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107 – It’s safe to say everyone thinks America’s tax system needs some adjusting, but where should we begin?
In this episode, Jeremy Keil discusses economist Dr. Laurence Kotlikoff’s professional opinion on fixing America’s tax code. He explains how inflation causes Americans to pay more in taxes, elaborates on why taxing consumption instead of income could be the solution and dives into the debate about how much of our money the government should have.
- What economist Dr. Laurence Kotlikoff believes is the number one problem with the American tax code
- How inflation causes Americans to pay more in taxes
- Why America should tax consumption, not income
- How much tax is too much tax
- And more
How To Fix America: Our Tax System
Tax Consumption, Not Income
We asked Dr. Laurence Kotlikoff, one of the top 25 economists in the world, what he thinks the top problem with the American tax code is and how he would change it.
Dr. Kotlikoff would like a consumption tax to replace the federal and corporate income tax.
He suggests we should tax consumption on a progressive basis. His top three recommendations are:
- A federal retail tax.
- Value-added tax.
- Exempting the first $40,000 of earnings in the payroll tax.
Doing so would lower the burden on workers and increase the load on the wealthier individuals who can afford to purchase more items. This conversion would essentially stop taxing people so much for basic living costs and raise the taxes on luxury expenses – purchases made for comfort rather than need.
It also stops taxing people on what they contribute to the economy through working and investments, but instead taxes them on what they take out of the economy through buying goods and services.
And it should stop the tax ‘shell game’ that wealthy individuals can play by shifting around their income. If they want to buy things – they pay the taxes on ‘consumption!’
Adjusting The Tax System For Inflation
Taxing consumption instead of income may be a long shot. It would mean radically reforming the tax system. For our immediate needs, Dr. Kotlikoff suggests we focus on adjusting the tax system for inflation.
He says, “We need to fully index the system so that people are not taxed on nominal capital gains.” That’s a fancy way of saying that if you bought something for $100, and now it’s worth $110 because of inflation you would have to pay taxes on that $10 gain.
A full indexation of the tax system can solve the problem to avoid increasing taxes just because inflation is driving prices up.
What do we do if we cannot fully index the system? In that case, we could tax only the actual interest income on inflation-indexed bonds (like Series I Savings Bonds) as opposed to the nominal/total income. Since the elderly and retirement plans own a disproportionate amount of these types of bonds this could help ease the tax burden on retirees.
How Much Tax Is Too Much Tax
There is another debate about how much the government should have of our money.
Some people think we need lower taxes to help the economy and grow some businesses. Others believe we need higher taxes for those with more money.
The federal reserve has tracked taxes collected by the government from the economy for 80 years. Whether the taxes are high or low, 15% to 18% of the economy goes to the federal government as taxes.
When the government starts getting above or close to 18% of the economy in taxes, the economy starts slowing down, creating fewer taxes to collect. When that number gets too low, close to or lower than 15% of the economy in taxes, the economy heats up and generates more taxes to collect because more activity is happening.
Dr. Kotlikoff points out that it doesn’t matter if we fight over low or high taxes because if the taxes become high, we all try to find ways to defer taxes, and because of that, the tax rate doesn’t matter to the government because it seems to even out over time.
Over the past eight decades, the American government has collected up to 18% in taxes. No matter what political party leads the country or how high or low taxes are. Everyone getting an exception to their tax situation makes everyone lose, so we need to make tax rates fair and easy for everyone.
To learn more about how America’s tax system could be fixed, check out the resources below!
If you have any questions, feel free to contact us using the contact information provided below!
- FRED: Federal Receipts as Percent of Gross Domestic Product
- Dr. Laurence Kotlikoff: Kotlikoff.net
- 101 – An Economist’s Secrets to More Money, Less Risk, and a Better Life With Dr. Laurence Kotlikoff
- 106 – How To Fix America: Healthcare With Daniel Sem
- Free Retirement Planning Video Course: 5stepretirementplan.com
- 3 Things You Should Know Before Choosing A Financial Advisor
- 7 Questions That Could Make or Break Your Retirement
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