Thoughts from the Frontline

Tax That Other Guy

By John Mauldin

February 25, 2012

Choose your language

The Fair Tax
What About Those Who Will Not Vote for Any Tax?
What Should Seniors Do?
Why Shouldn’t Everyone Pay Something?
Comeback, America
California, New York, Orlando, Conferences, and Webinars

Don't Tax You, Don't Tax Me
Tax that Man Behind the Tree!
– Senator Russell Long, Democrat Louisiana (1918-2003)

Last week's letter on taxes drew more response than any letter I have written in years. Questions that were raised simply beg for an answer, and some of the replies were very thoughtful, well-written suggestions for alternatives. This week I am going to do something I can't ever remember doing, and that is to use the entire letter to involve and respond to my readers. Let me begin by thanking all of those who responded, and to observe that every response I read was polite and courteous, even when aggressively disagreeing. Not every site on the internet has such a civil discourse among its readers. I appreciate that. Next week we will return to All Greece, All the Time or whatever the crisis du jour is, although I am much more interested in China of late. I will have to address the world's largest nation at some point soon. At the end of the letter, I provide some very interesting and fun links and a note on an upcoming webinar with investment legend Israel "Izzy" Englander. Now, let's zero in on taxes.

The Fair Tax

A rather significant and vocal number of you wrote in support of what is called "the Fair Tax," which is basically a national sales tax, suggesting it is a better alternative than a value-added tax (VAT). I should note that there are 70 members of Congress who have cosponsored a Fair Tax bill, so this is not outside the realm of possibility. It also speaks to the possibility of…

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Adam Schwartz

March 4, 2012, 12:05 p.m.

Other issues with the “Fair Tax”:
1. It will promote savings (good) but slow the economy (bad).
2. It will create widespread black markets.

Russell Barr

Feb. 28, 2012, 7:15 p.m.

I have an important question that I have not seen addressed elsewhere. I wonder under either a VAT or a Flat Tax, how will savings in tax-deferred accounts like IRAs be treated?

Under a consumption tax, money will be taxed as it is spent, so possibly funds could be withdrawn without additional tax, but this seems too good to be true. Will there be a difference in how money in a tax deferred account is taxed compared to other funds I have in after tax investments? If there is no difference, all the scrimping I did to conserve after tax dollars looks pretty foolish.

I have probably half of my net worth in IRAs and a 401K plan, and this is critical to my financial planning. If other comments have addressed this, I apologize. I searched for “deferred” and got no hits in these comments, but I am not sure my search included all three pages of comments.

Tom Arnold

Feb. 27, 2012, 5:03 p.m.

John-
Thank you for posting these interesting articles and comments.

Not being a financial expert, I can’t comment intelligently on the differences between these different tax proposals, nor was the 16th Amendment part of my day-to-day vocabulary until today, but, nonetheless,  I have one observation and a question.

Observation: re Mr. Buchholtz, I find his statement that income taxes “punish people” to be disturbing. Does he not understand that he lives in a society and in a country that gives him more freedom and personal security from harm than any other? Does not the cost of providing that freedom include the financial cost of the armed forces, environmental controls, food and drug safety, air flight safety, etc.etc.etc. Does he not understand that most of us willingly share the cost of providing those protections and freedoms.

Perhaps he would abolish all government and live by the sword, in which case I would not wish to be his neighbor.

A question: in all the discussion of various tax plans, I did not hear, or understand, how dividend income, capital gains and investment income would be taxed in a VAT system. Could someone explain that.
Thank you.

JOE TODOROFF

Feb. 27, 2012, 4:46 p.m.

Excellent and provocative subject, and Buchholtz’s FairTax seems to be the far better solution, although the law of “unintended consequences” should always be kept in mind.

My concern with this topic is that most all taking part in this vigorous discussion seem to genuinely be looking for a grand solution to a very complicated and politically charged problem. It predisposes that everyone is in agreement as to the problem, and desires to “fix it” for the better of our society. I will submit to you that some of the players that would advocate or not on this subject have far different agendas than 99% of us do.

Mr Mauldin’s initial piece makes one thing very clear, if we as people/government do not get serious with this deficit issue it will become self-imploding, thus our very system/way of life is at risk. When you already have 50% of the households not paying any income taxes (John basically buys into that because the system “must be saved”) can we really assume that everyone wants to keep our current way of life intact?? Thus John begins from the assumption that our system is worth saving (the best in human history i would agree, but far from perfect and from irradicating economic inequality)......it is my perception, even belief that some at the negotiating table will not share the notion that saving “our sysem” is a worthy cause…......and might benefit from the very economic holocaust that might engulf us…..the underlying issue really is about the governing system we employ, and destroying capitalism may open the door for far more draconian circumstances.

I believe that most arguing here from a pure economic/budgetary view may be missing the boat from a much broader perspective.

Phil Krause

Feb. 26, 2012, 9:43 p.m.

Every time I hear someone say “1/2 of the country doesn’t pay any income tax”, I want to scream, but not for the reason most would think.  From where I sit, business profits, executive pay, AND worker productivity keep going up.  On top of that, one survey after another on small business claim that their main concern continues to be—NOT regulation, NOT taxes, but lack of demand.

Gee, I wonder what it would take to get people to spend more of their paychecks?  How about getting those “job creators” to START putting more of those profits into the paychecks of the workers that helped create those profits.  It would add to those who pay taxes, and put more money into the economy.  Or does that make too much sense?

James Whitehead

Feb. 26, 2012, 6:54 p.m.

Great article Buchholtz. Get him back in six months to keep fire for FAIR TAX alive. J. Whitehead

Jody Eddings

Feb. 26, 2012, 4:13 p.m.

I am among the â??chemically blondeâ?? of your readers (read admittedly near-zero macro-economic knowledge, save having read 2 books on the Fair Tax) â?? yet, I wanted to chime in regarding tax reform and highlight some (other) key points of consumption tax ideas. I like that a consumption tax increases the tax base by taxing international visitors, and even illegal immigrants, who would not receive pre-bate checks. Also scooped into the tax base would be the underground monies of â??drug dealersâ?, etc.

Also, itâ??s a significant incentive to be â??greenâ?? and save â??greenâ?? through recycling and reusing (since used items can be sold tax free, until that money is spent on new items! Would â??usedâ?? gold be tax free?)

And, it encourages savings (or at least not spending!). And, most of all, it encourages INCOME! â??All of usâ? would have a renewed and vested interest in the consumption tax RATE â?? and maybe (therefore) even a renewed and vested interest in government spending.

It would be great to bring taxation back to representation (as Mike comments), however, it may take a â??revolutionâ??, or a national, wide-eyed â??revelationâ??, to pass anything like it â?? either of which, sadly, may occur waaaaaaaaaaaaaay too late! And, I think â??compromiseâ?? equals non-fundamental change â?? just short of a shell game, of which there is no shortage. 

Well, GOOD LUCK to us and U.S., and in the meantime, â??Tax that other guy!â?  :-D

Adam Schwartz

Feb. 26, 2012, 1:22 p.m.

The most reviled class of people in America?  Is it the rich, the poor, black, atheist, communist?  No.  Itâ??s the saver.  All large government economic policies essentially transfer wealth from one group to another.  The actions of the federal government and the Federal Reserve since the financial crisis bloomed have clearly been pro-inflationary.  Inflation is a transfer of wealth from the saver to the debtor.  The proponents of the so-called â??fair taxâ? on consumption seem to believe that penalizing those that have been prudent with their finances (an increasingly rare species of Americans) deserve once again to have their coffers robbed.  To me, this is one more policy of moral hazard.  The message: yes, please save so that when our debt grows too big, we can steal from your savings.

W R Dickinson

Feb. 26, 2012, 12:35 p.m.

If creative destruction can be good in the private sector, why not in the public sector as well? This country was created out of a failed British government. It was refined in the destruction of the Civil War. Why not consider letting the federal government fail? Perhaps, the USA is TOO BIG to allow it and our liberty to coexist. Let the states form smaller, more cohesive, less tyranical unions. I understand Wyoming is already studying how the state would respond to a collapse of the federal government. We have already gone over the cliff. Instead of trying to reverse course, we should consider how to pick up the pieces and refabricate a workable political structure.

Virgil Mocanu

Feb. 26, 2012, 11:48 a.m.

A consumption tax would tax consumers first.  This means that those furthest from the “printing press” (i.e. the consumer) would bear the burden of social responsibility, while those closer to the “printing press” (i.e. those who run the press) would gain more control over society.

Let’s not forget that in a democracy, “fair” is what voters decide.  So good luck with this meme of “tax the consumer”.

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