A Modest Proposal: Voluntary Fed Taxes in 2011 to Break the Back of the Great Recession

The following might sound like it came out of the movie “Dave,” in which a presidential look-alike who runs a temp agency (Kevin Kline) winds up being secretly installed as president after the real prez has a stroke. At first manipulated by an evil chief of staff (Frank Langella), “Dave” at one point outwits the chief of staff and tries to solve a federal budget problem at a cabinet meeting. He breaks the gridlock, momentarily. It’s my favorite political comedy.–PM

The country is in an economic funk. We need a game-changing play. Official unemployment is stuck near 10 percent. If you add in discouraged workers who have stopped looking, the underemployed like an engineer who is now a sales associate, and the under-the-table workers all over the place, then the figure is probably twice as high. The President keeps saying there is no silver bullet, no one trick shot that will change the game.

Here’s a thought for the White House. Forget arguing about whether to extend the Bush tax cuts that are scheduled to expire. Skip right over that fight. Come out after Labor Day and unveil a proposal to make federal income tax voluntary for one year, 2011, as a means of driving the country out of the economic ditch.

Some people have been saying since 9/11 that Americans collectively are primed to make a major sacrifice for the good of the country. We haven’t been asked. Here’s a test. Suspend the mandatory federal income tax for one year and allow citizens to contribute what they would like to the federal treasury based on what they think is a fair portion of their earnings. We are in an economic emergency. Mobilize the whole nation. Treat people like adults, and ask them to do their part to move the country forward. Americans are a generous people. There’s money in the country, but we’ve got a financial traffic tie-up with millions of people riding the brake. It’s a better idea than running a one-week nationwide telethon or a benefit concert headlined by Springsteen to pay for infrastruture renewal in 50 states. Take the figurative bookkeeping gun away from the heads of workers, business owners, and retirees for a year and see what happens. In a way, we already do this with the estimated tax system for businesses and the self-employed. Sure, a lot of people will pay nothing. Factor that in. On the other hand, there are people who can pay more than they are required by today’s rates. Will they? Hasn’t Warren Buffet said that it’s ridiculous that he pays less tax relative to his income than his low-level employees?

Warren Buffett, the third-richest man in the world, has criticised the US tax system for allowing him to pay a lower rate than his secretary and his cleaner.

Speaking at a $4,600-a-seat fundraiser in New York for Senator Hillary Clinton, Mr Buffett, who is worth an estimated $52 billion (£26 billion), said: “The 400 of us [here] pay a lower part of our income in taxes than our receptionists do, or our cleaning ladies, for that matter. If you’re in the luckiest 1 per cent of humanity, you owe it to the rest of humanity to think about the other 99 per cent.”

Mr Buffett said that he was taxed at 17.7 per cent on the $46 million he made last year, without trying to avoid paying higher taxes, while his secretary, who earned $60,000, was taxed at 30 per cent. Mr Buffett told his audience, which included John Mack, the chairman of Morgan Stanley, and Alan Patricof, the founder of the US branch of Apax Partners, that US government policy had accentuated a disparity of wealth that hurt the economy by stifling opportunity and motivation. (from The Sunday Times, timesonline.co.uk)

Assuming that the IRS will collect much less cash on a voluntary basis, there likely will be a lot more money circulating in the economy (unless we turned into a nation of savers overnight), which is what we need. More demand will have to be met with a greater supply of goods and services, thus stimulating job growth. To off-set the lower tax receipts, maybe the experiment includes a consumption tax at the federal level. What would be acceptable? Two percent on everything that is not food, medicine, or clothing? Maybe a small luxury tax on items costing more than $1000?

There would have to be a plan for the nation to borrow funds to fill the gap if the whole experiment melts down by the second quarter of the year. Maybe you test it in quarters, like paying estimated taxes now. If it’s a disaster by June 15, the mandatory system would kick in. But we would learn something about the American soul, wouldn’t we? Are we paying taxes only because we don’t want to be penalized—fined or jailed? We might benefit from a full-blown discussion about our mutual responsibility as citizens. Do we dare? I believe most people after thinking hard about it would pay almost as much as they are paying now. Are that many of us figurative civic children who have to be chased by the same old tax collectors who have been around for more than 2,000 years? I don’t think so.

Someone would have to run the numbers through computer models to evaluate the risk and identify the stress points in the budget. The social contract would have to be honored for people whose lives depend on federal support programs, hospitals, military pensions, and so forth. Would even the prospect of such a radical move totally destabilize the markets? 

There are so-called experts saying we should be prepared for official unemployment rates of more than 7 percent for two or three more years. Is that acceptable? There’s human suffering in each decimal point of joblessness.

Could President Obama call upon “the better angels of our nature” and ask the American people to be responsible and to do the right thing—but on their own terms? Would a move like this cause enough of a psychological jolt to pop the economy out of the ditch?

If it worked, would it lead to a total reform of the federal tax system or, based on the results, would we go back to some system that looks like what we have now?

Your thoughts?

5 Responses to A Modest Proposal: Voluntary Fed Taxes in 2011 to Break the Back of the Great Recession

  1. kad barma says:

    A flat tax would ensure an equitable assessment for all, reduce dramatically the wealth wasted on tax preparation, eliminate criminal collusion between legislators and tax dodgers, and enable us all to understand exactly what we’re paying for regarding our federal government.

  2. JoeS says:

    I prefer a tax system that is a hybrid of income tax and sales tax. The sales tax piece would be a flat tax, but with compensation to make it effectively a progressive tax. All proceeds from this tax would be dedicated to health care, thereby unburdening the US workforce of this onerous competitive penalty. The income tax should only kick in a high incomes, and be progressive for higher incomes. Virtually no deductions, but retain EIC for the working poor.

  3. Righty Bulger says:

    Paul, you gotta stop smoking the crack my friend. The donkey party won’t even consider a flat tax, never mind a voluntary tax.

    As long as there’s a class warfare card to be played, they’ll keep on fighting against all tax cuts to ensure that the richest one percent don’t pay a penny less than they’re paying now. Even if it means the other 99% of Americans are getting it put to them, the liberal wing of the party will not support anything that might benefit those who pay the most taxes.

    Do most folks realize that the richest 1% of Americans pay over 40% of the income taxes in this country? That’s income taxes, not overall taxes. Do people also realize that the top 5% pay over 60% of the income taxes?


    Some food for thought for those who argue that the rich don’t pay their fair share. In all honesty, we’d better pray the rich don’t start scaling back their spending habits too, because the rest of us aren’t capable of carrying any burden.

  4. JoeS says:

    “we’d better pray the rich don’t start scaling back their spending habits too, because the rest of us aren’t capable of carrying any burden.”

    That’s it in a nutshell, Righty – it was true prior to the Great Depression, and it is true again. What you do not focus on is the disparity in incomes – the top 1% have managed to garner it all!

  5. JoeS says:

    A couple of follow up points:
    1) The historical top marginal tax rates vary quite a bit, looking at the 1920s in the run-up to the Great Depression they were (starting in 1921 – 73%, 58%, 43.5%, 46%, 25%, 25%, 25%, 25%, 25% and in the early 1930s 25%, 25%, 63%. The top rate didn’t really start down once again until just after the death of JFK, when Congress passed his tax reduction request and dropped the top rate from 91% to 77%. It is now 35%.

    2) But that 35% is only for those who cannot game the system. The Hedge Fund managers, yes – some of the people who have run our economy into the ground, enjoy the fruits of their lobbying efforts (to both Rs and Ds), so that they can:

    “Not only have hedge and private-equity fund managers earned massive amounts – in 2007, according to Institutional Investor’s Alpha Magazine, John Paulson made $3.7 billion while George Soros and James Simons came in at just under $3 billion (to make the top 25 required $360 million) – even as their compensation does not require them to put their own money at risk.

    The most common arrangement provides that fund managers get a) a fee of 2 percent of the value of the fund, whether it goes up or down – a fee on which they pay ordinary income tax rates of up to 35 percent; and b) 20 percent of the annual profits, on which they pay only a 15-percent capital-gains tax rate.”

    And these people did well during the financial meltdown, with over $25B in 2009 income. The top “earner” made his money by betting clients money that the Government would not let the big banks fail! So, we effectively bailed him out so he could top the list, and pay a 15% tax rate on his winnings.

    Can anyone out there really support this?