“It is a paradoxical truth that tax rates are too high today and tax revenues are too low, and the soundest way to raise the revenues, in the long run, is to cut the tax rates.” 

– John F. Kennedy (Yes, a Democratic president back in the Camelot days of the early ’60s wanted to slash taxes.)

This week’s Outside the Box will make half of my readers indignant and the other half feel righteously vindicated in their thinking. I have no idea which half you are in. What is so controversial? Who pays taxes and why they should.

Today’s letter was sent to me by reader Tom Bentley. It bears the in-your-face title “Taxes Are Worse Than You Thought.” It’s by Mark J. Perry, whose bio tells us that he’s a scholar at the American Enterprise Institute and a professor of economics and finance at the University of Michigan. So yes, he is a conservative.

The point Mark is trying to make is that the top 1%/5%/10% are already paying the bulk of the income tax. From his viewpoint that is fair, or even more than fair. Although I will point out that he does include a chart which shows that the progressivity of tax rates, which climb relentlessly upward with income, surprisingly fails at incomes of over $10 million. I assume that is because at that point capital gains tax and other tax-incentivized income come into play that is typically not available to those of us with merely mortal incomes.

These statistics come from government data. I’ve seen the same type of data demonstrated before in other venues, so there is not much disputing Perry’s facts. I doubt this piece will make those who feel that “the rich” should pay more change their minds.

What I would point out, in the vein of the philosophy that my dad regularly quoted to me, is that you can’t squeeze blood from a turnip. There is only so much more income tax that we can extract from the top income tier of the country without doing serious damage to the economy. As Tom said in his note to me accompanying the link,

Politicians of all stripes seem to constantly champion middle-class tax cuts, yet it’s the highly progressive nature of our tax code that’s at the root of secular stagnation and social division. If we look at net taxes (after netting out the money we get back in entitlements), 60% of Americana pay zero, 30% pay their proportional (by headcount) share, and the top 10% pay for themselves and for the bottom 60%. No other advanced country has anywhere near that much progressivity because most all other countries have a VAT that spreads taxes more evenly. Democrats oppose a VAT for that very reason, while Republicans oppose it based on slippery-slope reasoning (they think a VAT makes it too easy to raise taxes further, though that makes little sense – why would it be easier to raise a tax that hits most everyone, rather than just impose higher taxes on the top 5%?). Yes, Europeans have a VAT and have very high taxes, but poll after poll shows that Europeans have a far more sympathetic view toward taxation than Americans do (no surprise there, we were founded based on our opposition to taxes). We should not be confusing correlation with causation; it leads to sloppy thinking and terrible policies each and every time.

Mark provides us with some excellent data to look at our tax code for the FUBAR system it really is, including the damage done by its complexity. In a better world, only the top 10% would pay an income tax, and they would file it on a single sheet of paper – add up all income from all sources, no deductions, multiply by the percentage, and write the check. All other federal taxes (except tariffs and excise taxes), including corporate and payroll taxes, would be eliminated, and replaced by a VAT.  The EITC would be invigorated so that those at the lowest income levels got their VAT rebated, to assuage those who get their knickers in a twist about the regressivity of VAT and excise taxes. Prices would go up to reflect the VAT, but the capacity to pay would go up also as payroll taxes are eliminated. A system like this is the economic “ideal”; the boom it would create would be huge and lasting – and it has no chance of happening.

Tom is basically echoing a theme that I’ve been developing for months (which is maybe why I like it): If we really want to reform the tax system, we’re going to have to develop a consumption-based tax, either some form of a VAT or even a carbon-based tax, which is just another consumption tax. The Fair Tax advocates will philosophically agree, although they prefer a direct sales tax, which I think has implementation issues. And as Tom says and I have noted, you could greatly reduce income taxes and get rid of the Social Security tax altogether if you introduced a VAT.

Let me be clear: The next time we have a crisis and Democrats are in control of the White House and Congress (and after almost 50 years of observing political to-ing and fro-ing, I consider that a near certainty), the only alternative will be for the Democrats to introduce and pass some form of a value-added tax, which will not be accompanied by income tax cuts. Income tax cuts for the upper end of the income spectrum is just not on their agenda. They don’t understand the philosophical or economic reasons why that is something that should be done. I’m not asking them to here – that’s a debate for another day. I’m just saying that if Republicans don’t wake up and introduce a VAT in a manner that they can live with, they’re going to have it shoved down their throats in a far more devastating and complicated manner. And that’s a fact, Jack.

If you want real change, dude, you have to make real change. Accept no substitutes. Seriously, the Washington Post tells me the White House is now considering a VAT or carbon tax – interestingly, a few weeks after I wrote my five-part series suggesting the same thing and trashing the border adjustment tax as a guaranteed trigger of a global recession/depression. I find it encouraging that Peter Navarro, Trump’s Director of Trade and Industrial Policy, is apparently being relegated to the sidelines, at least philosophically (which is all I care about – I’m sure he’s is a nice guy, and I wish him all the best personally). I will certainly be glad to sit down and talk with anyone about the logistics and implementation issues around creating a consumption tax that actually, seriously cuts corporate and income taxes, making this country competitive again.

If you want to even have a ghost of a chance of avoiding a recession within the next four years, you’re going to have to have real change. Tinkering with a few points here and there with regard to income tax levels is just not going to cut it. It’s all about incentives. And there are ways to create incentive structures that you can bring Democrats on board with, so it can be a bipartisan initiative. It turned out to be a bad thing that the Democrats shoved healthcare reform down the Republicans’ throats without one Republican vote, and it would be just as bad if Republicans were to shove tax reform down Democrats’ throats without one Democratic vote. We’re all in this together, believe it or not, and we need to figure out a solution that works. And you had better forget about partisan purity if you really want the economy to thrive again.

Yes, I’m a dreamer. Sigh.

But if we don’t achieve something like the dream I’ve outlined, then you’d better hunker down for more slow recovery, followed closely by the Mother of All Recessions. I’m quite serious about that and will be writing about it over the next few weeks. Meaningless “tax reform,” which only messes around at the edges, will not keep us out of the next recession, which will likely be triggered from Europe.

Now, on to better and brighter things. Texas is experiencing one of the finest springs I can remember. We’ve been dining out at night, spending time with friends, and just simply enjoying the atmosphere, which has been awesome. I hope that wherever you are – and with my readership, that means pretty much all over the world –you get to experience a prolonged period of meteorological bliss like the one we have enjoyed the last few weeks and months.