Here is a proposed federal law that would simplify the federal tax code, close unfair loopholes, and significantly increase economic prosperity in the United States.
Tax The Takers More Than The Makers
Wall Street financial firms and similar "taker" businesses avoid paying their fair share of taxes, while small "maker" businesses – such as family-owned restaurants and small software companies – struggle under a burden of excessively high taxes. This occurs because large "taker" corporations donate huge amounts of money to election campaigns, and in return they have received tax loopholes. In contrast, small hard-working businesses stay out of politics and barely survive under the burden of tax rates that were intended for the large "taker" corporations.
We can eliminate business-tax loopholes and simplify the tax code by taxing "taker" businesses at higher tax rates compared to lower tax rates for "maker" businesses, and then removing all subsidies and tax credits and other adjustments from business taxes. (This proposal does not request any change for taxes on individuals.)
The core of this proposal is to categorize business activities using the following categories that begin at the top with "farming" and "maker" business activities, which will be taxed at the lowest tax rates, and ends with "taker" business activities, which will pay the highest tax rates. In-between categories will be taxed at in-between tax rates.
- Farming, which includes: farming (except tobacco), and ranching
- Making, which includes: manufacturing (physical, mechanical, chemical, pharmaceutical, electrical, electronic, apparel, textiles/fabrics, etc.), inventing, cooking, baking, brewing, creating audience-focused entertainment (books, music, movies, stage shows, spectator sports, etc.), creating educational content, writing software, engineering, research (pharmaceutical, chemical, high-tech, etc.), power generation, oil refining, and water treatment
- Teaching, which includes: teaching, educating, and training (except as otherwise categorized, such as marketing and giving legal advice)
- Maintenance and health care, which includes: maintenance (mechanical, electronic, etc.), upgrading, facilities support, physical measurement, sewage treatment, medical services by medical personnel, hospital patient services (excluding administrative services), dentistry, and chiropractic services
- Communication and packaging and transportation and storage, which includes: television and radio and multimedia transmission and distribution, telecommunications (telephone and Internet services), data processing, administrative services, quality control, copying and duplicating, publishing (except content creation), canning, meat packing, waste management, shipping, hauling, driving, piloting, hospitality (hotels and motels), equipment rental, natural gas transportation and distribution, warehousing, and retail
- Sales, which includes: marketing, sales, and advertising
- Taking, which includes: banking, managing financial assets, managing a business in another category, commodity trading, stock-market trading, providing insurance (home, life, health, auto, and business), providing legal services (as done by attorneys, lawyers, paralegals, and legal assistants), payday loaning, real estate development, land development, timber cutting, fishing, hunting, trapping, mining, oil drilling, natural gas extraction, hazardous waste disposal, gaming (casinos), and tobacco farming
"Taker" business activities weaken the economy of the United States in these ways.
- "Taker" business activities shift the ownership of property that already exists, which does not increase the net value of what exists in the United States. Specifically, "taker" business activities yield a financial gain only by taking money or property away from someone else. As a consequence, "taker" business activities fail to grow the US economy in ways that involve attracting money from customers outside the United States. The "taker" businesses that do attract foreign money involve a loss of natural resources.
- "Taker" business activities often involve litigation and require government regulation, which wastes taxpayers' money and shifts resources away from wealth-increasing activities. For example, insurance companies often use jury-duty trials to decide whether or not the insurance company should pay an insurance claim.
- "Taker" business activities require skills that are relatively easy to learn. This lower learning threshold is demonstrated by the fact that machinery and computer software are used to automate many "taker" tasks. The reduced importance of quality in most "taker"-based products, and the lack of brand allegiance also demonstrate the lower learning threshold.
In contrast, "maker" business activities strengthen the US economy in these ways.
- "Maker" business activities create things of value that previously did not exist, which dramatically increases the net value of what exists in the United States. As a consequence, these activities significantly grow the US economy by directly or indirectly attracting money from customers outside the United States.
- "Maker" business activities do not involve as much regulation or litigation (compared to "taker" business activities), which dramatically reduces the cost of government and, in turn, reduces the taxation burden.
- "Maker" business activities require skills that are challenging to learn. This higher learning threshold is demonstrated by the enthusiasm of customers wanting to pay for what these businesses create, the brand appeal of successful "maker" businesses, and the need for people to perform tasks that are difficult to automate.
Initially the tax rates between "taker" and "maker" business activities will be small so that businesses and the Internal Revenue Service have time to adjust their accounting procedures to accommodate businesses (especially General Electric) that fit into multiple taker-versus-maker categories. (Existing information can be used to calculate an effective tax rate for a business that has business activities in multiple categories.)
Over a period of fifteen years the difference between the taker-versus-maker tax rates will grow, and at the same time all business tax deductions (not including expense deductions) will be reduced from 100% (full deduction) to 0% (no deduction), after which all such business tax deductions will be removed from the tax code.
The only exceptions to this revised tax structure will be adjustments that are regarded as important for the purpose of maintaining a strong military, and for the purpose of protecting the environment for future generations.
Besides simplifying the tax code and eliminating business-tax loopholes, the taker-versus-maker tax-rate difference will dramatically strengthen the economy of the United States in the following ways.
- "Maker" businesses, especially entrepreneurial ventures, can create jobs for unemployed and underemployed professionals as a result of retaining more of their income.
- Many (but not all) of the jobs in "maker" businesses that were transferred to foreign countries to avoid excessively high business taxes can be moved back to the United States.
- Businesses will be motivated to decrease their tax rate by increasing "maker" business activities – which strengthen the economy – and by decreasing "taker" business activities – which weaken the economy.
- Investors will favor buying the stocks of "maker" businesses because of their lower tax rate and the resulting higher business income. This change will make financial capital more readily available to wealth-creating "maker" businesses than to wealth-destroying "taker" businesses.
- "Taker" businesses tend to require more government resources, such as for regulation and scrutiny and enforcement, and they will pay more taxes to compensate for using more government resources. This change will lift the currently oppressive tax burden from "maker" businesses.
- Individuals will be attracted to "maker" professions where they can take pride in being recognized for their valuable contributions. In contrast, high-income "taker" professions will lose some of their excessive prestige. For example, doctors will gain prestige, and lawyers will lose prestige, which matches the value of the work they do.
- All businesses will waste less time on the accounting and legal activities that arise from now having excessively complicated business-taxation laws.
After the taker-versus-maker tax reform has been fully implemented, there will be less taxation on the exchange between a manufacturing business that buys computer software from a software business that, in turn, buys products made by the manufacturing business. In contrast, there will be higher taxes on the exchange between an insurance company that pays for legal work from a law firm that, in turn, buys its insurance from the insurance company. The lower tax rate reflects both the fact that a manufacturing business and a software company create things of value that previously did not exist, and the fact that both businesses sell their products to other customers. In contrast, the higher tax rate reflects both the fact that the work done by an insurance company and a law firm involve processing data and documents just for the purpose of transferring money, and the fact that these money transfers do not produce anything of value that can be sold to additional customers.
Although this tax-code reform does not apply to individual taxes, this reform effectively increases the taxation of money that is earned by wealthy people through their investments in "taker" businesses. This reform works without imposing a "progressive" income tax that could easily be avoided (such as by shifting income to other family members) by the wealthy individuals to which it is targeted. And this reform works without imposing a sales tax, which is effectively a "regressive" tax that would harm hard-working law-abiding citizens and leave investment income unaffected.
The unwillingness of rich people to pay their fair share of taxes was a significant contribution to the downfall of the Roman Empire, and the downfall of the Italian Renaissance. Currently we are financially suffering from a similar situation in which the people who richly profit from "taker" businesses (through investments and executive-level employment) have been avoiding paying their fair share of taxes. They avoid fairer tax rates by donating lots of money to the election campaigns of Congressmen in both political parties, which causes Congress to protect the many tax loopholes that benefit "taker" businesses. The data posted at OpenSecrets.org proves that "taker" industries give the largest campaign contributions and that such industries give money to candidates in both political parties.
Wealthy people correctly recognize that their investments are valuable for putting tools and other resources into the hands of hard-working individuals and "maker" businesses. Yet they overestimate the importance of their investments, and underestimate what they think they should be paying in taxes. Ironically the wisest investors recognize that "maker" businesses are the best kind to invest in because those businesses typically provide the best returns on an investment.
The time has come to unburden "maker" businesses and allow them to grow, hire new employees, and make the products and provide the services that attract enthusiastic customers. The result will be dramatic gains in the widespread economic prosperity of the United States.
Notice that, unlike other tax-reform proposals, this reform does not attempt to identify what is "fair" or which people "deserve" to pay higher taxes. Instead it simply gives a tax advantage for business activities that strengthen the economy, and imposes a higher tax burden on business activities that fail to strengthen the economy.
If Congress fails to recognize the wisdom of "taxing the takers more than the makers," then we, the unheard majority of voters, will have clear proof that we need to reform election methods, especially by banning single-mark ballots from Congressional elections. The resulting fairer elections would allow us to elect problem-solving leaders to replace the currently elected special-interest puppets. Hopefully our current Congressional leaders will recognize the wisdom of implementing this long-overdue tax reform, and they will recognize the need to cut the puppet strings that have prevented Congress from putting the needs of the majority over the desires of a few short-sighted people who own and run tax-loophole-favored "taker" businesses — that weaken, rather than strengthen, the US economy.