Why put off until tomorrow what can be done today? That is the pressing question for Congress and the administration as President Bush prepares for his second term. The pressing issues are tax reform and Social Security reform.
As the economy continues to pick up steam in the wake of recent tax reductions, only the most stubborn critics can deny a proven historical fact: lower tax rates lead to economic growth. Four times in history our leaders have responded to recession with tax cuts, four times the economy has responded with economic growth. The increased growth led to growth in revenue to the federal coffers.
It’s not enough to say, “Let’s make the Bush cuts permanent.” Nothing in Washington is permanent. This year’s “permanent” tax cut can be repealed next year. It’s time for total systemic change. Two tax reform proposals are being kicked about in discussions. One is a flat tax, the other a national retail sales tax.
Either proposal is better than the “Marx Lite” version of progressive taxation that we have today, but I favor the “Fair Tax” proposal – the national retail sales tax.
The two primary complaints against the sales tax are that it would add too much to the consumer price of goods, and that it would be unfair to the poor. Neither is true.
Every consumer good you buy today has embedded in its price about 20 to 25 percent of its cost in corporate taxes and compliance costs. Most serious economists who have studied this proposal agree that these costs will disappear when the sales tax takes effect. Decrease the price by 20% when corporate taxes are eliminated; add 20% back in for the retail sales tax. Voila – no price increase. And those below a certain income level, be they elderly or simply the working poor, will be entitled to either an exemption or rebate. According to Americans for Fair Taxation, a family of four earning less than $24,980 would pay no tax, and a family of four earning less than $49,960 would only pay at the11.5 percent rate.
Another benefit is that we, as consumers, control to a certain extent how much we pay in taxes. Want to keep more of your money? Cut back on that spending just a little, and save what you would have given to Uncle Sam. Our tax code has for too long offered no real incentive for saving. The Fair Tax proposal would change that.
One of the best features is this: no more withholding, except for Medicare and Social Security. If you make $40,000 per year, you bring home most of that.
Speaking of Social Security, that is the area most in need of reform. Forget all of the rhetoric and political posturing. Just look at a few simple facts. When the Social Security Act took effect, there were 40 workers for every retiree. The plan was financed with a 3% payroll tax. There are now three workers for every retiree, and the Social Security tax rate is 12 percent. If nothing is done to reform this program, by the time the baby boom generation retires there will be less than two workers per retiree, and the effective rate to support the program will be between 16 and 20 percent. Even with these rates, the program may be 10 trillion dollars in debt by that time. If nothing changes, the program will go into the red by 2014, and by 2037 it will be insolvent.
Do we want our children to pay 1 dollar out of every five to support us? And what of their prospects for retirement under such a system?
We could wait until the problem reaches crisis proportions to take action, or we can begin now with a common sense, systematic approach to the problem. Let’s allow those who still have time to pad their own nest egg to retain and invest a portion of their social security taxes in private accounts. The remainder of their payroll taxes will go toward funding survivor and disability benefits.
Such a program, initiated early enough and pursued progressively, can offer retirement benefits equal to or better than the current system while remaining solvent. And solvency is something the current plan simply cannot guarantee.
President Bush and Congress have a chance to make history. They can either coddle the groups that have a vested interest in the current system of taxation and retirement funding, or they can step out and look toward the future – and help improve the futures of those who deserve no less reliable a system than their parents enjoyed.
For information on the Fair Tax proposal, visit www.fairtax.org
For information on Social Security reform, visit www.socialsecurityreform.org
(Mike North writes a regular op-ed column for six newspapers in the southeast Tennessee, northwest Georgia and northeast Alabama region. He is a professional land surveyor with True Line Company, Land Surveyors. He is a former Walker County School Board member and a student of history and political science. He can be reached at
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