Appendix III
 
Three Planks in a Platform

 

The following three proposals for reform are among the planks in the Born-Again Democrat Platform   They form a policy whole in the sense that all three reforms would have to be implemented in order to achieve the effect for which they are designed.  The goal is to guarantee that all Americans and not just a privileged few share in the benefits of trading with low-wage countries like China and India.   Otherwise, just the opposite occurs: ordinary working Americans are, in effect, taxed for the benefit of that small minority of our population who derive most of their incomes from their capital holdings, including those who are privileged with high IQ’s and superior educations. Here are the planks.

 
1.  Compensation for lost wages caused by the elite trade and immigration policies that have been coming out of Washington for the past 40 years.  

"Let's you and him share, and we’ll take the gains."  That in effect is the attitude that America's elites have taken towards ordinary working families in our society and their less fortunate counterparts abroad.
 
Now it is true the American people are a generous people.  Historically we have always have been a generous people.  But we are also a people who insist upon fairness and justice.  If great sacrifices are necessary for the sake of our country, justice requires that all Americans, rich and poor alike, share in those sacrifices.  But just as surely, if great gains are going to result from changes in public policy, justice requires that the whole population share in those gains. 

It is important for the American people to realize that the principle of compensation has always been part and parcel of the modern theory of free trade just as surely as that theory predicted the negative consequences our new trade policies would have on American wages and working conditions. 

2) A graduated consumption tax as the only fair and efficient way to raise the revenues required for wage compensation. 

The basic idea behind a graduated consumption tax is as old and well-established in the literature of economics (for a good general history see Nicholas Kaldor’s An Expenditure Tax) as it is unknown to the general public.  It receives what is perhaps its first full modern exposition in the writings of Irving Fisher, a distinguished American economist of the first half of the 20th century, who published his Constructive Income Taxation: A Proposal for Reform in 1942. At heart it is simply the idea of making savings tax exempt.  People are taxed not on the basis of the money they earn but on the money they spend..[†]  And because it is a graduated tax, the larger the sums that need to be raised the higher the marginal tax rates must be set, which means the greater incentives to save and invest, and hence the greater the future growth of the economy.  This sounds like paradox, perhaps, but it is a paradox that nonetheless holds true so long as the rates are not taken to extremes (extremes being fatal to every form of taxation).

A key point in favor of such a tax from the business person’s point of view is that it allows successful entrepreneurs to amass larger fortunes more quickly than is possible under a graduated income tax, or under just about any other form of taxation for that matter, though it is equaled in this regard by an ungraduated sales tax. In other words a graduated consumption tax encourages rather than discourages innovation and the creation of wealth, so essential to the future prosperity of society.

The second point in favor of a graduated consumption tax is that, unlike an ungraduated sales tax, it embodies the principle that a dollar is worth more to a poor person than a rich one, all else being equal.  This is essential if we wish to promote the greatest happiness of the greatest number, which, after all, is one of the stated purposes of our federal government under the Constitution, being the very definition of the general welfare in view of the declining marginal utility of income (see pp 40-48 above).

On the practical side the public needs to be aware that a graduated consumption tax was actually drafted into law in the form of the so-called USA Tax of 1995, which was co-sponsored by Senators Sam Nunn (Democrat of Georgia) and Pete Domenici, (Republican of Arizona).* The public should also know that the economics profession failed to speak up in behalf of this bill, which is further testimony to its current disregard for the welfare of the American people.

As for the best way to administer wage compensation, I am no expert, but I have come to the conclusion that the simpler the better. Instead of an earned income tax credit we should consider an across-the-board percentage increase in hourly wages, letting the issue of progressivity be handled entirely on the tax side of the equation.  In other words, each worker’s take home pay would be a calculated multiple of his market wage as contracted with his employer.  Such a subsidy could be paid directly out of the U.S. Treasury and be automatically added to his paycheck (minus any withholdings) at the end of each pay period.  The advantages of this approach lies in its transparency. Everyone could see that the employer was not footing the bill, and that a free market in labor was being maintained.

3) An end to secret bank accounts, shell corporations, and off-shore tax havens, by which America’s wealthiest families avoid paying their taxes.
 
Every year, according to David Kay Johnston, who is chief financial correspondent of the New York Times, the 13,000 wealthiest families in America escape paying an estimated $300 billion in taxes they owe.  That works out to $4000 a year for the average family of four, revenues that ordinary taxpayers are forced to make up either now or in future generations.
 
How do these 13,000 families get away with it?  In a couple of inter-connected ways, according to Johnston.  
First, they make massive campaign contributions to both political parties, who in return bring political pressure to bear on the IRS not to pursue their complex financial undertakings beyond the borders of the United States.  Without the support of this “donor class,” as Johnston calls them, few of our elected representatives in Washington could successfully run for office.
 
 Then, having secured the home front, these families conceal their incomes in a maze of interconnected shell corporations and secret bank accounts, which they maintain in off-shore tax havens, many of the latter located on remote islands in the middle of the ocean.

Clearly, if we are going to establish equity in our tax system these fraudulent practices will have to be stopped.  But just as clearly stopping them is not a simple matter of domestic law enforcement.  At a minimum it will require the cooperation of our European allies and perhaps not a few of our East Asian trading partners.  Such cooperation may seem unlikely, but we should keep in mind that these countries have the same interests we do in collecting their taxes.  Furthermore, we can argue that ending such practices will go a long way towards putting the international drug cartels and terrorist organizations out of business right along with the elite tax cheaters, since all three groups depend upon the same anonymous access to the international banking system in order to pursue their illegal activities.

Let us therefore propose to our European allies that any sovereign entity that refuses to cooperate be expelled from the international community and lose its membership in the World Trading Organization.  Such an entity would, in effect, be unplugged from the global economy.  Henceforth there would be no more international landing rights for its airplanes, no more shipping into and out of its ports, and no more rights for its citizens to travel abroad, or even use a credit card.  If applied with skill and diplomatic tact such incentives should be more than enough to bring even the most recalcitrant sovereign states into compliance with the law.  The end result would be a much-needed integration of the world’s financial and legal systems to bring them into line with the already-far-advanced integration of the world’s economy.


 
 
 


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[*] See the classic teaching text, World Trade and Payments, for an honest overview of the subject.
[†]As a rough approximation think of unlimited IRA contributions with no penalties for early withdrawals.
 http://thomas.loc.gov/cgi-bin/query/z?c104:S.722: *For a complete text see S.722 USA Tax of 1995,