Restoring the Raise: How to Cause a Labor Shortage in America

By Susan Shelley

The United States of America needs a labor shortage. That would fix everything.

If we had more jobs than workers, employers would have to offer higher wages and better benefits to attract and hold employees.

If we had more jobs than workers, recruiters would be on college campuses saying things like, "What's your major? Sixteenth-century English literature? Let's talk signing bonus."

With more jobs than workers, the federal government and the state governments would see their tax revenues go up and their safety-net expenses go down.

If we had more people working, there would be more revenue coming in from payroll taxes, making Social Security and Medicare gradually less insolvent.

If more people were working, more people would be able to buy houses and cars and major appliances and even solar energy panels, stimulating the economy without burying everybody in debt.

A labor shortage would fix everything.

Hang on to that thought, and ask yourself this question:

What would you do tomorrow if you knew you could keep 95 percent of the money you made doing it?

Would you start a business? Would you expand your business? Would you invest in a business started by somebody else?

Would you invest in stocks instead of bonds or T-bills?

If the United States of America threw out the entire tax code and replaced it with a five percent flat tax, what would happen?

Please, don't interrupt.

We're not discussing whether it could happen. We're discussing what would happen if it did happen.

If the tax rate was five percent on wages, business income, corporate income, capital gains, dividends and interest, the United States would become the world's greatest tax haven.

Businesses in other countries would relocate to the United States to get in on our new low corporate tax rates. They would need more employees.

U.S. businesses would expand and new ones would start up. They would all need more employees.

Enterprises that are currently not profitable enough to be sustained would suddenly be a lot more profitable. You can probably think of two or three things you'd like to try yourself.

We would have economic growth.

We might have so much economic growth that we'd have a labor shortage within a few years.

This is the point where certain economists and former Federal Reserve chairmen would interrupt and warn that a labor shortage would result in higher wages, risking inflation.

Good.

The whole point of this exercise is to demonstrate that it is possible to have a tax policy that results in higher wages.

So, are we all in agreement, except for the former Fed chairmen, that more jobs would fix everything?

Let's figure out if we can get there.

The first objection to a flat tax is always that it is unfair for the rich and poor to pay the same amount in taxes. But they won't pay the same amount in taxes. Five percent of a million dollars is $50,000. Five percent of $20,000 is $1,000.

Fifty thousand dollars will always be more than one thousand dollars. The rich will always pay more in taxes than the poor, and they'll really pay it because there won't be any tax sheltering.

It would be possible and sensible to exempt people who earned less than $20,000 — or $15,000 or $30,000 — from the income tax.

The next objection to a flat tax is the political impossibility of repealing the home mortgage deduction.

The problem here is that we have a tax code that sets rates much too high and then offers generous tax breaks so people can get their taxes down to a manageable level.

But is that really the best idea?

Wouldn't it be better to have taxes at a manageable level without telling people that they have to own real estate?

Maybe you can't yet afford the house you want, or maybe you'd rather rent than own. Why should tax policy push you to buy or keep a home just so your tax bill isn't insanely high?

If the tax rate was cut to five percent, many people could give up their home mortgage deduction and still come out ahead.

Maybe some people would decide that rental property is a good business, and they'd buy houses or build apartments, eventually leading to a glut of rental property and more affordable rents. At a tax rate of five percent, rents could drop and the business could still be profitable.

Maybe you would buy up a few foreclosures yourself. A little paint, some sod in the front yard, and soon you'll be keeping 95 percent of that rental income.

Maybe the loss of the tax deduction wouldn't hurt the real estate market at all.

The next objection to a flat tax is the loss of the deduction for charitable donations.

The assumption is that no one will give to charity unless the government offers an incentive for donations.

That's a cynical view. Well-run charities that spend a high proportion of donations on non-administrative expenses can count on the generosity of Americans. Bloated charities would no longer have a government subsidy to bring them a stream of complacent donors. After all, if you're really donating just to get the tax deduction, it doesn't matter to you if the charity spends most of its money on high salaries and lavish offices.

It's also hard to see the logic of allowing people in need of charity to block a policy that would help people stay off charity.of

Many people think a flat tax can't pass because even one dollar in income tax is more than almost half of Americans are currently paying.

According to a study by the Tax Policy Center, about 47 percent of Americans paid no income tax in 2009. Some did not earn enough to owe anything, and the rest qualified for credits, deductions and exemptions that wiped out their tax liability completely.

If you have young children, you might very well be in that group. Every year, the "child tax credit" knocks thousands of dollars off the tax bills of people with kids, and what's more, the government mails out a check for the amount of the credit to anyone who doesn't owe enough in taxes to take full advantage of it.

But if you have kids, and you care about their future, you may want to think this all the way through. A tax code that discourages economic growth could be replaced by one that causes a labor shortage. A labor shortage means you could earn more money. It means your kids will have jobs when they get out of school. It means Social Security and Medicare will be adequately funded by the payroll taxes of an increasing number of workers, instead of just being drained by payments to an increasing number of retirees.

The price of that future is not a thirty-nine percent tax rate. It's just five percent of your income.

No one wants to lose a tax credit or a government subsidy. Politicians count on that. They run on that.

That's how the tax code came to be weighed down with worthy and wonderful things you can do to get a tax credit or deduction.

What this really means is that the tax rates are deliberately too high so the government can influence what you do with your life and your money.

The longer you think about this, the more you'll realize that it is a terrible infringement on your freedom.

Your tax bill is determined by how much money you earn and also by whether you buy a house, donate to charity, install energy-efficient windows, have young children, put money away for retirement, invest in municipal bonds and... well, let's stop there, before the list runs to 17,000 pages.

Do we really want this? Do we need the government telling us how to live? Should we have to confess to the Internal Revenue Service how we spend every dollar?

Taxes are necessary to fund the operations of government, but the government has turned the tax code into a giant rolled-up newspaper and a box of dog treats.

This has been going on for decades, and it goes on regardless of which party is in power. The only thing that changes is who gets hit with the newspaper and who gets the dog treat, and for what.

A little tinkering with the tax code may dull the pain, but it is not going to solve our problems.

A labor shortage will solve our problems.

A five percent flat tax will cause a labor shortage.

Can it be done?

Congress will never vote for it. They'd be removing their own power to award favors and impose penalties, and if they do that, they'll never get their fundraising phone calls returned.

Think about this: the income tax was created by the 16th Amendment in 1913. The U.S. Constitution prohibited an income tax, and that's why a constitutional amendment was necessary in order to impose one.

Think about the possibility of amending the Constitution again, this time to repeal the current federal tax code and replace it with a five percent flat tax.

Think about adding a section to the amendment that gives Congress the power to set the minimum income that would be subject to the tax, allowing lawmakers to exempt low-income people from paying it.

Think about how easy it would be for businesses to plan and grow once they know for certain that Congress can't hike their taxes every year with new legislation or with some clause slipped into some bill on some unrelated matter.

Think about all the investment dollars that would be directed to productive enterprises instead of things no sane person would invest in except for the fact that there's a tax break for it.

Think about economic growth, more jobs, higher wages, better benefits, and enough tax revenue to cut the deficit and adequately fund Medicare and Social Security.

That just leaves one question.

How do you pass a constitutional amendment?

The procedure is set out in Article V of the U.S. Constitution: an amendment has to be proposed, then ratified, and once ratified it's as much a part of the Constitution as if it had been there from the beginning.

An amendment can be proposed in one of two ways. It can be proposed in Congress, where both the House and the Senate must pass it with at least two-thirds of the vote.

Obviously that's not going to happen.

But the Constitution sets forth a second option for proposing amendments. If two-thirds of the states ask Congress to call a convention for the purpose of proposing amendments, Congress must call one.

It says so, right there in Article V.

That means if thirty-four of the fifty state legislatures want an amendment to the Constitution, they can get around Congress' objections and propose one.

Once the proposed amendment is passed by the convention, it goes out to the states for ratification. In every state, the amendment would be discussed and debated. Only when the legislatures of three-quarters of the states — that's thirty-eight of the fifty — have approved the amendment does it become the law of the land.

The process for amending the Constitution is cautious and deliberative. It's not quick and it's not easy.

That's why, for the last eighty or so years, Americans have accepted the U.S. Supreme Court's reinterpretations of the Constitution in place of amendments.

Today, people are so accustomed to the idea that the Constitution is updated through "test cases" that they think the process of amending the Constitution is wacky, unpredictable and dangerous.

You can judge for yourself which method is more wacky, unpredictable and dangerous, but in any case, it's technically possible to amend the U.S. Constitution entirely through the state legislatures, even if the House, the Senate, the President of the United States, the U.S. Supreme Court and all fifty state governors oppose the idea.

Interesting, isn't it?

Some people think Americans today are not wise enough to amend the Constitution. They think we're not as smart as Washington, Madison, Jefferson and Adams.

Maybe not.

But we're at least as smart as those guys in 1913 who passed the income tax amendment.

August 20, 2011

Susan Shelley is the author of the novel The 37th Amendment, which includes an appendix on "How the First Amendment Came to Protect Topless Dancing." Both are now available in eBook editions from Amazon.com.

© Copyright 2011 by Susan Shelley

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