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  INCOME TAX = PRODUCTIVITY TAX 
 
 As an economic observer, one notes that there are basically three types of 
 taxes a government can impose: 1) Income tax, 2) Consumption tax (e.g. sales 
 taxes, value-added taxes, tariffs), or 3) Asset tax.  In a free-market 
 economy, the imposition of each type of tax will differently influence the 
 choices of individuals with regard to income (i.e. work vs. leisure), 
 savings/investment, and consumption.  

 In the absence of taxes, people will presumably work, save and consume 
 (spend) at levels commeasurate with their own ability and desires.  This 
 would theoretically produce an economically optimized society.  However, 
 given the necessity for taxes to support services that government can best 
 provide, it seems desireable that taxes should be structured so as to at 
 least not cause economic sub-optimizaton.  

 Viewing current taxes from the point of view of an average taxpayer of 
 middle class means, the approximate tax burden on a two income, home-owning 
 married couple grossing $50,000/year living in a state with a hypothetical 
 5% income tax and 5% sales tax is as follows: 

  Gross Income               :  $50,000
  IRA contribution           : -$ 4,000  (savings/investment)
  Mortgage/Other Deductions  : -$ 8,000  (non-taxed consumption)
  State Tax Deductions       : -$ 3,000
                               --------
  Federal Taxable Income     :  $35,000
  Federal Income Tax         : -$ 6,047  (an INCOME TAX)
                                -------
                                $28,953
  State Income Adjustments   :  $ 3,000
                                -------
                                $31,953
  State/Local Income Tax     : -$ 1,600  (an INCOME TAX)
  Property Tax               : -$ 1,400  (an ASSET TAX) 
  Social Security Tax (6.5%) : -$ 3,250  (an INCOME TAX)
                                -------
  Consumable Income             $25,703
  Tax-Exempt Consumption     : -$ 7,000
  Other Savings (4% * 50K)   : -$ 2,000
                                -------
  Taxable Consumption        :  $16,703
  Sales Tax (@5%)            : -$   835  (CONSUMPTION TAX)
  Gasoline Taxes             : -$   200  (CONSUMPTION TAX)
  Excise Tax on Home         : -$   100  (CONSUMPTION TAX)
  (Amortized over 20 years)                                       

 Breaking the tax burden down by category shows:
      
   INCOME TAXES         $10,897      81%
   ASSET TAXES          $ 1,400      10%
   CONSUMPTION TAXES    $ 1,135       9%
                        -------
                        $13,432
      
 This example shows that the American tax burden is imbalanced between the 
 three types of taxes, with the majority of the burden by a wide margin being 
 comprised of an income tax.  
      
 
 The impact of this disproportionate tax burden on the economy as a whole can 
 be seen by examining how income taxes affect the utility of income to the 
 individual.  Since income can only be spent or saved (invested), a rational 
 individual will look at how an income tax affects those two options.  
      
 By saving and investing income, an individual foregoes current consumption 
 in favor of future consumption.  He or she will only be willing to do so 
 provided that they believe that it will enable a higher level of future 
 consumption.  For this to be possible, the income which is saved must itself 
 earn income which means it must be invested.  However, the income on this 
 investment will also be taxed.  This reduces the value of savings, thus 
 acting as an incentive for the individual to consume income immediately 
 rather than invest it for later consumption.  
      
 Despite the cuts in the top marginal U.S. income tax rates over the past 30 
 years, the real income tax burden on the average taxpayer has actually 
 increased.  This is the result of inflation induced bracket creep, higher 
 state and local income taxes, and expanding social security taxes.  It is 
 not surprising therefore, that over this time period the savings rate of 
 individuals has dropped from 7% down to about 3% of income recently (1988).  
 
 The declining savings rate has resulted in higher interest rates.  It has 
 also resulted in corresponding lower rate of industrial investment than some 
 of our foreign trade competitors.  This means that on average, U.S.  
 research and development facilities are turning out new products and 
 processes at a slower rate, and U.S. factorys are operating with older plant 
 and equipment as compared with top foreign competitors.  

 A severe trade imbalance and a decline in relative per capita income is the 
 already apparent inevitable result of these policies.  Reversal of this 
 situation will require either an economic calamity to re-stimulate savings, 
 or alternatively, but unlikely, a recognition by politicians that the income 
 tax is not a "progressive tax", but is rather a "Productivity Tax".  
      
  40% Socialist ? Ŀ
                                                                        
  In the example above, the total tax burden of $13,432 comprises 27%   
  of the couple's gross income of $50,000.  Adding the 6.5% matching    
  Social Security payment made by their employer, plus corporate        
  taxes and inflation paid indirectly through the price of goods and    
  services will raise the couple's total direct and indirect tax burden 
  to over 37%.  This is the percentage of Gross National Product that   
  is spent by local, state and federal governments in the USA.          
  Although we view ourselves as a capitalist, free market nation, these 
  figures belie the fact that we are already almost 40% socialist.       
                                                                        
  Stated in other terms, almost 40% of spending in this country is      
  a result of "collective" decision making as opposed to individual     
  decision-making.  This raises the question: If a majority of the      
  income of the majority of people is channeled through government      
  offices, will the private sector ever stand a chance with a public    
  dependent upon public payroll and political handouts?  One would      
  think not.  Perhaps it is time to place a constitutional cap on total 
  government spending so we will remain a country of free individuals.  
                                                                        
  Robert Nile Hobbs, Pres., Techserve, inc.                             
 
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  Copyright (C) 1988, Techserve, inc.  (P.O.Box 9, Issaquah, WA 98027)  
 Ľ
 
 
 ķ
  This article may be reproduced in whole or part provided copyright    
  notice is preserved.  Persons concerned with this subject are in      
  fact encouraged to send a copy of this to their congressmen and       
  legislators with a request for action to cap governmental spending    
  and to re-structure taxes in an economically balanced fashion.        
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