What’s the One Thing Congress Should Push Right Now?

It’s not the Balanced Budget Amendment, though that’s a good second choice. It’s certainly not senseless and impossible ideas like impeaching Obama or suing over birth certificates.

Instead, we should push an idea that’s ripe for quick passage.  It’s an idea that cheers political moderates and conservatives.  And it doesn’t immediately turn off liberals.

What is it?

It’s an old idea that Jack Kemp championed for decades. It’s an idea that I’ve written about many times before.  It’s the best next step in restore fiscal sanity to Washington.

It’s time to implement the Flat Tax.  Here’s why:

1. Flat Tax Closes Idiotic Loopholes:  I know that many Tea Partiers oppose legislation to close tax loopholes.  I do, too, if it’s done to punish certain classes of business.  But there’s really no good reason why General Electric paid no taxes on $5+ billion in profits.

2.  Flat Tax Eliminates Innocent Mistakes:  Flat tax is almost fool-proof.  We can test that theory on Tim Geithner.  When the formula is Tax = (Income – $30,000) * n (where n = rate), it’s hard to screw up.  The current tax code is so complex that the Secretary of the Treasury cannot understand it. 

3.  Flat Tax Eliminates Same-Sex Marriage Argument:  The individual flat tax is per person, not per household. There is no marriage penalty or marriage benefit.  Since marriage isn’t mentioned in the Constitution, it makes sense that our tax code ignore it, too.

4. Flat Tax Increases Revenue:  Yes, revenue will increase. Some, including many rich, will see their effective rate increase.  Others will see their effective risk fall.  Some who pay nothing today will begin contributing to functioning of government—legitimizing their opinion.  With a $14.3 trillion mortgage that grows every day, we need to increase revenue.

5.  Flat Tax Is Marketable:  Don’t underestimate the importance of marketability.  Great ideas (like the Fair Tax) are often stillborn because of their complexity.  Ninety percent (or more) of people don’t want to spend a week studying the effects of government policy on them. Complex tax codes strike people as crooked schemes designed to hide something.  The flat tax sells because it’s simple and obviously fair. 

6.  Flat Tax Eliminates Bracket Creep: You pay a flat percentage of your income above a flat, inflation-indexed deduction of about $30,000.  The poor pay no taxes.  Everyone pays an identical amount.  Without bracket creep, the marginal tax rate is constant, encouraging additional activity.

7.  Flat Tax Solves the Warren Buffett Problem:  Billionaire Warren Buffett (incorrectly) claims that his secretary pays more in taxes than he does.  (So why doesn’t Warren increase her salary until she hits his happy bracket?)  Although Buffett’s argument is nonsense, many smart people take him at his word.  The flat tax solves the problem of high income people avoiding taxes. 

There’s no reason why the Flat Tax cannot proceed in parallel with the Balanced Budget Amendment, which I came out for in The Conservative Manifesto in 1993.  But the BBA will take a while to get through Congress and 38 states.  The flat tax have to be phased in over a few years to prevent too large a jolt.   If Congress passes it 2011, it can be fully implemented by 2014 or 2015. 

While the flat tax may not be perfect, it’s the best tax reform that’s possible.  

4 Ways Government Can Help Create Shared Value

Last week I wrote about Creating Shared Value. In that post, I pointed to a Harvard Business Review article by Michael Porter and Mark Kramer. If you haven’t read both my post and the Michael Porter piece, please do so now.  I’ll wait.

Now that you’re up to date, let me add the Tea Party angle to this. 

Though Porter did not dwell on government’s role in Creating Shared Value (CSV), he did point out that government must reform for CSV to succeed.  Here are a few of the Tea Party reforms necessary if Porter’s (and Whole Foods CEO John Mackey’s) vision is to succeed:

Stop Vilifying Business:  Both parties fail to defend business when business is unfairly attacked.  Instead, politicians tend to jump on the populist bandwagon, piling on companies and industries. One example:  the regulation of cable television in the early 1990s.  Responding to false claims that cable companies were gouging customers, Congress stepped in and imposed regulations that caused cable rates to increase faster and customer satisfaction to tumble. 

Stop Picking Winners:  General Motors, Chrysler, Bank of America, Citigroup, and dozens of other banks and businesses should have failed.  Only illegal and inappropriate government interference in the market saved these companies, transferring financial responsibility from the owners to the tax payers.  Regardless of future performance, our economy is worse off than it would have been had government stayed out of the mess.  Moreover, innovation and ideas that might have improved the world and increased sustainability are lost because government’s clunky hand manipulated the markets.

Stop Creating Entitlements: Welfare reform gave us a few years of federal budget surplus. With Barack Obama’s historical and dangerous deficits, the last thing we needed was a new entitlement. But Obama and the 111th Congress gave us just that with health control.  John Mackey of Whole Foods pointed out a system that many employers offer that reduces healthcare costs and makes good insurance affordable for everyone.  Were affordable health insurance Obama’s actual goal, he would have embraced the high deductible solution. Instead, he outlawed it.  Government must eliminate all entitlements, not make new ones, if CSV is to succeed.

Reform the Tax Code:  Most of the our favorite tax breaks—designed to change behavior—will go away in order to pay off massive deficits brought about by entitlements and political handouts.  It’s time, then, to flatten out the tax code.  That means establishing in a tax-free income level (say $20,000), and a tax rate (say 18 percent).  The new 1040 looks like this:

Income:________ – $20,000 = _____________ * 0.18 = Tax Due ______________

 

Creating Shared Value is a business strategy.  Fully embraced, it offers the possibility of remarkable growth for companies, communities, and economies.  It rejects the notion of trade-offs, like clean air or full employment. Instead, it means clean air because of  full employment.

Companies can reach CSV only if government gets out of their way.  And if companies get out of their own ways.  But Michael Porter has advanced a strong argument for the later.  Now it’s time for the Tea Party to encourage government to do its part.

How else can government help advance Creating Shared Value by reducing its size, scope, and cost?  Leave your thoughts below in the comments.

What Are We For?

A few weeks back, the Christian Science Monitor asked me to write an op-ed. The subject was, “If the Tea Party ran America, how would things change; and why do you think you’ll win?” The call was my opportunity to break from the easy, unassailable position that things are bad and getting worse. It meant coming up with a solution or two.  And solutions already find disagreement somewhere.

For over a year I’ve said that the Tea Party movement, begun out of anger, must shift its energy over time from anger to solutions.  Now, I have no idea the exact shape of these slopes, but I’ve always pictured a graph something like this:

image

By November 2010, when our candidates accept the honor of serving in Congress or state capitols, we better have armed them with solutions to the problems developed over the past decades.

On May 23, the Washington Post carried an op-ed by Senator Bob Bennett. Bennett recently lost his bid to stand for re-election when Utah Tea Partyers targeted him for retirement.  In his op-ed, Senator Bennett correctly challenges Tea Partyers to move beyond negative slogans and to adopt positive reforms.

Their two strongest slogans are "Send a message to Washington" and "Take back America." I know both very well because they were the main tools used to defeat me in Utah's Republican convention two weeks ago. They also worked in Kentucky on Tuesday. They are more powerful than most pundits inside the Beltway realize.

More importantly, he points out that, by November or next year, Americans will be ready for sunny optimism again.

We can advance positive ideas, recognize today’s problems, and point to that brighter future all at the same time.  Honestly, that’s what leaders do every day.

No fool would believe that the incoming batch of legislators can solve all the problems generated over fifty years. But we must tackle a few.  I outlined some of the areas for consideration in the CS Monitor piece, but I’d propose just three reforms for the first term: Repeal the healthcare takeover, overhaul the tax code, and set an expiration date on one entitlement program.

Repeal Healthcare Takeover

The first step toward getting out of debt is to stop borrowing money. The easiest way for Washington to stop borrowing money is to stop creating new entitlement programs.

Now, Barack Obama will veto the repeal.  Do it anyway.  The left will claim we have no solution. Let them.  The American people have already decided this, and they came down on our side. The debate is over: ObamaCare lost everywhere except Washington, DC.

The replacement will be to unshackles states from crafting experiments to determine the best solution.  Other states will follow the successful models and shun the failures.  When done at the state level, experimentation works. When Washington experiments, the whole nation is in danger.

Overhaul the Tax Code

The income tax system in the United States is a sham designed to perpetuate itself by breeding succeeding generations of accountants, lawyers, and tax experts who will lobby to sustain an industry.

No more.

We need to begin this overhaul by implementing the system Ronald Reagan and Jack Kemp wanted in the 1970s: A flat tax on earnings above a certain threshold.

I don’t know the exact numbers, but I see the new tax form looking like this:

1040F

As I said, the exempt amount and the percentage are probably not perfect, but the formula works. The exempted amount would be indexed to inflation to that the government has no incentive to allow inflation to raise your taxes.

This is a formula everyone can understand, with the exception of Washington bureaucrats and politicians.

I know many in the Tea Party movement are fans of the Fair Tax, but I am not, and I’ll explain why: the Fair Tax is impossible to explain and easy to attack.

In Pennsylvania’s 12th Congressional District race to fill Jack Murtha’s term, the Tea Party candidate, Tim Burns, was portrayed as supporting the Fair Tax.

Most voters didn’t  “get” the Fair Tax idea until Tim’s opponent, Mark Critz, and the DCCC explained it this way: “Tim Burns wants to impose a 25 percent national sales tax on everything you buy.”

Burns lost, and it wasn’t close.

The Fair Tax might represent a much better solution, both economically and Constitutionally, than the Flat Tax.  But if the Fair Tax gets our best candidates defeated and cannot get through Congress, what good is it?  At present, the Fair Tax is simply too complicated to win broad national support.  It involves too many formulas and rebates and repealing the 16th Amendment.

When we get the votes in Congress to repeal the 16th Amendment, I’ll jump onboard the Fair Tax. But let’s do this one step at a time, okay?  Let’s make things better now, then make them best later.  Let’s not make things worse by demanding perfection on day one.

Under the Flat Tax, taxes will go up for some, down for others.  No one will be punished for achieving more.  The deduction of your first $30,000 is more generous than most combined deductions today.

Additionally, there is not marriage penalty because there are no filing statuses other than “Me.”  You worked or didn’t.  You earned or you didn’t.  I don’t care how many kids you have or whether your home is also your office.

Expire One Entitlement

I don’t care which one, but set a formula for eliminating one of the three big entitlements.  I would start with Social Security, which has not only jeopardized our economic future, it encourages otherwise good people to whine and beg for government handouts.

Social Security is a Ponzi scheme that works only if the next generation is much larger than the current one.  When Americans stopped having 4.5 kids per couple, the cookie began to crumble.

There’s a formula for ending Social Security, but it requires we all pay taxes to fund it until its dead. That’s because Congresses have spent all of the Social Security trust fund—and then some.  The SSA hold numerous notes that must be paid out of general revenue.

That’s okay.  If you borrow money, you have to pay it back sometime. And we’re the ones who borrowed this money by refusing to face this monster earlier.  Fine. Let’s get on with it.

First, anyone drawing Social Security or who’s within 15 years of eligibility will receive payments according to the rules in place today.  So I don’t want to hear from Big Old People that I’m stealing their entitlement.  I am not.

Second, those who have already begun paying into Social Security will have a choice: they can receive a tax-free,  lump sum payment equal to their lifetime contribution without interest, or they can leave the money in the SSA until age 65, then receive a lump sum payment including interest equal to the rate of inflation.  Either way, the FICA withholding—the individual’s and the employer’s—stops.

Third, those fortunate souls who are too young to have opened an SSA account never will.  They simply pocket the 16 percent that currently goes to fund a failing system.

States may want to create their own voluntary or even mandatory retirement scheme.  Fine.  That’s how the federalist system works.  I wouldn’t support a mandated state system, but there’s nothing in the Constitution that would prevent a state from adopting such.  The people of the state could always vote out the legislators who created it.

Solutions

My solutions may not solve all of our problems.  But they will advance four goals of the Tea Party movement:  smaller government, lower taxes, fiscal responsibility, and federalism.

By adopting this list of goals, candidates will move to the right of my chart above, providing solutions instead of just pointing out problems.  Yes, our enemies will throw mud at these ideas: there’s no idea that won’t find critics.

In the end, our mission from day one has been to make America’s future brighter than its brilliant past. We can do that only by moving toward the future we want, not away from the unknowns we’re afraid of.

Please take this poll:

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