Whether we like the effect or not, ALL taxes have a social engineering aspect. What they tax is discouraged, what they fail to tax is encouraged.
So to the new "compromise" where the Democrats basically gave the Republicans the farm, but only for two years:
Sounds great but I don't think it either attacks the behavior that led to The Great Frustration, nor does it do enough to encourage the behavior that will lead us away from the Great Frustration.
So let's describe the Great Frustration first:
- Republicans deregulated the banks to combine commercial and investment banking.
- Democrats created tax subsidies that encouraged the banks to lend to people who were unable to repay their loans.
-The lack of ability to pay back loans resulted in investors unable to trust the ratings agencies
-inability to trust the ratings agencies led to a slowdown of investment dollars to the banks
-an inability to trust the ratings agencies led to a lockup of credit for small business
- no credit for small business resulted in massive layoffs
- massive unemployment led to dropping demand
- lack of demand has resulted in falling consumer confidence
-which results in even more unemployment and even less investment.
So here's my compromise if the Republican plan doesn't work to get us out of The Great Frustration (we'll know this by total consumer + government debt to GDP ratio of >65%, unemployment >9% in 2012, consumer inflation less than 3%):
IF the above statistics still hold true in 2012, then I propose a complete reform of the Federal Income tax:
1. A new Alternative Minimum Tax of 75% for any individual with an Adjusted Gross Income > $2 million/year
2. A new Capital Gains tax will be imposed on any corporation whose Adjusted Net Profit > 10% of Gross.
3. EVERYBODY gets to lower their gross income for the following activities, verified in the following ways:
a. Creditors will be required to file a 1099LR form with the ratings agencies, the individual payee, and the IRS for any payment recieved by them on any secured or unsecured debt. Gross income for individuals and net profit for corporations will be reduced by this amount outright.
b. W2 payroll "match" taxes will be reduced to zero, and any other money used to pay for payroll (both income and benefits) will be treated as a cost, reducing AGI for individuals and net profit for corporations.
c. IRA contributions will also be considered to reduce AGI for individuals, and pension plans to reduce net profit for corporations, up to 100% of income or profit.
What this does is:
1. reduce debt levels drastically by making debt repayment tax free.
2. encourage employment, and thus, increase demand, which puts us back on an inflationary cycle instead of a deflationary one.
3. provides investment money for small business loans, combined with the government putting other debts than taxes first, to break the lack of investor confidence in such loans.