How to Make Our Tax Code Much More Progressive and Business Friendly Simultaneously

More Specific Rules for My Investment Income and C Corporation Tax Reforms

Below are the more specific and detailed IRS and other rules that I have proposed for my, Investment Income, US Employer/ Manufacturer Tax Rate Carve Out, tax reform, as well as my C Corporation, and possibly large Qualified Business Income Deductee, Higher US Employee Compensation Tax Incentive, tax reform. These rules work well with an accompanying video that I have up on my very new Youtube channel, “Tom Pallow’s Economics of Quality”. I will start with the first tax reform.

Before I go into these proposed rules, let me first explain the many and enormous economic benefits that would result from this tax reform and tax rate carve out.

There are Four Special Financial Investments wherein the income earned from those investments will receive a much lower tax rate when compared to the tax rate for gains derived from all other financial investments. In fact, this difference in tax rate between the carve out rate and the general tax rate could be the widest among modern tax carve outs. This is because the reform would be so hard to game, the math of the carve out is so positive, and the reform would spur so much domestic economic growth!

The Four Special Financial Investments are: One, Corporate Bonds that are bought only at first issue that are used by a US corporation or US corporate subsidiary of a foreign business. Second, US corporate or private entity stock that is publicly traded and bought only at first issue, or IPO or following issue involving real business equity. Third, US venture capital investments through established banks and venture capital firms. Fourth, the financial underwriting of any of the above investments. Of course, all FSFIs will first need to achieve US wage and/or US business capital expense requirements in order to acquire the lower carve out tax rate, and I will explain more soon.

The economic benefits of carving out for tax purposes these four investments are many!

To start, by incentivizing more investments in these four financial vehicles via a lower tax rate on capital gains derived from them, the cost of capital for businesses expanding in the US will be substantially reduced, while simultaneously creating the ability to raise massive amounts of new federal tax revenues by raising capital gains tax rates on capital gains derived from all other investments but the FSFIs.

The FSFIs are the financial vehicles that are used by businesses to raise business capital in the financial markets to expand. Large corporations will generally borrow from banks or float new corporate  bonds in order to raise capital. More medium sized businesses will often go from being private businesses to publicly traded corporations and in that process issue an Initial Public Offering of stock. Still smaller businesses will look for Venture Capitalists to fund expansion. Then banks and even individual people will underwrite the above three types of financial investments as these financial vehicles are first being created and packaged to be sold to ordinary investors for the first time.

The FSFIs are, in the end, the real economic purpose of the business side, as opposed to the investment side, of the stock and bond portions of the investment markets. The, almost always over 90 %, of investment market income gains that are derived from financial vehicles that are NOT any of the FSFIs, these none FSFIs are what are now sometimes called the, derivatives market, but were in the past commonly called the, secondary market, or even before, paper trades. They are stocks, bonds, and other financial investments that have already, as is referred to today as, “been underwritten and packaged”, and importantly for this reform, also have been “sold at least” once already. Or in other words, these are financial investment vehicles that have been “sold a second time or more.”

Therefore, by pinpointing when capital gains taxes can be lowest, that is with the FSFIs that have not been sold a second time or more and have met US wage and businesses capital expense requirements, by pinpointing lowest tax rates here at the point of US business capital formation, we will insure a much lower cost of capital for businesses expanding in the US by increasing the incentive for Americans to invest in qualifying FSFIs.

Qualifying FSFIs also make the perfect tax rate carve out definition point wherein capital gains and dividends that do not come from qualifying FSFIs could have tax rates increased on, and this would have the effect of both increasing federal government tax revenues while simultaneously increasing the tax incentive to invest in qualifying FSFIs, therefore further biding down the cost of business capital for businesses expanding in the US!

Here are some footnotes I have often used for this reform:

1. “Recent Changes in US Family Finances”, Federal Reserve Bulletin

2. Jay R Ritter, University of Florida, “Initial Public Offerings.”

These studies together show that the FSFIs over about a 30 year period, only in four quarters produced over 10 %, and never over 20 % of total financial market income gains, and that the average was around 6 %.

However, sources for both footnotes 1 and 2 do little to nothing to distinguish between foreign and US investments while also not having any of the domestic wage or business capital expense requirements in order to achieve the lower tax rate. So the percentage of investment income gains that come from qualifying FSFIs will be significantly less than 6 %, and my estimates would be that with the proper US wage and capital expense requirements, the cost of this tax carve out would always be under about 5% of the current federal investment income tax revenue total. Of course, that is the total cost of the tax carve out, without calculating and adding in any of the new federal tax revenues that would accrue  due to the amazing new levels of economic growth that would occur due to the incentives in this tax reform. .

The first footnote source is a very large survey that has been taken since the 1960s by the US government, and the second source I used to get the venture capital calculations.

So this reform would be, statically scored, extremely inexpensive, while economically doing so much. It would direct more business investment into the US by corporations, venture capitalists, and the investing community, thus increasing US wage and economic growth. It would reduce the cost of capital for businesses expanding in the US, thus improving US business competitiveness and growth.

Also, this tax reform would likely reduce the probability and adverse economic effects of financial market crashes by moving more financial market investments into tangible domestic wage and business capital expenses that have much higher domestic economic multiplier effects than do derivative trades and secondary market trades.

The reform would also reward gains from investments that require more research into an actual business, industry, and economy, instead of derivative and secondary market trading wherein the investing research tends to focus on fluctuations in financial market movements.

This reform could also very easily fix the Carried Interest issue by differentiating with income taxes on hedge funds between hedge  fund income from gains via qualified FSFIs and all other hedge fund income. This could be done in a, statically scored, “revenue neutral” way, and it would raise huge amounts of new federal revenues while increasing US economic growth. It would also discourage hedge funds and others from buying US businesses and moving them abroad.

In a bit I will also explain how small investors will also be able to invest in qualifying FSFIs.

But first, how can this investment income tax reform actually work without being gamed?

To start, fortunately for this reform, it concerns the US financial markets, which are one of the most regulated markets in the world. Importantly, I can not think of any information or data that will be needed to be collected by businesses and the IRS for this reform to work that is today not already required to be collected by some business or  government agency.

Let me start with the US wage and business capital expense requirement rules.

Generally stated, the US wage and Cap X requirements will vary depending on the legal structure of the business, the type of investment infusing capital into the business, and whether or not the business has direct investments outside the US.

The Wage and Capital Expense Requirements are expressed as a percentage of the Total Infusion of New Capital that are acquired by the business due to one of the FSFIs, minus any legal costs but within limits, to the business to acquire that new capital.

At the lowest level, a private business that is selling some or all ownership through venture capital and has no direct business investments in a foreign country, would only need to spend 60 % of its Total Infusion of New Capital as Qualifying Wage and Capital Expenses. 60 % would also be the percentage required for private businesses that sell ownership publicly and issue IPOs while not directly investing in a foreign country.

However, 80 % of the TINC would need to be spent on Qualifying Wage and Capital Expenses if: the FSFI that created the TINC is the flotation of any bond by any type of business entity, or if any business that created the TINC has any direct investments outside of the US.

The requirements of 60 % and 80 % were not set this way as an incentive for more US investment, although this tax reform as a whole seeks that goal, 60 % and 80 % are set this way so that they are low enough for the investment markets and economy to best function while not letting the tax law be gamed. We can talk more deeply about this area if you’d like.

Regarding hedge funds and fixing the carried interest issue by, when taxing hedge funds, carving out for a lower tax gains derived from qualifying FSFIs while raising taxes for hedge fund income from none qualifying FSFIs gains, for these investments, 90 % of the TINC would need to be spent on Qualifying Wage and Capital Expenses

Regarding the question of what are Qualifying Wage and Capital Expenses, wherein 60 % or 80 % or 90 % of the Total Infusion of New Capital of one of the Four Special Financial Investments needs to be spent in order so that income gains from this Four Special Financial Investment might receive the lower carve out capital gains tax rate?

First off, there will always need to be some US wage expense requirements that accompany any US business capital expense requirements for businesses to help their investors achieve the lower carve out tax rate. That is, if the lower carve out tax rate could be achieved through only business capital expenses and not any US wage expenses, then the law would be open to extreme abuse and gaming.

However, and often with manufacturers, bonds and stocks are issued and parts of ownerships are sold in order to raise funds for specific capital goods investments in order to remain globally competitive and keep employing in the US. That said, and only as my opinion due to economic and social benefit and not due to need that without this tax reform would be gamed, but  as a rule, the lower the total wage component of this requirement, the higher should be the average wage in this wage component. How “average wage” is measured I will explain with my second two tax reforms.

The good news with this tax reform is that we could use the same definitions for wages and capital expenses as is used with the Qualified Business Income Deduction of the TCJA of 2017.

In the past I set the minimum percentage of domestic wage expenses needed to quantify at around 10 % or even 5 %. This is because most manufacturing and even retailing is heavily capital intensive and not labor intensive.

And while it would complicate things a bit, and I will explain later with the other two tax reforms how it most easily could be done, I believe that as the US wage requirement is reduced as part of what is required, a higher US employee compensation average should also be needed to acquire the lower investment income tax rate.

The IRS will also need to document the exact date of TINC as well as the completion date of Required Wage and Capital Expenses. This is because income gains from the Four Special Financial Investments can only receive the lower carve out tax rate if the Four Special Financial Investment is first “bought” at “date” of TINC and first sold on or after the “date” of the business spending the RWCE. In my opinion this is the fairest and most economically beneficial method here, as opposed to also attaching specific time periods after date of TINC as well to quantify for the lower carve out tax rate.

Fortunately, our financial markets, especially concerning the FSFIs, are one of the most highly regulated markets in the world. The IRS and proper government agencies could have a policy wherein businesses with stellar records of compliance set their announcement dates of own TINCs and dates of reaching RWCE. Other businesses that have less than stellar legal records with the IRS and others would need to pay for IRS and other audits to be completed before certification of RWCE dates and even as possible TINC dates are publicly announced. Again, I always welcome questions.

The most obvious questions from here are, when is an investment considered “bought” on the date of TINC? Also, when is an investment considered “first sold” at or after date of RWCE and therefore no longer considered a FSFI?

The primary goals of laws and regulations here would be to accurately document and possibly certify that the information regarding ” sellers and buyers” of FSFIs at date of TINC, and sellers of FSFIs at date of RWCE, and all of these purchase prices involved are indeed accurate, while opening up investing in the FSFIs to as many people as possible and not just the wealthiest investors who have special access.

With these goals in mind, a FSFI would be considered “Bought at Date of TINC” if: It has not been bought by more than two financial or trading institutions or more than one private investor, or if it is more than three working bank days from the date of TINC. The federal government and regulators would also need to force large trading institutions into finding further ways for small investors to be able to buy FSFIs.

And, an investment that is considered “First Sold on or after Date of RWCE can only be sold once, be it sold to any financial institution or private investor.

Also to clarify, the FSFIs must be bought at TINC and can not be sold in any way until Date of RWCE.

So this is essentially the basics of this tax reform, but I am always open to every type of question. .

On to my second tax reform which is a tax incentive for C Corporations, and possibly large Qualified Business Income Deductees, to compensate their US employees at ever higher rates. A more specific example could be allowing America’s highest employee compensating C Corporations to have a top tax rate of 15%, while the worst employee compensating C Corporations would have a top tax rate of 35%, with an average tax rate of about 25%, and corresponding tax rates inbetween.

These two tax reform’s political opponents will argue that businesses must pay market rates for their employees, so rewarding businesses that compensate their US employees at above average rates with lower income tax rates will have no positive effects because businesses must pay their employees more regardless of their income tax rates.

While this may be true for long established business sectors that see little innovation, most of the economy is much more dynamic and ever changing than that, with new business models being implemented in new and old business sectors all of the time. With this tax reform, all entrepreneurs will always have a strong financial incentive to come up with business models that pay their US employees above average, and the more above the average the greater the tax incentive reward.  It is at this crucial stage, of the inception of new business models by US entrepreneurs, that a tax incentive to employ Americans at higher than average rates of compensation will be greatly appreciated by the American worker!

The one thing that all economists believe is that financial incentives work, at least to some degree. At least as importantly, the political, economic, and social value that will come from institutionally incentivizing in our tax code US businesses to pay their US employees higher than the national average, this value will be so high it may never be able to be calculated!

So let’s see how these two reforms can actually work.

I always want to piggyback on any existing IRS or other laws with my reforms.

IRS law currently has a “Small Business Healthcare Tax Credit.” We could use this section’s definition of “Average Annual Wages”, with the following exceptions:

1. All seasonal employment compensation should count for the business towards what is calculated for their Average Compensation Raking.

2. None profit work and compensation should not apply.

3. No wage, salary, or compensation can be counted positively by any business towards their Average Compensation Ranking if that compensation goes to any person who owns anything more than the least powerful form of publicly traded stock or profit sharing plan in that business.

So how does this ranking work in the real world and more on it:

Firstly, one of the great things about these two tax reforms is that a business would expose themselves greatly to the IRS if they were to attempt to game these two reforms.This is primarily because these reforms have to do with US employee compensation, which are the single most documented and confirmed accurate forms of data that the IRS has.

That stated, I think the most effective yet simply way to implement this lower tax rate for C Corporations and large QBID qualifiers who “pay their US employees above average wages” would be the following:

Both C Corporations and large QBID qualifiers would calculate their Average Compensation Ranking yearly and with quarterly estimates. Prior to this the IRS would publicly post quarterly, National and Regional Average Compensation Rankings.

These businesses would be ranked from 1 to 20 comparing their ACR to the National ACR, and 1 to 20 comparing their ACR to their Regional Average Compensation Ranking. The business’s two rankings are then averaged, with their Regional ACR only averaging half their total ACR to the degree to which they only employ in one Region. Then those businesses with totaled scores above 10 would then be able to reduce some of their income tax rate.

Scores above 10 can be subdivided creating three or more higher subdivisions above the average. For example, scores between 10 and 12.5 could achieve .25 of the possible tax cut, 12.5 to 15 half the cut, 15 to 17.5 would get .75, and above 17.5 the largest cut. And of course, businesses with scores below 10 would have their top tax rate increased from 25% up to 35% accordingly in reverse.

Importantly, the National and Regional Average Compensation Rankings made by the IRS should never be actual or even predicted actual averages. These averages should be closer to a 55 percent/45 percent split, where closer to 55 percent of US businesses would be above average. This would be a better policy for economic growth and predictability, while not at all affecting the goal of these reforms nor possible tax gaming. We can always talk further as to why this policy should exist.

And yes, having Regional ACRs will complicate tax preparation. Yet, regions could be made extremely large, but small enough to reflect important urban versus rural wage differences.

Another IRS rule would need to be that no business could take any total dollar amount of tax reduction that is above 80 percent of their yearly US employee compensation expense.

Also, at every point possible with these two reforms we should try and mirror the C Corp law with Qualified Businesses Income Deduction law. This policy would be helpful economically, politically, and administratively.

We could also raise some federal tax revenues and create a pay for by creating an employee wage requirement and attaching it to the C Corporation tax reductions in 2017’s TCJA. New federal revenues would be raised because many C Corporations have few to no US employees and other “dormant” US C Corps are used for tax avoidance.

The above Average Compensation Ranking system could also be employed in my capital gains tax reform by Rankings needing to be higher than average for Four Special Financial Investments that have relatively few total US wage expenses to quantify.

Summary of Our Overall Tax Reform Plan Using 2010 Numbers


Contact: Tom Pallow at 202-903-1133 or

All polls show that the top two issues Americans care most about are creating private sector jobs and lowering our federal debt. Our overall tax plan addresses these two issues better than any other proposed plan. Plus, our plan avoids the major economic and political vulnerability that Republicans will exploit Democrats with given the global nature of our economy, that Democrats will be raising taxes on job creators, and most detrimentally during a recession. Our overall plan affects the personal income, corporate, capital gains, and FICA taxes.

The personal income tax portion of our plan rests on a little known economic reality. We believe that now and in the future, given the now global nature of our economy, Democrats will need to fully take advantage of this reality in order to be successful regarding tax policy. The little known economic reality is this: Within the highest incomes strata in the US, as well as all incomes, a relatively small percentage of the total income is the profits of any businesses that in not a C Corporation that has one or more employees in the US. For example, within all the income that is earned by the top 5% of income earners in the US, only about 18% of all that income is the profits of any business that is not a C Corporation that has one or more employees in the US(1,2,3). For the top 1% of US income earners this number is about 21%, and for the top 10% it is about 12%(1,2,3). For the top 2% it is about 19%. The top 5% of earners is roughly all households that make more than $220,000 a year, or about where today’s 33% personal income tax bracket starts. President Obama has pledged to have the Bush tax cuts expire on today’s 33% and 35% brackets, and have them go to 36% and 39.6% respectively, beginning at $250,000 of income a year where about the top 2% of income earners begins.

Republicans with often quote figures as high as 70% for the number of “business owners” in the top 1% or 2% of US income earners. Yet that number can only be derived at by counting all those who own any kind of stock as business owners. Republicans will also say that if we raise taxes on the top 2% we will be raising taxes on 50% of the income of small business owners. If we define small business income as all business income that is taxed through the personal income tax, then it is true that 50% of small business income would have higher tax rates.

One option within the personal income tax portion of our plan would increase tax rates on the top two brackets by the same amounts and at the same income levels as President Obama’s plan. However, our plan would award US Employee Tax Credits for all W2’d employee wages and salaries below $106,800 a year (or that years FICA cap) that are spent in the US. These tax credits would enable a private businesses to lower their effective tax rate from the amount as though the bracket rates were 39.6%, 36%, 28%, 25%, 15%, and 10% to no lower than if the bracket rates were 35%, 33%, 28%, 20%, 10% and 5%. With the second set of numbers, given that the bottom four rates are below where they are today, and that the top two rates are not changed, the effective tax rate for about 98% of private businesses that hire in the US would go below where they are today under the current Bush plan. Effective tax rates for nearly all private businesses entering the 39.6% bracket would be cut by 2.25%. The 36% bracket would be cut 6.8%, the 28% bracket by 34%, the 25% bracket by 33%, the 15% bracket by 50%, and the 10% bracket by 50%.

These tax credits would create an effective tax cut for the employers of 98% of Americans that are hired by private businesses, and only about 1% of such Americans would have their employer’s tax rate go up. These tax cuts, along with the fact that they are tax cuts for employee expenses spent in the US, would completely reverse the argument by Republicans that Democrats will be raising taxes on job creators during a recession!

Our US Employee Tax Credits are calculated by adding $.07 for every dollar spent in employee net earnings for the first $106,800 in one tax year of W2 based wages and/or salaries that are paid for work done in the US. By only rewarding tax credits for wages and/or salaries paid below $106,800, where social security payroll taxes are paid, the calculating of the tax credits for businesses, and the policing of the policy for the IRS, will be made much earlier. Also, the $106,800 cap, which will increase as the social security tax cap increases, will insure that not much of the tax credits will be rewarded for the payment of very high salaries. Further, and very importantly, our US Employee Tax Credits would create an incentive for businesses to claim their employee expenses on their books and not pay employees under the table. Given that FICA taxes have been raised recently due to the Affordable Healthcare Act, and may need to be raised in the future given increasing healthcare and social security costs, the underground economy in labor is going to become an increasing problem.

Regarding the potential problem of businesses claiming ETC’s for people who currently work for them as independent contractors: Remember ETC’s are worth 7 cents for every dollar of qualifying wages or salary spent. No business would ever spend 7.65 cents of every wage or salary dollar expense for their employer side of FICA taxes only to then only get 7 cents of tax credit. Also, such an independent contractor would no longer be able to employ anyone to work for him and thereby be able to use these qualifying employee expenses for ETC’s against their income.

7% for the value of the ETC was chosen because by being below the 7.65% employer side of FICA taxes the ETC would not be a tax shelter. However, the lower the value of the ETC, the less universal the ETCO will be and the more it will be that extremely small employers with generally five or less employees will not be able to take full advantage of the the ETCO. So the ETCO’s contribution to the question of how high or low employer FICA tax rates should be will be a question for economists to answer in the future. However, and very importantly, with cuts to employer FICA tax rates being proposed in the past few years, it is true that it would be best for the value of the ETC to go down along with any such cut. It is also true that the value of ETCs should go up along with any increase in the total employer FICA tax rate, something that may have to occur under Obamacare, and this would increase the ETCO’s universality.

Below are more of the rules to qualify for Employee Tax Credits and therefore ETCOs:

Employee wages and salaries that qualify for the ETC may not go to any “business owner” nor any dependent of any business owner, be it a C Corporation or otherwise. Nor can they go to any immediate family member, including by marriage, who reside in any home owned by that business owner. Also, ETC qualifying compensation can not go to any of the portion above 33% of any single employee’s wages and/or salary who works more than 33% of the year outside of the US. Nor can they go to any “employee” who works less than 18 hours a week on average who simultaneously receives income from more than two other employers who use that employees wages or salary for the ETC. If a dispute arises regarding which three employers can use their paid compensation for the ETC for any one particular employee, the three employers who pay the three highest total compensation amounts over the calendar year will be the qualifiers.

A “business owner” is anyone who owns 10% or more of a business, C Corporation or otherwise, who also qualifies as “active” owners under current IRS rules. Also, as part of an active definition of ownership, no one business can have more than five business owners who qualify for the ETC at any one time. There also may have to be enacted what is called the Captivation Rule. The Captivation Rule simply states that a current employee of a business can not suddenly become their own private business or independent contractor who then lowers their effective tax rate through ETCs when their former employer makes up more than 60% of the total client revenues of the new private business. This rule should have a time limit of no more than 10 years.

Tax credits are never perfectly simple. But overall the ETC is much simpler than most tax credits because they are calculated using W2 based employee expenses which are one of the most documented expenses and figures in all economic data. Meanwhile, ETCOs and ETCs accomplish so much more than any other tax credits or tax strategy.

A private or pass through business’s tax bill would be arrived at by first going through all existing steps in the tax code. Then, if a business owner, it would be calculated by using new tax tables at the end of each applicable business schedule. These tables would give two numbers in each income grid square, the first number as though the bracket rates were 39.6%, 36%, 28%, 25%, 15% and 10%, and the second as though the rates were 35%, 33%, 28%, 20%, 10%, and 5%. The business could then deduct $.07 for every dollar of qualifying US Employee wages and/or salaries spent, from the dollar amount of the first number in the grid, to no lower than the second number in the grid. Also, in order for the ETCO to not become a subsidy, added to a business’s total deduction of $.07 for every dollar of qualifying employee expenses should be the total dollar amount of all other tax credits or deductions for employment, either local, state, or federal. However, it may be that it is decided by law makers that some tax credits or deductions for employment, like for example employment of disabled veterans or the recently discharged, have such social benefit that they not be included in this compilation of tax credits and deductions, thus creating a bottom line financial subsidy for employment for these purposes.

If it is decided by law makers that the ETC will be capped for businesses of a certain size, say for example 500 employees, than the ETC will be phased out in the following way: As a business adds their 501st and 502nd employee and so on, what would normally be the qualifying employee expenses for the ETC for the 501st and 502nd employee and so on without the employee cap would be subtracted in an exact dollar amount from the existing total dollar amount of qualifying employee expenses for the ETC of the business’s first 500 employees. At this point the same above tax table calculation would be made.

If you are involved with policy, and you have any questions at all regarding any of the ideas that can be found in this paper or any of the papers in this blog, please feel free to call Tom Pallow at 202-903-1133 during normal EST hours, and any and all of your questions will be answer right then or within a few days!

These tax credits in the personal income tax portion of our plan would only cost about $97 billion over 10 years, or conservatively about 20% of the $488 billion over 10 years in new federal revenues that President Obama’s planned personal income tax increase would raise. However, there are several possible pay-fors that would lower, eliminate the cost, or even raise more federal revenues than President Obama’s personal income tax plan, while accomplishing one of our plans primary goals of increasing private sector job creation. For one, a 7th bracket could be created for all incomes above $500,000 a year for both singles and joint filers with a rate of 41%. Such a 7th bracket would generate about $91 billion over 10 years, or about 94% of the cost of our US Employee Tax Credits. If this 41% bracket were to start at $349,700, and therefore become the rate for the top and 6th bracket, $106 billion over ten years would be generated, $11 billion more than President Obama’s plan. Also, if the second to top rate were taken to 37% instead of 36%, another $17 over 10 years would be generated. Therefore, our personal income tax plan could generate about $28 billion over 10 years more than Obama’s personal income tax plan while creating an effective tax cut for 98% of private businesses that hire in the US! Further, these revenue numbers assume that all private businesses in these top two or three brackets will exercise our US Employee Tax Credits to the fullest extent. Also, EVERY NUMBER in the above calculations is statically scored. If these numbers were dynamically scored, which is closer to reality than static scoring, the economic growth and therefore tax revenues would be much higher, perhaps four to five times higher.

These rate increases to 41% and 37% would keep personal income tax rates on the top 5% of income earners, and the top 1% of earners which is about where today’s top bracket begins, to BELOW the US historic averages since 1947. Married couples filing jointly, who are right at the income point where the top 5% starts, would pay a top rate of 28%, while single filers would pay a top rate of 39.6%. The US average since 1947 for the point where the top 5% starts is 32.8% for joint filers and 40.2% for single filers. The average for the top 5% from 1947-1986, a period ending with the Reagan tax cuts being fully implemented, was 34.6% and 43.5% respectively. All of the yearly averages since 1947 for the top 1% are far above 41%.

While implementing our US Employee Tax Credits without the pay-fors would cost some revenue if statically scored, this option for our plan, regarding both personal income and capital gains taxes, would raise conservatively about 2% more federal revenues than President Obama’s plans, $702 billion over 10 years versus $688 billion. Our plans would raise 15% more revenues, $793 billion over 10 years, if a top bracket of 41% were created at $500,000 of income. If the 41% bracket were taken down to $349,700, 17% more federal revenues would be raised, $808 billion over 10 years versus $688 billion. If on top of that, the 2nd to top rate were taken to 37% instead of 36%, 20% more revenue would be raised, $825 billion over 10 years. Also, our FICA tax plan as explained below would raise another about $336 billion over 10 years on top of the above numbers. That means as much as $1.161 trillion over 10 years versus $688 billion, or 69% more federal revenues.

ALL OF THE ABOVE NUMBERS do not account for any positive dynamic effect to tax revenue that would take place through our plan incentivizing private sector job growth and capital formation. Very importantly, our plan would take away the argument from Republicans that Democrats are raising taxes on job creators during a recession. In fact, our plan would create a continuous, built in, incentive to hire in the US. Moreover, the fact that it is a, continuous and built in, incentive would create more jobs than if the incentive were temporary!

Our capital gains plan would raise about 63% more revenues than President Obama’s capital gains plan, not counting the new healthcare increases. This would be $311 billion over 10 years versus $200 billion. Our capital gains plan would create three rates for long term gains, 10% for where today’s 10% and 15% personal income tax rates are, 20% for where today’s 25% and 28% rates are, and 25% for where today’s top two personal income tax rates are. But very importantly, our plan would lower to 15% the rate on the top bracket, it would lower to 10% the rate for the middle bracket, and drop to 0% the rate for the bottom bracket, on all long term gains derived from four investment types. These four are: One, all venture capital funds and projects. Two, all stocks bought at IPO or secondary offering. Three, all bonds bought at first issue. Four, the direct underwriting of any of the above three investments that would be taxed under today’s Carried Interest rule.

These four investment areas represent anywhere from 3% to 20% of all capital gains in the financial markets, but most of the time they are only 5% to 12% of all financial market gains. Therefore, the tax on the 95% to 88% of capital gains that are speculative paper trades can be raised, and gains from the four investment areas can be lowered. This policy would increase government revenues, while steering capital to U.S. job creators, while also curtailing destructive speculative investment bubbles. Plus, it would reword those financial investments that require the most research and risk for the investor, and it rewords those investments that generate the most return to society.

Very importantly, the above four investments cannot qualify for a lowered capital gains tax rate if the business floating the stock or bond does not have at least 5% of its US expenses, or the venture capital project does not have at least 5% of its investment, being employee costs that would qualify for our US Employee Tax Credits as explained in the personal income tax section of our plan. Moreover, a year after the initial stock, bond, or V.C. investment the company invested in would have to have a higher US payroll than it had at the time of the initial investment. In this way, our plan would insure increased job growth in the US, and not just an increase in the underwriting of financial instruments.

In order to achieve access by ordinary investors to the purchasing of IPO’s and bonds at first issue, stocks should still be considered to be bought at IPO and bonds at first issue until the moment either is sold for the third time by an institutional trader or five open financial market days after the first purchase, or until the moment either is sold for the first time by a non-institutional trader. Moreover, it would be beneficial to ordinary investors, institutional investors and their industry, and the economy as a whole for the federal government to enforce the existence of a minimum level of IPO and first issue purchases for the non-wealthy investing public.

Under our plan, all tax brackets and rates for ordinary dividends and qualified dividends would go to the numbers that President Obama has proposed for 2011 and beyond.

Our corporate tax plan would employ nearly the same US employee tax credits as our personal income tax plan. This portion of our plan we keep revenue neutral if statically scored, while if dynamically score it would raise large amount of government revenues due to its positive effect on US job growth. Our plan would eliminate the top four C Corporation tax brackets, while taking the fourth, 39% bracket, to 39.6%, and the third, 34% bracket, to 38%. Yet C Corporations, both foreign and domestic, could use our US Employee Tax Credits to lower their effective tax rate to no lower than if the bracket rates were 15%, 25%, 30%, and 30%. However, by making the US Employee Tax Credits for C Corporations worth only $.04 on the dollar, about half of all US corporations would have their effective tax rate go down while about half would go up. This would keep this portion of our plan revenue neutral when statically scored while creating a continuous, built in, incentive to hire in the US versus overseas.

It would also be possible to make the $.04 tax credit worth more for those C Corporations that have a median wage and salary that is above the US corporate norm or greater, or greater than that areas prevailing wage. This would incentivize American corporations to treat their US employees better.

All existing foreign C Corporations that presently hire employees in the US would be taxed as though their US employee expenses that would qualify for US Employee Tax Credits, when compared to their global expenses, was at the same ratio as is the average for all US C Corporations. Then, once our C Corporation tax plan was instituted, these foreign C Corporations would have their effective tax rate go down or up depending upon if they increased or decreased their ratio of US Employee Tax Credits to global expenses. Also, once the plan is instituted, any foreign C Corporation that latter begins for the first time to hire in the US would be compared in their first year to the US C Corporation average ratio. Their tax rate would then go down or up depending upon if they increased or decreased this ratio. Foreign C Corporations could also have their effective tax rate go down if their median wage or salary was above the US average or the prevailing wage of a particular area. For much more on this part of our C Corporation tax plan read the paper titled, “Carried Interest, Partnerships, Income Tax Deferrals, and a System More Compatible with Democracy” that can be found in the “Weekly Blog” section of our website, Further, I will be presenting much more on our C Corporation, or over 500 employees, tax policy and plan in my coming, early August 2013 paper and submission to the Senate Committee on Finance.

Our FICA tax plan would also accomplish the four primary goals of our revolutionary tax policy. These four goals are: one, stimulating private sector jobs and income growth, two, increasing government revenues, three, separating wealthy income that is more likely to create domestic jobs from wealthy income that is more likely to only purchase consumer goods or speculative financial investments, four, create a significant tax rate difference between those who hire employees in the US and those who do not, thus incentivizing entrepreneurship and the demand for labor domestically.

Our FICA tax plan would cut FICA tax rates for one year to 0, both on the employee and employer side, for the first 20 “net” new employees that are added to a business or the first 20 employees of a new business. These tax cuts would cost the federal government about $14 billion a year. However, our FICA tax plan would more than pay for these cuts in a way that would further stimulate American job and economic growth.

Our plan would more than pay for these tax cuts by raising the FICA tax cap from $106,800 of income a year where it is today to $120,000 for non-business owners. Such a plan would raise about $30 billion in the first year in new federal revenues above the $14 billion cost of the tax cuts. This would mean a gain of about $336 billion over 10 years in new federal revenues! Moreover, this $336 billion gain includes the cost of allowing “business owners” to use US Employee Tax Credits, as both are defined under our personal income tax plan, to lower their tax burden to no lower than as if their FICA tax cap stayed at $106,800. Very importantly, the fact that these business owners could lower their personal income and FICA tax rates by employing people in the US would greater incentivize job creation in the US by creating a greater difference in tax burden between those who hire in the US and those who do not!

Our plan would also make it easier for new entrepreneurs to start new businesses that hire in the US in that it would free them to focus on making a profit and growing their business as opposed to focusing on the bureaucracy of tax law. It would also make it easier for them, and potential employees, by making their first 20 employees cheaper to hire.

A FICA tax cap at $120,000 would also keep the FICA tax cap BELOW the point where the top 10% of US income earners begins. The original intent of social security was to only have the top 10% of US income earners have their remaining income exempt from payroll taxes.

A business would be considered to have “a net new employee” with their first hire that takes the dollar amount of their total US payroll above what it was the prior year, not counting any salaries that might go to any “business owners.”

The plan would be phased in by allowing all existing businesses to eliminate FICA taxes on the employee and employer side for their first 20 net new hires for up to five years. Such a rule would insure fairness among businesses with different size payrolls and when compared to brand new businesses. This rule would also create a greater incentive for all businesses to hire in the US. The above revenue numbers fully account for this phase in rule.

The final components of our tax policy deal with the environment. Under our environmental plan all private and public businesses, both foreign and domestic, would be allowed to lower their top tax rate on personal and corporate income by as much as 35 percentage points but to no lower than 0. Congress would be empowered to dictate to the EPA which manufacturing sectors and goods, and what types of production techniques that the EPA can then proclaim to be using “best practices” and/or “standard practices” in. Congress could dictate what is pollution regarding what is generated during the production of a product, and/or while a product is in use, and/or when a product is discarded.

It would be up to the EPA to propose “best practices” and “standard practices”. Yet it would be up to Congress and the President to make law regarding what products and techniques these best and standard practices can lower a tax rate through the use of and by how much these tax rates can be lowered by. Our philosophy regarding environmental taxes is that they are most efficiently and effectively structured when they use primarily a reward approach as opposed to a reward and punishment approach or just a punishment approach.

There is a second environmental feature of our tax plan, which also can be assisted by the US ETC. This is what we call an Environmental Fair Tax. One of the tax proposals that has gained much popularity in conservative circles is the Fair Tax. This tax is essentially a national sales tax that claims to allow for the elimination of the income and payroll taxes. Third Way Progressives oppose this tax because it is regressive, and because of its regressivity that would therefore slow the economy by reducing consumer demand, its numbers would not add up. Even more importantly, the sales tax rate that the Fair Tax advocates propose is a rate of 23%, although that rate would probably have to be much higher. However, past experiences throughout the world have shown that, when a sales tax goes above about 12%, the underground economy to avoid the sales tax seriously begins to organize, and that therefore, government revenues anticipated are never collected.

That said, a revenue neutral, national sales tax with an environmental objective that had a rate below 12% would be a very positive policy. That is, the federal government could piggy back on the state and local sales tax systems, and enact an increased sales tax on those products that are deemed environmentally inferior. This sales tax revenue would be used to reimburse states and localities that have lowered their sales taxes on products that have been deemed environmentally superior by the federal government.

Our US ETC comes into play in that, many will complain that increased sales taxes on products like trucks or certain other heavy equipment used by businesses will be an increased burden on American job creators. However, by allowing the US ETC to count against some of such a sales tax, the burden on American job creators would be reduced and a greater tax incentive to hire in the US would be created.

Our plan is important to implement at this time for two primary and related reasons. These reasons are our federal deficit and debt, and the current fragility of our economy. Our federal deficit in 2010 is projected to be about $1.38 trillion. Given that the total Obama tax increases regarding individual income, corporate, and capital gains taxes (outside of the Affordable Healthcare Act tax increases that were created to pay for healthcare) are projected to raise only about $688 billion over 10 years, in order to eliminate the $1.31 trillion deficit that would be left, our economy would have to grow at an unrealistically fast rate above what it is now growing, or government spending would have to be cut by $1.31 trillion below today’s GDP growth rate. The problem with either of these scenarios is that the Obama tax increases, alone, will create some kind of drag on economic growth, and the decreases in government spending will likely drive GDP growth down even more so. This might not be a problem if growth in the private sector were robust. But growth there is not, so the tax increases and government spending cuts could force our economy into a double dip recession. This scenario will be even more likely given that Japan and Europe will be engaged in similar levels of tax increases and spending cuts at the same time we are.

However, our overall plan would reverse these two primary problems. Few policies would do more to stimulate private sector economic growth than our plan, and our plan would more than pay for the tax cuts that would create this stimulus. Our capital gains and personal income tax plans raise 20% more federal revenues than President Obama’s like plans, and our FICA tax plan would raise another $336 billion over 10 years, all while giving a tax cut to capital formation and to the employers of 98% of Americans who work for private businesses in the US and a tax incentive for C Corporations to hire in the US. These numbers are when statically scored. Dynamically scored our tax plans could raise four to five times the government revenues.

To explain the US’s current situation regarding economic growth we must understand our current political/economic position and how unique it is. Our current recession is taking longer to get out of because banks and other lenders see an economic environment where governments in the US, Europe, and Japan have such high debts that they are now, or soon will be, forced to reduce their spending levels. This will create a damper on economic growth. This reduction in spending would not be so bad except for another phenomenon that has never occurred simultaneously with such high levels of government debts. That phenomenon is the fact that Federal Reserve interest rates are now essentially at 0% and that most experts expect that any added quantitative easing would have little effect at lowering interest rates for borrowers or stimulating the economy. In a normal recession lenders could lend knowing that if the recession became stubborn or a double dip occurred the fed could always cut interest rates further and/or the government could spend more to stimulate the economy. This is the first recession in our history where this is not true, and this is why this recession has been so stubborn. Our tax plan would be the best prescription for allowing the government to continue its higher spending levels, while increasing private sector growth, and creating stability and confidence in the economy!

Right now Democrats could push for immediate passage of the tax cuts in the personal income, capital gains, and FICA tax parts of our plan. However, they should only pass these cuts with the legal agreement with Republicans that, in 2013 with a new Congress and possibly a new president, there would be an up or down vote regarding the tax increases in the plan that by law could not be filibustered. Separate bills in 2013 would address the C Corporation part of our plan, along with general C Corp tax reform, and perhaps the environmental component of our plan.

Republican would have to go along with these tax cuts, because, they are very simple tax cuts and Americans are desperate for private sector jobs. Whereas, with the small business bill that just passed, Republicans were able to argue that the bill mostly consisted of the government buying equity stakes in small banks. Also, the Republicans would appear very cowardly and undemocratic if they did not take the challenge to have the vote in 2013 after the 2012 election. A large majority of Americans are weary of the filibuster, so this would also work in our favor.

For several reasons our tax policy over time can raise much more federal revenues than any other current tax proposal. For one, because our policy lowers taxes on most businesses, our proposal would eliminate the fear among voters that raising taxes on the wealthy would slow job and economic growth. With the elimination of this fear, the top tax rate on the wealthy could be raised far above 39.6% or 41%, and that tax base, those who we consider “the wealthy”, could be broadened far beyond what it has in recent decades.

Beyond political reasons, our policy is simply much more efficient from a purely economic stand point. Under our plan the demand for labor will be increased in the US, and the cost of capital for businesses will be lowered because businesses will have more money in hand due to their lowered tax rate and because our capital gains policy would lower business borrowing costs in the financial markets. A lowering in the cost of capital for businesses will then raise productivity because businesses would then have more money on hand to invest in R&D, capital improvements, employee training, and new employees. It is only an increased demand for labor, along with an increase in productivity, which raises real wages for workers.

Our new philosophical perspective would desire the biggest differential possible between the tax rates of those who employ people and those who do not. Such a tax model would be the most efficient tax regime possible, as long as R&D was continued to be rewarded and the differential was not so large that all other capital investments were given a tax disadvantage that had a negative effect on economic growth. The increased economic efficiency of our tax plan can be most specifically measured by quantifying the amount of money that growing businesses would no longer have to pay in interest costs for moneys they had to borrow to make up for the capital they lost due to increased quarterly taxes.

But more importantly, in relation to job creation, economic growth, and overall prosperity, our tax policy acknowledges a social reality that our current tax model does not. That reality is: All things being equal, a person who employs people is more important to society than a person who does not; therefore we need to create more who do.

Our tax policy is a different way of viewing the economy. An old liberal view of the economy pushes a dichotomy between labor and employers. We look at business, particularly small business, as being on the side of labor. In this era the most important dichotomy in the economy is between those who have capital to lend and those who do not! Our policy will also bring Democrats a new group of supporters in the form of the many business owners who would benefit from our policy.

Our policy continues the predictable cycle of having the definition of “liberal” substantially change every four, 25 year, generations, dating back to the 1500’s, and to a somewhat lesser way even before that. Between 1905-15, France, Britain, Spain, Germany, the US, and several other counties all past a progressive income tax for the first time. Prior to this time progressive income taxes had only existed for short periods and in a few countries, and most often just to pay for war. Very importantly, it was during this period of time that the Labor Party in Britain that championed the progressive income tax became the dominant political party along with the conservative Tories, while the then dominant Liberal Party that was not as passionate in championing the progressive income tax began to slip into political obscurity.

This rapid move to a progressive income tax in the developed world, and then latter for nearly the entire world, was done to compensate for the fact that economies had just moved from primarily agricultural to primarily industrial. This economic shift necessitated the need to compensate for the reality of Surplus Value. Surplus Value refers to the fact that, in an industrial economy, in order for businesses to make a profit, they must charge more for their products than what they pay their employees. For this reason, and therefore the need to redistribute income to the poor and middle class, the progressive income tax was created.

Today, we still need to compensate for Surplus Value with a progressive income tax. However, we now need to contour our progressive tax policy to the reality of the effective 12 fold increase in global trade that has come with the weakening and fall of the Soviet Union. The fall of the Soviet Union opened up a new cheap labor market of about 4 billion people to the multinational businesses of the developed world. This change is here to stay, regardless if some people want that or not. Nonetheless, due to the natural and accompanying desire to attracted business investments, this globalization has created a, race to the bottom, in tax policy. 30 years of this, race to the bottom, policy has created unsustainable government debts throughout the developed world, and our plan is the only responsible way to get out from under this debt while prospering.

Redefinitions of “liberal” also came during the Second Great Awakening of the early 1800’s with the advent of all the first modern socialist writers, during the Great Awakening of the early 1700’s with the popularization of democracy, and during the Puritan Awakening of the early 1600’s and the Protestant Reformation of the early 1500’s regarding increasing degrees of religious freedom.

1. Emmanual Saez and Thomas Piketty, “The Evolution of the Top Incomes: A Historical and International Perspective,” National Bureau of Economic Research, working paper no. 11955, January 2006.
2. The World Top Incomes Database, Facudo Alvaredo, Tony Atkinson, Thomas Piketty, January 2011.
3. US Census Bureau, Statistics of US Businesses: 2008 : All industries US.