Thursday, February 18, 2010

Blue Print to Sustained Growth and Job Creation

At the Federal and State level we are hearing the phrases "job creation" and "job growth" being tossed around. Thus far the bills tied to either phrase are increasing the debt load of the Federal or State government to only create temporary work. My son was working on Social Studies the other night. The topics were the Soviet Union, Lenin, Stalin, Communism and the Cold War. The book noted how class warfare led to the fall of the Czar and the rise of Lenin. People of Russia embraced Communism because it took control of the farms and factories and gave the people (lower and upper class) an equal share of the output. In theory the ideals of Communism work in so far as people will be no better or worse than any other member of society. The trouble, as the Russians soon discovered, is that the focus is placed to heavily on durable goods while consumer goods are ignored. Plus, with output being evenly distributed the need for excessive output (growth) was not required.

A lot of discussion is taking place on how to get America back to work. President Obama is using the old adage of Big Government, increase spending, and the expansion of entitlement programs to accomplish this. The result has been an unemployment rate that rose above 10%. Even though the unemployment rate has trended down in recent months, do not be fooled by the trend as it is merely an illusion of facts. While the unemployment rate has dropped below 10% the number of part-time and/or disenfranchised (those no longer counted as unemployed) workers has increased to heights not seen before. A friend of mine reminded me that consumerism is the key to a robust economy and sustained recovery. To counter the lack of new job creation, President Obama wants to give small business tax-credits for hiring new workers.

On the surface that is great news for the small business owner but when we dive deeper bigger questions are raised for the small business owner. What will these new workers do? How do I pay their salary in the future if business doesn't pick up? How will additional workers increase traffic for my wares? All valid questions, ones those Ivy League educated politicians seem to not address. Many have touted Obama the most intelligent of all Presidents even if he cannot read from a teleprompter all the time. Remember the last Bush we had was from an Ivy League school too. Now I was not as highly educated, true I do have my MBA but it is not from Harvard or Yale, as the recent men to hold the office of President but I do have a solid education in business, economics, history, philosophy and ethics.

Now, if the catalyst to a robust economy is consumerism then who is it that should be spending money? You and I is who. How do we get more money to spend, legally? We need to have more of our money we earn available to use on discretionary spending. Outside of a raise or lowering our debt, how can we increase our discretionary spending? Rather, how can government help us increase our discretionary funds? Simple, they can lower our taxes.

The trouble is that in a few years when the economy gets going again, the government will want to collect more because they believe it will not harm the economy. That is where the logic falls short. To sustain our robust economy the consumer still has to be able to consume. To ensure we can consume we need to alter our view on taxation. Taxation is a necessary evil to run our government, to keep us safe, and to protect our freedoms. That being said, does it make sense to tax someone more because they have bettered themselves financially through whatever legal means they have, no! A person seeking the American dream ought not to be punished for being successful; rather they should be rewarded for their efforts. At the same time should someone be punished by a rough start to life or a raw deal along the way, no!

So how do we allow both parties pursue their dreams without hindering them or taking away from their efforts? Simple actually, we trash the current tax code and replace it with a flat tax and consumption tax. The consumption tax is simple. We tax every purchase of non-essential items 2%. Now to help with a little social engineering I am open to additional "sin" tax on non-essential items of 3%. That takes care of the consumption tax. The flat tax works like this.

On your first $60,000 you get taxed nothing. For every dollar you make past $60,000, Uncle Sam gets $0.12. So if you made $70,000 this year that would mean that Uncle Sam would get $1200. To make it even easier to monitor, track and control all tax credits would be eliminated. Meaning, that no more credits for mortgage interest, child care, child, education, etc… It would also eliminate a large portion of the IRS as tax returns would be a thing of the past. With no tax credits allowed and a flat tax in place, no one would have to file a tax return. The concept can be applied to Corporations as well. By allowing people to keep all of their first $60,000 we open up the consumer market for health care expense, investment activity, luxury consumption and other desires of consumerism too.

States then can do the same as well. The State, such as Minnesota, can follow suit by establishing a flat tax of 5%. To expand upon the example above, the person making $70,000 would now see their total tax liability to both Federal and State rise to $1700. With the elimination of tax credits so would we phase out Medicare and Medicaid. Those turning 55 or already older than 55 this year (or the year the tax change takes place) will continue along the Medicare and Medicaid process. The rest of us will see our contributions to these programs shift to a Medical Savings account (MSA) that will be tied to our Social Security Number. The amount currently taken out would not need to be changed. It simply will go into a private account that the individual taxpayer can use to offset any expense related to medical needs.

The taxpayer could use the funds for co-pays, medicines, clinic visits, hospital visits, etc. By moving toward a MSA it will allow for greater portability of health care "insurance" and allow the taxpayer to dictate when, where and to whom their medical dollars go to. Imagine the competition it would breed among clinics, hospitals, pharmacies, and other medical facilities if ever they knew every taxpayer determined where their dollars were spent. All of these locations would need to post their fee schedules and will allow doctors and nurses to get back to providing medical care and away from administrative work. Insurance companies will be able to offer tiered plans.

Granted many of those in their late 30's to earlier 50's will not see the greatest benefit but we will set up future generations with a better system for medical as well as taxation. The next phase of this plan is to apply the MSA model to Social Security. When Social Security was crafted the funds collected went into a separate account that Congress was unable to touch. At some point in our glorious history our Congress saw the war chest of dollars being amassed. The temptation was too great for them and a change was approved. The change brought the Social Security funds from a separate untouchable account to the general slush fund. To eliminate or mitigate future destruction and temptation of Social Security funds by our politicians it is time to move it back into a separate account. Just as with the MSA, our own Social Security contributions will be designated by an account with our SSN.

No longer will Congress or any government agency have access to those funds. Taxpayers will have access to those funds just as they have access to them now. All that will change will be the account in which the funds sit. I understand there will be growing pains with this notion but that is what the original intent of Social Security was to be anyway. All I am suggesting is to undo the harm that we have allowed Congress to do over the years. Some of you may be asking yourself, "How will this create jobs?" That is an excellent question to ponder.

The best part is the answer is short and simple. By allowing you, as a taxpayer, to keep more of your first $60,000 earned you will have more money to improve your home, go to the local restaurant, purchase new consumer items, take an trip, etc…Plus if you know that taxes will no longer change one can plan their money better. By fixing the taxation it will allow our members of Congress and State Legislatures to focus on items that a critical to keeping their oaths to the United Sates Constitution and State Constitution they serve under. The switch from Medicare and Medicaid to a MSA will bring down costs through increased competition thus making health coverage affordable to all taxpayers. Combine these: the flat tax, consumption tax, and the MSA with an accounting switch on Social Security and we have a financial core that will be the envy of the World while ensuring the safety, prosperity and advancement of those living in the United States now and in the future.