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October 13, 2005

The Presidents Advisory Panel on Federal Tax Reform

Sent via e-mail

Attn: Mr. Charles Rossotti,

Re: The negative income tax for individuals revisited

Dear Mr. Rossotti,

I saw the President's Panel on Federal Tax Reform for the first time on
CNN last night, and appreciate your pragmatism and desire to first
simplify the tax code for individuals before entertaining a VAT. Richard
Nixon once recommended a negative income tax for individuals that would
replace or diminish many social programs, reducing the cost of staff and
overhead to implement the programs in addition to better reaching the
people who need help. Here's a variation on Mr. Nixon's theme which I
believe accomplishes your goal.

1\) It is a flat tax

2\) 33% rate plus social security

3\) Write offs only for charitable donations, home mortgage interest,
and costs incurred to generate income. Inheritance over \$1,000,000.000
is taxed at 33%, and long term capital gains are taxed at 16.5% to
encourage investment.

4\) \$500.00 per month is sent to every U.S. citizen 18 and over,
augmented by social security payments to those who qualify. Most
payments could be wired into bank accounts to avoid check and postage
expenses. Waiting for people to file annually instead of giving them a
monthly payment would reduce the economic effectiveness of the program.

5\) Social security has been an additional tax for quite a while. Its
rate and the amount of income subject to it should be re-evaluated to
keep the effective tax rate below 40%.

The ladder of success in this country is upside down. Although once
you're on the ladder, you can climb it, the first rung is too high to
reach. There are no boot straps to pull yourself up by. If we dropped
off 1,000 people who have learned basic skills in a Mayflower
re-enactment with tools and supplies, they'd survive, but people in the
inner city must rely on money to exchange support with each other, and
many choose to commit crimes rather than work for \$6.00 per hour with
social security and some taxes taken out, which isn't even close to a
living wage.

Unlike the aid to dependent children which was dysfunctional, this
program encourages marriage. A homeless couple can share a two bedroom
apartment with a roommate, and all can afford food, a phone and clothes
at the thrift store and bus fare to be able to contact employers and be
presentable in the work place. Once their base needs can be met by
partnering with a friend, there is an incentive to generate additional
income to improve their standard of life. This effect was seen in
Seattle when free shelter was proved to the homeless near the Pike Place
Market. Getting people back to work obviously generates tax revenues to
offset the transfer payments to them. The tax is also progressive. If
someone makes \$100,000.00 a year, they're in an effective 27% bracket
plus social security. Someone making \$200,000.00 is at the effective
30% bracket etc. with the maximum tax payer approaching 33%. The
effective rate of tax on the first \$18,000.00 of income is the social
security rate, as the transfer payments and Federal taxes cancel. By so
restructuring the lower bracket, people can better afford the increased
costs of energy. Even before the spike in gasoline and natural gas
prices, most people in Phoenix Arizona receiving food subsidies were
fully employed, and weren't making enough to make ends meet, so a
significant percentage of the American people are in economic trouble
due the system instead of laziness. The increase in energy prices is
pushing some people over the edge. Once again, tax revenues increased by
more economic growth and reduced unemployment are augmented with the
savings of reduced or eliminated social programs. Anyone concerned that
some people might spend their transfer payment on drugs or alcohol can
see they're already selling their food stamps, and such activities by a
small hard core isn't enough to scuttle a program. To assure there are
no shortfalls in revenue to fund this program, the Federal Reserve's
activities to monetize debt to create money to accommodate economic
growth can be on standby to shift to creating money for this program
instead.

This program creates an economy which is virtually recession proof, as
there is always money in the hands of the population seeking goods and
services. It can also be used to pay for tuition for people wanting to
continue their education. In addition, it provides a base of income that
allows someone to pursue entrepreneurial activity. So not only does it
provide a recession resistant base, it will generate more economic
activity and tax revenues as a result. This might take a year or two to
hit its stride, and when it does, it's important that the Federal
Reserve doesn't artificially increase interest rates to slow economic
growth to avoid an inventory recession or "wage inflation." We haven't
had an inventory recession in 30 years since the advent of computerized
inventory control, and wage increases in a growing economy are simply
giving the lower end their share of the larger economic pie, which is
not inflation.

A VAT would require tax credits to the poor anyway, and would still
place a severe burden on the poor not paying taxes. I also find a 15%
figure for a VAT to be excessive, and am more concerned about excess
taxation crippling the economy than I am about it feeding a government
free to grow in size. As you pointed out, the complexity of implementing
a VAT is also a problem.

I believe this flat tax is the more simplistic reform of the existing
system you are referring to. Please ask your staff to create a model of
the program. The savings from social programs is the key, with the more
sound economy and upside potential from greater economic activity being
a yet unquantified bonus.

Yours very truly,

Rick Weiss

Principal

Rw/pc