Make Government Bond Purchases 100 Percent Tax Deductible

In my blog explaining to another blogger that tax cuts are not the same thing as tax incentives, I mentioned the idea of making the purchase of Federal Bonds 100% tax-deductible. I’m going to suggest an even greater modification to that idea: Give individual federal agencies the ability to offer their own tax-deductible bonds to raise additional funds (if approved by Congress, of course).

It’s a pretty simple addition to the original idea, and will make it really easy for Congress to find funding for new measures. Rather than Congress trying to find some way to steal tax dollars from one project to pay for another project, it just allows the issuance of additional bonds (which, of course, would be tax-deductible)! Want additional funding for the National Parks? Issue more Federal Bonds specifically for National Parks. Want funding for bailing out GM? Issue more bonds for bailing out GM. Want more funds for bailing out the banks? Issue more funds for bailing out the banks. Although, I doubt those last two would get see much action.

This will also help keep Congress within budget and reduce the risk of deficit spending. If we the taxpaying citizens of America don’t want to pay for something, then those deals won’t fly. Of course, outside investors may be willing to purchase the bonds. They won’t get the same tax incentives, but if they are willing to make the investments, so be it. This could be a huge boon for more popular programs. For instance, if NASA wanted a couple billion dollars more, they probably wouldn’t have much trouble getting people to invest in NASA government bonds.

The bonds would be incredibly attractive to all taxpayers! Some might be thinking, wait… the logic doesn’t make sense. The government has to pay the money back for the bonds. Yes, the government has to pay the money back. However, change the rule so that the interest is taxable income. Plus, I’d say, it should be on a 10-year note instead of a 1-year note. Loan the government money for 10 years. You get all of it back tax-free and only have to pay the taxes on the additional money you received from the government (aka interest). This provides a greater incentive for America’s debt to be owned by Americans.

It also provides an opportunity for Americans to invest in our government and our government services. It allows liberals and conservatives alike to put their money where their mouth is. If you think greater federal funds are needed for socialized healthcare, buy Federal Healthcare Bonds. If you think greater funds are needed for border patrol and immigration control, buy INS Bonds.

Of course, the obvious question is, “Where does the Federal Government come up with the money to pay back the Bonds”? The simple answer is obvious: taxes, programs that make money, or sell more bonds. That reality is that this is how the government operates right now anyway. Plus, the government is going to know exactly how much it will have to repay every 10 years, so it will need to play accordingly.

This is about giving American taxpayers a massive incentive to purchase bonds and a greater say in what programs the government should and shouldn’t fund! This about a greater exercise of democracy. This is about a greater level of accountability by government.

It’s also about the middle class taxpayer!

All one needs to do is look at the tax brackets to see that our taxes are skewed to screw the middle class. There is a 10 point jump between those with $34K of taxable income and less and those between $34K and $82K (aka the “middle class”). Here is how a current taxation scenario pans out for the middle class:

$30,000 taxable @ 15% (*** Not really the middle class ***)
pay the government $4,500 in taxes
have $35,500 to spend
government receives $4,500
$40,000 taxable @ 25% (***This is the middle class ***)
pay the government $10,000 in taxes
have $30,000 to spend
government receives $10,000 ONLY
*** Yes, you are reading that correctly! You make more than someone else, but you actually take home less! ***

Now… Under my idea of 100% Federal Bond cost deductions…
For the middle Class…
$40,000 but loan the government $7K to get into the 15% tax bracket
$33,000 taxable @ 15%
pay the government $4,950 in taxes
have $28,050 to spend
government receives $11,950

You might be thinking, “WAIT!!! Jared is a complete moron! I’m paying $1,950 more to the government!!!” For the current tax year, that is correct. However, unlike taxes that you never get back, you are going to get back the $7K in 10 years. Let’s say that your income doesn’t change during that 10 year period…

$40,000 and don’t loan the government $7K
pay the government $10,000 in taxes (@25%)
have $30,000 to spend… But wait!!! There’s more! The government has to pay you back the $7K it borrowed, along with interest. Now, I’m proposing the interest is taxable (roughly $1,500 and change at 2%), but the $7K is not! That means you actually have $37K + the remaining interest after taxes paid on the interest (roughly $1,125).
government receives $10,000 + taxes on the interest paid out as income to us middle class folks (roughly $375)!

And how do things look after 10 years under the existing model???
$40,000 taxable 25%
pay the government $10,000 in taxes
have $30,000 to spend
government receives only $10,000

You have more money under the deductible bonds model *AND* the government has more money! How does that happen? It’s magic! 🙂 Really what is boils down to is having a government that is actually going to pay back it’s debt. Maybe the interest paid would be less than 2% Everyone is going to want bonds, right? However, all bonds will be limited (we hope). But taxpayers will have a greater level of interest in what Congress does with our money. They need to pay us back, and we aren’t going to be too keen on guys like Bernanke just printing more money! We’re going to want to keep the interest rates at a reasonable rate. We’re going to not want government deficit spending because that puts our money at significant risk.

All of the last bit is true today. However, when people are really invested in something, it means a lot more to them when the government decides that it’s just going to start spending more money or expand federally supported medical services, or spend billions of dollars on drug wars, or spend billions of dollars on body scanners and pat downs at airports, or spend billions of dollars flying a human to Mars!

Now, obviously this doesn’t take into account tax bracket changes, rises in income, wars, inflation, deflation, etc. Those are all variables that greatly have an impact on finances, government spending, etc. It also doesn’t take into account the impact of the Agency Federal Bonds. There will likely be some agencies that received a greater level of investment than others.

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  1. 1 Bring Back the Strong USD and Nobody Should Get “Tax Cuts” « Feed My Blog

    […] All the bogus debates about tax cuts for the middle class vs low income vs millionaires is laughable. The tax brackets with or without the OBushma tax cuts screw the middle class the most. All one needs to do is take a look at the tax rates to see that the middle class didn’t really get much of a “break”. What really needs to happen with taxes is a complete overhaul of what is tax deductible (see my blog about making US Bonds 100% tax deductible). […]




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