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Solution to Sovereign Insolvency, Part 3

Without tax reform, expect an economic implosion, major pain in the bond markets, civil unrest and more wars.

VANCOUVER (TheStreet) -- Is there anyone out there who would like to live in a world with no personal income tax, and no corporate income tax?

Do investors think that our economies would become more efficient if we eliminated all sales taxes and capital gains taxes? How about living in a world where all those taxes are gone?

No, I have not been ingesting illegal narcotics. In a world with a wealth tax, all other forms of taxation would be eliminated -- as being redundant. Furthermore, across the Western world, $10s of trillions in wealth would be exposed to taxation for the first time. The obvious advantage of such a tax system (apart from the enormous improvements in economic efficiency) is that with all wealth subject to taxation, the tax rate paid by everyone would decline.

In

Part 1

and

Part 2

, I explained why income taxation is the worst possible basis for a tax system, and also explained why it will inevitably bankrupt all economies -- as a greater and greater percentage of total wealth is funneled into fewer and fewer hands, every day. To reiterate, look at the numerical example I used in Part II.

We'll take a hypothetical billionaire, who has an annual salary of $10 million a year (greater than that of the average billionaire). As I mentioned previously, even that monster-salary only represents 1% of the total wealth of this individual. Thus, even a 100% (income) tax-rate on a billionaire only has a trivial economic impact on this individual.

More importantly (assuming a 10% annual rate of appreciation on assets), this person's income only represents 10% of his or her annual increase in wealth. What this means is that no income tax system could ever fairly tax such individuals -- with the inevitable result that more and more of a society's wealth is funneled into their pockets every year.

Now let's see what happens if we switch to a 5% wealth tax. It is simple arithmetic that a 5% wealth tax would result in the billionaire paying $50 million per year in taxes. In other words, using the numbers of this hypothetical example, a 5% wealth tax would result in 500% more tax revenues for government being paid by this billionaire than a 100% income tax-rate. Best of all, with the ultra-wealthy no longer being able to hide the vast majority of their wealth from taxation, the wealth tax can be set at whatever rate is necessary to stop this relentless plundering of all the wealth of our economies.

Ironically, the wealthy are always violently opposed to any form of "socialism": arguing that it reduces the incentive of individuals to "get ahead" or even to work, at all. Obviously, precisely the same argument can be made with income tax: It is a major disincentive to try to raise one's income. Eliminate income taxation, and we maximize the individual incentive to increase one's income. This, in turn, would lead to real gains in productivity -- rather than the pretend-gains in "productivity" that are reported by corporations each time they slash the compensation of their own employees.

Hypocritically, despite being grossly under-taxed, the wealthy complain about taxation at least as much as the over-taxed poor and middle class. They claim that "the only fair means" of taxation is a "flat tax" -- i.e., where everyone is taxed at the exact, same rate, regardless of how wealthy they are.

Well, in a wealth taxation system, the wealthy can finally see their dream come true. With a fair tax system, everyone can be taxed at the same rate. It is also a perfect opportunity to test the integrity of the wealthy. There can be no possible objection to a flat, wealth tax. Should such a proposal be advanced -- and meet the much more vehement protests of the very wealthy -- this would prove what average citizens have suspected all along. Specifically, the wealthy have never been interested in "fair taxation," but rather, they only want to keep all the wealth of society for themselves.

With wealth taxation, not only would personal income tax be gone, but so would corporate taxation. With all the wealth of corporations contained in the shares of their shareholders, by taxing the wealth of shareholders, corporate income tax would become redundant (a form of double-taxation). Exactly the same argument applies with capital gains and sales taxes.

With no capital gains or sales taxes, all these tax impediments to commerce (and profit-taking) would be permanently eliminated. This would greatly increase the "velocity of money" in our economies -- which, as any economist can tell you, is one of the most-obvious signs of a strong economy.

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Then there is the huge efficiency-gain simply from eliminating most of our taxation bureaucracy. It is only because we have income tax that we are faced with an absurdly complicated system that gets more and more complicated every year. While a wealth tax would devastate employment for tax lawyers and accountants, I'm sure that this is a "risk" most of us would gladly take.

As I have continued to stress throughout this three-part series, this is not merely some quaint, academic theory. I have demonstrated (through simple arithmetic) that all income tax systems must bankrupt these economies, over time, as they become totally hollowed out. The poor and middle-class get poorer every year, while the very wealthy get wealthier every year.

In my view, nearly a century of relentlessly plundering our economies has left only one pool of wealth capable of restoring solvency to Western economies: the illegitimate, under-taxed trillions held by the ultra-wealthy.

Without tax reform, there is no hope for our economies. Without the introduction of wealth taxation, there is no possible means of restoring tax equity to society. We are heading for the same fate that history has always imposed for these economic meltdowns. Expect one of the following:

1) Our "leaders" will start numerous wars -- to distract our populations while economic implosion takes place;

2) We will experience violent revolutions, as the oppressed majority becomes totally impoverished and has no choice but to take the wealth of the ultra-wealthy or wherever they can

3) To delay the bankruptcy of all these economies, there will be a huge "hair-cut" on bond holders -- who recklessly loaned these $10s of trillions to governments that never could be capable of producing revenue streams to service those debts (under current taxation). Since most of these bonds are also held by the ultra-wealthy, that will be one less place for them to "hide."

For bond holders, a wealth tax is the only means of avoiding either a massive hair-cut on the debt they are holding, or simply sovereign default -- where that "hair cut" could suddenly soar to 100%. This leaves all rational bond-holders with only two options: dump the debt they are holding, before it implodes in their hands, or push their servants in government to implement a wealth tax ASAP.

The reason all of our tax systems (and economies) are broken is nothing more than simple (irrefutable) arithmetic. The solution for the absurd folly of our current system of taxation is equally simple.

It is unfortunate that taxation is seen as such a boring and complicated subject that most members of society avoid even thinking about tax reform. Perhaps they believe it is something both unimportant and inconsequential. Nothing could be further from the truth.

There can be no excuse for the oppressed masses to be the least interested in taxation reform, as they obviously have the most to gain. The failure of ordinary citizens to rally around this sensible, viable solution to sovereign insolvency simply guarantees their own economic funerals.

--Written by Jeff Nielson in Vancouver, British Columbia.

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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.