Most of us accept that it
takes more than Social Security to keep us
secure in our later years. Why don’t we save
more while we are working? This month we examine
how our tax code discourages our national saving
rate. We propose some shocking solutions.
Anyone who ever filled out
their own tax return, or gathered the facts to
give to a tax preparer, has dealt with the two
interesting lines concerning interest. If you
earned interest on your savings, you reported it
as income, and paid taxes on your earnings. If
you borrowed money to buy a home, and paid
interest on a mortgage, you deducted the
interest paid from taxable income. Chances are,
most years of your life, you had mortgages
costing you a lot more interest paid than you
had in interest earned on your savings.
Therefore, you found that as a borrower, the
system worked in your favor. What worked to your
advantage also worked for all of your neighbors,
friends, and relatives.
Because our system rewards
borrowers, and punishes savers, we have a
problem.
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Now expand your mind to
consider mega-billion dollar corporations. Few
have savings accounts earning peanuts per year.
But most have borrowed millions of dollars, and
take elephant size tax deductions for the
interest they pay. For many corporations, for
many years, tax deductions were worth 50 cents
on the dollar. Chances are, your tax deductions
were only worth 15 or 20 cents on the dollar.
They win. You lose. |
You may think, ‘It’s always
been that way.’
I don’t want to hurt your
feelings, but that thinking is flawed. It has
been that way only for about the past 64 years.
I can hear reactions. Lord,
man, 64 years is forever in my life. I concede
you are right in feeling that way. But 64 years
is not forever. There was a time, 75 years ago,
when about 95% of working Americans paid no
income taxes. At that time, corporations paid
less than a 20% tax rate. Four great events,
hidden from the memory of millions living today,
caused the upheaval--The Great Depression, World
War II, the Korean War, and the Cold War.
President Franklin
Roosevelt imposed higher taxes on the very
wealthy in the Great Depression. He launched
building programs that provided lasting economic
benefits to future generations. His predecessor,
President Hoover, had done the same thing by
building Hoover Dam. Average workers paid little
or no income tax.
Withholding of money for
taxes from every worker began on the cusp of WW
II. Our isolationist nation was being dragged
into a war we did not want, but which our
leaders viewed as vital to our longer term
survival. The Corporate income tax rate was
raised to 42% after Japan attacked Pearl Harbor
on December 7, 1941. Our nation needed ships,
planes, tanks, fuel oil, guns, bullets, and
bombs to fight a war. Most Americans rose to the
challenge.
In June 1950, North Korea
invaded South Korea, and President Truman sent
our troops into battle. He also raised the
corporate income tax rate to pay for the war.
The Cold War kept it high for years.
Corporate owners objected.
Greedy or not, they were human. They objected to
President Truman declaring that the Government
was senior partner to every business owner, and
taking 52% of the business profit.
Some tax lawyer or
accountant discovered that by borrowing huge
sums of money, and paying tax deductible
interest, business owners could negate the
effect of high taxes. The seeds of rampant
inflation were planted. Our Government’s
borrowing cost doubled almost overnight, and
have stayed high for over half a century.
Can these problems be
solved?
In recent months I have
suggested that we abolish the corporate income.
That will end the corporate income tax
deduction. We should also abolish partnerships
business tax deductions for interest on borrowed
money, to level the playing field. In
synchronized moves, we should make current
Social Security taxes paid by working persons a
current income tax deduction. Last, adopt
mandated higher savings rates, by having money
now paid in taxes channeled into workers
retirement plans of IRA’s of 401 plans. This new
retirement money could be inherited by heirs.
In the real world, prices
are dictated by supply and demand. These moves
will lower the demand for borrowing, and
increase the pool of capital. That will lower
the cost of money, which, in turn, will lower
the cost of a balanced national budget. The
current level of taxes should allow us to pay
off the national debt in a decade. Another
national benefit will be the growth of a large
pool of capital that can be invested in
infrastructure and tools of production.
We must recognize that many
people are not able to meet all their needs and
wants from the money they earn. Voluntary
savings systems are not an option they can
choose. By keeping our Social Security system
intact as is, and adding tax incentives for
mandatory savings, we will create a greater
level of comfort for all.
It may sound complicated at
first reading, but once upon a time there was no
tax code at all. All I am proposing is that we
look at the mess we have, see how we got here,
and reverse the steps one by one back to a time
of greater shared prosperity in our land.
As I’ve said before, With
Imagination and Patriotism, we can make tomorrow
better than yesterday.
For April 2005, that’s my
New ThinKs! What do you think? Share this with
friends so it might find its way to the desk of
President Bush.
That is my New ThinK for this month. What do you
think?
