(word processor parameters LM=8, RM=78, TM=2, BM=2) Taken from KeelyNet BBS (214) 324-3501 Sponsored by Vangard Sciences PO BOX 1031 Mesquite, TX 75150 August 16, 1990 TAX1.ASC 旼컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴� � INCOME TAX = PRODUCTIVITY TAX � 읕컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴� As an economic observer, one notes that there are basically three types of taxes a government can impose: 1) Income tax, 2) Consumption tax (e.g. sales taxes, value-added taxes, tariffs) 3) Asset tax. In a free-market economy, the imposition of each type of tax will differently influence the choices of individuals with regard to income (i.e. work vs. leisure), savings/investment, and consumption. In the absence of taxes, people will presumably work, save and consume (spend) at levels commeasurate with their own ability and desires. This would theoretically produce an economically optimized society. However, given the necessity for taxes to support services that government can best provide, it seems desirable that taxes should be structured so as to at least not cause economic sub-optimizaton. Viewing current taxes from the point of view of an average taxpayer of middle class means, the approximate tax burden on a two income, home-owning married couple grossing $50,000/year living in a state with a hypothetical 5% income tax and 5% sales tax is as follows: Gross Income : $50,000 IRA contribution : -$ 4,000 (savings/investment) Mortgage/Other Deductions : -$ 8,000 (non-taxed consumption) State Tax Deductions : -$ 3,000 -------- Federal Taxable Income : $35,000 Federal Income Tax : -$ 6,047 (an INCOME TAX) ------- $28,953 State Income Adjustments : $ 3,000 ------- $31,953 State/Local Income Tax : -$ 1,600 (an INCOME TAX) Property Tax : -$ 1,400 (an ASSET TAX) Social Security Tax (6.5%) : -$ 3,250 (an INCOME TAX) ------- Consumable Income $25,703 Tax-Exempt Consumption : -$ 7,000 Other Savings (4% * 50K) : -$ 2,000 ------- Taxable Consumption : $16,703 Page 1 Sales Tax (@5%) : -$ 835 (CONSUMPTION TAX) Gasoline Taxes : -$ 200 (CONSUMPTION TAX) Excise Tax on Home : -$ 100 (CONSUMPTION TAX) (Amortized over 20 years) Breaking the tax burden down by category shows: INCOME TAXES $10,897 81% ASSET TAXES $ 1,400 10% CONSUMPTION TAXES $ 1,135 9% ------- $13,432 This example shows that the American tax burden is imbalanced between the three types of taxes, with the majority of the burden by a wide margin being comprised of an income tax. The impact of this disproportionate tax burden on the economy as a whole can be seen by examining how income taxes affect the utility of income to the individual. Since income can only be spent or saved, a rational individual will look at how an income tax affects those two options. By saving income, an individual foregoes current consumption in favor of future consumption. He or she will be less willing to do so unless they believe that saving will enable a higher level of future consumption. For this to be possible, the income which is saved must itself earn income which means it must be invested. However, income taxes reduce investment income, thus reducing the value of savings. Income taxes thus act as an incentive for the individual to consume and as a disincentive to save and invest. Despite the cuts in the top marginal U.S. income tax rates over the past 30 years, the real income tax burden on the average taxpayer has actually increased. This is the result of inflation induced bracket creep, higher state and local income taxes, and expanding social security taxes. It is not surprising therefore, that over this time period the savings rate of individuals has dropped from 7% down to below 3% of income recently (1988). The declining savings rate has resulted in higher interest rates. It has also resulted in corresponding lower rate of industrial investment than our strongest foreign trade competitors whose real interest rates are relatively lower. The lower industrial investment means that on average, American companies are turning fewer out new products and processes, and are operating with older, less efficient plant and equipment. A severe unfavorable trade imbalance and a decline in relative per capita income are the already apparent result of these policies. Reversal of this situation will require either an economic calamity to re- stimulate savings, or alternatively, but unlikely, a recognition by politicians that the income tax is not a "progressive tax", but is rather a "Productivity Tax". Page 2 旼컴컴컴컴컴컴컴컴컴컴컴컴컴 40% Socialist ? 컴컴컴컴컴컴컴컴컴컴컴컴컴커 � � � In the example above, the total tax burden of $13,432 comprises 27% � � of the couple's gross income of $50,000. Adding the 6.5% matching � � Social Security payment made by their employer, plus corporate � � taxes and inflation paid indirectly through the price of goods and � � services will raise the couple's total direct and indirect tax burden � � to over 37%. This is the percentage of Gross National Product that � � is spent by local, state and federal governments in the USA. � � Although we view ourselves as a capitalist, free market nation, these � � figures belie the fact that we are already almost 40% socialist. � � � � Stated in other terms, almost 40% of spending in this country is � � a result of "collective" decision making as opposed to individual � � decision-making. This raises the question: If a majority of the � � income of the majority of people is channeled through government � � offices, will the private sector ever stand a chance with a public � � dependent upon public payroll and political handouts? One would � � think not. Perhaps it is time to place a constitutional cap on total � � government spending so we will remain a country of free individuals. � � � � Robert Nile Hobbs, Pres., Techserve, inc. � 읕컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴� 靈컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴� � Copyright (C) 1988, Techserve, inc. (Box 70056, Bellevue, WA 98007) � 聃컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴� 靈컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴� � This article may be reproduced in whole or part provided copyright � � notice is preserved. Persons concerned with this subject are in � � fact encouraged to send a copy of this to their congressmen and � � legislators with a request for action to cap governmental spending � � and to re-structure taxes in an economically balanced fashion. � 聃컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴� -------------------------------------------------------------------- If you have comments or other information relating to such topics as this paper covers, please upload to KeelyNet or send to the Vangard Sciences address as listed on the first page. Thank you for your consideration, interest and support. Jerry W. Decker.........Ron Barker...........Chuck Henderson Vangard Sciences/KeelyNet -------------------------------------------------------------------- If we can be of service, you may contact Jerry at (214) 324-8741 or Ron at (214) 484-3189 -------------------------------------------------------------------- Page 3