Post Pandemic, US States and Cities Need Better Plans to Reduce Income Inequality

According to Forbes, "In 1965, America's top 1% controlled about 10% of the nation's after-tax income. That number has now grown to over 15%. The average CEO-to-worker pay ratio had increased from 20-1 in 1965 to a whopping 312-1 in 2017. And middle-class real wage growth has been stagnant for decades."

Presidential candidates have also weighed in on the fast-growing income inequality in the US. Senator Bernie Sanders talked about "Tax on Extreme Wealth" with a proposal for an ultra-wealthy tax ranging between 2% and 8%. Andrew Yang, another presidential candidate, ran on implementing a universal basic income of $1,000/month for every American adult over the age of 18. 

Given this widening income gap between rich and poor and stagnant wages for the middle class, we need some serious socio-economic re-engineering. Here are some:

1. Implement Laureate Yunus' Microcredit Model to Create Economic Opportunities in Inner Cities –- Most inner cities in the US lack good economic opportunities resulting in poverty, often rampant poverty. Thousands of bright people are stuck in poverty in inner cities due to state and local governments' inability to create meaningful economic opportunities. One-size-fits-all economic model does not work there; instead, local governments should try Laureate Yunus' Microcredit Economic Model, thus financially empowering the local entrepreneurs (who "are too poor to qualify for traditional bank loans") to turn their neighborhoods around. Though this bottom-up economic model was developed for impoverished villages in third world countries, it has tremendous potential for our inner cities. 

  

2. Let the Private Sector Develop a Fair and Equitable Property Tax Assessment System –- Property tax is often the primary source of revenue for Cities and Towns. The poorly built or haphazard assessment systems tend to be highly regressive, thus heavily favoring the rich. Under such a biased system, the poor and middle-class homeowners subsidize the upscale and high-end properties. Therefore, the growing and prospering cities and towns around the country must consider outsourcing this crucial public task to the private sector or developing it in collaboration with the private sector, so it becomes truly fair and equitable. Ideally, the development and managing of this task must be entrusted to the private sector. An unfair system uproots seniors and minorities and often pushes the middle class off the cliff. 

3. Build more Long-term Care Facilities, not Jails and Prisons –-People committing the so-called "serious crimes" must be sent to high-security long-term care centers under the care of qualified psychologists and psychiatrists. The young and reinvented cities around the country should rethink and redefine crime and punishment from a moral high ground. The lack (perhaps the absence) of economic opportunities often forces poor people to commit petty offenses, resulting in additional jail terms. Instead of sending them to jails, they should be assigned to the local clergies, rabbis, and imams to perform community service. Similarly, in a civilized world, juvenile detention centers' building does not pass the muster of moral hazards. 

4. Make College Education Free for STEM Students – This country needs to emphasize science and technology education to maintain global championship. Government colleges must provide free STEM education to all qualified poor students. Students must compete and qualify for the available seats to get into the free STEM programs, ensuring the best and brightest acceptance. Students pursuing other essential disciplines like nursing, teaching, etc. must receive tuition subsidies as well. All other majors (e.g., business, humanities, etc.), irrespective of the students' financial needs, must pay full tuition, thereby forcing the otherwise needy to pursue vocational education in line with the market demand. 

  

5. Richest 1% Needs to Accept the Generational Reset – The wealthiest 1% now owns 50.1% of the world's wealth. Given this absurd concentration of wealth, we need this 1% to be self-convinced (like Mr. Warren Buffett) that they are just temporary custodians of their wealth. They must, therefore, come to terms with the generational reset, meaning, at the end of their lives, they must return a sizable portion, if not all, of their wealth to society, pulling tens of thousands out of abject poverty each year. In other words, the success or failure of this country is now mostly dependent on them. If they are honest and honorable enough to accept this harsh reality, the citizenry's advancement will gleefully continue; absent this, millions more will continue to drift away in utter poverty. 

Of course, the 99% must also learn to put the country's interest ahead of their own. So, the rich and poor alike must come to terms with the generational reset, voluntarily returning a big part, if not all, of overall wealth to society. 

-Sid Som

homequant@gmail.com

Post Pandemic, Developing Countries must Improve Existing Economic Models

Income inequality has been growing by leaps and bounds in developing countries. While some of those countries are creating more billionaires every year, millions and millions of people are stuck in utter poverty, without any light at the end of the tunnel. They can break out of this vicious cycle by revisiting and renewing the existing economic models, emphasizing exploring and inventing forward-looking growth and income opportunities for the so-called 99%. 

To properly explore growth opportunities, developing countries should start at the national level, gradually drilling down to the state, local, and individual (yes, individual) levels. The onus is on all of us. A renewed "private-public partnership" economic growth model would be ideal for developing countries... 

1. Develop Basic Infrastructure with Private Cooperation. A developing country with well-developed infrastructure can attract more high quality foreign and domestic investments than their counterparts who are struggling to ramp up their infrastructure. Therefore, instead of selling out their natural resources, developing countries should intensify the development and expansion of necessary infrastructure by enticing private companies (well-known local and foreign) to provide the leadership in that sector. For example, those companies could be encouraged to build new toll highways and bridges, railroads, metro, and light rail, ports, airports, rural electrification, telecommunications, etc. shouldering all costs in return for all revenues (at pre-negotiated resell rates) from those projects for the first 15 to 20 years. 

2. Entice Neighbors to Follow the Successful Example. Of course, with the rising prosperity comes the border issue. A good leader sets examples that the neighboring countries spontaneously follow. Today, we live in a world of economic cooperation and free trade, so building a Chinese wall around the country's border does not lead to lasting economic prosperity. Instead, the prospering countries must encourage the weaker neighbors to follow the successful example and shore up their necessary infrastructure, paving the way for a concerted regional revitalization and growth by avoiding the refugee problem from the neighboring countries.

3. Develop Regional Economic Zones. As the regional renewal gains momentum, countries must work together on creating their economic zones, letting goods and services flow freely across borders without the costly and unnecessary taxes, tariffs, and other financial barriers. With economic zones in place, it would be easier to convince corporations to build toll-ways, bridges, waterways, etc. across borders, offering better scalability and enhanced economy of scale. Developing countries must experiment with and use (macroeconomic) growth models that are sustainable. G-7s down to BRICS must aid and cooperate with the developing countries that become signatories to an international economic model emphasizing regional growth, renewal, cooperation, and development of industrial zones.  

4. Create Tax and tariff-free Enterprise Zones. With the rapid growth and expansion of the necessary infrastructure, countries will need to set up tax-free or, at least, tax-abated enterprise zones around the country. It does not make sense to build all infrastructures around a handful of big cities, making them even more overcrowded. It must be a distributed and decentralized economic model, emphasizing enterprise zones, including affordable housing. 10-15 year tax abatement is an excellent incentive to attract an array of significant and diverse groups of companies worldwide, vertically integrated with the growing infrastructures. A decentralized model would help people live close to their roots – an ideal way to keep employee turnover and absenteeism low, with morale always high. 

5. Invite Private for-profit to Build Institutes of Higher Technical Education. As those countries start to develop the service sector (atop the manufacturing industry), a steady flow of qualified employees with higher technical education would be needed. Again, instead of the local governments getting involved and controlling this layer of education, the private for-profit companies could be invited to build and run the institutes, with initial concentrations in enterprise zones, as an added enticement. While the acceptance must always be merit-based, governments must significantly subsidize all economically disadvantaged students to avoid implementing a quota system down the road. 

While local governments should refrain from running all non-essential services (which they should outsource to the private sector), they must be involved in properly managing their natural resources and all essential services like military, law and order, taxes, primary education, healthcare, clean water, etc. The developing countries built on moral (not religious) high grounds are more attractive to investors. For example, in many third world countries in Africa, Asia, and Latin America, young women do not have equal access to education (which is a crime against humanity!). "Equal access to education" is a primary metric all foreign companies must use in evaluating the investment climate of a developing country. 

Stay safe!

-Sid Som

homequant@gmail.com

Post Pandemic, Congress should Replace Income Tax with Middle-class Friendly Progressive Consumption Tax

Under the existing income tax system, the top 1% pays 40% of all federal taxes. According to the Tax Policy Center, 44% of Americans will not pay any income taxes this year. On the other hand, Warren Buffett claims he has a lower tax rate than his secretary does. While much buzz was created about the carried interest, nothing has been done yet, and as a result, hedge fund billionaires continue to enjoy one of the lowest tax rates. According to Fortune, "Amazon will pay a whopping $0 in federal taxes on $11.2 billion profits." 

These different scenarios demonstrate how irrational the US Income Tax system has become. Therefore, it's high time that we replace the personal income taxes with a set of middle-class friendly progressive consumption taxes.

Of course, the one-size-fits-all consumption tax – which was proposed before and was justly unsuccessful – is inherently regressive, as poor and middle-class folks tend to spend a much higher percentage of their incomes than the rich people. 

Yet, the consumption tax could be an ideal replacement for the current income tax, as long as it is progressive. How? Quite simple – all non-food goods and services must be broken down into three progressive tax categories: Basic, Luxury, and Ultra-luxury. While the basic type will have the lowest tax rates, luxury and ultra-luxury will carry progressively higher rates. For example, the national sales tax rate (atop the state and local sales taxes as it replaces the federal income tax) for basic, durable goods (e.g., appliance) could be 2 to 3%. In contrast, luxury and ultra-luxury could carry 5% and 10% rates, respectively. 

The lower rates for the basic category will advantage the middle class. Simultaneously, the rich will be happier to pay higher national sales taxes in place of their disproportionately higher share of the federal income taxes (case in point: the top 1% pays 40% of all federal taxes). 

While a host of progressive consumption taxes could be thought of and implemented, here are some basic ones:

1. National Sales Tax on Basic and Luxury Durable Goods – To save, say $5K to $5M on annual income taxes, taxpayers would be amenable to an additional national sales tax – obviously atop the current state and municipal sales taxes – on durable goods. Unlike income taxes, consumption taxes are more humane, meaning families can budget or plan for these expenditures. Since the basic, durable goods impact the poor and middle class, the rate must be lower, say 2% to 3%, followed by progressively higher rates on luxury durable and ultra-luxury durable goods generally demanded by the rich. For instance, all appliances under $10K could be the basic, $10K to $20K being the luxury while over $20K being the ultra-luxury category, with progressively higher rates. 

2. National Sales Taxes on Million dollar-plus Home Sales – Since the rich and ultra-rich owning the upscale and expensive homes will be big beneficiaries of the phase-out (followed by no income taxes), the million-dollar-plus home sales must be subjected to the additional progressive national sales taxes. It must not be a one-size-fits-all blanket rate. Instead, it must be progressive, for example, sale price $1M to $2M @5.00%, $2M to $3M @5.25%, $3M to $5M @5.75%, $5M to $10M @6.00% and $10M+ @6.25%, etc. At the individual level, unlike the income taxes, these sales will impact them once in a while, thus a far preferable option than the high annual income taxes they have been paying. 

3. National Sales Tax on Luxury Hotels (4 and 5-Star) – These hotels are primarily for the corporate executives and rich folks, so an additional 5-6% national sales tax will not harm the hotel industry. These hotels might even use this sales tax as a promo ("We Will Pay Your National Sales Tax") to compete for the traffic during off-peak seasons. A vast majority of these hotels have medium-to-large convention centers – seasonal to round-the-year – so convention center sales surtax could be an ancillary surtax. The hotels that are run as resorts must be subjected to an additional resort sales surtax. Similarly, all private golf courses must have additional surtaxes. 

4. National Sales Tax on all Luxury Air Travels, Amtrak, Vacation Cruises, and Car Rentals – Business and first-class air travel, both domestic and international, is primarily for the corporate executives and rich folks, so an additional 5-6% national sales tax will not harm the airline industry. Similarly, those who spend thousands more on luxury and ultra-luxury vacation cruise suites can afford an additional 5-6% national sales tax, and it won't harm the cruise industry either. International cruises coming to the US shores may be subjected to additional port charges. Luxury cars, charter flights, and private jet rentals must carry sizable luxury and ultra-luxury national sales taxes. 

5. National Sales Tax on Unhealthy (processed) Foods and Beverages – It's about time that the health-conscious folks are not forced to subsidize those who live off junk foods and high-calorie beverages. This is a (preventive) health issue, and, hopefully, this national sales tax will save citizens billions in health insurance premiums down the road. The parallel case is equally compelling: Today, smokers pay a hefty price for their lifestyle (significantly higher taxes on their lifestyle products and higher premiums on life and health insurance, etc.). While we must not take smokers' choices away, the rest of us must not finance their lifestyles either. 

While progressive consumption tax is poor and middle-class friendly, the rich would also welcome the idea of considering the trade-off. Of course, well-studied tax rates will be needed to make the switch revenue-neutral, even revenue positive.

It's about time we return control to taxpayers!

-Sid Som

homequant@gmail.com

Post Pandemic, Congress should Replace Income Tax with Middle-class Friendly Progressive Consumption Tax

Under the existing income tax system, the top 1% pays 40% of all federal taxes. According to the Tax Policy Center, 44% of Americans will not pay any income taxes this year. On the other hand, Warren Buffett claims he has a lower tax rate than his secretary does. While much buzz was created about the carried interest, nothing has been done yet, and as a result, hedge fund billionaires continue to enjoy one of the lowest tax rates. According to Fortune, "Amazon will pay a whopping $0 in federal taxes on $11.2 billion profits." 

These different scenarios demonstrate how irrational the US Income Tax system has become. Therefore, it's high time that we (phase out and) replace the personal income taxes with a set of middle-class friendly progressive consumption taxes.

Of course, the one-size-fits-all consumption tax – which was proposed before and was justly unsuccessful – is inherently regressive, as poor and middle-class folks tend to spend a much higher percentage of their incomes than the rich people. 

Yet, the consumption tax could be an ideal replacement for the current income tax, as long as it is progressive. How? Quite simple – all non-food goods and services must be broken down into three progressive tax categories: Basic, Luxury, and Ultra-luxury. While the basic type will have the lowest tax rates, luxury and ultra-luxury will carry progressively higher rates. For example, the national sales tax rate (atop the state and local sales taxes as it replaces the federal income tax) for basic, durable goods (e.g., appliance) could be 2 to 3%. In contrast, luxury and ultra-luxury could carry 5% and 10% rates, respectively. 

The lower rates for the basic category will advantage the middle class. Simultaneously, the rich will be happier to pay higher national sales taxes in place of their disproportionately higher share of the federal income taxes (case in point: the top 1% pays 40% of all federal taxes). 

While a host of progressive consumption taxes could be thought of and implemented, here are some basic ones:

1. National Sales Tax on Basic and Luxury Durable Goods – To save, say $5K to $5M on annual income taxes, taxpayers would be amenable to an additional national sales tax – obviously atop the current state and municipal sales taxes – on durable goods. Unlike income taxes, consumption taxes are more humane, meaning families can budget or plan for these expenditures. Since the basic, durable goods impact the poor and middle class, the rate must be lower, say 2% to 3%, followed by progressively higher rates on luxury durable and ultra-luxury durable goods generally demanded by the rich. For instance, all appliances under $10K could be the basic, $10K to $20K being the luxury while over $20K being the ultra-luxury category, with progressively higher rates. 

2. National Sales Taxes on Million dollar-plus Home Sales – Since the rich and ultra-rich owning the upscale and expensive homes will be big beneficiaries of the phase-out (followed by no income taxes), the million-dollar-plus home sales must be subjected to the additional progressive national sales taxes. It must not be a one-size-fits-all blanket rate. Instead, it must be progressive, for example, sale price $1M to $2M @5.00%, $2M to $3M @5.25%, $3M to $5M @5.75%, $5M to $10M @6.00% and $10M+ @6.25%, etc. At the individual level, unlike the income taxes, these sales will impact them once in a while, thus a far preferable option than the high annual income taxes they have been paying. 

3. National Sales Tax on Luxury Hotels (4 and 5-Star) – These hotels are primarily for the corporate executives and rich folks, so an additional 5-6% national sales tax will not harm the hotel industry. These hotels might even use this sales tax as a promo ("We Will Pay Your National Sales Tax") to compete for the traffic during off-peak seasons. A vast majority of these hotels have medium-to-large convention centers – seasonal to round-the-year – so convention center sales surtax could be an ancillary surtax. The hotels that are run as resorts must be subjected to an additional resort sales surtax. Similarly, all private golf courses must have additional surtaxes. 

4. National Sales Tax on all Luxury Air Travels, Amtrak, Vacation Cruises, and Car Rentals – Business and first-class air travel, both domestic and international, is primarily for the corporate executives and rich folks, so an additional 5-6% national sales tax will not harm the airline industry. Similarly, those who spend thousands more on luxury and ultra-luxury vacation cruise suites can afford an additional 5-6% national sales tax, and it won't harm the cruise industry either. International cruises coming to the US shores may be subjected to additional port charges. Luxury cars, charter flights, and private jet rentals must carry sizable luxury and ultra-luxury national sales taxes. 

5. National Sales Tax on Unhealthy (processed) Foods and Beverages – It's about time that the health-conscious folks are not forced to subsidize those who live off junk foods and high-calorie beverages. This is a (preventive) health issue, and, hopefully, this national sales tax will save citizens billions in health insurance premiums down the road. The parallel case is equally compelling: Today, smokers pay a hefty price for their lifestyle (significantly higher taxes on their lifestyle products and higher premiums on life and health insurance, etc.). While we must not take smokers' choices away, the rest of us must not finance their lifestyles either. 

While progressive consumption tax is poor and middle-class friendly, the rich would also welcome the idea of considering the trade-off. Of course, well-studied tax rates will be needed to make the switch revenue-neutral, even revenue positive.

It's about time we return control to taxpayers!

-Sid Som

homequant@gmail.com

Replacing Property Taxes with Middle-Class friendly Progressive Consumption Taxes

The vast majority of homeowners believe that the current property tax system is inherently regressive, meaning middle class heavily subsidizes the rich. Others think it’s the biggest annual harassment they have to endure. Rich folks owning expensive homes are not too bothered as the system favors them. It is more or less the opposite of the income tax system where the top 1% pays 40% of all federal taxes. According to the Tax Policy Center 44% of Americans will not pay any income taxes this year – not so when it comes to property taxes. Property tax is one of the main reasons why seniors and minorities get uprooted from their neighborhoods. Unfortunately, home is the biggest investment for most Americans and it’s usually controlled by the local governments via their primary revenue tool called the property taxes.

It’s about time we phase out this mostly unfair and inequitable property tax system and replace it with a series of truly fair and transparent revenue tools, thus freeing the homeowners from the clutches of the government control. So, what are the replacement tools (revenue sources)?

     1. Introduce Junk Food Surtax on Unhealthy Processed Foods and Beverages – Just the way the middle class must not subsidize the rich people’s property taxes, the health-conscious folks must not subsidize those who basically live off junk foods. This is a (preventive) health issue and, hopefully, this surtax will save citizens billions in health insurance premiums down the road. The counter case is equally compelling: Today smokers are paying a heavy price for their lifestyle (significantly higher taxes on their lifestyle products and higher premiums on life and health insurances, etc.). While we must not take smokers’ choice away, the rest of us must not finance their lifestyles either. The phase-out of the property tax system will take 5 to 7 years, during which as the property tax revenue starts to come down, the Junk Food Surtax should start at, say 10%, graduating up and perhaps leveling out at 20% (will require studies to make the system revenue-neutral). This tax could be implemented at the State level, where the States reimburse counties based on actual collections. If the State becomes an unwilling participant, it must be implemented at the county level. In a Utopian society, this collection will come down to null.

     2. Implement Surtax on Basic and Luxury Durable Goods – In order to save $5K to $150K on property taxes at the front-end and capped deductions at the back-end, homeowners would be amenable to the proposed durable goods surtax. Unlike involuntary property taxes, consumption taxes are more humane – families can budget/plan for these expenditures. Since the basic durable goods impact the middle class, the rate must be lower, say 2 to 3% for the basic, followed by the luxury durable and ultra luxury durable goods, with progressively higher rates. For instance, all appliances under $10K could be basic, $10K to $20K being the luxury category and >$20K as the ultra luxury category, with progressively higher rates. Likewise, automobiles could have three categories as well. While counties would be allowed to charge different rates, there must be non-resident tariff provisions to negate any arbitrage; in other words, counties with lower rates must collect the differentials from the non-resident purchasers (from the reciprocating counties) with higher rates. Non-reciprocating counties would be notified of the non-resident purchases. 

     3. Let the Investors Pay Higher Sales and Transfer Taxes on Income-producing SFRs – In terms of sales and transfer taxes, single family homes occupied as primary residences must be treated differently from investor purchases for conversion to rentals. At the point of purchase, those investors must pay higher sales taxes (add-on sales surtax). During the last recession, many institutions bought and converted millions of single family homes into rentals creating a whole new SFR Rental industry. Unlike people’s primary residences, these are income-producing properties and must be treated as such. Even during the years of property tax phase-out, they must be treated as a sub-class of the multi-family, paying higher sales, property and transfer taxes than the primary residences, in line with the competing multi-families. This should apply to large institutions as well as other parties and individuals with 5+ rental units including condos and co-ops.

     4. Let the Gamers and Flippers Pay Higher Transfer Taxes – At the point of sale, shorter holding periods (say, up to 2 years) must carry much higher transfer taxes so the traders and flippers are separated from the homeowners. In fact, it’s a clear case of moral hazard when primary homeowners and gamers are treated alike by the local assessors. While the gamers are entitled to compete and buy, they must be treated as investors if they sell within the shorter window. They can however bypass the surtax by using the 1031 exchange (federal). Of course, exceptions (e.g., job-related relocation, medical emergency, etc.) must be factored in as long as the use of home as primary residence could be proven. During the tax phase-out period, none of these sales (institutional, traders and flippers) could be used in developing SFR AVMs or as SFR comps, to avoid having to artificially inflate the price/assessment levels.

     5. Introduce/Re-introduce Million$-plus Home Sales Surtax – Since the upscale and expensive homes (owners) would be a big beneficiary of the phase-out (followed by no property taxes), the million$-plus home sales must be subjected to additional progressive surtaxes. It must not be a blanket one-size-fits-all rate; instead, it must be progressive in view of the savings – for example, sale price $1M to $2M @2.00%, $2M to $3M @2.25%, $3M to $5M @2.50%, $5M to $10M @2.75%, $10M+ @3.00% etc., etc. While the elimination of property taxes will make the high-end housing market more liquid, the introduction of sales surtax (coupled with higher short-holding transfer taxes) will gradually de-incentivize gamers, stabilizing this volatile segment. Should sales clusters start to balloon just under $1M, the threshold could be lowered to the jumbo mortgage (non-conforming) level. Of course, State’s participation will be important, absent which counties must implement the surtax on their own.

     6. Let there be Luxury Hotel (4 and 5-Star) Surtax – These hotels are primarily for the corporate executives and rich folks so additional 5-6% surtax will not harm the hotel industry. In fact, these hotels might even use this surtax as a promo (“We Will Pay Your Surtax”) in order to boost traffic during the off-peak season. A vast majority of these hotels have medium-to-large convention centers – seasonal to round-the-year – so convention center surtax could be an ancillary surtax as well. The hotels that are run as resorts must be subjected to an additional resort surtax. Luxury car rentals must carry sizable luxury rental surtax. Similarly, all golf courses, private and public, must have additional surtaxes. None of these would adversely impact the middle class; even if they impact the middle class to some extent, it would be almost insignificant when compared to the tax savings they would be enjoying from the elimination of property taxes.

     7. Counties should Start Selling Naming Rights to its Infrastructure – Let the rich people/private institutions pay to put up their names on local government buildings, county roads, town squares, bridges, marinas, municipal parking, toll booths, service plazas, ball parks, parks and recreational centers, public pools and rinks, etc. (that the local governments own and operate). Of course, public schools and colleges should be exempted. The selling process must be totally open and transparent (via open tenders), thus awarding the naming rights to the highest bidders (some restrictions could apply). Also, in order to attract the right market price, it must also be term-limited, say 3 to 5 years. Counties could also consider private-public joint ventures to build new toll roads and bridges (unable to get federal funding) wherein the private party incurs all costs to build the infrastructure in return for the toll incomes for 10-15 years.

     8. Now that Airbnb is Mainstream, Counties must Claim its Share of Taxes – Like Uber, Airbnb has become mainstream competing with the commercial lodging industry, potentially lowering the latter’s occupancy rates and consequently government’s tax revenues. Under the circumstances, states must make sure that Airbnb collects and returns all taxes back to respective states and, in turn, to the originating counties. Given the skyrocketing popularity of Airbnb, this tax revenue will grow exponentially in coming years. In fact, this new-found tax revenue will not only far exceed the lost hotel tax revenue, but it will also generate new taxes in smaller markets where hotels/motels generally are in short supply. Because of the physical nature of Airbnb’s client-properties, it will be easier (than the internet sales) for the states to collect taxes. The emerging Airbnb competition must also follow suit, collecting and clearing taxes to the states.

     9. Last but not least, massive Savings will be generated from the Closure of Assessment Offices – In large cities and counties, hundreds of employees work in those offices (Assessor’s office, Assessment Review, Data Collection, Mapping, Valuation and Valuation Modeling, Customer Service, Exemptions, Public Relations and Outreach, Attorneys, etc.). The elimination of those high-paying jobs will save local governments tens of millions in salaries and benefits. Additionally, the closure of those offices will save significant sums in rent, utilities, security, maintenance, IT, web, telecom services, etc. Since governments try to solve all problems by hiring more people (actual case: “The county has hired 60 staffers and plans to bring on 20 more. The [XX] Commission…has hired 16 staffers and plans to bring on another 10 in the coming months.”), the elimination of property taxes will save local governments a ton.

Since property tax is one of the most explosive issues for the local politicians (they win or lose elections based on the assessment issue alone), homeowners and their watch groups must fight tooth and nail to phase it out. Now that the SALT deduction has been capped, even the rich homeowners might be in favor of this phase-out. Of course, the local unions will not be silent spectators in this fight. No doubt, this fight will end up at State Supreme Courts. Of course, in order to win this fight, all homeowners need is one favorable decision, which will spearhead and strengthen the movement coast-to-coast.

- Sid Som, MBA, MIM

President, Homequant, Inc.

homequant@gmail.com

Link to the Book

Replacing Personal Income Taxes with Middle-Class friendly Progressive Consumption Taxes

Under the existing income tax system, the top 1% pays 40% of all federal taxes. According to the Tax Policy Center, 44% of Americans will not pay any income taxes this year. On the other hand, Warren Buffett claims he has a lower tax rate than his secretary does. While much buzz was created about the carried interest, nothing has been done yet and as a result hedge fund billionaires continue to enjoy one of the lowest tax rates. According to Fortune, “Amazon will pay a whopping $0 in federal taxes on $11.2 billion profits.” These conflicting scenarios demonstrate how irrational the US Income Tax system has become. Therefore, it’s high time that we (phase out and) replace the personal income taxes with a set of progressive consumption taxes.

Of course, the one-size-fits-all consumption tax – which was proposed before and was justly unsuccessful – is inherently regressive, as poor and middle class folks tend to spend a much higher percentage of their incomes compared to the rich folks. Yet, the consumption tax could be an ideal replacement for the current income tax, as long as it is progressive. How? Quite simple – all non-food goods and services must be broken down into three progressive tax categories: Basic, Luxury and Ultra-luxury. While the basic category will have the lowest tax rates, luxury and ultra-luxury will carry progressively higher rates; for example, the national sales tax rate (atop the state and local sales taxes as it replaces the federal income tax) for basic durable goods (e.g., appliance) could be 2 to 3%, whereas the luxury and ultra-luxury could carry 5% and 10% rates, respectively. Needless to say, the lower rates for the basic category will advantage the middle class while the rich will be

Happier to pay higher national sales taxes in lieu of their disproportionately higher share of the federal income taxes (case in point: the top 1% pays 40% of all federal taxes). 

So, how will the progressive consumption tax system work?

1. National Sales Tax on Basic and Luxury Durable Goods – In order to save, say $5K to $5M on annual income taxes, taxpayers would be amenable to an additional national sales tax – obviously atop the current state and municipal sales taxes – on durable goods. Unlike income taxes, consumption taxes are more humane meaning families can budget or plan for these expenditures. Since the basic durable goods impact the poor and middle class, the rate must be lower, say 2% to 3%, followed by progressively higher rates on luxury durable and ultra luxury durable goods generally demanded by the rich; for instance, all appliances under $10K could be the basic, $10K to $20K being the luxury while over $20K being the ultra luxury category, with progressively higher rates. Likewise, automobiles could have three categories as well. Since this a national sales tax, it must cover all online purchases. While states and municipalities will continue to charge different sales tax rates, the national sales tax rates will be uniform across all states and territories as they will replace the federal income taxes.

2. National Sales Tax on Unhealthy (processed) Foods and Beverages – It’s about time that the health-conscious folks are not forced to subsidize those who basically live off junk foods and high-calorie beverages. This is a (preventive) health issue and, hopefully, this national sales tax will save citizens billions in health insurance premiums down the road. The parallel case is equally compelling: Today smokers are paying a hefty price for their lifestyle (significantly higher taxes on their lifestyle products and higher premiums on life and health insurances, etc.). While we must not take smokers’ choice away, the rest of us must not finance their lifestyles either. The phase-out of the income tax system will take 5 to 7 years, during which as the income tax revenue starts to come down, the junk food/beverage sales tax should start high at, say 10%, graduating down and perhaps bottoming out at 5%.

3. National Sales Tax on all Name Brand Prescription Medications – When a particular medication (all forms: oral, injection, iv, etc.) has a generic counterpart, it must be subjected to the national sales tax. Since the name brands are significantly costlier, they are generally meant for the rich folks, without directly impacting the poor or middle class. Of course, if or when a generic is not available (or is not easily or readily available), the brand name must be exempt from the proposed sales tax. Even the prescription generics produced in foreign facilities could be taxed (excise or sales).

4. National Sales Taxes on Million dollar-plus Home Sales – Since the rich and ultra-rich owning the upscale and expensive homes will be big beneficiaries of the phase-out (followed by no income taxes), the million dollar-plus home sales must be subjected to the additional progressive national sales taxes. It must not be a blanket one-size-fits-all rate; instead, it must be progressive, for example, sale price $1M to $2M @5.00%, $2M to $3M @5.25%, $3M to $5M @5.75%, $5M to $10M @6.00% and $10M+ @6.25%, etc. At the individual level, unlike the income taxes, these sales will impact them once in a while, thus a far preferable option than the high annual income taxes they have been paying. On the contrary, in order to keep the upscale housing market liquid and economic, the property tax component of the SALT cap must be separated and de-capped. Should sales clusters start to balloon just under $1M, the threshold could be lowered to the jumbo mortgage (non-conforming) level.

5. National Sales Tax on Luxury Hotels (4 and 5-Star) – These hotels are primarily for the corporate executives and rich folks so an additional 5-6% national sales tax will not harm the hotel industry. In fact, these hotels might even use this sales tax as a promo (“We Will Pay Your National Sales Tax”) in order to compete for the traffic during off-peak seasons. A vast majority of these hotels have medium-to-large convention centers – seasonal to round-the-year – so convention center sales surtax could be an ancillary surtax as well. The hotels that are run as resorts must be subjected to an additional resort sales surtax. Similarly, all private golf courses must have additional surtaxes. Again, none of these will adversely impact the middle class; even if they impact the middle class to some extent, it will be insignificant when compared to the tax savings they will be enjoying from the elimination of income taxes.

6. National Sales Tax on all Luxury Air Travels, Amtrak, Vacation Cruises and Car Rentals – Business and first class air travel, both domestic and international, is primarily for the corporate executives and rich folks so an additional 5-6% national sales tax will not harm the airline industry. Similarly, those who spend thousands more on luxury and ultra-luxury vacation cruise suites can afford an additional 5-6% national sales tax and it won’t harm the cruise industry either. Foreign cruises coming to the US shores may be subjected to additional port charges. Luxury car, charter flights and private jet rentals must carry sizable luxury and ultra-luxury national sales taxes. Likewise, upscale suites and berths on Amtrak must be subjected to the national sales tax as well. Again, none of these will adversely impact our middle class.

7. Selling Non-specific National Sales Tax Data to Private Companies – Undoubtedly, the national sales tax data will pave the way for the largest warehouse of the most uniform consumer spending and market performance Big Data, so the Commerce Department might consider selling the generic data to private companies, reducing the importance of the back-door data from the social media. Private companies in the consumer sphere, including the market research and econometric consulting firms, will pay large sums on an on-going basis to have access to such central and uniform data. Since the data will constantly change in line with the economic cycles, companies will be dependent on it, perennially. Additionally, the sale of data to the end-user private companies will be directly taxed while the value-added resellers will collect sales taxes from their clients. In no time, the national sales tax data could be a big money maker for the federal government. Citizenry would be relieved as the dominance of the social media data taking a nosedive.

8. Selling Naming Rights to Lesser-known or Un-named Federal Infrastructures – Let the rich people and private institutions pay to put their names up on lesser-known federal government buildings, town squares adjacent to federal buildings, highways, bridges, parks and recreational centers, education/job training centers, shelters, libraries, etc. that the federal government owns and operates. Federal government must also own the naming rights while funding (or primarily funding) non-profit institutions with federal dollars. If the wall is built on the southern border, naming rights to each stretch or segment must be auctioned off as well (in fact, this could provide partial funding for the wall, as well as the cost of general maintenance). The selling process must be totally open and transparent (via open tenders), thus awarding the naming rights to the highest bidders (some restrictions could apply). Also, in order to attract the right market price, it must also be term-limited, say 3 to 5 years. US DOT should also consider private-public joint ventures to build new toll roads and bridges (unable to get federal funding) wherein the private party incurs all costs to build the infrastructure in return for the toll incomes for 10-15 years.

9. Last but not least, Massive Savings will be generated by Downsizing IRS – IRS has over 80,000 employees with an operating cost of $11.5B. Obviously, the vast majority of them are expected to work on the personal income side. With the phase-out and eventual elimination of personal income taxes, the overall manpower could be significantly downsized, reducing the operating cost to $2B to $3B. Of course, a much smaller national sales tax group (Collection, IT and Data Science) will be needed under the umbrella of the Commerce Dept. Along with the reduced headcount, many IRS Centers around the country could be closed, data centers merged and cloud/storage facilities scaled back. The corporate income tax rate has already been lowered to 21% and any further reduction would necessitate some compensating European Union-style VAT. 

Instead of forcing the top 1% to pay 40% of all federal income taxes, we should seriously consider switching to a more humane progressive consumption tax system wherein people at large get to plan and decide the amount of taxes they would pay. While progressive consumption tax is poor and middle-class friendly, the rich would also welcome the idea considering the trade-off. Of course, studies will be needed to make the switch at least revenue neutral.

- Sid Som, MBA, MIM

President, Homequant, Inc.

homequant@gmail.com

Link to the Book