Step 3: Taxing Caesar

In ancient Rome taxation was different for Roman Citizens than it was for everyone else. “Citizenship” was just another word for elite supporters of the state. Citizenship was conferred upon people by generals or emperors.  A person was a natural citizen only if both birth parents were citizens at the time they were born.  People paid taxes (or ‘tributes’) and Citizens ruled the people. Of course Caesar and his Citizens paid little or no tax themselves. They were charged with how the taxes would be spent.

I apologize if this sounds eerily familiar, America.

Taxation in our country today is a political patchwork not a financial system. Ripe with exclusions, exceptions, deferments, credits and deductions, American tax law is as unfair and lopsided as the Roman system of old.

The fix however is a political nightmare. While a ‘flat tax’ seems the most fair and reasonable approach, the current tax laws employ literally, millions. Tax lawyers, estate planners, tax preparers, financial planners, corporate controllers and the entirety of the IRS – to name only a few – make their living off of tax management and leveraging tax shelters.  The impact of a level, fair and simple tax code would be a major blow to the economy and would be fought by the most powerful lobbies in Washington. 

But corporations and taxpayers are not the only stakeholders in the current mess. Lawmakers in congress use taxes as a carrot and stick for most all funding proposals. From gas taxes to cigarettes – taxes are used to leverage, reward and punish.  Income tax ‘rate tables’ and deductions are part and parcel of these carrot and stick laws. Not to mention tax deferments and investment credits for corporations.

Many say a flat tax simply will not work. Why? Because a truly flat personal income tax would have no deductions, exceptions or credits.  No deducting your mortgage interest, your student loans, your dependents.  Nothing, period.

Of course they are totally wrong. All Americans have been paying a flat tax for over 80 years. Every employed person – and every company they work for - has paid FICA (Federal Insurance Contributions Act – AKA Social Security) taxes. FICA is a totally flat tax (currently 6.2% for each employee and employer) with no deductions or exemptions at all. Not for employees or employers. It’s capped however. Just as with Rome, ‘Citizens’ that make over $130K a year stop paying FICA when they hit the cap. The rest of us pay our whole lives.

What makes FICA so great is that it is not tied to PROFIT only INCOME.  The company you work for pays 6.2% too – no matter if they are a Fortune 100 company – or they exist in bankruptcy.

Not too many people know that the FICA tax system resulted in a HUGE windfall for the government over the years. Even when the salary cap for contributions was low (started out in 1937 as 1% on the first $3K of income) the Social Security fund gained billions over time.  

Of course our lawmakers could not stand to see that much money just lying around – so they passed laws that allowed the government to ‘borrow’ from the fund at extremely low interest rates. They all but drained it in a few years. Now they have to pay back enough each year to keep it as solvent as it would have been if they left it alone. Another statistic that not too many people know about is that 27% of the National Debt, or $6 Trillion dollars, is owed to Social Security and federal pension funds (in contrast, China owns $1.3 Trillion in US debt).

But I digress….

Back to a flat tax.  If we were to use the current model of FICA taxation we could, in theory, eliminate all graduated, tiered and profit based taxes – while saving American taxpayers billions. It’s possible we could actually pay down the national debt at the same time. A flat personal income tax of 20% on gross income - with no cap or deductions – would easily replace the current level of federal revenue from personal income taxes and FICA combined.

Corporate taxes are a different story. The basic issue with FICA is that it is based on the number of U.S. based employees and their salary. And that, along with the natural tendency to avoid taxes, has meant a drain of low wage jobs from U.S. companies and foreign companies doing business in the U.S.. Eliminating the FICA contributions of corporations could be hugely popular on wall street and main street. 

Companies are used to ‘baking in’ the FICA taxes as part of the cost of doing business. Such costs determine the prices companies set for goods and services in order to make a profit.  If we eliminate FICA – based on US employees – and replaced it with a flat business tax of say 15% of Revenue (not income/profit). No caps, no credits or deductions for losses, etc. Then every company would have a solid measurement of the tax burden regardless of where they do business or where their employees reside.  They can bake it into the cost of doing business at the outset.  Not only does it replace a company’s FICA burden, it removes the uncertainty and cost involved with tax management.

In both cases – personal income and corporate revenue – hiding income from the government would need to come with huge penalties.  We need to make the tax rates so low, and the penalties so high, that the only prudent way to go is to pay your fair share. 

In summary, a political taxation system is hard to change when the solution rests with politicians.  But we have an advantage in this country. It’s called a vote.  If we put enough people in congress that have the will to change the tax law then We The People will get it done.

JWB