Step 3 in the fight to save capitalism

By David Nelson, CFA

The final chapter in a series to help save the greatest economic engine the world has ever known takes us to the heart of the problem, Washington DC.

Step 3 – Trash the Tax Code

irs buildingI don’t care which side of the political aisle you live on the marginal tax rate is the least of your problems. The left wants to raise your taxes and the right wants to lower them. The bigger issue is the tax code itself. It’s 77,000 pages long and you can bet most of it is dedicated to loopholes that help you avoid paying taxes in the first place.

Every politician represents some special interest group they believe deserves a tax break. If they want to keep on the gravy train of political contributions every so often you have to come through for your paying constituents. The only real winners in such a complex system are tax attorneys and accountants who receive the bulk of their compensation from the uber rich and corporations they represent. Show me a tax and I’ll show you a loophole to avoid paying it.

The argument over what the current corporate or personal tax rate is meaningless. If you receive enough deductions and write offs to reduce your adjusted gross income a 25, 45 even a 90% rate doesn’t matter. Any percentage times zero is still zero.

In 2018 nearly 100 Fortune 500 companies paid no effective corporate income tax. You can bet it took an army of tax attorneys and accountants to come up with the savings and I’m confident it was legal and above board. It goes to the heart of the real problem. It isn’t the rate it’s the complexity of the code itself which invites this behavior.

The only way out of this quagmire is to throw out the current system and start again. KISS – Keep it Simple Stupid.

For individuals take some multiple of the poverty line and make all of that income completely tax free. After that you could use a flat tax with everyone paying an equal share but here’s the kicker. NO DEDUCTIONS.

Term Limits

Any real hope at changing a system so entrenched demands term limits for members of congress. It’s the only way to dilute the power of special interest groups to shape and dictate policy.

Term limits are supported by most Americans and demographics. The only real challengers to change are long term incumbents and the special interest groups that support them.

As I said at the start of the series the real danger for our society is to do nothing and defend the status quo. Capitalism does not promise equal outcomes, but it should promise equal opportunity. The profit incentive and the innovation that comes with it has helped make the United States the most technologically advanced society on the planet. Without it that iPhone sitting next to you would likely be the size of a brick.