Tuesday, July 2, 2013

Tax Reform for Jobs 2014

Radical tax reform is needed to save our US economy and the middle class. First, we need to go to a 20% value added tax (VAT) for goods and services consumed within the US. Next, we need to eliminate all income taxes on all US businesses. Only when cash and property is distributed from a business to an individual then such distributions (including all distributions, dividends, wages, royalties, and interest) will be taxed to such individual at regular income tax rates. Dividends and capital gains would no longer be afforded lower tax rates for individuals. The individual tax rate brackets and tax rates should remain unchanged.

To maintain the standard of living in the US and compete in a global economy with cheap labor markets we need to eliminate business income tax and provide a subsidy to businesses that pay decent compensation to its US employees. US businesses will be paying taxes to the US Treasury for the employer’s share of employment taxes (FICA and Medicare). The subsidy paid to a US business will be based on compensation paid to an employee which includes wages and benefits (like health insurance). So a business paying a compensation package of $35,000 to $44,999 will receive a 10% subsidy, payment of $45,000 to $54,999 will receive a 15% subsidy, and payment of $55,000 to $65,000 will receive a 20% subsidy. Compensation over $65,000 will be limited to a subsidy at 20% of $65,000.

The subsidy to US businesses will be funded by the US VAT. US exports will not be subjected to US VAT but are usually subject to foreign VAT. Remember the US VAT will also include foreign imports (goods and services) consumed within the US.  Instituting a VAT system in the US will put us on equal footing with other countries who VAT tax US imports. Let us look at China imports that have cheap labor costs. China imposes a business tax rate of 25% on its own businesses and along with the 20% US VAT imposed on foreign imports these two added taxes will greatly increase the price of Chinese goods to US consumers. Even though US goods will be subject to the 20% US VAT, US businesses will have goods and services not subject to any income tax and will receive a government subsidy for decent compensation paid to its US workers which will reduce the effect of the US VAT of US goods and services consumed in the US.

All US businesses will file a world-wide information tax return showing an income statement, balance sheet, and statement of cash flow along with a listing of all US employee compensation by each employee in order for such business to receive the government subsidy. The US Government should examine the business information tax return along  with analyzing books and records to ensure that all distributions are properly accounted for or look for money being diverted from US taxation distributed to any individual. This tax reform will keep US multinational corporations from leaving the US and may draw other foreign corporations into the US.