National Economic Stabilization And Recovery Act

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This article is about the legislative tax reform proposal. For the internet based conspiracy theory involving secret laws, white knights, aliens, September 11, and the reworded National Economic Security and Reformation Act, see NESARA Conspiracy Theory.

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The National Economic Stabilization and Recovery Act (or NESARA) is a legislative proposal to reform the fiscal policy, monetary policy, and monetary system of the United States of America. NESARA was authored by the late Dr. Harvey F. Barnard to address the inefficiencies he saw in all three of these areas. As a proposal, NESARA competes as an alternative to other monetary and fiscal policy reform proposals such as the Monetary Reform Act, FairTax, flat tax, and the value added tax. NESARA has not been introduced in the United States Congress.

Summary

NESARA proposes to put the Federal Reserve back into the control of Congress, and rewrite current banking rules that would eliminate compound interest for secured loans, and require principals to be paid back first before the more-appropriately named "monetization fee" is collected by the bank. NESARA proponents claim that banks would find themselves becoming the public service they were meant to be, instead of continuing to separate the rich from the poor by means of current compound interest equations.

NESARA also proposes a revenue-neutral scrapping of the income tax in favor of a 14% national sales tax, with no rebates to compensate as the necessities of life are exempt for everyone: groceries, leases, rents, medical services, and insurances.

Advocates claim NESARA would bring prosperity because it improves systems which were originally initiated with no real precedent or way of predicting the outcome - a Great Depression, rampant inflation, and a continuous cycle of boom and recession; and replaces it with something re-designed for a 21st century economy.

Fiscal Policy Reform

In the area of fiscal policy, NESARA proposes a revenue-neutral reorganization of the existing United States tax system by eliminating the income tax and instituting a 14% national retail sales or excise tax administered by a new National Tax Service, while providing for exemptions on certain items such as groceries, leases, medical services, and insurance. Social Security, and Medicare income taxes would remain. Proponents of NESARA claim that the actual public need for these social programs could conceivably drop to the point where they are no longer needed, once the Monetary Reform provisions of the NESARA draft were passed and its benefits fully realized in American society.

Opponents claim the NESARA proposal is regressive on income. NESARA removes the progressive income tax but leaves the regressive payroll tax and then adds a regressive sales tax. Classical economic analysis indicates that the marginal propensity to consume (MPC) decreases as income increases. Households at the lower end of the income scale are spending almost all of their income, while households at the higher end are more likely to devote a portion of income to saving. MPC and income elasticity of demand tends to increase as wealth increases however. In addition, the exemption on life necessities effectively provides a progressive tax on consumption.

Opponents also worry that a federal hybrid system of sales and income taxation will simply add a new form of taxation and will allow for the income tax to redevelop. A hybrid system would add additional expenditures for tax collection and enforcement. In addition, exemptions add complexity as it leaves tax lobbyists the opportunity to seek exclusions and loopholes.

Monetary Policy Reform

In the area of monetary policy, NESARA proposes fundamental changes to the reserve and lending practices of the commercial banking system, including abolishing compound interest on all secured loans made under a fractional reserve basis in favor of a non-compounded monetization fee, and requiring principal on loans to be paid first before banks collect the monetization fee. The purpose of these changes are to reduce bankruptcies, end bank defaults, and reduce consumer debt service burdens for American citizens. Under these new economic rules, one popular result frequently cited by NESARA proponents is the ability to pay off a typical 30 year mortgage in only 17 years under the new system. The resulting economic growth of just the monetary reform provisions of the NESARA draft bill alone, would be expected to help drastically reduce the public need for government welfare programs such as Medicare and Social Security - the last of any existing income taxes under NESARA that could be eliminated once the need for these welfare programs diminish.

Monetary System Reform

In the area of monetary system reform, NESARA proposes a structural reorganization of United States monetary policy to eliminate inflation altogether, and reduce American public debt. NESARA proposes amending the Federal Reserve Act of 1913 to replace the privately-run Federal Reserve System with a new government-controlled Treasury Reserve System and the reassignment of its functions and those of the Federal Open Market Committee and Federal Reserve Banks to a new government-controlled Treasury Reserve Board.

In addition, NESARA proposes creation of an additional monetary tool, the Treasury Reserve Account, to more easily control aggregate national inflation and reduce it to zero. In order to eliminate the growth of the public debt and its effect on inflation, all banks and other fractional reserve lending institutions would be prohibited from using government securities as reserves. New interest-free Treasury Reserve Notes would be printed to replace the interest-bearing Federal Reserve Note that currently circulates.

For additional accountability between the government and the people, NESARA also makes provisions to reintroduce gold and silver specie as two additional currencies that could compete alongside the Treasury Reserve Note in a free market. Inexplicable minor fluctuations in the value of one currency over another would raise alarm that something was amiss. The public would be able to switch to a different currency and so be able to continue to preserve the value of their exchanges until the situation with the other currency had been sorted out. The federal government would be required to receive treasury credit notes for all transactions, thereby putting pressure on the government to maintain a stable fiat currency. Inflationary pressures on the Treasury Reserve Note itself would be dealt with by the Treasury Reserve Board using, among other tools, the new Treasury Reserve Account to absorb and reflect stored Treasury Reserve Notes into and out of circulation. Minor fluctuations, as well as major fluctuations can now be dealt with using the tools and system that NESARA proposes. Currently the Federal Reserve System is only designed to handle major fluctuations in the value of the Federal Reserve Note, a system some say is an antiquated way of dealing with a 21st century economy that has proven to be more and more sensitive to increasingly minor fluctuations.

Other indirect effects

Like any policy change, the NESARA proposal would create several effects in other markets:

Home mortgage interest deduction

The current federal tax law allows individuals to deduct the interest cost on home mortgages. Home mortgage interest is one of the few personal expenditures that is treated in this manner. While most do not itemize the income tax deduction for full benefit, this preferential treatment of mortgage interest encourages households to spend relatively more of their income on housing than would otherwise be the case.

Charitable giving

Like the home mortgage interest deduction, charitable giving receives preferential treatment under current tax law allowing individuals to deduct donations to certain charities. While most do not itemize the deduction for full benefit, this encourages households to donate more of their income to charity than would otherwise be the case. NESARA advocates state that total philanthropy as a percentage of GDP has held steady at around 2% for at least two decades regardless of changes in income tax deductibility. Proponents claim this economic boost would strengthen charitable giving.

Black markets

Opponents argue that imposing a national retail sales tax could drive transactions underground, creating a vast black market. This effect can occur for two primary reasons:

Under a retail sales tax system, the purchase of intermediate goods is not taxed, since those goods are supposed to be used to produce a final, retail good that will be fully taxed. Individuals and businesses may be able to manipulate the tax system by claiming that purchases are for intermediate goods, when in fact they are final purchases that should be taxed. At present, however, some business owners overstate business expenses or claim that expenses that are largely or solely personal are business expenses. No income tax would mean no business expense deduction.
The second arises from the use of a retail sales tax rather than a value added tax (VAT). A VAT imposes a tax at every intermediate step of production, so the goods reach the final consumer with much of the tax already implicit in the price. Thus the retail seller has little incentive to conceal retail sales, since he has already paid much of the good's tax. Retailers are unlikely to subsidize the consumer's tax evasion by concealing sales. In contrast, a retailer has paid no tax on goods under a sales tax system. This provides an incentive for retailers to conceal sales and engage in "tax arbitrage" by sharing some of the illicit tax savings with the final consumer.

It is important to note that a VAT and a retail sales tax have no impact on who bears the tax burden. Rather, a VAT conceals most of that burden by distributing it along the value chain. Both tax structures distribute the tax burden between the consumer and producer depending on a specific product's supply and demand characteristics.

Proponents respond to the black market argument by pointing out that, whereas tax evasion under the current income tax system requires only one person (the payor) to lie on their tax forms, sales tax evasion under NESARA requires collusion of both the payor (the retail purchaser) and the payee (the retail seller).

Illegal immigration

The current system of taxation, in many cases, provides incentives for illegal immigrants and companies that employ them. It is estimated that approximately 5 million illegal immigrants are paid off the books in cash allowing employee and employer to avoid paying federal taxes estimated at $35 billion a year. Under NESARA, illegal immigrants would pay the national sales tax on non-necessity items allowing for partial collection of this lost revenue. Due to the NESARA burden, wage increases would be required for illegal immigrants to retain the same buying power. This would allow Americans to more effectively compete for jobs held by illegal immigrants.

Underground economy

Supporters state that underground or illegal economic activity is largely untaxed under the current tax system. Economists estimate that the underground economy in the United States exceeds $1 trillion annually. By imposing a sales tax, underground economic activity will be taxed when proceeds from such activity are spent on legal consumption. For example, the sale of illegal narcotics will remain untaxed, but drug dealers will face taxation when they use drug proceeds to buy consumer goods. By taxing this previously untaxed money, NESARA supporters state the underground economy will be paying what would otherwise be uncollected income taxes.

Notes

By redefining the common definition of currency as representing debt and not wealth, Dr. Barnard set out to design an engineered solution to believed inefficiencies in the fiscal policy, monetary policy, and monetary system of the United States; and NESARA is the solution to his final analysis .
NESARA proponents claim that if all provisions of the bill become law, the standard of living for Americans will double within 20 years.

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