* * * THE SEVEN PERCENT SOLUTION An Essay: A Universal Solution For Economics And Taxation Policy
- From: tx_max_king <txmxking@xxxxxxxxx>
- Date: Fri, 19 Aug 2011 03:56:22 -0700 (PDT)
THE SEVEN PERCENT SOLUTION
An Essay:
A Universal Solution For Economics And Taxation Policy
We live in a world of consistently fluctuating variables. Yet our
success is dependent on constancy and stability. Our lives are quickly
disrupted when any single one, of the many constants we depend on, are
threatened. All facets of our economic system, such as tax rates, bank
rates, and profit margins, require us to incessantly recalibrate our
budgets and our lives. Public forums are always cluttered with debate
on what is ‘fair’ and what is not. We find it difficult to agree on
where boundaries lie. How much of a tax is too much? How much of a tax
is not enough? How do we achieve a fair balance and simplify a complex
economic system so the entire system is equally beneficial to all, and
in turn assures the success of all? Many economists and naysayers
would conclude this is never possible. Without a dictatorial
government, or a socialist system of redistribution, they would deem
it impossible. I disagree. I believe within a Democratic system, a
fair system of economics is not only attainable; it is the most
effective economic system to sustain and grow a true democracy.
I now present the Seven Percent Solution. The 7% solution is a
guideline for economic policy to balance the fair and mutually
beneficial trade among government, business, and individuals in our
society. This is not a mandate, nor is it a call for mandatory
legislation. It is a guideline. A template to provide a center point
of economic activity, easily understood by all, and just as easily
implemented by all. The focal point of debate, and the question we
struggle with the most is, where does the fine line set? Where does
‘not enough’ become ‘too much’? I conclude, through study and
research, seven percent is the balance point. It is not only the
beginning of a solution; it is also the continuation of a solution, ad
infinitum. Why is seven percent so significant? And what makes it the
perfect balancing point in economic theory? In order to explain the
significance of the numerical value, we must define the parameters.
And in order to define the parameters, we must begin by defining the
subject matter. To begin, we will study three facets of our economic
system that are critical to all: taxation, banking, and business
profits.
Taxation, banking, and business profits are each very unique facets of
our economic system. Yet at the same time they are very similar, and
all three facets have a direct correlation with each other. Not only
do they have a direct correlation with each other, but each is
dependent on the other for its success or failure. A failure of the
banking system will create a failure within the business community,
which in turn creates a failure in the taxation system. This is most
evident today in our current economic situation. A failure of the
taxing system will create a failure in the business community, which
in turn creates failures within the banking system. And any failure of
a business will create a failure of the bank for additional revenue.
And the failure of the business will create a failure to provide
additional tax revenue for government. It is a symbiotic relationship.
This is a relationship which in the recent past, has been both ignored
and overlooked by all parties involved, and in turn has created
failures for all three. The relationship is no different than the
relationships we find in nature within a food chain. If one system
breaks down, the entire system fails.
Such has been the recent economic downturn that has reverberated
throughout the world. The balance has been tipped and therefore the
scales have brought down the entire system. The failure of banks and
government housing programs, along with the failures of greed,
unscrupulous accounting, and the exceptionally risk laden investment
practices of Wall Street and other financial markets, have created a
failure of business and a decrease in tax revenues required to provide
public services for individuals. Within the great failures of these
three facets of our economy is one more group, whose relationship is
also completely and directly symbiotic with the other three. The
fourth group, are those that do not make decisions in government, do
not own their own business, are not bankers, nor are they usually
directly invested in financial markets. The fourth group is better
known as the ‘consuming public’. In many ways they are just as
powerful as the other three groups. They are the workforce of
business, government, and banking. They are the investors in business,
government, and banking. And they are the catalyst for the success or
failures of business, banking, and government. All four groups are
beneficial to each other, and also dependent on each other. Without
the success of one group, the other three do not succeed. As in any
relationship among partners, complete trust, honesty, and fairness are
critical. Without trust, honesty, and fairness, all are doomed to fail
miserably in time. And here is where we find ourselves now. Consumers
do not trust banks, or government, or business. They have been lied to
and swindled by all three. Public trust has been broken, and no one
seems to know how to repair it.
For this economic and inter-relational quagmire, I present the Seven
Percent Solution. Again, why seven percent? It is because seven
percent is fair to all parties involved. Seven percent provides
growth. It provides consistent growth without gouging each other. If
we were all treated fairly with a Seven Percent Solution, we would all
grow and succeed and benefit mutually. Please allow me to expound. In
order to do so, I will focus on each group individually and explain
the current situation, the required changes, and how it will benefit
all.
It is best to begin with the banking system, which is currently where
much of our problem has developed. Banks control two very important
facets of our lives, the interest rate at which we borrow money, and
the interest rate we earn on our savings. First, we will analyze the
interest rate at which we borrow money. Interest on loans will vary
extensively. Yet it is the same money, although it may be used for
many different things. We pay interest on our home loans, our auto
loans, our business loans, and our consumer loans. The balloon loans
are the reason many have lost their homes. A low ‘teaser’ loan which
eventually led to an inflated loan rate based on rising Federal loan
rates. Consumer loans were also hijacked with low teaser loans that
eventually ballooned into extensive loan rates when banks invested
themselves into a failing corner. Businesses have also struggled
because growth capital ground to a halt as banks refused to loan money
and the rates they had provided businesses on their credit was
increased. Yet the same banks continue to borrow money from the
Federal Treasury at discount rates, most often below 4%. This
inconsistency in loan rates has created panic and failure. There was a
time when anything over ten percent was considered ‘loan sharking’.
That is no longer the case. Banks consistently strap consumers and
business with rates well above 10% while borrowing from our own
government with our own Federal dollars at 2-3%. So what is considered
a ‘fair’ loan rate? On a home loan 7% is fair. On an auto loan 7% is
fair. On a business loan 7% is fair. On a consumer credit card loan 7%
is fair. This is the Seven Percent Solution.
There was a time when returns on Savings Accounts paid 6-7%. Lately
the average return on a Savings Account is 1 ½ to 3%. Maybe slightly
higher on longer term CD’s. Yet the average stock market gain annually
has been 10% for decades. So what is a fair gain on money you have
invested in a bank to help you later in life when you need it? I say
it is 7%. If you are required to pay 7% interest on money you borrow,
wouldn’t it be only fair to receive 7% interest on money you loan?
Yes, it would. This is fair, honest and a pillar of trust. And it
provides you with consistency you can budget on, grow, save and
succeed. But that is not what our monstrous banking system has morphed
into. Instead they have transformed from a Service Trust where we hold
our money and transfer our funds, to a greedy megalomaniacal system
that leeches every cent from us any chance it gets. They bombard us
daily with fees and gimmicks to cover their slight of hand with our
earnings. All this is achieved with the blessings of our State and
Federal governments. Yes, banks should be compensated for handling our
financial transactions. But the money we invest with them is for them
to invest with others. It is for them to invest in markets where their
returns will achieve 10% or more so they can profit and pay for their
expenses of handling our money. And if the Federal Reserve and the
Treasury are providing them with money at 3-5% interest, then it is
not unfair for us to receive 7% interest on money we provide them to
make their investments. The trust has been broken. Banks are not
satisfied with profiting enough to pay their employees, grow their
businesses, and pay their expenses. They want to get fatter, and the
management at the top wants to have more and more--- at our expense.
You don’t have to show a year end profit to grow a successful
business! Read that last sentence again, because it may come as a
surprise to many. But it is a fact. That is not to say you don’t have
to make a profit on the goods and services you sell. In order to
survive, you certainly do. But as long as you make enough profit to
pay your employees, and your expenses, and you use whatever else is
left to re-invest in your own company, you don’t have to show a year
end profit after expenses to have a growing and successful business.
The ‘game’ of quarterly, or year end profit after expenses, is
strictly a Wall Street game. It’s a game that is costing us all very
dearly. Let me explain. There are two types of profit. One type of
profit is necessary. The other type of profit is manufactured to
achieve prominence in the trading pits of Wall Street. Making a profit
to pay all your bills and reinvest in your company is essential. You
must make a profit on your goods and services to survive. But the
quarterly and year end profits companies report to Wall Street are
ambiguous at best. If your company forecasts an earnings profit and
you achieve it, your stock price goes up. The stockholders are happy
and the companies that pay dividends also keep their stockholders even
happier. But because these companies report a profit to Wall Street,
does not necessarily mean they are running at a profit. They could be
holding huge debt which they are not paying down on, just to report a
greater profit to the stockholders. Most companies run on debt. Few
companies run with all debts paid up to date. The small few that do,
are the companies that are actually making a profit after expenses are
paid.
This is the dark dirty secret no one will tell you. Instead, the real
picture is hidden in financial geek speak of P/E, equity, asset, and
other ratios that need to be deciphered before anything is easily
understood. So what is a fair return on investment on a company in the
markets? A fair return is 7%. If all the accounting is above board and
the debt is being reduced, or remains consistent from reinvestments in
the company, then a fair annual growth is 7%. That’s not to say
companies shouldn’t grow at a higher rate, or sometimes fall below the
7% rate of annual growth. But 7% annual growth is progress. 7% should
be the median where positive annual growth is judged. The formulas for
judging company growth on Wall Street are skewed. Without a level
playing field to judge true progress, all financial reports are
ambiguous and more often than not, deceptive. This creates wide swings
in stock prices that are not true to the actual health of the
companies involved. And it creates deceptions that create failures and
fraud exemplified by such names as Enron, Tyco, Arthur Anderson,
WorldCom, AIG, and many others that have failed or have been
prosecuted for deceptive trade practices. The pressure to report
consistent quarterly gains to satisfy investors and stockholders leads
to deception and fraud. A business that makes a fair profit on goods
and services, pays all of their employees and expenses, reduces their
debt, uses a portion of those profits to reinvest in their company,
and can still report a consistent annual profit of 7% at the end of
the year . . . is a company that is strong and will continue to
succeed.
And so what is a fair profit margin on sales of goods and services? A
fair profit margin is 7%. Can all companies survive on a 7% profit
margin on good and services? No, they can not. Some companies have a
much higher overhead and require a higher profit margin. But if the
overall ratio of overhead to profit is 7%, the Seven Percent Solution
provides a guideline for success. Now we all know that some businesses
sell their products at much higher margins than 7%. Some companies can
get away with selling their products at hundreds of percentage points
of margin, even after covering overhead costs. But generally, this
means that a company has an exclusivity on a product or service and
minimal or no competition. In some cases, such as intellectual
patents, this may be acceptable. But if the high profit margin is due
to market manipulation, monopolization, government favoritism,
protectionism or cronyism, then the exorbitant profit margins are
inflated and we all suffer. Other companies take the opposite
approach. They prefer to sell in quantity at margins below 3%. This
can also have an adverse effect on the economics of the industry
concerned. It creates an artificial market, decimates competition, and
eventually the company fails, because it cannot survive or pay
operating expenses on such minimal margins. These high and low
extremes in profit margins are what have created such an imbalanced
distribution of wealth in our society. The low margins have resulted
in bankruptcies and higher costs passed down to consumers, a stifling
of competition where large corporations easily out compete smaller
family based businesses, and an exporting of jobs to struggling
economies that can afford to pay minimal wages. The exorbitant margins
through cronyism, monopolies, protectionism, government subsidies,
government favoritism, and market manipulation have created a wealthy
class based on artificial or manipulated economics.
And finally, we arrive at the third group in our economic analysis,
government and government taxation policy. The best examples of
government subscribing to the Seven Percent Solution are State
Governments. The average State Sales Tax is 7%. In States where State
Sales Taxes (or adding in additional State Income Taxes) exceed 7%, we
find the States struggling to survive. In California, New York, and
other States where Sales and State Income taxes combined exceed the 7%
rate, we find businesses struggling to survive or leaving the States
for more fertile ground. Or we find consumers so over-taxed, their
economies are failing in every responsibility of government; Social
Services, Infrastructure and Development. On the Federal level, the
taxing system has become a quagmire and a nightmare. The complexity
for a solution astounds economists and politicians alike. Yet here
again, a Seven Percent Solution is not only viable, but it is the most
sustainable answer to a system wrought with loopholes and legal
verbiage that is incomprehensible to everyone except the most astute.
The first and most important requirement for a taxing system to be
fair for everyone, is for everyone to pay into the taxing system. In
this way, tax equity becomes everyone’s concern, not just those that
pay into the system.
The current debate continues deciding on whether a Federal Tax system
should be based on Income or based on a VAT tax (Value Added Tax). VAT
taxes are based on the sale or purchase of products or services (much
like a sales tax). The problem with VAT taxing is the complexity of
accounting for VAT taxes. And the susceptibility for fraud is even
more prevalent than in our current 'Income' taxing system. VAT taxing
is another opportunity for the very wealthy who can afford to shelter
a portion of their incomes in places where the reach of VAT does not
touch it. They never spend it. They simply hoard it and it never
reaches the government coffers. This is why VAT taxing is so popular
with the wealthy. They will then have a legal shelter for their riches
and the government will never touch it as long as they don’t see it.
Our Federal taxing system is a plethora of mixed regulations, both
inconsistent and benign with partiality. The question most often asked
is: where do we begin to reform our Federal tax system? A good
starting point would be with our current Non-Profit status. Non-profit
status has been consistently abused. Once again, as in those that are
not required to pay an Income Tax because of their lower wage bracket,
it is a shelter unfairly shifting the tax burden to others. Non-
profits have the right to vote on issues affecting those that are
paying taxes. If Non-Profits have the voice of a representative
voting, then they should also contribute to the tax system. The best
guideline of fair taxing comes from our very own Constitution. In
Article One, Section Eight of the Constitution there is a phrase that
defines the Federal government’s role in taxation. The phrase is
‘. . . uniform throughout the United States’. These four simple words
have been misaligned and ignored by our Federal government for
centuries now. But it is the one phrase in the Constitution that
defines our Founders concept of equality. And it specifically refers
to the Congressional power to levy taxes. So the answer of taxation
becomes much less complex. All citizens should pay Federal taxes
regardless of their economic stature or their non-profit business
status. And what would be a fair Federal Tax rate? Yes, Seven Percent
would be a fair tax rate for all citizens to pay the Federal
government to provide for our defense and our general welfare.
Why, you ask, should churches, social organizations and those with
meager income pay a 7% Federal Tax? Because by paying their share of
federal taxes they become Federal taxpayers and stand on equal footing
with all other taxpayers. Income is still the best system for Federal
taxation. Abolish Social Security taxes on Income and Federal
Withholding taxes on Income and collect a flat 7% tax on Income from
all citizens and registered business entities without exception. This
is a ‘fair’ Federal tax. All citizens and business entities would have
an equal stake in how their money is spent and all voters would have
an equal voice in their government. If income is invested in any type
of savings, then it should not be taxed until it is withdrawn. If
income is donated to charity, then it is not taxed. The government
would still receive a 7% revenue from the charitable organization
through the abolishment of non-profit status. The 7% revenue from
charitable organizations would go into a strategic fund that would
provide for Foreign Aid to other countries. Foreign Aid should be non-
existent except for funding coming directly from the strategic Foreign
Aid Fund provided by the 7% tax coming directly from charity
organizations and indirectly from the income of taxpayers donating to
charity organizations. Foreign Aid should not be a political tool, but
it should be a charitable contribution from taxpayers for countries in
need.
A 7% flat tax on income from all citizens and business entities is the
foundation of a fair Federal taxing system and it is ‘uniform
throughout the United States’. Government, with taxpayer approval, can
create a tax relief of 3% for investment in education, relieving some
of the tax burden on those paying to educate themselves or their
offspring, while at the same time promoting education as a national
priority. 7% is a base rate. For those with incomes above the national
average, an additional ascending income tax would be appropriate. A
flat 7% tax rate on all products and services sold in the United
States from other foreign countries would not only simplify our system
of import tariffs, it would also provide a level competitive playing
field for all countries wishing to sell their goods and services in
the United States. It may also inspire other countries to do the same.
A 7% preferential import tariff for countries that also charge us a 7%
import tariff, is a good incentive to promote fair trade throughout
the world. Corporations and businesses should only be charged a 7%
Federal Income tax rate on income and profits made here in the United
States, or profits brought into the United States from their
subsidiaries in foreign countries. Profits made from their
subsidiaries that remained in the countries where the subsidiaries are
located, would be exempt from the Federal taxes here in the States.
This would be a fair taxing system for corporations. It would require
them to pay the taxes on their income from their subsidiaries, in the
countries where the subsidiary resides, and at the tax rates of the
countries where the subsidiary is located. This would also level the
playing field for companies deciding on whether to do business here or
abroad. Corporations would no longer be able to shelter profits
overseas, because if the income and profits were made here in the
United States, then they would be taxed here in the United States. All
corporations doing business in the United States, whether foreign or
domestic would be taxed at the same 7% base tax rate on all income and
profits.
The Seven Percent Solution would require much stricter record keeping
and monitoring of the income of citizens and businesses. But it would
also provide a consistency and fairness we have yet to experience in
our Democracy. The last time the nations Federal spending to GDP
(Gross Domestic Product) ratio was near 7% was in 1907. Since then
wars would double the ratio. And after the war the ratio would
significantly reduce, but never to previous levels. Government would
find comfort in spending more. Currently the ratio of Federal
Government spending to GDP is almost 50%. This is certainly economic
suicide. The Federal government should also live by the 7% solution
when it comes to annual Federal spending. Seven percent of the 12
trillion dollar National Annual Income is just under a trillion
dollars. This is certainly a reasonable figure for a Federal
government to operate on. An increase in National Income would mean an
increase in tax revenue and vice versa.
UNIFORM THROUGHOUT THE STATES
The Constitution requires our Congress to provide for two very
important tasks with our tax dollars. It requires Congress to provide
us with ‘National Defense’ and the ‘General Welfare’ of citizens. I
prefer to define these as International Spending and Domestic
Spending. Each should have equal revenue from the Federal coffers.
Each should receive their equal share of the 7% of the Federal Budget.
Dedicating an equal share to both the obligations required by our
Constitution would dismiss the arguments and debates on how much of
our tax money should go to Defense and how much should go to Domestic
programs. Defense spending would include our intelligence agencies,
law enforcement and military. Domestic spending would include the
operating budget of the Federal government and social services. States
should also be budgeted a single annual revenue payment from the
Federal government based on the ‘uniform throughout the States’
Constitutional mandate. Each State would receive its annual
appropriation from the Federal government based on a calculation of
State population and area. This would eradicate the ‘honey’ deals,
pork barrel and behind the scenes chicanery so prevalent in
Congressional disbursement of funding to the States.
I sense the dissidents cry, ‘but 7% of all of our incomes is not
enough to run our government and provide our current social services’.
In order for the Seven Percent Solution to work for taxation of Income
and for Federal spending on social services two things must occur.
Both are also symbiotic one with the other. First we must understand
that Social Security, Medicare, Medicaid, Welfare, Unemployment, and
Workmen’ Compensation, all provide the same basic service. They all
provide for the ‘General Welfare’ of our citizens. In effect they
should all fall under the same bureaucratic agency. By understanding
that all of these programs achieve a similar goal, we can reduce
redundancy and inefficiency in government. And in turn, provide a
better system of social services for the general welfare. But to
continue with the status quo will not suffice. Our system of Social
Security and other so-called ‘entitlement benefits’ is neither
realistic nor economically feasible in the long term. It will only
burden us with more debt and a possible future failure of our economic
system and our government.
We require a new system of operating to provide the beneficial
services required in times of aging, ill health or other hardships
where government may provide a cushion of support. On this note, I
return to our taxing system. And to continue I must begin to provide
firm numbers to work with. The best ‘standard’ numerical factor to
work with is the ‘Average Individual Income’. The Average Individual
Income is the Income level where an individual receives enough income
to provide housing rent or mortgage costs, transportation costs,
insurance costs, food costs, cost of utilities and a portion of income
for clothing or other annual costs. A reasonable individual annual
gross income of $30,000.00 in 2011 may provide those needs. This
figure, the Average Individual Income, is important for two reasons.
First, it becomes the basis for where the 7% Income Tax bracket is
incremented to the next tax bracket. And second, it provides a
reasonable figure for individuals to earn a comfortable living. The
key word here is ‘individuals’. This does not include a spouse or
children.
This leads us to the second aspect of the symbiotic relationship
required for the Seven Percent Solution to work. Out tax codes are
complex, cumbersome and cater to special interests. This has to be
stopped. Again we turn to our Constitution. A Federal Tax Code must be
‘uniform throughout the States’. This means that any Federal Income
Tax Code has to apply to all entities across the board. This also
means that the same Tax Code brackets that apply to individuals should
also apply to Corporations, Business entities, Capital Gains and any
other organization profiting from Income. Furthermore, the
differentiations between filing Single, Jointly or as a Head of
Household needs to abolished. Each individual, Corporation or business
entity, would all pay the same base 7% Income Tax. An ascending tax
scale would increase for those with a gross income over $30,000.00
annually. I’ve outlined an ascending tax scale which I will explain
after this final point.
In order to provide for what we now classify as Social Security,
Medicare, Medicaid and other General Welfare benefits, we must develop
a different system of revenue streaming. For those who earn
‘individually’ less than $240,000.00 annually, an additional 7% of
Income is collected and invested in U. S. Treasuries as a savings
account to provide for future retirement at 65 or medical expenses
after retirement. It is important this revenue can ‘only’ be invested
in Treasuries and not in other riskier market investments. The
investment savings account will provide for retirement funds and
medical expenses. If the total, including interest accrued is not used
upon the death of the individual, then the revenue would be
transferred to their beneficiary. Anyone with an income of over
$240,000.00 would have the option of ‘opting out’ of the retirement
and medical savings account, but when reaching their retirement age,
would not be compensated by the Federal government for any retirement
or medical benefits.
Here is the breakdown of the tax brackets and the percentage of income
sent to the Federal government. This taxing Code and tax brackets
applies to individuals, Corporations, Capital Gains and Business
entities. Non-profits pay only the 7% base Income Tax. Deductions may
be provided for children for anyone above the 7% tax bracket. Keep in
mind that this tax system replaces all Payroll deductions of both
employees and employers.
* Note: Total charitable deductions allowed for all tax brackets is 7%
of gross income. Total legitimate deductions allowed is equivalent to
the percentage of the tax bracket. In other words if you are in the
35% tax bracket, you are allowed a maximum of 35% of legitimate
deductions. Hence you would only pay taxes on the Income sum after
deductions. The 7% Retirement Medical Savings Investment Account tax
would be taxed on gross income (before deductions).
Under $30,000.00 Gross Annually ……….7% ........add 7% for Retirement/
Medical Savings Investment Account
Under $60,000.00 Gross Annually ………..14%........add 7% for Retirement/
Medical Savings Investment Account
Under $120,000.00 Gross Annually………..21%........add 7% for Retirement/
Medical Savings Investment Account
Under $240,000.00 Gross Annually ………..28%........add 7% for Retirement/
Medical Savings Investment Account
Under $480,000.00 Gross Annually ………..35%
Under $960,000.00 Gross Annually ………..42%
Optional Revenue Tax Bracket for International conflict where
additional military spending is required:
Under $1,920,000.00 Gross Annually ……...49%
I’ll leave it to the number crunchers to calculate the difference in
tax revenues between our current system of taxation injustice, and the
simplified fair taxing system of a Seven Percent Solution. I do know a
Seven Percent solution for banking, business and taxation would
rekindle the trust, honesty, and fairness we all long for. And in turn
it will provide a simple formula with consistent results, and the
potential for consistent growth and success for everyone to share.
Comments and suggestions encouraged. Please post them on my blog at:
http://texasmax.blogspot.com/
It's now up to you.
tmk
February 11, 2011
Revised August 17, 2011
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