost, so the jobs disappear; those workers who can find jobs are also upset about the very low pay they have left to live on.  But as we see here and across Europe and much of the world, increasing the Minimum Wage, while helping those few low-wage workers who do find a job (temporarily), makes conditions just that much worse for all employers – who must necessarily cut back on the number of jobs they can provide or substitute part-time for full-time jobs – and for the ever-increasing number of workers who cannot find jobs.  Unemployment and the cost of welfare (to taxpayers) just keep getting worse.

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The Flat Tax Revisited

Many approaches to a Flat Tax have been suggested as replacements for our much loathed and reviled Income Tax, but no one to my knowledge has devised a comprehensive version that addresses the core problems of Minimum Wage and Low Income protection, excessive cost to employers, and Entitlement costs (Healthcare and Retirement).  I would like to offer here a model that actually does address all of these problems.  I have started from scratch, so today’s methods for handling them – Social Security, the ACA, Minimum Wage laws, Unemployment Insurance, Healthcare Insurance and essentially every aspect of our current system – are all eliminated.  I would also eliminate all direct taxation of business profits; more on this later (see Other Considerations, Section 5(a) – Business Taxes, page 29).

My first consideration was to determine just how much an individual would need to invest annually to cover his lifetime costs of Healthcare and Retirement, assuming no up-front taxation of the amount dedicated to these expenses and assuming a very conservative average growth rate of 5% for the investment return.  If the Minimum Wage were replaced by requiring an investment of this amount in a Tax Deferred Savings Account (TDSA), and no other costs were mandated at the expense of employers, would this enable us to realize true Full Employment?

We can solve the problem of inflation by replacing Dollar income figures with fractions of Median Income.  I prefer to use the monetary unit M – Gross (or ‘Earned’) Income divided by Median Income, or  M = GI / MI – in place of the dollar.  If we use $50,000, the 2007 level of MI, as a base level, a 40 hour work week as the nominal full-time standard, and a work-year of 50 work weeks plus 2 vacation weeks, the Median Hourly wage would be $50,000 / 2000 work hours, or $25, and our current Minimum Wage of $7.25 would be slightly less than an M of 0.3.  If we were to invest a constant M of 0.3 yearly at a 5% interest rate we would accumulate more than 38 MI after 40 years.  With no inflation over the 40 years (MI still equals $50,000 at the end of that time), this would be almost $1,918,000.  With or without inflation one MI will still have about the same purchasing power in 40 years as it does today, so it should be clear that investing all of today’s Minimum Wage would generate significantly more retirement income than anyone would need, and far more than today’s Social Security return.  The retirement income from that total would still accrue at the same 5% annually, and 5% of $1,918,000 is $95,900, more than 6 times today’s Minimum Wage!

Even a minimum of $5 / hr., or about M = 0.2 MI, translates to a 40 year accumulation of 25.57 MI, (nearly $1,280,000 in 2007), which would continue to generate $64,000 per year at 5% – still more than 4 times the annualized Minimum Wage income!  From this it should be obvious that by investing even a minimal income, that grows at the same rate as inflation and yields a conservative 5% return (interest, dividends and capital gains – most IRAs or 401K’s yield about 8%), replacing Social Security with this less costly and more profitable alternative is a winning proposition.  These figures do not account for MI growth; this is discussed below.

A separate problem is the cost of healthcare.  Again, the method we use now is inefficient and grossly overpriced.  Every employer is required to insure coverage for all sorts of medical conditions, whether the individual employee needs it or not.  The fact that the insurance companies must provide coverage for a broad spectrum of clients means that they have no choice but to automatically cover all possible conditions for everyone and figure in a comfortable profit margin; the cost goes up accordingly.  Our army of insurance salespeople, administrators and accountants is both medically unproductive and extremely expensive.

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Doctors, hospitals and other caregivers are in a similar position.  They figure the maximum real cost for any treatment, make the assumption that the insurance companies will typically pay only a fraction of that amount, and add in a margin for themselves that will cover any resulting shortfall.  Anyone on Medicare who looks at their billing statements closely will be familiar with the grossly inflated cost of their treatment (typically about 10 to 20 times what an uninsured private practice would charge), with the amount actually paid by the insurance company (typically back down to the amount a private practice used to charge), and with the subsequent co-pays billed to the insured.  This distortion is especially obvious when one looks at the cost of, say, an aspirin tablet given to a hospital patient and charged at $35 on the Medicare bill!  The infamous $660 toilet seats for the military are another typical example of this mindset.  The bureaucracy that goes along with this is staggering in both size and cost.  Those who really care about the cost to the taxpayer of this bloat can only despair as it continues to grow, year after year.

If everyone had to be responsible for their own medical costs, we could expect workers to cover the cost of routine healthcare out of their personal TDSA accounts.  We could allocate up to half of the TDSA funds to healthcare, let each individual work with his own doctor to determine what healthcare was needed and agree on the cost.  If the cost per year does not exceed, say, a quarter of that year’s employer contribution to his TDSA, it should be paid for out of TDSA funds directly.  If the cost goes over this level in any year, the worker should have access to a basket of insurance plans that cover the excess costs, with a co-pay of 20 to 25%.  If the total cost, including premiums and co-pays, exceeds the remaining quarter of the TDSA, the insurance should be designed to cover 100% of these larger healthcare costs, up to a lifetime Cap.  The whole idea is that when individuals learn what their healthcare needs are, how much they cost, and how to manage that cost, they can make more intelligent choices and get far higher quality healthcare at far lower cost than is possible today.  The most important advantage of this is that we could get government out of our healthcare lives altogether.  See also Pages 25 and 26, Healthcare Management.

Note that this arrangement splits the TDSA into two halves, one for retirement, the other for healthcare.  The TDSA deposits analyzed above, 0.3 MI (today’s Minimum Wage) and 0.2 MI, show that the latter would be borderline inadequate to cover both retirement and healthcare, but the current Minimum Wage should be more than enough.  My recommendation is to replace the Minimum Wage with a minimum Cost of Employment (analogous to Minimum Wage) set at 25% of MI (about $12,500 in 2007), and put that amount annually into every (full-time) employee’s TDSA to cover retirement, healthcare and (for most people) a small surplus which could be used to cover such things as unusual healthcare costs and/or education.  (Education, like healthcare, would benefit immensely by getting the Federal government out of the picture and letting parents determine what kind of education they want for their children.)

I have analyzed the outcomes of this arrangement along with three estimates of average MI growth during the same 40 year period.  With no MI growth the cumulative total comes to almost $1.6 million (32 times the MI at retirement age) and the annual retirement income is nearly $80,000.  If we assume an average MI growth rate of 2%, the end results would be $2.14 million total (19.4 times the MI at retirement age) and over $107,000 annual income.  Assuming a 4% MI growth brings the total up to almost $3 million (12.5 times retirement MI) and the income to almost $150,000!  I have attempted to show these results in Figure 2:

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Variable Growth of TDSA

Variable Growth of TDSA

Figure 2 – Compounded TDSA and MI Comparison

At first glance it may appear that combining normal MI growth along with the 5% investment growth yields a truly fantastic 40 year outcome; but MI growth does not mean that everything is cheaper and everyone has more money!  MI ‘growth’, more accurately, means that the value of the dollar is reduced by this factor.  If we take into account the final MI values after 40 years, the 0 growth value, in 2007 dollars, is still $50,000; the 2% growth value comes out to be over $110,000; and the 4% value is just over $240,000! Dividing the retirement income by the growth in these inflated MI values shows that the Purchasing Power (relative to Cost of Living, COL, in 2007 dollars) grows only to about $48,500 (2% growth) or $31,230 (4% growth) for the annual income values, compared to the 0 growth annual income of $80,000.  I have based these numbers on the assumption that COL increases in close correlation with MI.  These are still fairly acceptable incomes, especially when compared with today’s Social Security; but bigger numbers are clearly not necessarily better!

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The fact is that MI is a mixture of inflation (those factors which negatively impact prices and Purchasing Power) and GDP (predominantly Productivity Gains, which reduce prices and thus increase Purchasing Power).  The somewhat negative long-term views above for the higher MI growth figures must be taken with a healthy dose of reality.  If inflation growth is much higher than productivity growth, then those figures are valid and economically detrimental; but over most periods of history, as long as we enjoyed a reasonably free society, we could count on productivity growing significantly faster than inflation, so the zero-MI-growth scenario has generally been more realistic.  The significance of this observation is that we absolutely must curtail the growth and intrusiveness of government in order to realize a better outcome for everyone regardless of income level.  The fundamental nature of bureaucracy is always to be self-protective and to grow like a cancer – the perfect antithesis of creativity and productivity.

Figure 3 below shows how my proposal would appear compared with Figure 1, our present system.  I have used 25% of MI to fund the TDSA as my basis for replacing Social Security, Medicare and Medicaid, and a Flat Tax of 15% as my initial estimate for general government funding.  Figure 3 is greatly oversimplified but it serves to define the basic features.  The monetary values along both axes are in M units, GI/MI, and I have again added the 2007 dollar values, when MI was $50,000.

At Minimum Compensation level (‘Cost to Employer’, top line in graph), the TDSA starts at its constant value of MI / 4 while both the GI and Tax values start at zero.  It should be obvious that this plan leaves little or no Gross Income to be used by lower-income workers for ordinary Living Costs.  At very low-income levels, we will need to provide another source of income (a Supplementary Income, or SI, Fund) along with a set of rules defining who has access to how much income from this Fund.  We can also incorporate a feedback mechanism to encourage the employers of low-income workers to put real effort into improving the productivity and skills of such workers so that they can wean themselves from the SI system.

Of critical importance is the fact that all of the ‘fixed costs’ and Payroll Tax zones in Figure 1, neither owned and usable by the employee nor taxed by the government, are replaced by the smaller TDSA zone which is totally owned and used by the employee and also generates tax for the government when any portion of it is withdrawn (for either healthcare or in retirement).  The only thing lost in this arrangement is the bureaucratic waste.  To justify this, however, we must assure that we can manage the cost of the Supplemental Income Fund in a sustainable manner (see Cost / Revenue Analysis, page 12).

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Figure 3 – Simple Flat Tax and TDSA

In my next diagram, Figure 4 below, I show a simple basic design for this SI system.  Since this entire system is tied to a growing MI, I have omitted any reference to dollar amounts.  All indices are in my M units.  I have included a series of levels of SI based on family size, or Household size.  These are discussed in more detail below.  The 50% slopes of three of the possible SI zone boundaries shown here are set to return half of a worker’s increasing GI back into the SI system; these show the pre-tax relationship of SI to GI, up to where the selected boundaries intersect the primary GI line.  The dotted lines in this picture are the same SI zone boundaries after tax.  They show the amount of spendable earned income after adding in the appropriate amount of SI and subtracting the tax amount.  Note that the point at which each dotted line crosses the GI line (brown diagonal line) marks the Gross Income at which the Flat Tax paid by a worker exactly equals the amount of SI that worker receives.

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TDSA and Linear SI

TDSA and Linear SI

Figure 4 – Linear Supplementary Income Boundaries

The dashed line at the top of the color-coded zones is the upper boundary of the TDSA zone added to the uppermost Supplementary Income zone.  The aggregate colored area, above the cross-hatched Tax zone, represents the grand total of all usable income available to any employed worker, both taxed (earned income plus SI) and tax-deferred (TDSA).

There are several conditions required to implement this system:

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  1. An adequate portion of the total tax base to maintain the liquidity of the SI Fund; from charts published by the Census Bureau, I estimate significantly less than 20%,
  2. A full-time job commitment on the part of those who need to access this Fund,
  3. A requirement that employers who hire workers at low incomes pay the Flat Tax that would be owed by the worker if the SI funds were taxed as ‘Earned Income’ – this is my feedback mechanism; this tax should go back into the Supplementary Income Fund,
  4. And finally, an enforceable mandate between all levels of Government – Federal, State and Local – to hire any workers deemed unemployable by private employers; this employment must follow the same compensation and tax rules that apply to private employers.  These workers can be useful in doing many jobs, such as cleaning, maintaining infrastructure and generally tidying up messes left by others who are too careless or too lazy to clean up after themselves.  Our parks, roadways, utility right-of-ways and many other such areas are typically left to blight our countrysides.  Putting otherwise untrained labor to work on projects of this kind would result in a much better world for all of us to live in, and should result in virtually zero unemployment for the foreseeable future, and provide much-needed job experience at the same time.

With full employment and resulting elimination of Entitlement expenses (due to the TDSA funds owned by each worker) and welfare from general tax expenses, the cost of this system will be quite manageable – far less than current entitlement and welfare costs.  I have worked up a detailed analysis of the cost and revenue totals that I expect to result from this system (see Cost / Revenue Analysis), page 12).  The job requirement for earning TDSA and SI income should ensure that workers will cooperate willingly and responsibly.

The following list is a suggested funding level schedule that serves to prevent poverty in different kinds of households, ideally neutral with regard to encouraging or discouraging choices such as marriage or having children.  Basic cost-of-living expenses vary across the country and between urban and rural settings.  This poverty prevention schedule should be adequate for minimal national conditions but should not cater to local variations; these variations should be left to State and Local governments, and paid for locally.

  1. Household costs, basic shelter and utilities: 10% of MI; mortgage and rental may be treated differently,
  2. Head of Household, Basic Personal Expenses: 10% of MI,
  3. Married Spouse (implies long-term commitment), Personal Expenses: 10% of MI,
  4. Live-in Adult in-lieu of spouse (Partner, Relative, other childcare help, etc.): 5% of MI,
  5. First Dependent: 5% of MI,
  6. Second Dependent: Half of previous level (2.5% of MI), etc.

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The limit of this series would be a maximum Base Level at 40% of MI as shown in Figure 4. For practical purposes we can simply follow the above sequence up to 5 dependents and then jump directly to the limiting value for six dependents or more.  Note that this limit will be the full 40% only for a Household headed by a husband and wife; it would be smaller (35%) if the spouse is missing but replaced by an adult helper, and smaller still (30%) if neither spouse nor second adult is present.  With no children (or other dependents) the Head of Household would be due only the ‘single’ supplement amount of 20%.

For simplicity I call the Base Level SI values ‘C‘ to denote Household Constants; so C can be any value from 5% (for a family dependent living away from home, e.g., in a school dormitory) up through any of the variations described above.  Then ‘C‘ is the value at the start (left end) of each SI line, and there can be many lines, starting at many different ‘C‘ values, for which people in various circumstances might qualify.  Other values of ‘C‘ can be defined for special cases such as students dependent on family support but living at school, homeless people who have jobs but no regular home address, etc., but a minimum ‘Living Standard’ cost (e.g., a homeless person living in his car) should be 5% of MI, the minimum ‘personal expense’ level for those who are not members of a household should also be 5% of MI and the maximum Household limit should be 40% of MI, with no exceptions.  (I suggest that Congress might spend their time and energy more usefully fine-tuning the possibilities here than trying to micro-manage the lives of all the rest of us as they have in recent years.)

The key elements in this structure are that:

  1. An employee can be hired at a minimum cost to an employer of only 25% of MI (TDSA) plus the Flat Rate Tax on the amount of Supplemental Income appropriate to that employee’s Household size and pay.  Assuming my initial recommendation of 15% for the Flat Tax, the minimum employer cost would be 28% of MI: 25% for the employee’s TDSA fund plus FT on the SI, C = 20%.  Even the maximum SI base cost for an employee with a spouse and many dependents would be only 31% of MI: the same 25% TDSA portion plus the FT on SI with C = 40%.  Compare these figures with today’s Minimum Wage plus overhead at a cost per employee of more than 44% of MI (see page 1).
  2. All employees can look forward to an adequate Savings Account (the TDSA) to cover both medical expenses and a comfortable retirement for as long as they live.  Uncertainty may exist for those rare few who suffer unusually costly medical conditions starting early in their work careers, but with reasonable cooperative efforts between the medical and insurance professions and State Governments, such cases should be resolvable.
  3. Using this system the Federal Government can eliminate all welfare expenses other than the Supplemental Income Fund, and completely eliminate all ‘Entitlement Expenses’.  With close to 100% employment virtually guaranteed (by requiring employment as a condition for accessing the SI benefit and for accumulating a TDSA and by mandating government jobs for the chronically unemployable), the only true unemployment will be those who are unable (profound medical disability) and those who choose a lifestyle likely to get themselves institutionalized (criminal behavior or drug addiction).
  4. The proportion of our population engaging in criminal and drug-addiction behaviors can be expected to drop significantly.  People who have a chance at a real job with adequate living-cost income and with guaranteed affordable retirement and healthcare income are far less likely to choose destructive life-styles.
  5. Taxes will be paid ultimately on all of the TDSA funds as well, simply delayed until those funds are needed.  Any TDSA funds not used during the owner’s lifetime will be taxed on death.  The advantage of this becomes obvious in Cost / Revenue Analysis, page 12.

Figure 5 below is an alternative version of Figure 4 above.  The most obvious difference is that the boundaries of the SI layers curve upward and merge tangentially with the GI line rather than intersecting at an angle.

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Family of SI Curves Figure 5 – Family of Curved SI Boundaries

A more important but less obvious difference is that I have altered the slope for each ‘C’ (Household Size constant).  This was essential because each of the points of merger between the SI curves and the GI line occur at rapidly increasing values of M if the slope remains constant as C increases (shown by the large colored dots along the diagonal).  If this were allowed for the higher C values the merge points would fall well above Median Income.  This in turn would imply that workers with incomes below an M of 1.0 would be paying the Flat Tax on their Earned Income and would therefore be subsidizing some people with incomes greater than MI but still eligible for SI.  For this reason SI eligibility should never extend beyond M = 1.  The formulas to accommodate this refinement will require a computer program to calculate the SI and Tax values for a given GI, but the government (IRS or its replacement) or any tax-support provider will supply the programs, or ‘Apps’, at no cost to taxpayers.

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The dashed lines correspond to the parallel linear zone boundaries in Figure 4.  This modified method will slightly increase the cost of the SI system for small households (C less than 0.2) and slightly reduce it for larger ones, but it represents a more elegant solution by transitioning smoothly from SI to unsupplemented GI, eliminating the  sharp breaks where SI intersects with GI.  These differences in cost will all be well within the savings realized relative to today’s welfare costs.  Dotted lines (omitted here to avoid clutter) could be added, as in Figure 4, to show the Flat Tax owed on the Earned Income (the GI line) for each of these curves, and the intersections of those dotted lines with the GI line would again show where that amount of tax equals the SI.  I have omitted the TDSA zone from Figure 5, but it remains at 25% of MI and would appear above the appropriate SI boundary.

Cost / Revenue Analysis

In my earlier publication, I included a ‘Cause and Effect’ discussion of the present state of our Welfare system.  The first graph in that section showed the destructive effects of ‘Welfare Cliffs’ built into many of our welfare plans.  Omitted from that picture (reproduced as Figure 6, below) was the cost of this disruptive welfare to all of us – the taxpayers. Numerous online sources recently have placed the current (2015) cost of our welfare system at just under $1 Trillion, not including any State or Local welfare programs!  I do not believe the true total cost of today’s welfare system can be accurately determined – I don’t think even the government knows exactly how much they waste on ineffective attempts to ‘help’ the poor – so the $1 Trillion cited above is the best estimate I can give.  However, common sense should tell us that the welfare cess pool shown in Figure 6 must be doing more harm than good, both to the ‘benefactors’ (the poor) and to all the rest of us, the taxpayers.  All of this must be paid for out of General Revenue (Income Taxes) with today’s system.

Welfare Cliffs

Figure 6 – Today’s ‘Welfare Cliffs’

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The second graph, published by the Census Bureau in 2011 and reproduced as Figure 7, below, shows a breakdown of population percent vs. income in the year 2010 within narrow $5000 bands from $0-5000 up through $195,000-200,000.  I have reproduced both of those graphs here in an effort to show that the current system is exorbitantly costly and that my replacement system is both less costly and more effective.

Two pieces of useful information not included in the Census Bureau plot were the ‘Unemployed Percent’ and the ‘Participation Rate’, a measure of the portion of our working-age, work-capable population represented in that graph.  I have looked up what information I could find and discovered that our Participation Rate dropped over the 10 to 15 years leading up to the ‘Great Recession’ from nearly 68% (late 1990’s) down to under 66% by 2010.  Since then it has dropped by another 3% and is barely above 62% today (early 2015) and is still falling.

The roughly 10% ‘Unemployed’ reported during the early part of the recession could have been included in the $0-5000 bar at the left end of the Census Bureau graph, but those and the ‘Non-Participation’ population were both ignored, so the Census Bureau’s 100% sum actually includes only actively employed workers, ‘Participation Percent’ minus that 10% unemployed acknowledged by the government.

Population vs. Income Distribution

Figure 7 – Population vs. Income Distribution, 2010

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To get a better sense of what this information means, and measure its cost, we need to put actual population numbers in place of these percentages, so I have reproduced the Census Bureau data in Figure 8 below, added in the Non-Participation and Unemployment numbers and included the early 2015 numbers for comparison.  In order to estimate these population values, I have taken the following approximate values as ‘known’:

All years, normal distribution:

‘Working population’ – 50% of total population

‘Non-working population’ (too young, too old, the profoundly handicapped, those inclined to criminal behavior, etc.) – 50% of total

Participating (employed, or willing and actively looking for work) – 33% of total, or 2/3 of ‘Working population’

Non-Participating (unemployed spouses, adults still in school, laid-off workers who have given up looking for jobs, those simply too lazy to bother, etc.) – 17% of total, or about 1/3 of ‘Working population’

Unemployed (temporarily out of work) – variable, ideally under 5% of Participating.

From these ‘normal’ values, we can estimate the ‘actual’ values for 2010 and 2015:

2010:                                     Expected                               Actual

U.S. Population –                                                              ~ 315 million

Working population –                                                        ~ 157.5 million

Non-working population –                                                ~ 157.5 million

Participating population –    ~ 105 million                        ~ 104 million (~ 66% of ‘Working’)

Non-Participating –              ~ 52.5 million                      ~ 53.5 million (~ 34% of ‘Working’)

Unemployed –                       < 5.2 million                      ~ 10.4 million (10% of ‘Participating’)

Working and contributing to economy (and to MI) –      ~ 93.6 million (Remaining 90%)

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2015:                                       Expected                             Actual

U.S. Population –                                                               > 320 million

Working population –                                                         > 160 million

Non-working population –                                                  > 160 million

Participating population –     ~ 107 million                         ~ 99 million (62% of ‘Working’)

Non-participating –                ~ 54 million                          ~ 61 million (38% of ‘Working’)

Unemployed –                       ~ 5.3 million                       ~ 5.4 million (5.5% of ‘Participating’)

Actually working –                > 102 million                       ~ 93.6 million (Remaining 94.5%)

The next chart, Figure 8, shows the approximate population numbers for these categories, over the same range of incomes shown in Figure 7, but including the ‘Non-participation’ and ‘Unemployed’ values for both 2010 and 2015.  The population numbers along the left side (y-axis) are in millions of workers.

What really stands out is the fact that, despite a population increase of at least 5 million between 2010 and 2015, there were virtually the same number of actual employed workers at the end of 2014 as there were in 2010, at the peak of the ‘Great Recession’; and a substantially larger proportion of those were employed in Part Time jobs in 2015! Median Income has partially recovered from the recession toward its long-term trend since the mid-20th century (over 4.3%, 1950-2000, as compared to about 3.5% average growth over the past five years), but jobs and incomes versus cost-of-living have taken a terrible beating since 2007, and continue to suffer still.

The population numbers for the very wealthy (beyond an M of 4 in figure 8) are distorted because I estimated population percentages for M ranges of 4-9, 10-49, 50-99 and 100 or above to replace the last two bars in the Census Bureau graph (figure 7).  These high-end values are quite variable from year to year and are meaningful only because these very small populations take in huge incomes and pay enormous amounts of tax.

I have also smoothed the population profile for 2015 to reflect the fact that the measured values for 2010 show small irregularities which are unlikely to duplicate from year-to-year.  What cannot be shown in Figure 8 are the cost and revenue amounts (in ‘current dollars’)  corresponding to these population values.  Specifically, the tax rates that determine the revenue derived from these income numbers are simply unknown; no two people with the same incomes use the same deductions and pay the same taxes!  This problem of unknown and unknowable tax rates can be fully resolved by using the tax rules described in this work, a fact that should benefit both employees and employers, and the government as well.  Since this reform has yet to be implemented, I can only hope that it will be soon so that I can project the results I expect forward to a time after Congress has made the switch from Social Security to TDSA, and when businesses and workers have responded to the changes and settled into new patterns of behavior.  For present purposes, let’s skip forward a few decades, say to 2040, and simply assume that our current dysfunctional Tax Code has been fully replaced by this plan.

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Census Data Converted to Population (Millions)

Census Data Converted to Population (Millions)

Figure 8 – Census Data Converted to Actual Population Numbers in millions – for both  2010 and 2015

By 2040, the total population should be about 400 million (assuming a growth rate of about 1% / year); the working-age population will be near 200 million, and we can reasonably expect that the ‘non-participation’ portion will have dropped back down to 32%, or about 64 million.  MI should be at least $100,000 by 2040, nearly double what it is today.  I will go out on a limb and assume that my system will be effective enough to bring unemployment down to under 2%.  By 2040 the ‘swamp’ below an M of 0.25 (in Figure 8, the cross-hatched area and in Figure 9, the pale green area, A; these are the ‘fringe’ employed – part-time or between jobs or having difficulty holding a job) may still contain some small percentage of the working population, perhaps 1% to 2%, but since this population has no real effect on the economy under my rules, such workers can be included at the left end (25% position) of the new employment curve (Figure 9, pale pink zone, B).  That curve will jump quite sharply up to a peak which will contain almost all of the ‘would-be participants’ who have opted-out of today’s job market, then drop back down to a near-duplicate of the profile in Figures 7 and 8 approaching M = 1 and closely resemble the 2010 (normal) profile for all higher incomes.  The total numbers of workers in these two zones (A and B) are identical; the ‘fringe’ employed have simply been distributed into the four lowest pink income bands in such a way as to produce a smoothly curved segment.  This makes no real difference to the ‘real’ and Supplemental income totals or to the tax computations that follow from this, but it makes the computations much simpler.

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Projected 2040 Population Distribution

Figure 9 – Population / Income Relationship after Tax Code Reform

As in Figure 8, I have used the smoothed data in Figure 9 above 0.55 MI.  To color the zones I also generated  a series of curves that closely match the original profile and retain the MI = 1 position accurately.  The percentage of income earners in the Upper Median, between M = 1 and 4, is still close to 46%, and the final 4% of ‘Mega-Rich’ are omitted from this display altogether.  It should be remembered, however, that this final 4% still generates the lion’s share of total annual income and will continue to pay most of the nation’s total income tax revenue.

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With this information we are now in a position to create a graph showing Total ‘Ordinary’ Income, Total Tax on Earned Income, Total Tax Deferred Deposits and, most critically, Total Annual Outlay for Supplemental Income (‘welfare’).  The critical pieces of information for this are reliable measures of population versus ‘real’ income and versus ‘welfare’ income.  The rules above remove any problem of computing Entitlement Income, because everyone with a real job will be paying their first 0.25 MI per year into their TDSA, and everyone will pay the same flat tax on that money upon withdrawal – and by far the greatest portion of that money will have grown by a substantial factor before withdrawal, so the tax ultimately paid on TDSA funds will be far greater than if the funds had been taxed up front (see pages 4 – 5 and Figure 2).

Two uncertainties that need to be addressed are: 1) how to calculate a total cost of my SI fund when we have no way of knowing the distribution of Household sizes versus income, and 2) how to calculate the annual revenue expected from my TDSA system once it achieves a steady- state flow.

In order to estimate an average cost of my SI ‘welfare’ system, I assume a ‘C’ value of 30%.  Although the C value discussed above as part of the SI computations can vary between 10% and 40%, I anticipate that the greatest usage will cluster around C = 30%.  There are several combinations of household types that yield a C value of 30, fewer (singles, single parents with one child, etc.) with C values of 10 to 25%, and probably fewer households will have many dependents with C values above 30.  If we multiply the 0.1 MI income band populations (from Figures 7 and 9) by corresponding SI eligibility (using C = 30%) and sum these products across the full range of those receiving SI, we come up with an annual cost (in 2040 dollars) of slightly over $1 Trillion in total ‘welfare’ cost, close to today’s Federal costs with a smaller population.

To estimate the revenue expected from the TDSA system, I will start with the simplification that everyone who contributes to a TDSA will work full-time for 40 years, then retire – and die soon thereafter.  This would result in the retirement of 2.5% of the workforce every year, and the resulting payment of 15% of their fully vested TDSA’s annually.  From Figure 2 we can see that the value, on retirement, of an individual’s TDSA should be somewhere between 12 and 20 times the MI after 40 years’ work.  I have used a conservative factor of 15 to estimate the tax revenue derived from this source in Figure 10.

This simplification will result in an overestimate of actual annual revenue due to portions of individuals’ TDSA siphoned off for medical costs over their 40 year accumulation, but even here there would be the 15% tax on all of those withdrawals, and more than half of those would occur after most of the TDSA growth had already occurred.  Additionally, a small percentage of workers who started on their 40 year work path would fail to finish it.  It should be safe to ignore this factor because I do not believe the number of such workers will be significant.

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Two other factors will cause an underestimate of the amount of revenue: 1) many workers, particularly those who start working right out of high school – or even before finishing high school – will most likely put in closer to 45 years of employment before age 65, and so accumulate more than the normal average amount in their TDSA’s; and 2) also, with a now-normal life expectancy of about 80 years, most retirees will live, on average, about 15 years beyond age 65 (many are already choosing to work some of those years), with the result that they will pay income tax each year only on that portion of their TDSA which they use for living costs, allow the balance to grow at the current growth rate and repeat again the following year.  This provides a steady stream of revenue for some years before a final retirement balance gets taxed upon the retiree’s death.

My guess is that these two conflicting factors will approximately balance each other and so result in an annual stream of revenue equal to at least 15 times the final (retirement) year’s MI times 2.5% of the working population times the 15% Flat Tax rate.  With my estimated 133 million workers in 2040 and MI of $100,000, this would produce almost $750 Billion in tax revenue for 2040, from just the TDSA withdrawals alone!  Taking into account the tax already paid by those employers who pay the SI eligible wages (15% of the $1 Trillion noted above), we can now see that these two revenue sources – the tax on SI payments and annual revenue from TDSA withdrawals – almost completely cover the cost of my SI system.  The remaining balance due, roughly $150 Billion (in 2040 dollars), is easily covered by the ‘ordinary income tax’ paid by those with incomes below 70% of MI.  Putting this in simple terms, the lower-paid half of all employees are quite capable of paying their own way in this country – including their cost of appropriate welfare, healthcare, retirement income and living costs at a standard well above what we see today – without any help from ‘the Rich’, provided that we enjoy ‘full’ employment.

Charitable help from the Rich in this country has always been forthcoming, but it should be channeled more narrowly to those who really cannot take care of themselves: those truly disabled, either mentally or physically.  The ordinary income tax paid by ‘the Rich’, including everyone from Median Income on up, is obviously far more than adequate to cover the rest of the legitimate costs of our government.  A 15% Flat Tax is probably justified for some period of time in order to retire the monstrous debt we have accumulated, but after a maximum of a few decades on this plan the tax rate should drop to under 10% and stay there.  Figure 10 shows all of these estimated dollar amounts, by population and income ranges, and by annual totals.

Needless to say, the numbers in Figure 10 are speculative; they involve projecting 25 years into the future and require that the plan offered here has been accepted and in full operation for most of those intervening years.  The relative number values, however, are both accurate and reasonable as they are based entirely on Census Bureau data and rigid mathematical analysis.  Of particular interest is the light brown zone near the left end of the ‘Ordinary Income Tax’ zone; this shows the approximate portion of low-income tax revenue needed to balance the remaining cost of my SI Fund, independent of any help from other taxpayers or any level of government.

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Spending vs Income, 2040

Figure 10 – Ordinary Income, TDSA, SI and Related Taxes – 2040 Est.

One further factor should be stressed again here: this chart covers only out to an income level of M = 4.0, equivalent in 2040 dollars to an income of about $400,000.  The wealthiest 4% of income earners are ignored here because to include them at the scale of this picture would require a page width nearly half a mile wider to the right!  Although these very rich taxpayers earn roughly half of all income and pay at least half of all income taxes, the members of this elite group are very sparsely scattered along the higher income scale, and they play almost no part in generating the useful information contained here.

Alternative Choices

The single most common reaction I have gotten from those who have read this proposal is that “there is no way the people of this country will ever give up the form of Social Security we have today”, even though they typically agree that this system is ‘going broke’ and is ‘unsustainable’.  That minimal level of common understanding is entirely valid.  If our government does not actually cut spending relative to income, our current account balance will soon grow large enough that any future income will be less than the cost of servicing the resulting debt and America will go into default; end of story!  The only question becomes “How soon?”; if interest rates start to rise even a small amount the default looms that much closer.

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In view of this ‘mental block’ on the subject of restructuring Social Security, I have discussed with a few others what may be the only mathematically viable policy to prevent the ultimate default, and that is to open the borders of the country to the maximum level of immigration that we can accept – and thus ‘grow’ the economy faster than our government can spend it.  I believe that the only reason some of our current Republican leaders are waffling on the immigration problem is that they are aware that population growth is the only possible alternative, barring massive spending cuts and entitlement reform, to economic failure in the near future.  If our elected leaders are incapable of cutting spending to the degree needed to prevent the impending default, pushing that default into the future can only be accomplished by increasing our population enough to offset the ‘birth-rate deficit’ of today’s citizen population, and thus increase the tax base enough to delay the ultimate consequences.

It should be quite obvious that this solution is unsustainable as well; the increasingly rapid depletion of natural resources, especially water, dictates that this solution has a limited lifetime.  The chief complaint of those who ‘care about the environment’ is that there are already too many people in the U.S. and in the rest of the world.  All of our wars and international quarrels can be traced back to too many people disagreeing about everything.  So this alternative is not a viable solution for the long term.

We seem to be faced by three choices:

  1. Continue on our present path of growing spending and deteriorating economy and reach default within a) five years – very likely, b) 10 years – virtually certain, or c) 20 years – absolutely unavoidable;
  2. Open our borders to increase the tax base and simultaneously put some meaningful brakes on spending.  This may delay the default long enough to implement a better plan; the degree of delay depends entirely on the force behind the spending controls, but the long term population effects are likely to be neither popular nor successful;
  3. Implement the plan I describe in this paper, or at least something very similar in effect, and achieve a deficit-free growing economy within the next 30 to 50 years.

I would argue that the only acceptable course for rectifying our current economic and political impasse must be to put into effect something very much like the plan I have offered here – and to do so as soon as possible.

—— End of Main Article ——

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Part Time Jobs, Education Costs

Near the beginning of the previous section, on Page 3, I introduced my primary ‘Monetary Unit’, M, which equals an individual worker’s GI divided by the annual value of MI, Median Income.  I also discussed smaller units for weekly or even hourly wage equivalents of M.  Using my nominal standard work-year of 2000 hours, if MI = $54,000, the approximate value for 2014, and if a full-time worker’s income is $40,000, then his annual income would be M = 0.741 (40000 / 54000).  His equivalent hourly wage would be $20 / hour ($54,000 / 2000 hours * 0.741).  It is a straight-forward relationship to convert any M value to an equivalent hourly wage, or vice versa, in this manner.  For workers who have only part-time jobs, we can calculate both the fraction of a pay-period worked – Part Time Fraction or PTF = annual hours / 2000 or weekly hours / 40 – and the corresponding M position to arrive at the appropriate dollar amounts for TDSA deposits and SI access.  Total hours per year will not be known until an end-of-year is reached, but the equivalent number can be converted to hours per week or per any desired pay-period to arrive at the corresponding TDSA and SI amounts in dollars.  Employers of part- time workers should again be required to pay the tax due on any SI funds accessed via this formula.

I have put this observation into a discussion of education costs because it is common for students at any level beyond high school to have part time jobs to help support themselves and pay for their education expenses.  When one considers the critical importance of an adequate education in the world today, it seems logical to do everything possible to make higher education as accessible as we can.  Among other considerations, rather than watching college costs continue to skyrocket, as they have in recent decades, we need to have a discussion between governments (at the State level primarily), school administrations and all citizens to establish controls so that education costs can be constrained to grow no faster than MI, preferably more slowly.

I would like to suggest also that the time students spend learning could be matched with some fraction of employment time for access to SI funds.  Education, like healthcare, should be available to everyone, especially those who have the brains and initiative to use it, without regard to family income.  Grades achieved and behavior (both in class and outside of class) should be taken into account, as should the academic level of the course materials covered.  (For example, some of the courses chosen by those on athletic scholarships might not qualify for this employment time matching; of course, athletes on scholarships are very likely receiving enough income that they would not qualify for SI in any case!)

One possibility would be to allow each hour of (part time) employment to be matched by one hour of academic work.  If, for example, a student works ten hours a week for an employer, the employer will follow the rules above and put the first Minimum Hourly Wage amount into the student’s TDSA; if the hourly wage is greater than the minimum, the student may choose to  receive the balance at the end of that week as ‘Earned Income’ and pay the standard Flat Tax or deposit it, pre-tax, into his TDSA.  This amount of ‘Earned Income’ – any excess above the Minimum – can be divided by the number of hours worked plus the matching amount of time spent on academic work (a total of 20 hours in this case) to determine where, on the Gross Income line, this student’s wages fit for determination of Supplementary Income due for that pay period.  Using the same 25% of MI value for Minimum (Annual) Wage discussed above, we can calculate the Minimum Wage equivalent for any selected part time pay period.

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If the student’s Earned Income is less than the upper limit for his ‘C‘ level (typically ‘Single- dependent’ for students, see pages 8-9 above) and ratio of part-time to full-time for the hours of work plus study, then the student can draw the appropriate amount of SI from the fund to augment his earned income.  In this way we should expect to see that any student who is willing and able to spend up to 20 hours a week of his time working toward earning a degree will be able to afford the cost of education with minimal help from parents or others.  Employment time above 20 hours cannot be fully matched because that would bring the total effective work hours to more than my standard full-time of 40 hours.  In any case, carrying a full load of academic studies does not mix well with working on an outside job more than this 20 hour limit.

In order to analyze this step-by-step, let’s look at two examples, Jane and Bill Student, who each have part-time jobs totaling 10 hours a week.  Jane is a Junior and has worked at her job as a part-time news reporter for over a year and is now paid $16 an hour.  Bill is a Freshman and has a job as a ‘burger-flipper’ at $10 an hour.  The ‘current’ MI is $54,000 and the Flat Tax rate is 15%.  The equivalent hourly minimum wage (Minimum Hourly TDSA deposit) is $6.75 (25% of 54000 / 2000) and both students receive more than this ‘Minimum Wage’.  Both students have a full schedule of coursework, so their academic hours greatly exceed their employment hours.

In Bill’s case, his weekly income is 10 hours at $10 / hour or $100.  Adding another 10 hours of study time would bring his effective hourly wage down to only $5, less than the TDSA minimum of $6.75, so Bill cannot use the full amount of matching study time.  Instead, he must figure how many hours he would have worked, at $6.75 / hr., to bring his total to the $100 he is being paid: $100 at $6.75 / hr. = 14.815 hours; so Bill can claim only 4.815 hours of study time along with his actual employment time to calculate his weekly Supplemental Income.  The figures work out as follows:

  1. All of Bill’s pay goes into his TDSA; none is paid to him as ‘Earned Income’, and he owes no taxes (alternatively, he could elect to receive the excess $3.25 / hour for 10 hours as income in lieu of ‘Earned Income’ of $32.50, and pay the 15% Flat Tax on that amount);
  2. He is credited with working 14.815 hours per week at $6.75 / hr., so his Part-Time Fraction (PTF) is 14.815 / 40, or 0.3704;
  3. His M equivalent is zero (no full-time earned income), so he qualifies for the maximum SI of $216 (20% of 54000 / 50 weeks) times his PTF of .3704 = $80.00 per week.  Over a full year this would yield an SI total of just over $4000, or a grand total (including his TDSA) of $9000.

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In Jane’s case, her weekly income is 10 hours at $16 / hour = $160.  Over her weekly job time of 10 hours work plus 10 hours study, she is making an adjusted $8 / hour, still well above the TDSA minimum, so her employer will automatically put the first $135 (20 * $6.75) of her weekly pay into her TDSA and then pay her the balance of $25 as ‘Earned Income’.  She will pay 15% of this in taxes, $3.75, and keep the rest, $21.25.  (Here again, Jane may opt to receive the excess of $92.50 over her 10 work hours of TDSA as in-lieu earned income and pay ordinary income tax on that amount.)  Her SI eligibility is calculated as follows:

  1. Her current M value is 0.046296 ($25 / $540, her weekly Earned Income divided by this year’s equivalent weekly MI for a half-time schedule of 20 hours per week, PTF = 0.5);
  2. Using the formula for C = 0.2 (Figure 5, page 11) her annual SI pay would be 0.22121 MI or $11945, times her PTF, so her weekly SI would come to $119.45 (annual SI divided by 50 half-time weeks);
  3. Her total weekly Earned Income plus SI now comes to $134.86 after income tax; thus, over a full year, she could accumulate a spendable total of $6743.  Including the TDSA yearly amount of $6750 (25% of MI for a half-time year) would bring Jane’s total to $13,493, after ‘current income’ taxes, a fairly generous annual income for a student working only ten hours per week! (Remember that TDSA taxes are deferred until a withdrawal is made, and SI taxes are paid by the employer.)

In these examples I have assumed that neither Bill nor Jane have opted to take the ‘in-lieu earned income’ derived from their study time as cash in calculating their annual equivalent earnings; rather, I have assumed that they both elected to put these funds into their TDSA accounts.  In any case, this choice does not affect the calculation of their SI eligibilities.

I have used the Single Head of Household basic SI in the calculations for both Jane and Bill (C = 0.2).  This is valid if both of them have elected to be independent of their family and totally responsible for their own living costs, but this is unlikely to be the case with most students.  An obvious alternative choice might be if they were set up in an apartment owned by their parents and then given the responsibility of paying rent and maintaining the apartment and managing their separate living costs, in which case they could qualify as a Head of Household and adult partner.  There are many possible combinations, each of which could result in a different C value for the actual SI calculation.  Rules for C values will necessarily be set by Congress, or by a version of the IRS established by Congress for the purpose.

Of course, neither Jane nor Bill is expected to continue these same work schedules through their summer vacations or over the entire four or more years they spend in college, but it should be clear that this access to SI funds, and matching study time, will make their college expenses significantly easier to manage.  Both of them will need additional help from scholarships or from their families to cover their remaining school expenses and living costs, but both will graduate, after their degrees are completed, with much less debt than would be expected with today’s conditions, and with a good start on their own TDSA accounts as they enter their working lives and establish their own households.  Note that MI is expected to grow year-by-year, so the dollar numbers in the above examples will change annually along with MI.  College costs, in dollars, should not be allowed to grow at a greater rate.

This college SI funding will come at the expense of other taxpayers, just as today’s welfare does, and there will likely be many hundreds of thousands of young adults taking advantage of this opportunity.  The net gain from a better educated and higher earning future citizenry certainly should be viewed as more than adequate compensation to our country for this cost.

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Another aspect of Part Time Work and Supplemental Income deserves a detailed discussion at this point.  What happens if a worker loses a good-paying position, due to bad economy or any other reason, and cannot quickly find a comparable replacement job? Let’s look at another hypothetical case to see how my system works in practice.

Suppose a married couple, John and Mary, are living with their two children in a house on which they carry a substantial mortgage.  As a couple with children, their ‘C’ is 0.375 (20% for John as Head of Household, 10% for Mary as spouse, and 5% and 2.5% for the two dependent children).  Let’s assume further that John was receiving a salary greater than M = 1 until just recently, when his company went bankrupt and his job disappeared, so the family has neither needed nor used the SI Fund previously.  Mary has been a mostly ‘stay-at-home’ mother because of the children, but has worked part-time in a local shop with a pay rate of $15 / hour.  Her part time work averages less than 20 hours a week and is variable.

As soon as John loses his job he becomes eligible for the back-up government work mentioned earlier, with a wage of at least my required minimum of 25% of MI, in this case on a weekly basis, because he fully expects to find a better job within a reasonable length of time.  Until that better job comes through, John can work full-time on his government job, continue adding the maximum (MI / 4) to his TDSA, and draw on his SI eligibility. Mary can continue with her part-time job, continue adding to her TDSA, and adding her taxable earned income to the Household total.  With her $15 / hr. wage and variable hours, Mary will have a PTF equal to her hours worked each week divided by 40.  This gives her a deposit of $270 times PTF (here I have assumed the MI of $54,000 for 2014) into her TDSA account each week, and an earned income of $8.25 times hours worked minus the 15% Flat Tax.

If we assume that John receives only the TDSA ‘Minimum Wage’, $270 / week while on this interim job, he can draw the maximum SI of $405 each week ($54,000 * 0.375 / 50), minus a small reduction for Mary’s taxable income, until a suitable job is found.  With his previous job experience, chances are good that he can be assigned to an interim job that makes better use of his background and pays far more than the ‘Minimum Wage’, but at least this minimum is guaranteed as long as he works full time.  Their combined TDSA of $270 / week, adjusted for Mary’s hours and PTF, will cover any medical expenses and continue growing his retirement fund, and the SI should cover at least all normal basic living expenses.  Payments on their mortgage may have to be reduced or suspended for a short time but banks will normally accept this in preference to losing a good client.

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Healthcare Management

At the start of this discussion, on page 4, I made only passing reference as to how to handle the division of the TDSA Fund into Retirement Fund and Healthcare Costs.  Simply dividing it into two equal halves leaves much to be desired and fails to demonstrate why this plan is so much better than what our country has been accustomed to.  The primary justification for imposing the ACA on us in 2009 was that too many low-income people lacked any form of healthcare, either because they could not afford the direct medical costs (doctors and hospitals), or because they could not afford the insurance premiums that might provide a reasonable level of coverage.

The cost problem is neatly solved with this plan by assigning up to half of each year’s TDSA deposit specifically to healthcare costs.  By 2040, the year analyzed here for cost purposes, ‘up to half the TDSA deposit’ would imply about $12,500 per year.  The 2015 equivalent, for comparison, would be $6750, far more than most people expect to spend, per year, on healthcare if they are healthy and in their prime years (say, below age 55).  By the time this kind of expense might be expected – old age diseases, cancers, etc. – there should be more than enough accumulated in their TDSA funds to cover these increased costs.  But we still have a deep divide in the way people think about how their healthcare should be paid.

Those who have been exposed to the Socialized Medicine ideas of Europe and Canada may prefer a totally single-party payment scheme in which Government plays the primary role.  Most Americans, especially those who have college degrees or have achieved mid-level incomes (say, at least double the MI) are more likely to prefer to pay directly for minor medical expenses and buy simple insurance plans for all conditions likely to cost many thousands of  dollars.  Even with these plans, they still will pay significant amounts in co-payment obligations.  Because of the many years of employer-provided coverage we have become accustomed to, we have as a nation become nearly blind to the real total costs of healthcare.

The true advantage of the plan I put forward here is its flexibility.  Those who really believe in letting government take over responsibility for their healthcare lives could simply pay the $12,500 (half of their 2040 TDSA deposit, or the equivalent MI / 8 every year, to a government entity (like Medicare) and be assured that no matter what medical costs they incurred it would all be paid for, throughout the rest of the lives.  All well and good, but rest assured there would be limits on what procedures would be covered!  Certainly, cutting edge treatments for obscure ailments would NOT be covered if the costs were excessive.

For those who believe in hands-on control of their own healthcare – who their doctors are, what treatments they want or need, and how much cost they are willing to incur – the choice would be equally simple: they will pay for everything that is within their ability to pay, directly to the medical practitioners of their choice, and then buy a suitable insurance package that covers all other expenses with a co-pay and some level of lifetime Cap.  Alternatively, the ultimate do-it-yourselfer may choose to pay all of his own expenses and work out the details for handling expensive treatments with his own doctors, with no insurance costs involved at all.

Each of these possibilities falls within a continuous range of methods people could use. The point is that the amount indicated for the TDSA fund will be well beyond what should be needed by most people for most of their productive lives, and the ability to shift the funding within this range, and to cover the larger expenses expected later in life from unused earlier TDSA money should enable everyone to go their own way without any interference from bureaucratic rules and regulations.  By retirement age, most people would expect to have a surplus in the healthcare portion of their TDSA; this would simply be combined with the retirement portion.  The beauty of this arrangement is that market principles will guarantee that the best care will be available to each according to his/her choice of healthcare path.  Competition will drive this unfailingly!

One of the problems with any such plan is the fact that our government has long insisted on playing a starring role in our citizens healthcare choices, a role that I personally find repugnant.  However, I will admit that there is one area in which government could play a very useful role: managing the coverage that any of us may need at some time in our lives to pay for the cost of catastrophic medical care, such as major surgery, cancer or any of several extremely expensive treatments for accidents or diseases.

Since by their nature these conditions are exceptional and rare, their cost within the total of all healthcare costs is fairly small, but the cost to any individual – even for the wealthy – can be unbearable.  As a percentage of all real income, we might estimate this type of healthcare to consume as much as 1%, unlikely any more than that.  If all workers were required to plan for such disasters through ‘catastrophic insurance’ policies, we might well expect the cost to increase to at least 10% of all income, using traditional insurance.  If, however, we could come together on a plan for the government, as a non-profit insurance agency, to take that 1% of all income from everyone’s TDSA and then cover all catastrophic medical costs, we just might solve our healthcare costs once and for all.  In fact, I suspect that the 1% would more than cover the government’s costs in this matter, and any excess could then go to supporting medical research to find better, cheaper, more effective treatments for many of the health problems we continue to suffer from.

Based on this estimate (if it turns out to be in error, the numbers can be altered as needed) I would like to submit a fairly simple scheme that can be combined with my TDSA to completely cover every worker’s retirement and healthcare needs almost seamlessly, but still includes a layer of personal responsibility so that there would be little room for fraud.

First, as suggested earlier, we split the TDSA into two equal parts, the TDRSA (for retirement only) and the TDHSA (for healthcare primarily, but available for retirement if not fully used up before retirement).

Next, we dedicate 50% of the TDHSA to routine doctor-patient-managed healthcare, 15% of the TDHSA to a government-managed catastrophic healthcare coverage, and the remaining 35% to cover such costs as the taxes on TDSA withdrawals, excessive but less-than-catastrophic care, CO-PAYS on certain portions of costs assigned to the ‘Catastrophic Coverage’ category (more on this below), and any other costs not covered elsewhere.

Lastly, we accumulate any unused portion of each year’s TDHSA and retain it, with the same expected growth as with the TDRSA, for use in later years.  Whatever remains, on the death of the owner, becomes a part of the TDRSA that passes on to the owner’s heirs.

In keeping with my estimates of 1% of Real Income and 15% of each individual’s TDHSA, I propose that 15% of every TDHSA be automatically assigned to a Government Catastrophic Health Insurance Fund.  This amount will include the taxes owed due to withdrawal of this amount from each TDHSA, so the amount actually dedicated to the insurance would be 12.75% of the TDHSA, or 1.6% (⅛ of 12.75%) of MI for each year from every worker, but since both the insurance ‘premium’ and the tax go directly to the government, it makes no sense to treat them separately.  (These figures will change appropriately if and when the Flat Tax Rate is modified – presumably downward.)  In addition, for those whose real incomes are greater than 1.875 times the MI, there would be an additional contribution of 1% of those incomes minus the 15% of TDHSA already paid (note that the 1% of income is after tax and the 15% of TDHSA already includes the tax owed on it).  This results in a payment by all income earners of the greater of 15% of TDHSA (0.15 x 0.125 x MI) or 0.01 x Gross Income.  At a GI of 1.875 x MI, that 1% of GI is equal to 15% of the TDHSA.

My reason for suggesting this distribution is that it should solve two vexing problems: 1) the amount collected over the whole nation should be easily enough to cover the actual costs of those rare catastrophic healthcare events, and 2) there should be enough extra to provide the government with funds which could then be dedicated to research for finding better cures for those conditions which are now lacking in sufficient funding.  The clinching argument would then come down to eliminating the Billions of dollars of unnecessary and unproductive insurance costs and profits.  It may appear at first glance that these figures are far less than what we spend today on total healthcare, even with many people still not covered, but the difference in cost is, I think, quite conservative because at least 90% of today’s total cost of healthcare goes to the insurance companies (salaries, advertising, investors, etc.) not to defraying real medical costs.

Doctors and patients will need to negotiate their pricing arrangements for the first 50% of TDHSA funding, and each worker will have to make his own choice as to whether to include payment of taxes on any withdrawals within this 50% segment.  In general, I would expect those with lower incomes to have this tax paid out of the TDHSA so as to minimize taxes on ‘real’ income each year.  Once healthcare costs (plus concomitant taxes) exceed that 50%, any further healthcare costs will begin to degrade the funds available in the TDHSA for future expenses, especially if taxes are added to the withdrawals, so at some point most workers may elect to pay the taxes out of their regular income – note that taxes must be paid on the amount withdrawn to pay the taxes as well (see Section 5(a) – Business Taxes, paragraph 3, below for discussion of this point) – and thus conserve an adequate account for future needs.

Once current healthcare expenditures exceed the 50% of TDHSA level, a secondary usage of the Catastrophic coverage can be triggered, but if this is for excessive cumulative expenses rather than for singular extremely costly treatments, a CO-PAY of 20% should be brought into play.  This 20% can be paid out of the remaining 35% segment of the TDHSA.  Taxes are already paid on the Catastrophic coverage, but not on the 35% zone, so the user can be expected to request this usage only when essential.  Each individual case should require a special request that the government, as ‘insurer’, would have to approve, but leniency and generosity should be among the priorities for this decision.

One more important point, the entire TDHSA fund is owned by the worker who receives it as his Minimum Income.  One obvious result of this private ownership is that, within the restriction that it be used solely for healthcare, the kind of healthcare is at the discretion of the owner.  He can use it for dental work, vision care, mental health or any other treatment he perceives as needed.  He can even use it to pay for non-traditional medicine if he is convinced in his own mind that this kind of care is his only chance for acceptable health.  (Government may well want to put emphasis on mental health in this context, in view of the ongoing war between guns and mental health as the driving force behind violence nationwide.)  Everyone should have the freedom to choose – in healthcare as in anything else – as long as it doesn’t adversely affect the well-being of others.  The only caution here is that the owner must keep current on his level of usage so that he does not fall short of enough money to cover health problems, which almost always occur unexpectedly.  Accounting procedures will need to be carefully thought out and implemented.

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Other Considerations

More than a year ago, I published several versions of my Tax Reform blog, culminating in Version 5 which can still be found at  That article presented a somewhat convoluted tax structure I developed, primarily to protect those at the low end of the income scale.  This paper offers a far better overall solution, but several sections of my earlier effort  are, I think, still valid and necessary for a full treatment of this subject.  I have copied in edited versions of several sections from my earlier publication below.

‘Section 4’ was devoted to describing how to shift incrementally away from today’s ‘Defined Benefit’ entitlement (Social Security) to the ‘Defined Contribution’ plan described above.

‘Section 5’ discussed business taxation; it shows why taxation of business profits is harmful both to the businesses and to the nation’s total economy.  It also discusses the advantages of treating personal income from businesses – both regular income (interest, dividends, etc.) and investment income (capital gains) – as taxable income, but with adjustment for MI growth during the length of time the investments have been held.

‘Section 6’ covered some simple concepts of Government Reform which should help greatly to diminish the ‘them vs. us’ conflicts that have created such a hostile environment over the past few decades, both between the two Parties and between our government and “We The People”.

Section 4 – How to Transition from Social Security to my TDSA Plan

In Tax Reform V.5 (link above) I developed a simple plan for shifting gradually away from today’s Social Security to my Tax Deferred Savings Account plan.  To recap, this method involves starting with those older taxpayers who have already paid in most of their share of the FICA tax and will start collecting it back after retirement.  Those who have deposited the maximum limit for the mandated minimum number of years, and who have reached a required age, can expect to receive the standard full monthly Social Security retirement check.  Based on the assumption that a normal working lifetime is approximately 40 years, we can start as of a ‘Year 0’ to allow those who have paid into the FICA fund for at least 35 years, and have reached an age at or above the mandated retirement age minus five years, to terminate their payroll tax and instead put that amount of their income into their own TDSA account.

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To offset the loss of their payroll tax, they will accept a reduction in their monthly Social Security checks of 1.25% for each year they are short of the mandated retirement age at the time they stop paying into FICA.  Their employers will continue putting the employer portion of the payroll tax into FICA.  If both employee and employer had switched from FICA to TDSA, the reduction would have to be 2.5% of each monthly check because one year is 2.5% of 40 years.   But to assure that sufficient money continues to flow into FICA during the early years of the transition, the employer half of the FICA income should be retained.  (I am assuming for now that this sequence is started independently of my Flat Tax plan.  It would be better to implement both simultaneously, but with the restriction that only those who accept the TDSA option can take advantage of the new Tax Code.)

The following year, ‘Year 1’, this plan would reduce the year and age groupings to 30 years of FICA contributions and an age no less than retirement age minus 10 years.  The same rules as above would apply to this larger group as of Year 1.  A year later, Year 2, the numbers would drop to 25 years of FICA contributions and retirement age minus 15, and so on.  If the year groupings are set at five-year groups, this option would work through workers of all ages and take a period of eight years to complete.  Please note the words allow and option in bold print above.  The point here is that the transition should be optional to every taxpayer, during this initial phase, not mandatory.  The first few years will be critical to the success of this plan and there are likely to be many people who trust investment markets even less than they do our government!  Those who feel uncomfortable during this early phase should be allowed to continue with their full payroll tax and the low returns expected from Social Security.  However, once a taxpayer has opted to switch, there should be no question of switching back.

Note also that I suggested starting with five-year groups during the phase-in period.  Any period from one-year to 15-years could be used; the goal is to make the transition ‘gradual’ but not too slow.  A final necessity is to change from optional to mandatory, once the phase-in period has been implemented (presumably) successfully, to complete the privatization process.  After the final year of the phase-in, all taxpayers should be committed to the new system and only those who were already retired and collecting full or partial Social Security checks will still be a burden on the Treasury.  This load will be much smaller than at present by that time and will diminish fairly rapidly with each successive year, so at this same time the employer portion should also be switched over to employee’s TDSAs for all those newly employed.  I envision eliminating the entire Entitlement Spending problem in under 20 years from year 0 if it is done this way, and even this could be shortened by offering a generous final Social Security ‘pay-out’ in the form of an annuity or a single payment by the government into each retiree’s TDSA to replace the anticipated amount still owed under Social Security at some time after the end of the phase-in period.

With the above as a preliminary view of what is needed and how to approach this problem, I would like next to offer the following detailed plan of execution.  This method will complete the privatization in five years, and it has the advantage that it addresses the three primary obstacles of 1) preventing any loss of income during the transition phase to those who opt to make the switch as early as allowed; 2) avoiding any additional costs to employers of those who engage in their option; and 3) assure that the government does not need to incur excessive additional debt during the transition period in order to cover its costs.

My detailed plan has the following rules:

  1. As of the beginning of ‘Year 0’, as soon as the necessary law has been passed, any worker who has completed at least 33 years of work under the existing Social Security system and is within 7 years of eligible full-benefit retirement may terminate his/her payroll tax obligations and commence full deposit of the MI / 4 annual TDSA accumulation.  It is almost inconceivable that the amount of the payroll taxes (counting both the employer and employee components) will be less than the MI / 4 minimum, this requirement will be met with no problem.  Any excess from the two payroll tax mandates, and all of the ‘fixed costs’ zone in Figure 1, should go to the government to defray most of the shortfall in revenue they would have received.  Any loss to the employee due to abnormally low income (and therefore insufficient payroll tax to equal the MI / 4 TDSA rule) will be more than met by a small portion of these ‘fixed costs’.  A more critical issue is the potential loss of Medicare coverage for those who have paid into the system for a major portion of their working career and have the promise of Medicare coverage for the remainder of their lives.  The simple way to fill this gap would be to honor the Medicare promise, but expect the employee to pay back a portion of that coverage out of his TDHSA.  That portion would be minimal for the first few 7-year transitioners, and would be expected to grow with subsequent 7-year periods.
  2. On retirement, each transitioned worker would receive his usual Social Security benefit, reduced by 2.5% for each year ahead of retirement schedule at which the transition takes place.
  3. Also starting as of the beginning of ‘Year 0’ EVERY new worker entering the workforce will be automatically put fully into the new privatized plan.  These workers will have no obligation of any kind toward funding the old Social Security or Medicare/Medicaid and will receive no benefits from them.  Since they have no expectation of using any of the funds in their TDRSA retirement accounts for many years (at least 40 under normal conditions) they will agree to allow the government to access as much as needed of those funds to cover any shortfall in Federal revenues to pay for shortfall in the payments needed for points 1 and 2 above.  Any funds borrowed for this purpose will be repaid at a minimum of 5% before they are expected for retirement of the owners of those TDRSAs.  This minimum is in line with the expectation of at least 5% growth discussed earlier (page 5).  If the normal return for all TDSA’s proves to be greater than 5%, the government should also pay that higher rate.

With these rules in place, it will take five years for all existing employees at ‘Year 0’ to have the option of transitioning, and by then all new workers will be on the new system, so at that point all remaining pre-existing workers who rejected the switch will be automatically switched as well.  The same protections guaranteed those who opted in will be extended to those who refused, but the amount of protection they would need should be minimal because of their late arrival in the new system.

Government revenue, by the end of this five-year transition period should be sufficiently enhanced by the increased percent of employed workers and resulting increase in income tax revenues – as well as radically reduced burden of welfare payments – that the national deficit ought to be completely eliminated and a healthy surplus start to accumulate.

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Section 5(a) – Business Taxes

The primary reason people build businesses is to make a living, that is, to make money for themselves.  Secondarily, they wish to develop an idea for a product or a service that their business can provide which they believe will be useful to other people, at a price that their consumers will be willing to pay.  Clearly, the concept of a business profit is inherently a flawed concept; any money the business brings in always goes either to maintaining and expanding the business, or to people: the business owners, managers and employees, and lastly, to investors.  It is people who realize or ‘enjoy’ any profit, not the business itself; and any business profit tax is necessarily a form of double taxation because those same people will be taxed on any portion of the business income which ends up in their hands.

As a general rule, any form of ‘Profit Tax’ on a business operation has a net negative effect, directly on the business and its owners, indirectly on the national economy.  It automatically diminishes the ability of businesses to hire more employees and it discourages higher wages.  In addition, any tax imposed on a business will necessarily be passed on to those who would become purchasers of the business’s products or services, increasing costs and further reducing efficiency and depressing the economy.  No company could remain profitable if it did not add the cost of taxation into the cost of its product.  Following this logic, I propose the following rules:

  1. Business income/profit which stays in the business, to be used for operating expenses and for growth and improvement of the business, should never be taxed.
  2. Any business income which is extracted from the business for the benefit of an individual in any form should be taxed as income to that individual.  Payroll, employee benefits, employee insurance premiums, bonuses, dividends, interest payments, etc., all should be taxed as personal ordinary income, to the recipient.
  3. If an employer wishes to pay both a benefit and its concomitant tax together, the total amount of the benefit plus tax (or BPT) must be used in calculating the correct total amount of the tax.  Let’s assume a company wishes to give all of its employees life insurance policies with an annual premium of X dollars, without incurring any tax on the employees.  The net tax must then be FT * (X + tax), so the tax can be calculated as:  Tax = FT * X / (1 – FT).  To demonstrate this, let’s say that the premium paid by company costs $100 per employee, and FT for this year = 15%.  Then the tax paid by the employer will be $17.65 per employee, not $15, because 15% of the total BPT ($117.65 in this case), taxed at 15%, is equal to the amount of the tax, $17.65.  In this special case, the employer will be paying a tax on behalf of all of his employees.  It would be expected that the employer will take this cost into account in determining the appropriate pay scale for each employee.  The employees in turn should realize that they are enjoying a benefit at significantly lower cost than if they bought their own.
  4. Non-commercial organizations, such as Unions, Churches, Charities, Social Groups, Homeowners Associations, etc., are all considered businesses under these rules, and they will pay no taxes on already taxed money that is contributed to them by individuals or households.  When any organization pays money to others who classify as Personal Taxpayers, those persons will pay the appropriate Personal Taxes, as above.  A charity or church, however, may provide food, clothing, general welfare materials to those it deems to be in need, without incurring any tax obligation on the part of the recipient or the provider.  That is the nature of the charity’s business rather than payment for goods or services; for example, a union may provide temporary support in the form of food or housing for members who are unemployed, without being taxed.  If that temporary support is given as a cash payment in lieu of wages, however, it is income to the worker and is subject to standard income tax rules, payable by the worker.
  5. Implicit in these rules is the requirement that unionized workers must pay the normal income tax on their earnings before paying their union dues.  The only alternative would be for the unions to pay the tax out of the dues they collect.  In this latter case, the unions would have to pay the full FT tax rate on all the dues they collect.
  6. If a business contributes to a charity and such support does not qualify as a part of the business’s normal activity, then there will be a Personal Income Tax obligation to be paid by that business (again note the tax calculation under Rule 3, above) or by the receiving charity, a) because the end beneficiaries of the donation are the individuals who receive the charity, and b) because no prior taxes have been paid on the amount donated.
  7. When one business buys stock in another business, to increase its cash reserves or improve its product, or any other legitimate business purpose, any profits realized from such transactions which remain in the business should not be taxed.
  8. Any business which sends money overseas, to open a new plant or start a new

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branch operation for example, will post a ‘tax bond’ in the amount of the current income tax rate, FT, times the amount of money expatriated.  Assuming that the foreign investment bears fruit and returns money or equivalent cash value to the U.S., there will be a refund, or bond reduction, at the same tax rate on the value repatriated. This serves two purposes: it prevents American companies from sending income to offshore accounts for favored executives without their paying the appropriate income tax, and it reduces the incentive for companies to ship jobs overseas where labor costs are less than in the U.S. When (if) the overseas operation returns the whole amount originally expatriated, the ‘tax bond’ account will be closed and any further money coming into the U.S. for that account will be untaxed profit to the company.  Note that this arrangement also eliminates the incentive for Congress to try to tax any overseas earnings of either businesses or taxpayers (Territorial Tax Limitation).  Analogous to the ideas detailed in Section 5(C) below, I would suggest that the amount required to be repatriated to cancel a ‘tax bond’ should include the MI growth rate over the period the bond is outstanding. The dollars returned will be worth less than those sent overseas.

Section 5(b) – Political Influence

It has been traditional for both individuals and businesses to deduct political contributions from their taxable finances each year before computing taxes due.  New rules are needed in this area.

  1. Personal contributions – Since deductions from personal income will no longer be allowed, there is no reason to limit contributions that individuals can make, after taxes, to any politician or political organization.  People should be free to give any amount to anyone they wish without penalty.  This same logic applies to gifts from one person to another.  Tax must already have been taken from the person giving the gift, so any additional tax would constitute double taxation of that amount of income.
  2. Business contributions – Since business profits will no longer be taxed in the traditional manner, it is necessary to consider the basis for any political contribution from a business source.  The primary consideration, of course, must be that a business does not contribute to a political entity for purely altruistic reasons; such giving is necessarily always done to gain some influence or advantage that would not be available otherwise.  In other words, money is used to buy favorable legislation and/or attention.  For this reason, there should be a cost to the business for the advantage it expects to realize.  This same reasoning applies to Unions, Charities, or any other business or organization.

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It might seem fair to penalize such behavior with a tax rate greater than the normal, but this would be self-defeating because the same end can be achieved by simply giving a trusted employee or company officer a bonus in the amount the company wants to donate and achieve the donation ‘by proxy’.  The tax incurred would then be the standard FT times the bonus, ‘paid by the proxy’ (and no doubt reimbursed in some manner not within view of the tax authorities).  So the pragmatic solution is to simply treat political donations from businesses as income to the recipients and charge the standard tax to the recipient (at 15%), or directly to the company (at 1 / 85%, again noting the proper calculation under Rule 3 of the previous section).  In this case, no political person or group should be deemed immune from taxation.

Corporate and union influence in Congress both are notorious sources of bad legislation, and have been for as long as this country has existed.  At least by taxing all such influence we may achieve a better balance.  I suggest that taxes realized from this source be dedicated to paying down the National Debt rather than simply going into the General Fund.  This again would go a long way toward defraying the cost of ‘business as usual’ in our ‘crony capitalism’ society.

Section 5(c) – Taxation of Investment Income

We tend to think of ‘income’ as the weekly or monthly paycheck that almost all of us receive in return for the services we perform as employees.  We tend to view investment income as something to which only the rich have access, although in fact all of us have bank accounts, IRA accounts, pension funds, etc., all of which are forms of investment.  It is also true that Capital Gains, dividends and bond interest – forms of investment income with which most of us are familiar – actually add up to far more value than all the ordinary, or ‘earned’, income we receive as our paychecks.  In addition, there are other sources of asset growth such as Real Estate and other Properties (art work, books and other collectibles) which increase in value just by sitting idle for extended periods of time.  Bought today and sold years from now, they often become ‘worth’ much more than their original cost, so that difference constitutes a significant ‘gain’.

While the regular payments listed above, specifically interest and dividend payments, are typically classified as ‘current income’, most of the other forms of investment income are not realized on a regular basis and may not be realized for many years after the initial investment.  In my earlier Tax Blog I went into some detail to discuss how to handle this; here, I will simply summarize the process.  Since MI will almost certainly have a different dollar value from the time of an investment ‘purchase’ to the time of its ‘sale’, that change in dollar value should be reflected in the amount of real gain on which tax is owed.  If MI has increased by, say, 10% from purchase to sale, then the dollar price of the sale must have increased by more than 10% over the purchase price for any real gain to be realized.  Taxes should therefore be paid only on the amount of gain in excess of that MI growth percentage.

It is accepted that risk is a component of all investment, so there is no reason to adjust the definition of real loss.  A loss is incurred when the sale price is less (in dollars) than the purchase price.  Congress has generously chosen to include transaction costs as part of the net purchase and net sale prices.  They may choose to continue this generosity or not, but I would maintain that only real gain, over and above MI growth, should be taxed as income.

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Section 6 – Government Reforms

Congress has, for far too long, viewed its own members as though they were a ‘Ruling Class’, not bound by the same rules they write for the rest of us.  This is perhaps the clearest sign that our government has turned its back on the Constitution and has taken upon itself the role of a Monarchy.  A new set of rules is needed to get our nation back onto the track established by our founders.  I recommend, in the strongest possible terms, that the following rules should be encoded in the form of an Amendment to the Constitution so that the resulting benefits would be much harder to abrogate in future years:

  1. Congress shall make no law that in any way restricts or penalizes all of the Citizens, which does not apply equally to Congress and all members of the Government Bureaucracy (e.g., Insider Trading laws);
  2. Congress shall make no law that in any way benefits or favors its own members, or other Government employees, which does not apply equally to all citizens (e.g., Government pension and medical plans);
  3. Congress shall pass no law which it is not certain is clear and devoid of destructive unforeseen consequences, or which it is not convinced is enforceable (e.g., Illegal immigration problems) – see also Rule 5 below;
  4. In keeping with the letter of the Constitution, no new laws or binding regulations may be made and enforced without full Congressional approval.  Furthermore, all laws and regulations which are approved by Congress (and signed by the President), once passed, must be fully enforced.  There must never again be situations where a new administration decides unilaterally that it doesn’t like laws passed by a previous administration and then refuses to enforce such laws; nor will Congress ever decide that it doesn’t approve of a law from an earlier administration and simply refuse to fund its enforcement.  Once properly passed, every law must be followed rigorously unless and until it is determined that the law was not well advised and needs to be altered or removed (e.g., DOMA, Immigration laws).  A government divided against itself is destructive, self-defeating and useless;
  5. As a simple method for implementing Rules 3 and 4, all complex laws, especially any that involve ‘Social Engineering’, which are likely to cause unforeseen consequences, must have built into them a Sunset Clause so that they can be more easily removed if those consequences are found to be damaging to the country;
  6. Congress shall make a concerted effort to remove any and all old laws which have proven to be poorly written, are unenforceable, which duplicate other better written laws, or otherwise are simply not worthy of retaining.  I would certainly vote for a Congressman who would promise to get rid of bad laws in preference to one who would promise to try to pass a law that would benefit me personally;
  7. Congress shall permanently terminate the practice of adding riders to bills unless the riders relate clearly and objectively to the primary subject of the bill in question.  If the subject matter of any unrelated rider is worthy of passage, it must be considered on its own merits as a separate bill, with no exceptions;
  8. Congressional salaries should not be determined by Congress alone.  Any general increase in Government salaries must be approved, on a case-by-case basis, by both houses of Congress and the President, and where appropriate by the people of the Congress member’s district or state.  There should never be a general Congressional salary increase without voter approval.  Note also my recommendation for Federal salary decreases in response to deficit spending, in item 11 below;
  9. Voter fraud has been much in the headlines recently.  The Constitution clearly states that all Citizens have the right to vote (with rare exceptions for mental disability or for criminal status), but it also states that only Citizens have this right.  To enforce this rule, we should require that a biometric voter ID card be issued to every eligible citizen and that this card be used as proof of right to vote in every election.  Early voting or vote-by-mail may still be used, but each year voters should have to produce their ID card to remain on the early voting rolls.  With recent advances in internet capabilities, this could be adequately managed online after the original citizenship checks and issuance, but an annual verification in person would be preferable where practical;
  10. All military personnel should be granted automatic vote-by-mail privileges when on active duty.  Special precautions must be observed to assure that they can record their voting preference at an opportune time prior to any election so that they are never denied their right to vote.  It sometimes happens that non-citizens are on active duty with our U. S. military; these personnel are normally extended a special right to vote also, so the same vote-by-mail privilege should extend to them as well;
  11. Halting Government Over-Spending – The structure detailed in the first part of this work shows that tax revenue, welfare, entitlements and living expenses can all be balanced equitably.  But how can we put a stop to the insatiable lust of our politicians for ever- bigger government and ever-increasing revenue to pay for it?  In earlier versions of my Tax Reform plan, I suggested simply resetting ‘this year’s’ FT, the Flat Tax rate, equal to ‘last year’s’ FT times last year’s spending divided by last year’s total revenues.  So every year spending exceeds income (deficit), FT will increase and people will pay a higher tax rate the next year.  My thought then was that the people would eventually change their voting habits and get rid of profligate politicians.  With the degree of corruption and bias I have seen in politics and the media recently, I no longer have much faith in relying on people’s voting habits to be able to correct these problems.

A better way would be to increase FT by 1% each year our government posts a deficit, and simultaneously reduce the pay of ALL government employees, specifically including all elected politicians, by 1%.  This should happen every year there is a deficit, and the reduced pay scales should not be brought back to pre-deficit norms until the total debt is also reduced to the pre-deficit level.  If the value of FT would have to go above 20% to fulfill this requirement, the FT increase should be waived and in its place the government pay scale should be cut 2% each year until the problem gets serious attention from those in our government who are causing it.

I am well aware that proposing such a cure for over-spending will not make me popular with those feeding at the public trough, but I suspect that if the media were to advertise this possibility publicly it would be extremely popular with the voting public!

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Glossary of Terms

BPT = Benefit Plus Tax.  When a sum of money is spent by a business for a non-business purpose, or withdrawn from a tax-deferred fund (like the TDSA), that amount of money becomes immediately taxable.  The tax rate applied will always be the same FT applied to all income.  However, if the amount withdrawn is then taxed, there is less than that amount to pay for the purpose of the withdrawal.  Let’s say that Joe Taxpayer needs $10,000 to pay for a hospital bill and he wants to take that $10,000 out of his TDSA for that purpose.  As soon as he withdraws the $10,000 he must immediately pay $1500 in taxes, so he now has only $8500 with which to pay his $10,000 bill.  To cover this shortfall he now wants to withdraw another $1500 to pay for that tax.  Fine, but now he owes another $225 in taxes for that $1500 withdrawal, and so on.  This is an example of an ‘infinite series’ problem that has a very simple solution, given in Section 5(a) – Subsection 3 (page 18):

Tax = FT * X / (1 – FT), or

W = X + Tax = X / (1 – FT), where

X is the amount to be paid out of TDSA funds, W is the full withdrawal including the ‘Tax’, and ‘Tax’ is $1764.71 rather than only $1500.

COL = Cost of Living.  This term is commonly used today as a political wedge to convince lower income workers that they are unfairly underpaid.  Since there is no way to compare any two individuals true cost of living – no two people eat the same food, buy the same clothes, live in identical homes in identical neighborhoods, etc. – this term can only be a very poor guide to judging the rate of inflation, or more accurately the rate of debasement of the dollar, over time.

FT = Flat Tax.  This is this single tax rate to be applied to all forms of taxable income, one time only, no double taxation.  FT may be changed from year to year, if necessary to respond to an imbalance between government spending and tax revenue, but other changes should accompany any increase in FT to restore a proper balance (see Section 6, Item 11).

GF = Growth Factor.  With normal productivity gains and inflation putting pressure on both prices and incomes to increase, we must expect that MI will increase every year unless there are serious economic problems to prevent this.  The natural growth of MI is defined mathematically by a percentage increase from one year to the next; this percentage is referred to as the ‘Growth Factor’.  Inflation, GDP, MI, productivity and other properties of the economy all have their own ‘Growth Factors’ and each is loosely correlated to all the others.  When we speak of a 5% growth, what we mean is that the value of something next year is 1.05 times its value this year, so a ‘1’ must be added to ‘percent growth / 100’ to find the value of the ‘Growth Factor’.

GI = Gross Income.  Total of all earned income from all sources received by an employee during one work year.  This does not include the Supplemental Income of low-wage workers, nor does it include the required TDSA deposit of 25% of MI, scaled to normal pay-periods.

M = Monetary Unit, defined as GI / MI.  An M value of 1.0 implies an income exactly equal to the current Median Income, MI.

MI = Median Income.  Half of all income-earning employees receive a gross annual income less than or equal to this amount, in current dollars; an equal number of income earners receive more than this amount.

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PTF = Part Time Fraction.  For those workers who have other responsibilities – higher education hours, family-care requirements, etc. – which limit the number of normal work hours, the SI system can be extended to include fractional SI funding, using the same fraction, PTF, as the ratio of actual hours each worker is able to manage to ‘normal’ work hours.  With a ‘standard’ full-time work year defined as 2000 hours of actual work, or 40 hours as the standard work week, it is simple enough to calculate PTF as the fraction of those standards spent ‘on the job’.  In the special case of college or university attendance, I have recommended allowing each hour of normal class time (and its equivalent lab or study time) to be added into the calculation of PTF in order to assist students with their education costs.  A similar rule could be made, with due caution, to apply to other Part Time workers.

SI = Supplemental Income.  For those who are willing and able to work a normal full-time work schedule, this SI Fund guarantees enough income, in addition to the worker’s TDSA and ‘Earned Income’, to support minimal but adequate living costs.  For unskilled workers who are unable to find a job in the private sector, government entities – Federal, State or Local – must place those workers in jobs that pay at least the minimum TDSA requirement (25% of MI – note that the dollar amount changes annually with recalibration of MI).  The Flat Tax on the amount of SI paid to such workers will be paid by the government employer (or by the private employer if/when one is willing to hire the worker) up to the point at which the worker achieves the experience and competence level to merit a level of earned income above the SI limit for his/her Family Size constant, ‘C’.

Calculation of SI:

SI = a* + b*M + C, where

C is the Household size constant described on pages 9 and 10, above,

b, the initial slope of each SI curve starting at zero ‘earned income’, is calculated from C:

b = 0.2 + (0.4 – C) * 1.2  (the constant 1.2 is arbitrary; it determines the spacing of                      the SI curve intersections with the GI line, see Figure 5),

X is the M value at which each SI curve intersects the GI line (large dots in Figure 5);

a and X are derived from b and C to connect the SI curve smoothly into the GI line as follows:

a = (1-b)² / 4C,  and

X = 2C / (1-b),

and all of the curves shown (in Figure 5, page 11) are the sums of lines of the form  y = bx + C (my linear SI boundary lines) and simple parabolae of the form  y = ax²; which makes each curve a quadratic function of the form:  y = ax² + bx + C, where ‘x’ is the appropriate M value for the current year MI and individual income.

TDSA = Tax Deferred Savings Account.  This is the individually owned account into which an employer must deposit the required minimum pay for every full-time employee.  This minimum deposit is analogous to today’s Minimum Wage, but no employer is required to compensate a low-skill employee any amount more than this, for healthcare, insurance, retirement pension or any other purpose.  This payment is not taxed at the time of deposit into the TDSA, but any amount withdrawn from the account for permitted usage (healthcare costs and retirement income are the only two usages considered at this time) will be taxed at the time of withdrawal at the Standard Flat Tax Rate.  Any balance in a TDSA at the time of death of its owner will be taxed at the Flat Tax Rate and the remainder distributed to the owner’s heirs.

Page 34

Authored by:  David Johnston


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