The reason the stimulus packages coming from congress never work is that they don’t address the real problem. In the tradition of Washington big budget busting programs they seek to resolve a problem by throwing money at it. What is needed here is for Washington to leave some money alone.

Charitable Contributions

Charity begins at home, not in Washington. Charitable contributions go down for several reasons. Incomes are down, inflation is up, fuel costs are up, taxes are taking the disposable income, etc. The current tax code encourages some charity by making it a tax write-off up to a certain percentage. I propose an unlimited charity write off. If Joe makes $100,000 this year and gives $100,000 to charity than Joe pays no taxes. If Mary earns $50,000 and gives $25,000 to charity then Mary pays taxes as if she earned $25,000 and if Jean earns a $1,000,000 and gives $1,000 to charity then shame on Jean. oops. Jean Pays taxes as if she earned $999,000. In other words, everyone pays taxes on the money they made after charitable contributions and contributions are subtracted from the persons income for tax purposes.

This will encourage philanthropy across the board but especially among the wealthy. Since Charitable contributions are a hedge against taxes it makes sense to donate. Rather than Raising taxes and thereby discouraging production you effectively encourage the wealthy to help the little guy by making it a tax shelter/advantage.

FIX THE SAVINGS CRISES

One of the biggest problems in this country right now is a lack of savings. We have come to a point of negative savings which means we are spending more than we make on average. Even in the depression Americans managed to save for their future but today we do not.

First lets consider the market. Politicians love to tell us how volatile it is and how dangerous it is to savings. The truth is that, averaged over a 10 year period, the market has always grown. Pick any 10 year period in our history and you will see growth in the market, even during the depression. Second you should look at the history. On average about 100 banks go under every year. That bit of news came directly from the treasury secretary on a national news broadcast. No it’s not a Bush thing it’s a history thing that dates back many decades. In the past 10 years you can count on 1 hand the number of Mutual funds that have gone under. Some have rolled into new management and changed names as managers retired but very few go bust. Banks give you 10-5%intrest or less on your savings and mutual fund returns can average up to 12% or more. We need to quit fear mongering and educate the people on the real risks of the market and the real benefits it has as well.

The second problem on this front is taxes. Money derived from interest and investment returns is called Capital Gains. The current tax on Capital Gains is 15% and many think we should raise it to take money from the rich. Consider this. Money from your savings account interest is a capital gain. when your retirement account grows it is a capital gain. When your CD, Treasury bill, Government bond matures that is a capital gain. If you sell something for more than you paid it is a capital gain regardless of whether it is company stock, collectors coins, comic books or your house. Capital gains effect everyone.

I propose removing the Capital gains tax. First, if people know that they won’t pay taxes on money they make by saving and investing their money they will be a lot more likely to save and invest. This is why municipal bonds grow tax free. It encourages more people to invest in the bonds. The rate of return is lower but by not paying taxes on the increase you effectively increase your return on investment. By eliminating the capital gains tax we can develop 3 major areas of the economy.

1) Housing will make a comeback. If people know that they will not pay taxes on the difference between what they paid for the property and what they sold it for they will not only be more likely to buy they will be more likely to invest in improvements to the property that bring up its value.

2) Savings will make a comeback. If people can make money from interest tax free they have a big incentive to save and or invest in the market. Their money grows tax free and they insure their future and retirement. College funds can grow without penalty and retirement accounts become simplified. We currently limit the amount you can put in retirement accounts and it only defers the tax burden until you take it out. You pay no taxes on the money put in your retirement investments but it is taxed at regular income rates when you take it out at retirement. Without a capital gains tax you can save as much as you want for retirement. Like the Roth IRA you pay taxes on the income you receive before it goes into the account but you will never pay taxes on the money again. The interest/return on investment is tax free whether you put it in a savings account at 2%, a CD at 6% or a mutual fund at 12%. Your money can work for you without taxes.

3) Business will boom and bailouts will no longer be necessary. Investment capital to make business grow is currently taxed on the basis of Capital Gains. If investment growth is tax free there is much more incentive to invest. Imagine all those “greedy rich folks” bailing out wall street in search of tax free profit instead of bureaucrats taxing everyone to bail them out.

Taxes are sucking the life out of our paychecks. It’s rare to pay less in withholding than you will owe at the end of the year and the reporting standards make it nearly impossible to set your withholding to a level where you won’t be owed a return without potential fraud charges. Even the kid making minimum wage is paying taxes and without an accountant your unlikely to get a return as big as you should.

Lets start by removing withholding from any job under say $25,000 per year or $12/hour and adjust those number upward each year for inflation with the base number at 2009. I'm not certain where the actual cut-off is where you don’t have to pay taxes under “X” income but $25,000 seems reasonable. I’d be willing to go as low as $18,000 which is around the amount it actually costs to live in reasonable conditions without assistance but by setting that bar a little higher we encourage those on the bottom rung to improve their situation by giving them room to make a living and do some saving and even give a decent amount to charity before they reach the taxable income level.

The fact is that most of “the rich” would love to see everyone prosper and very few would object to setting this level since it would improve the spending and investing power of the lower and lower middle income brackets.

Next let’s set a flat tax. The more you make the more you will pay because everyone pays the same percentage and loopholes are eliminated except for charity. Obviously there will still be business write-offs it’s a matter of profit and loss. I make $500,000 in sales but spend $300,000 on product and $100,00 on the expenses of licensing, store rent, utilities and the like my actual income is only $100,000 and that’s all I should pay taxes on. If I give $20,000 to charity then I should pay taxes on $80,000. Since we set the base living expenses at $25,000 I only pay taxes on $55,000.

For employees the boss won’t take any taxes from your paycheck until you reach $25,000 in income and you will only pay taxes on the money over that amount. If you made $26,000 dollars for the year then you only pay taxes on $1,000. Of course, those who gain income from multiple jobs may go over the $25,000 limit for the year without exceeding it at any job. These folks will not have paid withholding so they will owe the IRS a check. on the other hand we’ve eliminated the tax burden on investments and savings so They have an incentive to save money against that possibility since it gains interest tax free and there are no penalties for withdrawal like there are with retirement accounts.

The Coup De Gras

In order to encourage savings investment and market growth we can establish a tax incentive for qualified savings plans. In this way we can encourage the continued use of retirement savings such as 401k, IRA, and certain annuities. Since these plans incur a penalty for early withdrawal and are designed to provide secure retirements or college savings we can encourage savings by giving a tax benefit. Say I put $2,000 a year in a qualified program and I can get a write off for 10% that means I can take $200 off the taxable amount of my income. With the options available for retirement savings a single wage earner might not reach taxable income until nearly $30,000/year further encouraging them to be productive and reducing the burden on taxpayers to take care of them. Adjusting welfare benefits so that they count towards the total income and are reduced as the person reaches the $25k mark would further encourage people to work without fear of benefits disappearing before they are ready to take care of themselves. Furthermore I would place the cutoff for savings at no less than $12,500 and maybe as high as $25k. this would encourage savings in welfare recipients to better their positions and move them towards getting off welfare and being independently productive. By allowing a higher amount of savings we allow them to build an emergency fund to take care of unexpected expenses and prepare them for the responsibilities and needs of living off welfare.

Conclusion

By addressing the problems the country actually faces and encouraging self correction through tax incentives the government can greatly increase it’s effectiveness in growing the economy.

Government redistribution is not charity it is theft as it uses force to take your money and give it to another. Furthermore it is highly inefficient. The accountants are paid to minimize the burden, the IRS is paid to collect the money, The government is paid to run everything and transfer money from IRS to departments. The Feds are paid to transfer money to the state, the state is paid to distribute the money and more often than not they pay private companies to handle things like debit cards used for distribution.

Take the same money given to a church or other charity, often the workers are volunteer but even when they are not they cost very little. The money goes from giver to worker to recipient skipping 3-5 expensive layers of bureaucracy.

Business depends upon investment and investments will grow along with corresponding business growth if people have a good reason to invest. Minimizing the burden of taxation not only frees capital to grow the economy but it also allows greater opportunity for the lower income brackets.

Finally there is one simple and undeniable truth. Lowering taxes increases Revenue to the federal government allowing them more cash flow to deal with more programs. The proof is Historic. Eisenhower, Kennedy, Nixon, Reagan, and G W Bush all cut taxes with a corresponding increase in government revenues and market gains. This fact alone is sufficient reason to cut taxes rather than raising them.