Open Letter to President Obama

20 February 2012

Dear President Obama,

On this President’s Day I thought it apropos to send you a letter.

Here is the secret to ensuring your reelection. But you must do this now so as to steal the Republicans thunder. Many of these ideas have been floated before by both Democrats and Republican’s so there should be ample bipartisan support. Keep the message and the tax system simple and it will sell. There will be disagreement on some of the details below, but EVERYONE hates the current tax system. You will be universally applauded if you can achieve what no president has for the last 100 years. Truly simplifying our tax system. But not just for its own sake, but in a way that will boost the economy while maintaining a revenue neutral alteration (actually revenue positive due to greater compliance). I believe the following would be a politically viable solution to the quagmire that is our federal income tax. It would both allow you to sell this idea as helping the middle class while ensuring that none escape contributing to the tax system. The key is simplicity and transparency. No loopholes, no tricks, no gimmicks. Simplicity and low rates encourage compliance because (a) simple rules are easy to follow and (b) low rates diminish the incentive to break the law.

I propose the following:

1) Eliminate all income tax for amounts under $50,000/year (per household)

2) Implement a flat tax of 15% on ALL income above $50,000/year (per household, index to inflation). No deductions, no credits, no exceptions, all income, whether earned or unearned. This value is based on tax return figures for 2009 and is simply arrived at by dividing the total income tax by the total AGI of all returns less all returns under $50,000/year  ($865b / $5,905b = 14.7%). There should be no need for multiple progressive rates because progressive rates are simply an attempt to make up for the tax revenue lost through special deductions and loopholes. Eliminating all deductions ensures none can escape. Those making $50-$200k/year would see an increase in their taxes, however their bosses will be more than happy to give them raises since the bosses will be paying less tax both personally and corporately. So although the wealthy might end up with the same net amount of money (less tax, but paying out more payroll) the benefit is transparency. Everyone will see exactly where they get their money and where it is going.

3) Capital gains would be indexed to inflation (to eliminate taxing gain based solely on inflation effects) and after that adjustment they would be taxed at 15% whether short term or long term.

4) To maintain tax alignment between pass-through and non-pass through business entities (S vs C corps) corporate tax rates would be lowered to 15%. All loopholes and credits would be closed to ensure the mega-huge corporations pay. Likewise corporations would be governed by the same rules as individuals, namely that all worldwide income, whether brought to the US or not must be declared and tax paid. Both the lowered rate and this policy of taxing income regardless of where earned would incentivize corporations to repatriate foreign funds back to the US (since now the funds would be getting taxed at higher rates overseas vs the US). If a company paid a dividend then it could deduct that dividend for tax purposes. This avoids double taxation and encourages the payment of dividends and larger dividends (because less money going to tax more can be paid as dividends). The enhanced payment of dividends greatly helps the retirement portfolios of seniors who depend on actual income sources in retirement.

5) Eliminate gift and inheritance taxes. Not only is it simply the right thing to do (why should the state be allowed to retax an estate that has already paid taxes on all assets just because someone happens to die) but it will free up a lot of money currently wasted trying to avoid or account for the tax (i.e. life insurance trusts that do nothing but pay the tax).

Fix Social Security

Social Security was supposed to be a safety net – not a long-term source of income. It must be converted over an appropriate time frame (so that’s those depending on it now or soon are not affected) to a safety net system. So all of these changes below would be phased in, say, over 10 years, although (3) could be done immediately.

1) Establish income and asset thresholds for benefits, I don’t know where that should be but obviously Warren Buffet doesn’t need to collect social security. Perhaps with tax code alignment set it at $50,000/year. If your income exceeds that you don’t get any Social Security, if it is less than that you only get enough to bring you up to $50k/year up to a maximum of your allowed benefit. For asset testing, if one is asset rich but cash poor they could get Social Security, but once they pass away their estate would be liquidated and the government reimbursed for any benefits paid (we do this now with Medicare I believe so not a huge change). This solves the problem of a multimillionaire estate passing to heirs while the occupant that had no income collected social security, whereas someone with a modest estate and no income would not be subject to the payback rule. Again, this ensures Social Security is truly a safety net and is not taken advantage of by those that don’t need it.

2) Change the retirement age for social security benefits. We are all living longer and the retirement age should reflect that. For men it would be 75 for women 80 however a widow or widower could collect on their spouses if they themselves had no benefit (never worked) at their retirement age (e.g. a 77 year old women could continue to get her deceased husband’s social security, at 80 she could choose to switch to hers or stay on his, but not both). A disability or incapacity to work (e.g. senility) basis for benefits would still be permitted of course.

3) Allow those that wish to do so to “opt out” out of Social Security. They would be required to sign a legally binding contract that says if they opt out they will have no basis whatsoever in the future to apply for Social Security  (even if dirt poor and homeless – in this case they must rely on private charities, if you’re not firm on this it simply will encourage a massive free rider problem). But one could opt in if they wish but they would have pay back all accumulated amount in arrears they would have otherwise paid (eliminate the free rider problem – e.g. “Sure you can enroll in Social Security again at age 60 even though you got out at 30, but you must first pay $90,000 to catch up to where you should have been sir”). Opting out will allow that “unfunded liability” figure to greatly diminish over time as more and more people are no longer eligible. It will also encourage personal responsibility.

4) Eliminate the employer match on Social Security. Most employers will simply pass this amount on to the employee in increased pay (I’m an employer and I would). Why would they? Because employees aren’t dumb, they’ll demand it because they’ll know the employer isn’t paying it to the government anymore. How does this help Social Security? Because the government can incentivize the employee to invest that money in a Roth or other IRA, to take responsibility for their own retirement, and thus when they do retire their income stream will more than likely be well above the $50,000/year minimum and thus they’ll have paid in but never receive benefits (assuming of course they did not opt out). But even if they don’t invest it and simply spend it, then all that extra demand will boost the economy and drive more job creation and greater investment returns. Increased demand for employees will drive wages up (if demand goes up while supply is constant then price i.e. wages, goes up). These enhanced returns will further decrease the likelihood that a retiree would be allowed to receive social security benefits (because the elevated returns will ensure an income stream greater than the income means test). This in effect is a market based subsidization of retiree income by young investors.

Fix Medicare

Again, it should be a safety net system. Set the age limit the same as social security and means/income test it. As I said before, Warren Buffet doesn’t need Medicare. There is no sense wasting it on those that don’t need it.

Personally, I’m a libertarian and I don’t think what I wrote goes far enough. But I also recognize that this would be a tremendous step in the right direction and that for there to be any positive change we must all reach a common ground. I believe the above achieves goals of all sides

a) Protecting the middle class by actually lowering their income taxes to zero

b) Protecting the poor by eliminating their income taxes as well and ensuring that Social Security and Medicare are exclusively available to them as a basic safety net

c) Eliminating the unfairness in the tax system that allows the super rich to escape taxation that the merely well off or rich can not partake in… (which ironically currently results in the well off and merely rich subsidizing the taxes of the super rich) by lowering and flattening the tax structure by removing all deductions.

d) Increasing tax revenue by taxing foreign income of domestic corporations but at a rate more competitive than foreign countries and also eliminating unfairness in corporate taxes that allow super large corporations to pay little tax while modest size corporations that can’t share in the loopholes bear the burden of the full 35% rate (as I can personally attest to). Further revenue enhancement occurs through greater tax compliance because the rules are easier to follow and there is little incentive to risk jail time over tax evasion when the rates are relatively low (e.g. one will have greater incentive to cheat if they pay a 45% marginal rate vs a 15% marginal rate).

e) Boosting the economy through Social Security reforms and dividend rule changes that will encourage market investment and expanded dividend payments that in turn are spent further spurring the economy while simultaneously decreasing people’s reliance on Social Security. Further boosts come from rule changes that incentivize repatriation of trillions of dollars.

To ensure the economic benefits are long lasting and start quickly make the changes “permanent” i.e. no 10 year sunset provisions. I don’t know if you’ll actually get to read any of this, I’m sure you get tens of thousands of emails every day, but I hope you will give it some real consideration. Although I don’t agree with a lot of your policies you do seem to be intelligent and thus I hold high hope that you will find the validity in what I have proposed even if there is disagreement on some of the details.


Gregory Morin