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Professor Kotlikoff agrees with President Bush's tax reform

 
 
Reply Mon 11 Oct, 2004 07:30 am
By: Laurence J. Kotlikoff

Chairman, Department of Economics

Boston University

Co-Author, The Coming Generational Storm

October 7, 2004

750 Words

Getting to Yes on a National Sales Tax and Social Security Reform

With Iraq on the front burner, domestic policy is getting short shrift in the presidential campaign. Two issues ‑ the tax system and Social Security - deserve much more attention. Notwithstanding recent tax cuts, our tax system places a huge burden on middle-class Americans, reducing not just their take-home pay, but also their incentives to work and save. And Social Security is a walking time bomb with no obvious means, apart from highly regressive payroll tax hikes, of covering two fifths of its future benefit commitments.

To his credit, the President addressed tax and Social Security reform, albeit briefly and separately, in recent weeks. He indicated that a national retail sales tax is worth exploring and suggested letting workers invest some of their Social Security taxes in private accounts.

Senator Kerry objected. A sales tax, he said, would raise the tax burden on the middle class. And privatizing Social Security would leave the elderly's retirements subject to volatile financial returns. As a student of the tax and Social Security systems, I see where Senator Kerry is coming from. But I also see a way to combine both reforms to meet his concerns.

The three-part plan, which has been endorsed by over 150 top U.S. academic economists, is entitled the Personal Security System (PSS). Part 1 replaces Social Security's payroll tax with a federal retail sales tax. Part 2 eliminates any further Social Security benefit accrual, paying (with the sales tax receipts) only the benefits now owed current retirees and current workers. Part 3 sets up an individual account system, but one Democrats as well as Republicans can support.

John Kerry should love part 1. The payroll tax is highly regressive. It taxes only wages, and only up to $87,900. For Bill Gates, who makes $87,900 in minutes, payroll taxes are a pittance. But with a retail sales tax, Gates would pay taxes on every dollar he earns, as well as on his entire $61 billion in wealth, the minute he spends these funds.

Mathematically speaking, a retail sales tax is equivalent to taxing all wages plus all wealth because both are ultimately spent on goods and services. Hence, replacing the payroll tax with a sales tax is the same as a) eliminating the payroll tax ceiling, b) taxing wealth at the payroll tax rate, and c) taking advantage of the expanded tax base to lower the payroll tax rate. What more could a Democrat want?

But what if Gates saves his earnings and his wealth and spends it later? This delays, but doesn't reduce, his tax payments since the interest earned on this saving is also taxed when spent. What if Gates gives his money to his kids? Again, there's no tax avoidance; the kids pay the tax when they spend the gifts or inheritance.

How about the elderly who live off Social Security? Won't they be hurt by having to pay higher sales taxes at the store? No, because their Social Security benefits are adjusted annually for price increases, including those arising from higher sales taxes. The same would hold for other transfer recipients were their benefits adjusted for inflation. Congress could go even further and rebate all sales taxes up to the poverty level.

Part 2 phases out the existing Social Security system, which served us well for decades, but is well past its prime. Why keep in place a retirement system with 2,528 rules that no one understands, that discriminates against working women, that redistributes income capriciously, that is two-fifths underfunded, and that requires highly regressive payroll tax hikes to sustain?

Part 3 replaces the current Social Security system with a fully funded modern alternative. Specifically, the contributions workers formerly made to Social Security are split 50-50 between spouses and invested in individual accounts. The government provides matching contributions for low earners. All account balances are invested in a single global market-weighted index fund, providing all workers the same fully diversified portfolio and rate of return. The government fully guarantees the downside; workers can only gain from investing in the market. At retirement, PSS balances are gradually sold off and converted to inflation-indexed pensions. The Social Security Administration handles all paper work, investing, and pension conversions. Wall Street plays no role and collects no fees.

This plan gives Democrats and Republicans most of what they seek via tax and Social Security reform and provides a great boost to the economy. Most important, it gives our children a transparent, efficient, and equitable retirement system that won't drive them broke.

The Fair Tax Act, HR 25, is the FINAL SOLUTION to our tax problems.

See the Fair Tax at: www.fairtax.org

Then go to: www.congress.org and tell your congressmen that you want the Fair Tax Act, HR 25, passed into law ASAP!!!!
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Type: Discussion • Score: 1 • Views: 2,377 • Replies: 21
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blueveinedthrobber
 
  1  
Reply Mon 11 Oct, 2004 07:42 am
anytime I hear this administration and FINAL SOLUTION mentioned together it makes me nervous.....
0 Replies
 
joefromchicago
 
  1  
Reply Mon 11 Oct, 2004 08:24 am
Re: Professor Kotlikoff agrees with President Bush's tax ref
Just a few comments:

I don't know why this thread is called "Professor Kotlikoff agrees with President Bush's tax reform." Bush has said that, at most, he wants to investigate a national sales tax. That's hardly a ringing endorsement of the plan that Kotlikoff is proposing.

Prof. Kotlikoff wrote:
John Kerry should love part 1. The payroll tax is highly regressive. It taxes only wages, and only up to $87,900. For Bill Gates, who makes $87,900 in minutes, payroll taxes are a pittance. But with a retail sales tax, Gates would pay taxes on every dollar he earns, as well as on his entire $61 billion in wealth, the minute he spends these funds.

Bill Gates doesn't spend $61 billion; he spends a tiny fraction of that amount. Instead, he invests most of that money. And the income from these investments would not, presumably, be subject to sales tax.

Prof. Kotlikoff wrote:
Mathematically speaking, a retail sales tax is equivalent to taxing all wages plus all wealth because both are ultimately spent on goods and services.

Mathematically speaking, that's just plain wrong. All wealth is not ultimately spent on goods and services. Moreover, the percentage of one's wealth spent annually on goods and services is inversely proportionate to the amount of wealth one possesses: i.e. the poorer one is, the more one spends as a percentage of one's wealth. In simpler terms, a sales tax is a regressive tax, not a progressive one.
0 Replies
 
FreeDuck
 
  1  
Reply Mon 11 Oct, 2004 09:21 am
It's an interesting idea, but it isn't Bush's idea.
0 Replies
 
chugalugalug
 
  1  
Reply Mon 11 Oct, 2004 12:56 pm
A WORD OF WISDOM from one of our FOUNDING FATHERS.......

It is a signal advantage of taxes on articles of consumption, that they
contain in their own nature a security against excess. They prescribe
their own limit; which cannot be exceeded without defeating the end
proposed, that is, an extension of the revenue. When applied to this
object, the saying is as just as it is witty, that, "in political arithmetic, two and two do not always make four." If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds. This forms a complete barrier against any material oppression of the citizens by taxes of this class, and is itself a natural limitation of the power of imposing them.

Alexander Hamilton, Federalist Paper #21
0 Replies
 
cicerone imposter
 
  1  
Reply Mon 11 Oct, 2004 01:38 pm
One only needs to follow Bush's rhetoric against what he actually did to know there's absolutely no confidence is his rhetoric. Only the likes of a gullable professor doesn't understand logic.
0 Replies
 
Cycloptichorn
 
  1  
Reply Mon 11 Oct, 2004 02:05 pm
A Bush appointee agreeing with Bush? <GASP>

Cycloptichorn
0 Replies
 
cicerone imposter
 
  1  
Reply Mon 11 Oct, 2004 02:07 pm
Appointeee? Now, that explains everything. Most of the business profs from MIT and Harvard (over 160 of them) said Bush is the worst president to our economy.
0 Replies
 
padmasambava
 
  1  
Reply Mon 11 Oct, 2004 04:55 pm
M.I.T? Harvard?

What are those places?

Socialist camps!

It is amazing that GW Bush bought hisself a degree from one of those pinko institutions.
0 Replies
 
cicerone imposter
 
  1  
Reply Mon 11 Oct, 2004 04:57 pm
HIs daddy paid for GWs degree from both Yale and Harvard.
0 Replies
 
chugalugalug
 
  1  
Reply Mon 18 Oct, 2004 10:28 am
Here's a very COMMON MISCONCEPTION:

I have talked to a few people about the Fair Tax and when I
mention the taxes embedded in products that will go away, thus
reducing the prices of products, I hear things like, "Yeah, right.
Their taxes may go down but there's no way companies will pass the
savings on to the consumer who is already used to paying the higher
price."


In a market where there is no barrier to entry, when a firm or a
group of firms make a [economic] profit that goes beyond the normal
operating cost (normal profit which includes salaries, dividends,
etc.), it creates incentive for other firms to enter the market.

All things being equal, the demand for the product being constant,
larger the number of new firms entering the market, lower the prices
that can be charged by the new firms (assuming no product
differentiation). If the newer firms are offering less for the same
product, older firms already in the market need to lower their
prices accordingly or it will lose market share.

One more thing ---- price gouging is actually a positive thing since
it creates stimulus for other firms to enter the market to take
advantage of the large profit (price gouging). But larger the
number of new firms entering the market, lower the long term prices,
and larger the supply.

People who doesn't understand economics think that price gouging in
vaccines or oil was wrong, when in fact, that was the best thing to
happen because if it was allowed to continue, supply would have
increased.

Here's a simple intuitive example. Suppose there was a disaster
which destroyed all the electrical circuits in your area, and
there's only one electrician in town. There would be large demand
for his services, which would drive his hourly wages up. If the
incident was isolated to this particular area and electricians in
other town realized that they could make several times more offering
services at one-electrician-only town, they would start offering
services there (from nearby town), driving up the supply of
available electricians. In the long term, prices would drop and
equalize at normal equilibrium.
0 Replies
 
Cycloptichorn
 
  1  
Reply Mon 18 Oct, 2004 10:31 am
THREE Threads now!!!

Stop posting this crap to every thread!!

Cycloptichorn
0 Replies
 
JustWonders
 
  1  
Reply Mon 18 Oct, 2004 10:50 am
Is posting in multiple threads against A2K rules, Cycloptichorn? Or, merely an irritant? Kinda like this?

http://www.able2know.com/forums/viewtopic.php?p=959591#959591

http://www.able2know.com/forums/viewtopic.php?p=959587#959587

http://www.able2know.com/forums/viewtopic.php?p=959586#959586

http://www.able2know.com/forums/viewtopic.php?p=959585#959585

http://www.able2know.com/forums/viewtopic.php?p=959583#959583

http://www.able2know.com/forums/viewtopic.php?p=959582#959582
0 Replies
 
Cycloptichorn
 
  1  
Reply Mon 18 Oct, 2004 10:54 am
I don't think it's against the rules, just stupid.

Also, not posting links or attributing = plagarism...

But, in a move reminiscent of your political leaders, you've done a great job trying to defend one person's actions by pointing at what someone else has done wrong. It doesn't work for them, it won't work for you, buddy....

Cycloptichorn
0 Replies
 
JustWonders
 
  1  
Reply Mon 18 Oct, 2004 11:02 am
So it is an irritant to you. But....only if certain people do it. Smile Smile Smile
0 Replies
 
Cycloptichorn
 
  1  
Reply Mon 18 Oct, 2004 11:04 am
It's an irritant when ANYONE does it.

I only wrote about it in this case b/c I happened to see him post the three almost real-time.

Not everything is a partisan issue, you know. Sheesh.

Cycloptichorn
0 Replies
 
McGentrix
 
  1  
Reply Mon 18 Oct, 2004 11:15 am
Cycloptichorn wrote:
I don't think it's against the rules, just stupid.

Also, not posting links or attributing = plagarism...

But, in a move reminiscent of your political leaders, you've done a great job trying to defend one person's actions by pointing at what someone else has done wrong. It doesn't work for them, it won't work for you, buddy....

Cycloptichorn


Shocked

This is an all time favorite liberal move! Whenever anyone dares criticize Kerry or any Dem leader type, all we hear is how awful Bush is. No one can defend Kerry because he is indefensible. Therefore the only tactic left is to attack his opponent.

Trying to say this is a conservative trick is hardly truthful Cycloptichorn.
0 Replies
 
McGentrix
 
  1  
Reply Mon 18 Oct, 2004 11:17 am


Very Happy Very Happy Thanks for pointing that out JW, I did similar on a seperate thread.

Laughing
0 Replies
 
chugalugalug
 
  1  
Reply Thu 21 Oct, 2004 12:05 pm
Read these articles:

http://www.fortwayne.com/mld/journalgazette/news/editorial/9966136.htm

http://www.columbiatribune.com/2004/Oct/20041019News007.asp



http://www.heritage.org/Research/Taxes/bg1808.cfm



http://www.lincolncourier.com/news/04/10/18/a.asp



http://www.orlandosentinel.com/news/elections/orl-locmaxwell19101904oct19,0,6583698.column?coll=orl-home-headlines



http://www.denverpost.com/Stories/0,1413,36~150~2476629,00.html



http://www.pantagraph.com/stories/101904/opi_20041019001.shtml



http://springfield.news-leader.com/news/today/1019-Collaborat-204882.html



http://www.2theadvocate.com/stories/101904/new_national001.shtml



http://www.fortmorgantimes.com/Stories/0,1413,164~8312~2476557,00.html



http://www.northfulton.com/DisplayArticle.asp?ID=%7BCCD78D45-D677-4EEA-951C-75028921DF98%7D



http://www.swtimes.com/archive/2004/October/17/opinion/sat_letters.html



http://www.thestate.com/mld/thestate/news/special_packages/election2004/9951929.htm



http://www.burlingtonfreepress.com/specialnews/election/119.htm



http://www.thecentralgeorgian.com/politics006.html



http://www.nbc5i.com/politics/3829370/detail.html



http://www.whig.com/286442958888713.php



http://www.aiada.org/article.asp?id=25450&cat=Politics



http://www.kansas.com/mld/kansas/news/special_packages/election2004/9949926.htm



http://www.thestate.com/mld/thestate/9946864.htm



http://www.myrtlebeachonline.com/mld/myrtlebeachonline/9947530.htm



http://washingtontimes.com/national/20041018-124849-5560r.htm



http://www.starbanner.com/apps/pbcs.dll/article?AID=/20041017/ZNYT01/410170303/1009/BUSINESS



http://www.washingtonpost.com/wp-dyn/articles/A40620-2004Oct17.html



http://www.wjla.com/news/stories/1004/181071.html



http://www.wjla.com/news/stories/1004/181071.html



http://www.citizen-times.com/cache/article/editorial/63390.shtml



http://www.timesdispatch.com/servlet/Satellite?pagename=RTD/MGArticle/RTD_BasicArticle&c=MGArticle&cid=1031778576301



http://www.2theadvocate.com/stories/101604/new_standout001.shtml



http://www.townhall.com/columnists/robertnovak/rn20041016.shtml



http://www.startribune.com/stories/587/5035563.html



http://www.thetandd.com/articles/2004/10/15/news/doc41707ebf59f2b427704385.txt



http://www.nationalreview.com/nrof_comment/gessing200410150832.asp



http://www.fox21.com/Global/story.asp?S=2429734&nav=2KPpRzbZ
0 Replies
 
McGentrix
 
  1  
Reply Thu 21 Oct, 2004 12:06 pm
AAAHH! STOP IT!!! Evil or Very Mad
0 Replies
 
 

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