By BOB MAISTROS
What are the big problems that consume our political system and drove our recent financial crisis? And what is the one factor that connects them all?
You guessed it – the distortions caused by their treatment under the current income tax code. Plus the ability to address these problems by ditching that code in favor of a modified version of the Fair Tax – a national sales tax. Here we go with more of the reasons the Republicans should make its adoption their core focus:
Health care. We don’t need no stinkin’ Obamacare. Nor do we need all the other convoluted solutions trotted out by various Congress-types from one end of the political rainbow to the other and in-between.
All we need to do is get rid of the income tax, whose double bag of goodies for employer and employee – a historical accident from the era of wage and price controls – leads to overutilization, ever-rising prices, poor outcomes and a lack of competition and consumer control over their own care.
Dump the current code, and suddenly, consumers are the buyers of care – not their employers. They call the shots – not health insurers and providers. Despite what you hear about health care, when confronted with choice, consumers will make smart decisions that balance price and quality. We’ll see more capitated contracts directly with providers – say, $60 a month for basic care, with an emphasis on prevention, delivered largely by nurse practitioners with doctors at the ready – combined with what used to be called “hospitalization.” And we’ll all be just as healthy, if not healthier.
Debt. How come we never just hear about how much companies actually made – i.e., profit? Why do investors have to wade through terms like EBIDTA, “free cash flow,” and other ways of dressing up their financial reporting?
And most important, why did we have a Wall Street debt crisis? Lots of reasons. But one biggie is the current tax code’s massive preference for debt over equity.
It’s why Wall Street and Main Street firms alike overleveraged and why private equity firms swooped in and grabbed great brands, hollowed them out, loaded them with debt and dumped them back on the market for sorry suckers to invest in.
Move to a consumption tax, and you’ll find much more equity investment in companies. With strong foundations in equity investment, and greater clarity and transparency in earnings – not to mention incentives to offer returns through dividend payments rather than rampant speculation – we’ll find safer and sounder investment decisions based on economics, not tax-favored leverage.
Retirement Security. One of the complaints you’ll hear about replacing both the income and payroll taxes with a consumption tax is that you’ll lose the concept of Social Security as a pension-type system, where payments out are related to what workers put in.
It’s all a crock. Your money is not sitting in an account somewhere. The Supreme Court has made clear that the government isn’t obligated to provide you a dime of the cash you think you’ve stashed in the system for decades. It’s not a question of whether future benefits will be reduced, but by how much.
Time to end the fiction and provide a minimum safety net benefit for everyone under a certain age yet to be determined. Even those older would be subject to future benefit reductions.
Of course, the amount of those cutbacks would be less than otherwise necessary because we’ve already established that, under a consumption tax combined with rebates, we’re going to encourage family formation and child-bearing. Which means more future workers to pay into the system and prop up future retirees.
But something even more important happens with a consumption tax system: you and I now have an incentive to save for the future rather than spend and buy and hand a chunk of our purchases to Uncle Sam. Which means we can expect everyone to play a greater role in putting by for their own retirement.
(Which, BTW, also contributes further to capital formation and job creation, which is how these virtuous cycles, with the emphasis on virtuous, tend to work.)
Isn’t it nice when everything works together like it’s supposed to?
Bob Maistros writes for North Star Writers Group.