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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Edward Lack

Feb. 26, 2012, 10:31 a.m.

I have a problem with your Altegris conferences. When you have a gala symposium I have to have millions of dollars in free cash to attend (which I do not). When you have a webinar I have to stop working to attend (which I find damages my patient population). So when is a working person who does not have millions of dollars get the value of a seminar combining you and Altegris?

Nick Jacobs

Feb. 26, 2012, 4:37 a.m.

John Mauldin continues to ignore the elephant in the room.

Look at that chart, labeled “Nearly half of all Americans don’t pay income taxes”. Of course the headline is a big lie, because all working Americans pay Social Security tax, which is an income tax. But skip that, and ask yourself why the chart looks as it does.

People in the middle class file their 1040s and pay Federal tax. But the middle class has been hollowed out in the last 25 years. That’s what the chart really shows.

If the country had remained more or less on the track it was on from the 1960s to the end of Reagan’s first term, we’d still have poor people and rich people. But we would have more people in between - people earning in the range $60,000 to $200,000 per year.

What has happened is that instead of, say, 100 people making $100,000/year and 1 making $500,000, we have something like 100 people making between $20,000 and $80,000, and 1 making $5,000,000/year.

That is the problem, and making the tax system even less progressive than it is already will make it worse.

Joseph Moffa

Feb. 25, 2012, 11:23 p.m.

It is a glaring absurdity to pretend, that taxation contributes to national wealth, by engrossing part of the national produce, and enriches the nation by consuming part of its wealth.

Taxation is the transfer of a portion of the national products from the hands of individuals to those of the government, for the purpose of meeting public consumption or expenditure. Whatever be the denomination it bears, whether tax, contribution, duty, excise, custom, aid, subsidy, grant, or free gift, it is virtually a burden imposed upon individuals, either in a separate or corporate character, by the ruling power for the time being, for the purpose of supplying the consumption it may think proper to make at their expense; in short, an impost, in the literal sense.

Nick Proferes

Feb. 25, 2012, 10:20 p.m.

John,  Iâ??ve enjoyed the past two letters on changing the tax system.  As a dual citizen and living in Australia, I fill in tax forms for both countries and am familiar with both systems.  Perhaps the experience here over recent years may be of some benefit to those struggling with the alternatives. 
A GST (Goods and Services Tax) of a flat 10% was introduced here in 1999 and took effect in 2000 so has been in place about 12 years.  It was supposed to replace a raft of individual state taxes and a wholesale sales tax, and was accompanied by reductions in personal income tax rates (though we still have a graduated scale of income tax rates) major changes to capital gains tax with a fixed rate of 30% which reduces to 15% for assets held one year or more, and large increases in government payments to pensioners, families, and low income earners.  Medicines, some services such as doctorâ??s visits, and most food items are exempt from the GST.
The GST is, in effect, a VAT (Value Added Tax) as it is imposed on transactions at all levels of business except those small enough to be exempt.  At the time, similar arguments for and against, to those posted here, abounded, but the outcomes are now known.
Firstly the argument that it would dampen consumption.  Of course, just prior to its introduction, stockpiling of some goods and materials occurred with subsequent drop-off in demand until those stockpiles were consumed, but itâ??s been a â??fact of lifeâ? for over a decade now and there is no evidence to suggest it dampens demand in any way.  Itâ??s part of the cost of doing business and running a household.
Secondly, the GST was introduced under an agreement with the states as all the income from the tax is re-distributed to the states though not in the same proportion to that by which it is collected.  Some states receive more back than is collected from transactions in them, others less.  This still causes some disagreement as you can well understand.  In addition, quite a number of the inefficient taxes collected by the states, which were supposed to be abolished, were not.
Thirdly, as it is a VAT imposed at all levels of most businesses, compliance costs are high with regular reporting, etc.  Businesses are able to claim back GST they pay on purchases where the materials are â??sold onâ? to reduce compounding effects and taxes upon taxes.  Thus only the INCREASES in costs of goods sold attract the tax.  What is suggested for the US as the tax being applied only on sales to end consumers would seem a much better alternative resulting in lower costs of compliance and less regulating bureaucracy.
Finally, the GST is the only general sales tax.  There is no separate state sales tax system which might give rise to lots of duplication and competition between states on that basis, EXCEPT for a few items like alcohol and tobacco, and petrol.
So, in summary, I think the introduction of a GST has been a good thing for the country BUT fell far short of simplifying the tax system to what was really needed to make the country and doing business here as competitive as it could have been.  The â??Fair Taxâ? being proposed would seem to me to be a far better option though I wonder at the risk of double taxing with state and local taxes adding to any federal sales tax.  This may be reduced by changes to federal income taxes.  In the end, everyone will look at â??what it means to me, will I be better or worse off under these proposed changes?â? in arriving at their opinion.  I did see some figures a while back on the BILLIONS spent by taxpayers at all levels, in the US, on taxation advice and assistance.  Anything which reduces or eliminates these unproductive costs as well as those policing compliance, would seem to me, to be a huge benefit to the country as a whole.  I wonder how that can be quantified and worked into the cost/benefit equation?

Clayton Barker

Feb. 25, 2012, 9:34 p.m.

There is an assumption that raising marginal rates will raise tax revenue.  We may have a bit more tax revenue to be raised by raising rates, but the cost to the economy will be severe.  The US has never sustained a long period of government drawdowns of more than 20% from the economy.  Granted that some of it is “recycled”—payments to seniors—but trying to draw more than 21 or 22% from the GDP seems risky in light of past performance.  So, if we raised rates from 35% to 40% (14%), does anyone seriously believe that the tax revenues would increase by 14% —or even 6%, assuming that it would only apply to the 35% or so that might hit that top bracket?  Based on past experience, raising the rates from 35% to 40% would likely raise about the same amount that we raise today, but slow down economic growth. 

Now what do you suggest?

Russ Abbott

Feb. 25, 2012, 8:03 p.m.

First a preliminary question. Why are there two different sets of comments? I find it confusing.

More important, I applaud you for refusing to take the hard-line conservative position. Your independence is refreshing.

Regarding taxes, I recommend that you look at Robert Frank’s The Darwin Economy where he argues for a consumption tax, but one that is steeply progressive. Not just allowances or exemptions but the more the consumption the higher the tax rate.

Jim Hilsenteger

Feb. 25, 2012, 4:18 p.m.

I agree with the strategy of simplifying the tax structure. However, what happens to many of the lawyers & accountants involved with taxes, as surely we will need significantly fewer?

Brian Topping

Feb. 25, 2012, 2:36 p.m.

Reading the comments, especially those of Skye Aureus, make it clear that finding a solution that is going to be acceptable to all is going to be very difficult.  But this is also one of the defining issues of our time; the “forest for the trees” perspective of this is that something must be put in place soon and some unique circumstances are going to be adversely affected.  There are only difficult options left at this point, but we cannot afford to kick the can down the road any longer.

As Mr. Mauldin points out, a consumption tax is not in his own best interest, but even so it resolves enough of the other negatives that it would appear to be a least cost solution with the greatest social benefit. 

For those that are fortunate to have many years behind them with substantial savings accumulated, the other perspective that they must consider is estate taxes are no longer an impending liability for the family.  How does 63.8% compare to our current system that includes inheritance tax?  The results are likely to be far less ominous overall. 

My economic skills are insufficient to quantify by how much, though I can imagine there must be some additional factor by which citizens born before some date can qualify for a higher prebate.  It would be justified by the fact that most people do not start saving for retirement until later in life, but also adjusted by the fact that our current account deficit was created on the same watch that these savings were accrued.

In looking for a fair resolution and getting the course righted, it is imperative that the minimum number of these kinds of exceptions are implemented.  A solution that uses a date of birth as a qualifying cutoff also provides natural attrition of such an exemption.

I truly hope that FairTax is able to find implementation in some form. I’ve been interested in it for years, but had to distance myself after finding it’s also a group of well-meaning fiscal conservatives infected with a group of social ideologues hunting for open-minded prey.  (Among other circus acts, I still get robocalls from Mike Huckabee with liberal bashing messages that border on hate speech as a result of giving my phone number to the FairTax organization.)  It’s uncomfortable to support a group that refuses to self-police it’s members and actively prohibit partisan behavior, especially for something so important to the future of our country.

Myron Martin

Feb. 25, 2012, 2:28 p.m.

No question that the tax system is far too complex and badly screwed up. One point of the problem that was not touched however is that the foundation of the problem lies elsewhere. I have seen well researched essays showing that as much as 50% of taxes are composed of INTEREST and while the banking industry has done a great job of brainwashing the public at large that what is desirable and prudent is what has been labelled “the magic of compounding” supposedly getting rich through investing in various forms of DEBT instruments.

What is ignored is the fact that interest is mathematically impossible, only a few can be net gainers, the vast majority end up as debt slaves since our currency supply is borrowed into existence as debt. As long as we operate on a DEBT based system the gap between rich and poor will only continue to.widen. Since “every bank loan is a new creation of money, and when it is paid back it ceases to exist”  (Central Banker Graham Towers testimony in 1939 before Canadian Parliament) it necessarily follows that since only the principal of a loan is ever created the fractional reserve banking system is a recipe for perpetual debt. The only way that interest can continue to be paid is if there are exponentially increasing levels of borrowing to replace the loans being paid back that is DOUBLED through the payment of interest over an average of 20 years.

Just imagine the wealth that could accrue if you only had to pay for a house or car ONCE, not double or more through interest and on top of that your taxes were cut in half, PLUS we had honest money that retained its purchasing power so that the money you SAVED would not be eaten up by inflation.

If you want to solve the problem of unfair taxes you need to first of all restore constitutional money and then reform the tax system accordingly.

Skye Aureus

Feb. 25, 2012, 1:35 p.m.

I see two serious problems with the “Fair Tax”.  One of these problems regards the taxing of home rentals and would cause very serious economic dislocations, but is easily fixed.  The other is an inherent problem in the system.

I have read this latest version of the Fair Tax bill and note a very important problem:
Sales of all used items are exempted from the Fair Tax. This is necessary or it would freeze ownership of everything not used for business purposes.

Rentals not for business purposes are subject to the Fair Tax.

Is the rental of a used item (not for business purposes) subject to the Fair Tax? As currently written, rentals of used items (not for business use) are indeed subject to the Fair Tax.

This would cause many trillions of dollars of capital misallocations if the rent of used items is not exempted.

How could this happen? The sale price of a used home would not be subject to the Fair Tax. If the rent on a used home is subject to the Fair Tax, this would cause a huge unintended bias in favor of people purchasing used homes rather than renting because the current monthly rent would have 27% added on to it to pay the so-called 23% Fair Tax. This is a much bigger bias in favor of home ownership over renting than that which created the real estate bubble and crash of 2008. (Note that renting makes workers far more able to move to where the jobs are.) This problem could be solved by exempting rentals of used items such as homes from the Fair Tax - but that is not the way that it is now written.

A further effect of the Fair Tax would be to effectively kill all new home construction for at least a decade because the price of a new home would have to be marked up by 27% to pay the Fair Tax on its sale.

Then there is a matter of definitions of how much use is needed for something to be used. Suppose a home builder uses a new home for a year as a sales office (no Fair Tax would be payable on this use). Can the builder then sell it as a used home, which would not be subject to the Fair Tax? After 6 months use? One month’s use?


Worst - and most unfair of all - the “Fair” Tax would be the largest transfer of private wealth to the government in history. I, and many other people have substantial savings on which we have already paid income and FICA taxes. These trillions of dollars of private savings would be subject to an additional 23% tax if the Fair Tax were instituted. I have already paid marginal federal taxes of over 40% on every dollar of these savings. The “Fair” Tax would take another 23% of what I have already saved and paid taxes upon. What is “Fair” about this? The Fair Tax, without a tax credit for existing already taxed savings, is a multi-trillion dollar redistribution scam from savers to the Federalies!

If you read the primary book on the “Fair” Tax, you will find that this problem was considered by the authors. Their conclusion is that if all existing already taxed savings were exempted from the Fair Tax, that the rate would have to be so much higher that it would be politically unsalable - so rob all existing savers of another 23% of their already taxed life’s savings! Is this “Fair”? 

Consider someone who is self-employed and of middle class income: They have already paid 15.3% Social Security plus Medicare taxes plus another 25% income taxes for a total of 40.3% federal taxes on their savings.  When they spend these savings on eventual consumption, the must pay another 23%, for a total federal tax of 63.3%.  Those who have no pre-“Fair Tax” savings pay 23%.  How many people with savings that they have already paid taxes on will consider this to be fair?  Or are extant savers who have already paid their taxes to be sacrificed to a central government that has turned into a metastatic cancer that is destroying its host?  I’d rather that the central government destroyed itself.  “Our” central government is by far the greatest existential threat to America; a proposal that results in an overall 63% tax rate on extant already taxed savings is not an acceptable solution.

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