February 2005

The PACT America Report

Tax-Free Justification:

Many people may have doubts about whether Congress could actually afford to waive taxes for this plan. This is because people have become overly accustomed to taxation. While an income tax first appeared during the Civil War, it did not become a permanent part of America until the passage of the 16th Amendment in 1913. The 16th Amendment reads, “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.” Therefore, the modern income tax has existed for less than 100 years, and tax withholding did not appear until World War II when the government needed a steady cash flow to support the war efforts.

Contrary to what some people might try to claim, this plan will not take money away from the country. While it’s true that these contributions are tax-deductible, they are also saving the country a great deal of money over the long run. Unused accrued interest will ultimately belong to the government. This means that an account holder will only have rights to the original contributions and the interest payments on the total balance upon reaching a retirement age. The government will assume any unused accrued interest upon an account holder’s death if there are no qualifying interest transfers. Therefore, the government will have waived years of taxes in exchange for profit sharing.

The current maximum individual income tax rate is 35%, but most Americans are in the 15% tax bracket. In 2004, a single person could have a taxable income of $29,050 and still be in the 15% tax bracket. Such a person would also have $3,100 in personal exemptions and a $4,850 standard deduction. Therefore, the gross income of such a person is actually $37,000. This person would have to pay a 10% tax on the first $7,150 of taxable income and a 15% tax on the remainder. Therefore, the total income tax would amount to $4,000. Taken as a percentage of gross income, $4,000 amounts to 10.8%. This means that the adjusted tax rate for a maximum earner in the 15% tax bracket is 10.8% of gross wages. Therefore, a $1,000 tax-deductible contribution would amount to $108 in lost tax revenue for the government. If every single person in the country made the maximum annual tax-free contribution of $1,000, this lost tax revenue would amount to over $30 billion. However, the projected annual interest savings of this program is over $25 billion. Therefore, the upfront program costs are minimal, and the government stands to generate additional revenue upon an account holder’s death.

Over a period of 40 years, this lost tax revenue amounts to $4,320. However, this lost tax revenue really isn’t lost at all. The government is actually investing these taxes in the program, and will claim any unused accrued interest. Therefore, the government is simply providing account holders with a safe form of leverage. The average American life expectancy is 77.3 years at birth. A maximum contributor for 40 years who lived to the age of 77.3 would have an accrued interest surplus of $9,503.56 at death. This means that the government would receive $9,503.56 at the end of 40 years instead of receiving $4,320 over a period of 40 years. This is equivalent to the government earning a quarterly compounded interest rate of 3.57% on its tax money. Therefore, the government is essentially investing its tax revenue.

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