A Good Stimulus Package

Well, President Obama is in hot water with his party for caving to the Republicans on the extension of the Bush tax cuts. Now Congress is rewriting the bill to try to make it more appealing to both parties.

In the spirit of bipartisanship and cooperation, I’m going to propose a totally different tax package that could provide long-lasting relief from our current economic woes. It would be a two-step program, and I offer it to either party in Congress, though I already know which one would endorse it and which would not.

There is an unknown element in this package; the amount is indeterminate. The reason for this is that nothing we do is static. Any program that effects changes in behavior has that unknown element in it. Change in behavior is what any stimulus is intended to promote, so the cost is solely dependent on how much behavioral change takes place.

Okay, here’s the plan…

Step one: Put a 6-month moratorium on collection of personal income tax from everyone.

You might think that those at the upper end of the income scale should be exempted, but it is impossible to determine what constitutes “the upper end.” A person living in rural mid-America with an income of $100,000 could be considered rich, while a counterpart living in New York City or Los Angeles would justifiably laugh at the notion that they are wealthy.

That is only one of a host of reasons why means testing is silly. Besides, The wealthy people in our society are bigger spenders, and spending is what the stimulus is supposed to stimulate.

There is another reason why we cannot and must not exempt anyone from the tax moratorium. I want everyone to get used to not having any income tax withheld from his or her paycheck. It will make step two easier to enact.

Step two: Repeal the 16th Amendment, and institute the Fairtax.

What politicians in opposition to the Fairtax always fail to tell their constituents is that the 23% add-on to the price of everything you purchase replaces all of the current federal taxes that are levied in over one hundred ways including the dreaded income tax. In Fact, it also replaces the other income taxes that masquerade under the title, “payroll tax.”

Can you even imagine what your paycheck would be if the income tax and payroll tax were not withheld? It could add 30% more to your take home pay, and that in itself would more than compensate you for the 23% increase in prices. But that isn’t the end of it.

The base price of most items would fall. The taxes collected up the line before the product comes to market are also gone, so it will make it less expensive to produce and some of that difference will be passed on to the consumer. Those who have studied the effects of implementation of the Fairtax state that the reduction would be about 22%. If so, the prices should remain about what they are now, even with the 23% Fairtax added on.

Now, there is one more factor in the Fairtax that would come into play. You are currently given a reduction in your income tax liability for personal exemptions and deductions. The Fairtax has a built in “prebate” that compensates everyone for those same exemptions and deductions.

You would receive a check or a direct deposit each month based on the number of people you support. The more dependents, the higher the prebate., so the 23% tax you pay on everything—up to a reasonable minimum amount—would actually be refunded to you even before you pay it. I’ve seen estimates that the minimum monthly payment would be about $500 for a single person with no dependents.

Imagine that! Not only would you have a paycheck with no withholding, but you would also get at least $500 per month from the government. If you have some dependents, it would be considerably more than $500.

What could you possibly use all that extra cash for? Maybe to pay off some of those credit card bills? Or possibly to purchase some of those items you’ve put off buying for lack of funds? You might use it to pay down your mortgage, or to buy that replacement car or bigger house you’ve always wanted.

The fact is this stimulus would do more to help get our economy back on track than all of that prior stimulus money combined.

I know that I’m not the first to suggest a tax cut as a stimulus, but I’ll wager that there aren’t many who have combined it with the opportunity to institute a whole new system of taxation that makes 66,000 pages of the Internal Revenue code obsolete while leveling the playing field so that everyone pays their fair share of tax.