Chapter 2

Reduce Taxes


The US Tax Code is a joke

As a starter, please consider that the US tax code is over 75,000 pages of exemptions and exceptions written by lobbyists and passed into law by our esteemed Congress. Don't forget who permits this atrocity to continue from one Congress to another. Vote them out if they choose not to address the use of the tax code as a political tool. The message here is to get politics and about 74,900 pages out of the tax code.

Government, regardless of whether the sponsors of legislation are Republican or Democrat, should not determine who wins or who loses in any marketplace. It is intrinsically unfair. This notion extends to the Republican sponsored "Pickens Plan - House Bill 1380," which was introduced in April 2011.

Republican voters are against crony capitalism for sure. However, most see it simply as a Democrat thing. But, the Pickens plan is just as bad as Solyndra. D or R, no subsidies means no subsidies. There are no home games and away games that permit us to change that mantra. The only difference in the Pickens plan is that Republicans like Pickens just as the Democrats liked Solyndra. Say no to House Bill 1380 and any other attempt to add more stipulations and more subsidies to the tax code.

Regardless of how it is restructured and 75,000 pages is something we all think is a bit much for honest government, the US tax code should have all subsidies removed. If businesses cannot make it, then they should not make it. It is that simple. The taxpayers should not pay for a Boone Pickens boondoggle or anyone else's boondoggle, if you pardon my choice of words. 

When things are so good that everybody should want in on the deal, let the people who like the deal and who can afford to risk their capital go for it. Let them become even richer by using their own money. That’s OK. That’s capitalism.

Rich people should not risk my money in order to become richer. Moreover, they should not think they even have a right to my money and your money for any reason. Use your own money, period. Crony capitalism results from any subsidy. Moreover, there are no regular Americans of which I am aware, in an age when corporations are taking the people's jobs overseas, who would vote to give corporations welfare of any kind. Sorry! No thanks!

Even if after all is said and done, we the people might win by risking our national treasury, it is unfair to all of us to do any favors for any company or any individual. Mr. Pickens and others seeking or enjoying subsidies, if the deal is so sweet, do it yourself. Americans have a lot of reasons to not trust governments, corporations, or unions. Stop playing with us and stop playing with the tax code. It is already too complex to suit my taste. How about yours?

It’s time to ship all the wheel barrows loaded with oppressive tax legislation to the scrap heap and do what is right for America. Herman Cain decided to give it a shot, and for that, I applaud him. For honest government, subsidies, which always create crony capitalism, must become a thing of the past.

The 999 plan

Herman Cain sure looked like the real deal. His 999 plan is a tax-only plan that would represent just the first “R” of the RRR Jobs Plan—Reduce Taxes. It would help bring jobs back to America for sure but the RRR plan is more comprehensive. The intent of Cain’s plan is to keep tax collections the same (revenue neutral) and completely restructure the tax code, making it far more simple than today.

[On December 3, 2011 Herman Cain suspended his campaign and thus ended his presidential legacy. The biased media was able to stop Cain because they knew he would beat Obama.]

Eighteen percent of the tax (9 plus 9—sales tax plus corporate tax) brings a lot more taxpayers (unreported tips, druggies, black market action) into the tax game. The “black market” is its own $1 trillion economy if not more.

I like 999 on the surface, but I admit it is not all that easy underneath in terms of how it affects the economy. The unintended consequences, once identified need to be addressed. Cain showed that he was willing to make adjustments. If any other presidential candidate opts for Cain’s 999, they too will have to be prepared for some changes. So, let’s look at the pieces of this simple, yet highly innovative plan in a little more detail

The 999 plan ends with a nine percent sales tax. So, in Pennsylvania, for example, we would be paying 6% plus the 9%. For the poor, Cain already adjusted one of the 9’s by subtracting 9 from it. The plan for the poor is that they pay the sales tax but they pay no social security and no income tax. In fact, nobody in Cain’s plan pays a separate Social Security tax, or a separate Medicare Tax. For the poor, no income tax would need to be paid but a form would have to be filed even for those under the poverty line and that is good. If it were my plan, even the poor would pay something, though very minimal.

I think everybody in American needs to be in all parts of the tax contribution game. Anything brought in through withholding, other than perhaps a .25% rate, would be refunded normally. In other words, without working out specifics, I would not make the income tax zero for anybody. It would be .25% instead of zero. I admit, however, that I have not yet learned enough about the Cain plan to know how specifically to modify it to make it work for all.

Cain quipped that this plan version for the poor is really 909. The 9% corporate tax, the first “9” is like a gross receipts tax after investments. Non-capital expenses such as payroll wages would be the big part of the revenue that would be taxed. One of the wishes of Cain in proposing 999 is that seniors are more likely to receive larger dividends as no corporate tax would be extracted on the amount of the dividends provided by corporations to its shareholders.

999 provides a big incentive for corporations to take what would have been tax and return it to shareholders as dividends. Many of these are elderly who may live in government subsidized high rises in major urban areas. Shareholders would then pay 9% tax on the distributed dividend income that they would not have gotten otherwise. Any purchase from another company (non-retail) in the 999 plan would not be taxed so it is not as onerous as a value added tax as in Europe.

Corporate income tax reduction key to job growth

The reduction in the corporate rate is critical for bringing back corporations from overseas. In other words, we need a substantially lower corporate rate to increase jobs in America.

Ireland is now the least expensive country in which a corporation can do business. Its corporate income tax is 12.5% on all corporate bottom-line income. The US deferral corporate rate is 35%. If you add state income taxes, on the average, the corporate income tax (state and federal) totals out on the average to be about 39.3%. That high rate is a big reason why many corporations have taken their jobs overseas.

Nothing is as simple as it first looks. The 39.3% composite rate is a national average of apportioned taxes paid. Pennsylvania for example has a complex corporate tax, in which the major income tax rate is 9.99. To determine the portion of corporate income that is taxable in each state, most multi-state corporations use an apportionment method. This takes three factors into consideration in determining how much income is applicable to each of the 47 states that have corporate income taxes. For income apportionment, it does not matter in which state a corporation is chartered. It matters how much property; how many employees; and how much sales a corporation has in a particular state compared to all other states.

Pennsylvania ranks second in the nation in oppressive corporate tax rates behind Iowa’s 12%. In Pennsylvania and other states, once the income is determined, there are other components of taxes which corporations must also pay, making such states very unfriendly towards business. Pennsylvania has about ten of these other considerations.  

Congress and the President need to take the combined rate seriously as the US has one of the highest state and federal corporate combined income tax rates in the world. To make the rate more competitive internationally, corporate tax rates will have to be reduced both in Washington and in the state capitals.

Making the federal corporate tax 9% instead of 35% gives corporations a real financial reason to bring jobs back to America. America’s competitiveness in the world would increase even more substantially if the states also pitched in with decreases in corporate income tax rates. This is not just speculation. Taxes are more of an incentive for offshoring than lower wage rates. By making corporate tax rate low or non-existent, American corporations will be flocking back to our shores and foreign corporations will be trying to get new plants built as soon as possible. That sure beats “shovel ready.”

In any Kelly tax plan, revenue would not be neutral so I differ with Cain on this one. Revenue would be less than neutral. In other words, there would be a tax cut at the individual level and at the corporate level and a good part of the revenue would be made up by increases in jobs and individual income as well as by increasing tariffs. In other words, the same that JFK put in place in the 1960’s could take place again. See JFK quotes in Chapter 1 and information about raising tariffs in Chapter 12.  

The Perry plan

Rick Perry has another taxing idea which I also like. I am normally not so agreeable. His proposal would lower the corporate tax rate to 20 percent from 35 percent and give multinational companies a temporary incentive to bring home foreign-earned income at a far lower rate of 5.25 percent. I would recommend that Perry set the corporate rate at 12% or lower so it would be the lowest corporate rate in the world if the states also cooperated. Lowering the corporate tax rate is highly desirable and most economists believe it would be a big factor in helping to bring jobs back.

Lowering the repatriation of cash rate for corporations to 5.25% will surely bring greenbacks back into the country. When the corporations give dividends to their stockholders, these greenbacks will be spent and there will be a temporary surge in the economy. It will help us get over the hump at least somewhat.

I like all of that. Additionally, I would like to see incentives for corporations to hire American workers v. hiring foreigners and v. offshoring jobs. Members of Congress that are not tightly tied to lobbyists should agree that those additional criteria are good for Americans.

What is repatriation?

Many Americans do not know that government for years has permitted multi-national corporations, whose headquarters are in the US and who manufacture or otherwise do business overseas, to keep their overseas profits in overseas banks until they need the cash back home. When it comes back home, the IRS and the states whack the corporations with the 39.3 % plus combined corporate income tax rate minus any amounts that were already paid to the host country.

Most other countries do not tax their home based corporations on overseas income so in these days of globalism it is easy to see why corporations, not loyal to America, would move their headquarters to more tax-friendly countries.

Obviously, multinational companies don’t particularly like that they get taxed by two countries so they bring the money back only when absolutely necessary. There is about a trillion, and perhaps two trillion dollars that might come back and be taxed at Perry’s 5.25% rate instead of 35%. Since US based corporations must pay a corporate income tax to the foreign countries in which they do business, there is really no free lunch out there for any of these guys.

Let’s say corporations earn their dollars in Ireland and they pay the 12.5% Irish corporate income tax. If the corporation is not a US-based corporation; it is the end of their tax obligation. If they are a US based corporation, then they would pay 39.3 % Let’s us 40% in the calculations) 40 minus 12.5 gives 27.5 percent additional tax on every dollar they bring back home.

So, you can see that the 5.25% Perry “tax holiday rate,” is very favorable and would result in cash immediately coming home. More than likely a share of this corporate windfall would be given out in dividends and the dividends received by John Q. Public, would be spent or invested in US projects or products. Moreover, the fact that the corporation would be banking a lot of the proceeds means that a heck of a lot of money would be hitting the shores of the US. It is a good deal.

The United States bases its jurisdiction to tax international income on residence. As a result, U.S.-chartered corporations are taxed on their worldwide income, but foreign corporations are taxed only on their U.S.-source income. Domestic corporations are taxed on their worldwide income at the federal and state levels.

Corporate income tax is based on net taxable income as defined under Federal or state law. Generally, taxable income for a corporation is gross income (business and possibly non-business receipts less cost of goods sold) less any allowable tax deductions.

US tax laws permit corporations to indefinitely postpone its U.S. tax due from foreign income by operating through a foreign subsidiary. So, that is how most deferrals begin in the first place. U.S. corporate income taxes on foreign profits can be deferred as long as the corporation’s foreign earnings remain in the control of its foreign subsidiary and are reinvested abroad. The U.S. firm pays taxes on its overseas earnings only when the subsidiary corporation (wholly owned in almost all cases) pays the income to the U.S. parent corporation in the form of an intra-firm dividend or even as other income.

This is not a tax course. It is simply a book about the fabulous RRR plan devised by yours truly. Though my MBA is in Accounting and Finance, you would not want to hire me as a tax accountant because my area of expertise is operations management and information technology.

It is good to know, however, that the Perry plan for earnings repatriation is almost exactly the same plan as the repatriation provision of the American Jobs Creation Act (P.L. 108-357) which was a 2003 plan to help create more jobs. It did not do that well back then but it surely did help and would help again.

So, I am saying that the 5.25% one-time tax plan has been tried before and it has not worked well for jobs but there is no doubt it would work well for seniors who could use the dividend dollars. I will do my best to figure a way in which the corporate rate can be just 1% or something very negligible so that corporations can have almost no tax owed if they do their business in the US. The 1% means they would still have to file returns, but far simpler forms.

Of course we would want them to all stay US corporations and not become “global” corporations. The US, if my plan passed would ask them to favor US in their policies. Because some CEO’s might raise a middle finger to America and do their own thing, I would leave the rate of the corporate income tax at 35% for companies that earn their dollars overseas and I would completely eliminate the deferment of taxes for those that qualify on this negative.

The moral of the story is that if you are a corporation and you want to make a lot of money from Americans purchasing your products, the Kelly plan would insist that you play our American game. Corporations who wish to go rogue will find their competitors, who behave as friends of America, receiving major business advantages in America including good will.

Rate for US companies importing to USA

Any US corporation that chooses to move its corporate HQ as some have done to other countries to avoid taxes would be singled out. All of their goods, whether shipped directly to the US or those goods, which come through intermediaries, would be taxed (via a tariff) at 35% and perhaps more. The message is that Uncle Sam represents the lowliest citizen in America and corporations need to learn that it is not nice to mess with Uncle Sam.

Additionally, any service sector organizations such as call centers or banks or insurance companies or other non manufacturing organizations that choose to slip off to some other country and establish corporate HQ, the price to do business in the US will be exceedingly high.

Foreign corporations hiring employees in the US will be given the same favorable treatment as those American companies that use American workers, regardless of the business sector. American companies that choose to stiff-arm the United States will be so identified and will be treated by this country as “not a friend.” The “not a friend” list will be well published as in the nature of a “most wanted list.” This would permit American patriot citizens at their choice, to do business only with companies that are friends of the US. If corporations choose to give Americans the short end of the straw, the tax code under the Kelly plan will make them regret that posture.  

The 12-12-0 plan

Michael Busler, writing in his New Jersey Room blog on the Web has yet another idea. Just like Cain’s and Perry’s plans, his innovative plan is a major restructuring and on balance, it seems like a good plan. The big difference is that Busler is not running for office.

It is all about a 12% single rate tax on all income above the poverty line, with no deductions for anything and no consumption tax? This 12-12-0 plan as Busler calls it would replace the Federal Income Tax only. It leaves the payroll taxes in place. Like the Cain plan it would be revenue neutral. It would also likely encourage significant growth in the economy as the corporate rate (without considering the states in composite form) would be just a hair less than Ireland. And it sure seems like it would be fair since each taxpayer would pay taxes in proportion to her or his income.

As with all these plans, this too would have to be tweaked to assure they are revenue neutral or as I would recommend, less than neutral (tax cut). They must be conceived in a way that GDP increases and thus revenue itself increases while the “neutral” rates remain constant.

Tax Code-is not just for Congress

As easy as toying with the tax code may seem, some of the 75,000 pages actually have a noble purpose. For decades on decades, Congress has decided that 75,000 pages were noble and they would never want to find out which were ignoble by wiping out all 75,000. I take a different approach. The 75,000 are killing us since nobody other than Charles Krauthammer can understand them all and we know they are mostly self serving and the selves served are members of Congress and their corrupt cronies.

So, let’s wipe them out in their entirety as Cain, Perry, and Busler suggest, and let’s listen to the screamers as long as they are not lobbyists. Then, we can adjust as necessary while the scrupulous people of the US watch closely. The big game right now is for anything that is done—to encourage economic growth which ultimately brings more revenue into the treasury. Of course as in days past Congress should have to agree or be forced to resign so they would not choose to spend any extra revenue for any purpose. We all must remember that we are 15,000 billion dollars in debt, and Congress is to blame.

Any potential Congressman should be given a simple test with about 20 to 50 questions so that they can be rated as frugal or a big spender. It is time for the big spenders to stay home unless they want to spend their own funds.

Billionaire extra tax provisions

On the Perry tax form and the Cain tax form and the Busler tax form, and anybody else’s form, I would like to add a few boxes and lines to permit extra giving to the US treasury. That way folks like Warren Buffet and Jeffrey Immelt or anybody who once was helped by Uncle Sam, and who would like to pay something back, would be able to do so without creating a big public fuss.

Though I find it hard to believe anybody trusts government so much, there may very well be billionaires like Buffet and Immelt, who, rather than give to the American Heart Association or the American Cancer Institute, would prefer to give a few billion to the American Government.

All citizens pay a national $10.00 tax

Under the category of “there is no free lunch,” everybody over 18 should be required to file a tax return whether they pay taxes or not. In the Kelly adjunct to any plan, there would also be a required $10 national tax for every non-taxpaying citizen over 18. These make up all the people eligible to vote. I would recommend that any citizen paying no taxes to the federal government shall not vote in any election in which they have not paid taxes within a one calendar year period. The national $10.00 tax would count as payment. Retired seniors, and those on unemployment, and the helpless that are on welfare from the government would also be required to pay the minimum ten dollar tax and submit a very simple income tax form.

Non-citizens pay $250.00 per year

Illegal aliens and any non-citizens living in America for over a year, each year would pay a $250.00 tax to help defray the taxpayer cost of their living in America. Failure to pay the tax would result in a $500.00 fine payable within one month and if the fine is not paid, the freeloader would face immediate deportation.

All remunerations to all are documented

As another thought to help those once helped by John Q. Public to remember who helped them, I would assure that it be written in law that all businesses or federal or state agencies or charitable organizations, who provide any type of earned or unearned remuneration to citizens or non-citizens, provide all recipients with a form such as a 1099, W-2, or a form which acknowledges the type of remuneration they received. The organization, institution, business or government or other, would upload information to a huge database and would not need to mail the documentation. IT analysts can design this to be a smooth operation.

Of course the new element is that even those who did not receive earned income would be required to get a receipt for free services provided by taxpayers, and they would have to file an annual return. Non-citizens would supply all supporting documentation with their $250.00 annual tax. The dollar part of the returns can be done via a source such as PayPal with no paper needing to be filed, though paper would be permitted.

So, that there are no exceptions, all of the following: income, gifts, welfare, cash payments, medical assistance in any program, unemployment compensation, food stamps, SSI, or any other form of remuneration not included in this list would be required to be reported each year to the appropriate federal government agency (Now it is the IRS), by the providing source of service/cash and a copy provided to the recipient (such as a 1099). All of this can be done in machine readable media with no paper required.

The source of the income would also be listed and the receipt would be provided so that there was a match just as with 1099s and W-2’s. By the way, this law may help collect from those operating under the radar, if somebody in the government ever decides to find out who they really are.

Depending on the type of service, the electronic form would identify the payment and the purpose if it is government supplied remuneration. As previously noted, everybody over 18 years of age, regardless of whether they are employed or not, would be required to file a “tax” return and submit the documentation provided.  If no tax payment is required, the entire form plus the $10.00 national tax may be submitted online including machine readable supporting documentation and something like PayPal. If payment is required, and the taxpayer cannot find a way to submit online, perhaps a surcharge would be required of say, $50.00, if lots of paper must be processed.

As a system designer for many years, I see the key to making this system workable and cost-effective from an IT perspective is that each voucher from any payment source (cash services, or other) needs to contain a unique number which can be entered online so that no postage stamp and no paper would be required for an individual to submit their return once a year with minimal inconvenience. Anybody who receives funds of any kind from government or its surrogate agencies would be required to report it.  It will help us all. The IRS or hopefully, a kinder and gentler government agency of another makeup, would thus be able to assemble all of the documentation electronically by key, without inconveniencing the recipient.

Any privacy / data security issues would need to be resolved before such a system were implemented.

Summary Restructure Tax System 

The United States needs a tax system that helps to grow the economic pie for all to enjoy. There are many recommendations for restructuring the whole code or eliminating it and starting over. All of these notions will take time.

In our time of national need, we cannot wait for a full tax restructuring. The same gain can be realized in the short term through across-the-board cuts in corporate and personal incomes taxes, and shifting towards greater reliance on indirect tax to make up for any shortfall in government revenue while moving towards a FAIR tax.

In the meantime, it is time to dust off the Kennedy tax objectives and implement a plan that JFK would be proud of. With the immediate institution of a tariff on imported goods, which I recommend in later chapters, even more revenue can be achieved while helping American based businesses, and giving those that have offshored a solid reason to come back.

Over all, a growth-oriented tax system is designed to promote economic growth. Faster growth, in turn, means better-paying jobs and higher standards of living for all.

All of the notions in this book (RRR) promote a means of achieving growth for American business in America while Americans also prosper.