The Author

I’m a 77-year-old retired public finance attorney. At this stage in life, I want to share some of my hard-won knowledge with the next generation, and that knowledge happens to be an insider’s understanding of the American tax system. During my 40-year career, I leveraged tax preferences, commonly called loopholes, to help wealthy clients keep as much of their money as possible. In many cases, I also helped them make more money. However, after decades of observing the effects of legal tax avoidance on people at every socioeconomic level, I believe that almost all tax preferences are damaging our country’s future and eroding the middle class.

Massive legal tax avoidance, made possible because of the proliferation of tax preferences, is a policy problem that’s over 50 years in the making. With few redeeming economic or political effects, legal tax avoidance has widened the income and wealth gap between the very wealthiest and everyone else, and has encouraged favor-seeking politicians to sell out the public interest for personal benefit. My book is an effort to show Americans a new way for capitalism to grow America’s economy while preserving and growing the middle class. Only by understanding how tax preferences threaten their economic standing will enough citizens muster the political will to fight for the changes necessary to protect their families’ futures.

I wrote this book primarily for my daughters. I thought about them and their friends – professionals, teachers and others in their 20s, 30s and 40s – who are still optimistic enough to believe in the American Dream but wonder if they’ll ever achieve it. I also wrote this book for interested yet busy citizens of all ages who wish they had time to understand the implications of tax policy on their standard of living. For anyone who wants a shot at upward mobility for themselves or their children, things must change, and making those changes largely depends on changing tax policy.

We’ve moved into a new economic world, one that simultaneously favors a growing global elite composed of wealthy investors, imaginative entrepreneurs, and highly skilled technology professionals over ordinary workers. The unfettered ability of capital to roam the world to find its highest and best return, the globalization of labor markets, and the displacement of human labor with robots and artificial intelligence have blessed capital and cursed labor. In this new world, the level of taxes and who pays them will determine, in large part, what kind of future lies ahead for the middle class.

The day is coming when the market wages of 95 percent of the population won’t enable them to save enough to pay for their own retirement and healthcare, much less pay for their kids to get the education necessary to compete. People are waking up to this reality, thinking they’re alone, but they aren’t. Looking at the median income of the American family (I’ve put a sample budget in my book), it’s obvious that they don’t make nearly enough money to pay for adequate healthcare, a quality post-secondary education (the costs of which are rising much faster than wages) for their kids, or a decent retirement. These expectations are the mainstays of the American middle class, arguably the backbone of American society, and they’re increasingly beyond reach.

Of course, another name for advances in technology and globalization is “progress,” and there’s no turning back from it. However, such progress gravely endangers the living standard of most middle- and low-income Americans. Like it or not, those who have been hindered by these forces will have to adapt and cope. How well we adapt as a society largely depends on how well we reform our tax system.

In the 1950s and 1960s when I grew up, neither wealth nor income was nearly as concentrated in the top 1 percent as it is now. However, in today’s economy, wealth and income disparities have reached the highest levels since the early 20^th century. Tax policies that worked in an economy with relatively small wealth and income disparities and a relatively small national debt won’t work in today’s economy. That’s why we need serious tax reform, something far more comprehensive than what is currently being discussed in political circles.

Chief among the economic shifts we’re seeing is the imbalance between the return on labor and capital. The scale has tilted substantially in favor of capital, and nothing indicates that this tilt won’t continue. Compared with the mid-20^th century, capital is now much more easily substituted for labor, which explains, in large part, why wages for ordinary workers are relatively low and likely to remain so. On top of this imbalance, the after-tax income of those in the top 1 percent, as compared with everyone else, has grown faster than their pre-tax income, which exacerbates income and wealth disparities. The disproportionate growth of the after-tax income of those in the top 1 percent means that a maldistribution of the tax burden has come to favor those at the top. Too much income and wealth concentration in the top 1 percent risks creating an imbalance in the economy that allocates too many resources to investment and too little to consumption. Too much money available for investment and too little for consumption means a lower standard of living for everyone other than those at the top.

Meanwhile, the national debt has now grown to the highest level since the end of World War II. This is the result of a generation of under-taxing, which has become routine practice. Historically, America has under-taxed itself, as evidenced by its taxing several percentage points of GDP less than what it spends, and also funding government by increasing the national debt. Consequently, America’s out-of-control national debt has subjected it to the looming risk of dangerously high long-term interest rates and inflation.

Under existing tax policy, both the after-tax income of the top 1 percent, relative to everyone else, the national debt has grown for the last 30-plus years. To the extent that globalization and technological innovation continue to concentrate wealth and income at the top and America continues to spend more than it taxes, the ongoing trend of a maldistribution of the tax burden and the risk of a swollen nation debt threatening long-term growth will continue and possibly accelerate. Given these realities, comprehensive tax reform is necessary to save the middle class and assure long-term economic growth.

We’ve now reached a point where only wealthiest Americans and super-successful entrepreneurs, technological innovators, and professionals with extraordinary skills have enough income to pay for quality health care, a decent retirement, and college for their children. Given the disruptive effects of globalization, automation, mounting debt, and the concentration of wealth and income among the very few, I believe that America needs a new tax policy, one that simultaneously reduces the disparity in the after-tax income of the top 1 percent and everyone else, enables America’s economy to grow, and pays down the national debt to a manageable level. This means a tax policy that’s more progressive and raises more revenue.

If America is to make the public investments necessary to save its middle class, enable its economy to grow, and pay down its national debt – all of which includes providing essential funding for social insurance programs, national security, the military, a world-class transportation and communication infrastructure, and a manageable national debt – then the federal budget must grow over the next decade to about 25 percent of GDP (about 6 percent above its historical average). Since America has routinely taxed 2 or 3 percentage points of GDP less than it has spent, taxes will have to be increased by at least 7 or 8 percent of GDP over the next decade. Increasing taxes by this amount, particularly when the American people haven’t been prepared for it, will shock America’s politics. That said, I believe that this is America’s most important political and economic challenge for the next generation.

Those who balk at a tax increase of any kind might consider that, of all the major economies in the world, America is still the lowest taxing country of all the world’s major economies. And even if it increases taxes to 25 percent of GDP, it will remain the lowest taxing country. Also, of all the major countries, America is the wealthiest in terms of per capita GDP, and its top 1 percent is wealthier than it has been since before the Great Depression. This means that America has a resource unavailable to other countries, which is the ability to increase taxes substantially to make the public investments that are necessary to keep America as the world’s foremost nation. Even with a substantial tax increase, Americans will still enjoy the highest after-tax standard of living of any major country in the world.

America’s leading assets – its social and political stability, workforce, transportation and communication infrastructure, national security establishment, and it having the world’s strongest economy – require ongoing maintenance, just as the assets of any business require ongoing maintenance. And, just like a business can fail if it defers maintenance on its assets for too long, so too can our country. The taxes paid for improvements that benefit the public should be treated as investments in America’s assets, much like a business must make the investments necessary for its future. To qualify as a public investment, the funds that are spent must yield a tangible social, political, or economic return over the years.

Examples of public investments include the following:

• Funds spent on social insurance that enable working Americans to have a decent retirement, adequate health care, and higher education for those who can and will make the best of it. These expenditures contribute both to America having the world’s best trained and motivated workforce and also to the country’s social and political stability.

• Funds spent to make America’s transportation and communication infrastructure the best in the world. These expenditures promote the free flow of commerce and make it possible for business to engage in commerce all over the world at the highest level possible.

• Funds spent to preserve America’s national security, and to ensure international peace and the rule of law throughout the world. These expenditures make vigorous global commerce possible so that American businesses can access markets all over the world and reduce the danger of international conflict.

• Funds spent to pay down the national debt. Paying down the national debt contributes to America’s long-term financial security and access to cheap capital from the world’s top investors.

The source of the funds necessary to make these public investments can only come from substantially increasing taxes while adjusting the tax burden to take into account both the intense concentration of wealth and income in the top 1 percent and the need to strike the right balance between investment and consumption.

Merely tinkering with taxes won’t save the middle class and will not ensure the long-term economic growth necessary to sustain America’s social and political stability. To be worth doing, tax reform should be comprehensive in that it must raise sufficient revenue, allocate the burden based on the ability-to-pay principle weighed against the need to strike a proper balance between investment and consumption, and greatly simplify tax administration.

Right now, about 90 percent of tax revenue comes from three separate income taxes – the personal income tax, social insurance taxes, and the corporate income tax. The remaining 10 percent of tax revenue comes from a grab bag of excise taxes and the estate and gift tax. Even though the corporate income tax is paid by corporations, its economic burden falls primarily on shareholders. Since corporate profits are eventually distributed to shareholders, corporate income is taxed twice, once at the corporate level through the corporate income tax, and once at the individual level through the personal income tax. Using three separate taxes – the personal income tax, social insurance taxes, and the corporate income tax – to tax income creates unnecessary complexity.

Aside from unnecessary complexity, the present system of income taxation suffers from the proliferation of tax preferences. Tax preferences tax almost all types of investment income at rates lower than wage income and permit those taxpayers purchasing the most expensive homes they can afford and the most expensive health insurance plans possible to offset a part of their taxes. Almost tax all preferences disproportionately benefit those in the top 1 percent, particularly the wealthiest of the wealthy. For example, in 2013, the top 400 taxpayers in America had an average income of $106 million, yet paid an effective tax rate of no more than 23 percent due to hundreds of tax preferences that disproportionately benefit them. Under existing law, if there were no tax preferences, these billionaires and millionaires would pay taxes at an effective tax rate of close to 39 percent.

Meanwhile, quarterly CBO reports consistently show that over the next decade, the cost of government will rise to over 25 percent of GDP. However, we’re only taxing at around 18 percent of GDP. By under-taxing the wealthiest taxpayers, the economy is missing out on a critical source of revenue. Taking all of this into account, my plan for tax reform is based on the following principles:

• Except in times of national emergency, taxes should be sufficient to pay the current cost of government and pay down the national debt to a manageable level.

• To make taxes as simple as possible, a unified personal income tax stripped of all tax preferences would replace social insurance taxes, the corporate income tax, and the estate and gift tax.

• All income, including inheritances and capital gains, would be taxed the same as all other income.

• Taxpayers making the same income would pay the same taxes.

• The first dollar and the last dollar of each taxpayer’s income would be taxed at the same rate.

• No taxpayer would be taxed into or near poverty, and no taxpayer would be taxed at a rate that deprives them of a reasonable incentive to earn the next dollar.

• Tax rates would be reset each year to ensure that there is sufficient revenue to pay the current cost of government and pay down the national debt as well as to offset the undue concentration of after-tax income in the top 1 percent.

I believe that tax policy based on these principles would simultaneously promote economic growth, reduce social and political tensions, and cut substantially the cost of tax compliance.  It would also raise the revenue necessary to maintain the country’s competitiveness and quality of life in a way that is economically sustainable.

The short answer is no. Other than taxing personal income based on the ability-to-pay principle, covering the current cost of government, and paying down the national debt to a safe level, my tax plan doesn’t interfere with the workings of capitalism. It also doesn’t interfere with the “pecking order” in that the pre-tax and after-tax pecking order of taxpayers will be the same. Strivers will still be motivated to climb as high as their ambition takes them. In fact, compared to current tax policy, my plan represents a quantum leap forward in enabling capitalism to function at maximum efficiency.

I believe that Adam Smith’s vision of capitalism – in which open and honest markets are protected from fraud, anti-competitive practices, and the evils of monopolization – should be left free to work its will for the betterment of all. Tax policy shouldn’t favor some types of activities over others, some types of expenses over others, or some types of income over others. By eliminating the corporate income tax, which raises the cost of capital and favors some business activities over others, and social insurance taxes, which tax labor, both capital and labor markets would be freed from the government using the tax laws to pick winners and losers. By increasing the after-tax income of middle- and low-income taxpayers through a more progressive personal income tax, the need for government programs like food stamps and housing subsidies would be reduced.

The idea that the wealthiest should hand over more of their income to increase government subsidies for social insurance to enable middle- and low-income Americans to share in the American Dream will surely provoke criticism. However, I don’t believe that in today’s economy there’s a better way to make capitalism work for everyone. Striking the right balance between under-taxation and over-taxation is key to assuring long-term growth that enriches all income groups. Striking this balance begins and ends with taxing enough to pay for the annual cost of government and paying down the national debt to safe levels, something that hasn’t been done for over a generation. My tax plan would achieve these goals.

Speaking for myself, I’ve been fortunate enough in my life to have had enough income on several occasions to put me well into the top 1 percent, and I have paid taxes at an effective tax rate of 35 percent or more, a full 12 percentage points above the average effective tax rate paid by the top 400 taxpayers. As a patriotic American, I was and am proud to have paid my taxes at that rate. Paying taxes at a 35 percent rate didn’t rob me of my incentive to earn the next dollar, save for my own retirement, pay for my family’s own healthcare, send my two daughters to the University of Texas and, at the same time, enjoy a comfortable standard of living. Someone must pay the taxes necessary to keep America great, and I’m proud to be able to do my part.

My book is a call for those in the top 1 percent to pay back America for their success by investing in the rest. Conversely, the wealthiest might consider how much money they will make in a future America suffering from an ignorant and demoralized workforce, widespread and growing social conflict, a dwindling consumer base, precarious national security, a crumbling infrastructure, and a bloated national debt that drives up interest rates. These are the maladies that result from under-taxation, and just as over-taxation can lead to a stagnating economy, under-taxation will harm the wealthy as well as everyone else.

Increasing taxes on the top 1 percent shouldn’t be regarded as a penalty for their success but as an opportunity for them to invest in keeping America great by creating the world’s best trained and most highly motivated workforce, providing America with the world’s best transportation and communication infrastructure, advancing America’s national security, and paying down the national debt. These are the things that will ensure America’s future greatness.

The short answer is no if the tax increase doesn’t deprive the economy of needed investment capital or unreasonably discourage the successful from earning the next dollar, and the tax increase is spent on public investments or paying down the national debt. Wealth, not income, is the source of almost all investment, and my tax plan doesn’t tax wealth.

Because of intense concentration, there’s more wealth in the top 1 percent now than at any time since the 1920s. Given a worldwide capital glut, and historically low long-term interest rates coupled with historically high corporate profits, there’s no evidence that increasing tax rates on personal income for the top 1 percent will leave the economy with too little funds to meet the investment needs of the economy.

There’s a point at which tax rates on income are so high that they unreasonably discourage anyone from working for the next dollar, which can lead a taxpayer to be less productive. If a taxpayer only gets to keep 10 cents on the next dollar, it’s understandable that the taxpayer may decide it’s not worth it to work for the next dollar, particularly if they’re a high-income taxpayer and the next dollar doesn’t affect their standard of living.

Moreover, America has extensive experience with high personal income tax rates on those with very high incomes, tax rates much higher than 50 percent. Historically, over the last 70 years, top tax rates have been 50 percent or higher for 40 of those years and lower than 50 percent for only 30 years, with GDP growth rates averaging 3.27 percent during the high tax years and only 2.57 percent during the low tax years. There is scant, if any, evidence that increasing the top tax rate from the current 39.6 percent to 50 percent for millionaires and billionaires would prevent them from aggressively chasing the next dollar.

As a matter of common sense, one should ask oneself if they believe that a 50 percent tax rate would cause Kevin Durant or Tom Brady to stop playing their best, cause Warren Buffet to stop using his best skills in investing, cause a Fortune 500 CEO to not manage their company to the best of their ability, cause Brad Pitt to turn down a juicy acting role, cause a driven entrepreneur to slacken their efforts to optimize a business, cause a gifted surgeon to turn down patients, or cause a skilled lawyer to walk away from a blockbuster case. Apart from studies by experts, it’s been my personal experience in 40 years of working with super-successful professionals that a 50 percent tax rate wouldn’t dampen their desire to work for the next dollar.

So, I’m confident that taxing the income of multi-millionaires and billionaires at up to 55 percent would not slow economic growth or rob them of their incentive to continue making money. However, I do fear that the failure to increase their taxes will prevent America from making the public investments essential to keep America socially, politically, and economically strong and unified.

I’ve delved deeply into each of these preferences and found that they primarily benefit upper-income taxpayers who don’t really need the help. For example, to qualify for the home-ownership and charitable deduction, a taxpayer must itemize their deductions and only about 10 percent of taxpayers. Very few middle-class taxpayers itemize and therefore don’t qualify for any deduction of any kind. While the health insurance exclusion applies to all taxpayers, including those who don’t itemize, it benefits upper-income taxpayers much more than lower-income taxpayers.

Apart from the effect of any individual tax preference, of which there are several hundred, I’ve got a big problem with the fundamental concept of tax preferences. I believe that they’re destructive to America’s political health. As a confirmed capitalist, I believe that tax preferences distort markets of all kinds. In my view, middle-class taxpayers would be much better off if these tax preferences were eliminated and the savings applied to either increase the standard deduction or used to cut rates. Since after-tax income has concentrated at the top over the last two generations, those at the top don’t need an after-tax break as much as lower-income taxpayers need lower taxes.

America today is terribly divided, and I believe that tax preference further divide the country. The personal income tax, corporate income tax, and estate and gift taxes are all riddled with hundreds of tax preferences that give special interest groups an edge over most taxpayers. Whole industries, including commercial and residential real estate, insurance, and energy and healthcare, each enjoy special tax benefits that lower the taxes of some at the expense of increasing taxes on everyone else. In addition to these industries, a highly lucrative tax preparation and lobbying industry composed of very highly paid tax lawyers, accountants, and various types of experts and influence peddlers has sprung up to protect and expand tax preferences.

By their very nature, tax preferences benefit politically favored groups at the expense of everyone else. Most tax preferences are the offspring of improper relationships in which small, well-off, influential groups induce politicians through contributions and other favors to grant them a benefit to be paid for by all other taxpayers who aren’t in on the deal. With a few exceptions, tax preferences largely benefit small groups of wealthy individuals.

Since tax reform can’t happen without congressional approval, getting it means mastering the game of congressional politics, which is controlled by congressional insiders and the lobbyists who support them. Congressional politics turns on first identifying the multiple choke points, of which there are many in which as few as a single congressman or senator can derail reform, and then overcoming each obstacle. Since only insiders who follow the inner workings of Congress know where the choke points are and who controls them, a dedicated, knowledgeable, and well-financed few can almost always get their way in Congress.

Because congress operates with Byzantine procedural rules and lobbying laws remain lax, meaningful tax reform will never originate and be enacted by Congress. However, the difficulty of tax reform should not stop citizens from understanding its necessity as a solution to major problems facing our country. The business of granting and expanding, and only occasionally curtailing, tax preferences accounts for much of the corruption in Congress. Therefore, getting rid of tax preferences would contribute mightily to draining the swamp in Washington.

In politics, things usually have to get worse before they get better. Only when an overwhelming majority of voters come to understand that a problem exists will politicians start thinking about it, and then the politicians will usually wait until some sort of consensus emerges before they’ll do much about it. After almost 40 years of intense income and wealth concentration, and with an alarming number of middle- and low-income Americans losing hope of living the American Dream, many politicians have now at least recognized that there’s a problem. Not a lot of politicians, however, can state exactly what the problem is, much less do anything about it.

Few politicians will now admit that the market wages for all but a few Americans won’t permit them to live the American Dream. At some point, this reality will become so obvious that not even the most ideologically driven politician will be able to credibly deny it. No one knows exactly when a political consensus will emerge for the government to make the public investments necessary to save the middle class, but inexorable economic realities are drawing that time closer. It’s my hope that when the time comes to raise taxes, my plan will become attractive to those who want to tax the right way. Until that time, readers will make a difference simply by learning about their tax system. Even after all that I’ve seen, I still believe that knowledge, especially when applied, is power.