Tag Archives: flat income tax

The Flat Tax fantasy

fairtax

fairtax

In the wake of the recent IRS scandal, some well-intentioned but badly misguided people have begun touting the flat income tax (called the flat tax for shorthand) as a replacement for the current tax code. They claim it would be an antidote to the IRS’s abuses and curb that agency’s powers while also supercharging America’s economy.

But they are dead wrong. The flat tax is no solution at all. It would not solve any of the problems with the current tax code and the IRS, and it could be replaced with a progressive income tax by the next Congress anyway.

Here’s why the flat tax would utterly fail to solve the problem, and why the FairTax – a flat 23% consumption tax designed to replace all federal internal taxes (income, payroll, excise, gift, death, etc.) is the solution:

  • The flat tax would still be an income tax, and as such, would still punish hard work, wealth creation, productivity, and savings, taking away from people what they have earned. Making an income tax flat does not change the fact that it is still a punitive tax on INCOME. By contrast, the FairTax, as a consumption tax, would be levied only on retail sales, not on income, inheritance, or the sales of raw materials or unfinished products.
  • With the flat [income] tax, you would still have to file tax returns every year by April 15th, and be liable for any mistakes you make therein. With the FairTax, there would be no such problems.
  • Administering the flat [income] tax would still require having a large IRS with dozens of thousands of staff to receive and review tax returns, audit people and organizations, and punish cheaters, and the IRS would, of course, retail ALL of the awesome powers it currently has, all of its staff, and all of its budget – and would still retain all your financial records. By contrast, with the FairTax, the IRS would be abolished PERMANENTLY, and under the FairTax bill (H.R. 25), all IRS records would have to be destroyed within 2 years of the FairTax being enacted – the sole exception being records related to Social Security, but these would be turned over to the Social Security Administration, not retained by the Treasury.
  • Unlike the flat [income] tax, the FairTax would be administered by the states, who would then send the revenue (minus their costs of administering the FairTax) to the federal government. Thus, it would dramatically shift the balance of power in the US in favor of the states and against the federal government. There would only be a federal Sales Tax Bureau with 51 personnel to audit the states in rare cases of state malfeasance.
  • The flat [income] tax would keep the current tax code, although it would be somewhat slimmed down from today’s 70,000 pages. The FairTax would abolish the federal tax code completely and replace it with the simple 123-page FairTax Act.
  • The FairTax would provide sufficient revenue for Social Security, though not for the entire federal Leviathan that exists in Washington today.
  • The FairTax would be completely transparent – you would know how much you pay in taxes everytime you make a retail purchase. By contrast, even under the flat tax, you would not know how much you really pay in taxes.
  • The flat [income] tax would keep the 16th Amendment. The FairTax Act would jumpstart the process of REPEALING the 16th Amendment forever, and would sunset (i.e. expire) automatically 7 years after its enactment if the 16th Amendment is not repealed within that time. But once Congress passed a resolution repealing the 16th Amendment, the states would be eager to ratify such resolution, as it would shift the balance of power in their favor.
  • The flat [income] tax would keep tax exemptions and thus allow the IRS to decide who deserves them and who doesn’t. Conservative groups applying for such exemptions would still face IRS audits.
  • And last but not least, the flat [income] tax would not remain flat for long. The next Congress could repeal it and replace it with a progressive one. The evidence? The current monstrosity of a tax code started in 1913 as a flat income tax at a 4% rate. But just 4 years later, in 1917, it was a heavily progressive income tax, with a maximum 77% rate. Although the maximum rate was later cut under the Coolidge Administration to 24%, it was still a progressive income tax – and 24% was still a rate that not even the most fervent advocate of the income tax had hoped for in 1913. Similarly, when President Reagan and the Congress enacted the 1986 tax reform bill, creating only two low rates, it took the Congress and Reagan’s successor, George “Read My Lips” H. W. Bush, only 4 years to add two new, higher rates, and thousands of pages, gimmicks, exemptions, and loopholes, thus essentially undoing President Reagan’s tax reform in just 4 years.

The flat [income] tax is not a solution. It would not solve ANY of the problems with the current tax code, the IRS, the 16th Amendment, the income tax itself, or the US political system. Only the FairTax would do that – by doing away with the income tax, the IRS, and the 16th Amendment PERMANENTLY.

It is no coincidence that the FairTax bill now has over 70 sponsors and cosponsors in both houses of Congress (including such conservative stars as Sen. Ted Cruz and Congressman Tom Price), while the flat tax bill has only one sponsor in the Senate and no companion bill in the House.

The flat tax is not a solution to anything and should not even be considered.

fairtax

 

Romney's Christmas Gift To Voters: A VAT Tax

Mitt Romney gave an interview to The Wall Street Journal over the weekend, discussing his concepts on tax policy. I think the mere fact that Romney used the tactic of concealing the discussion, not just in a “Friday night news dump” way, but in a Friday-before-Christmas-news-dump, should tell the reader everything they need to know about what Romney had to say on taxes.

So, what did he say, you ask?

In typical Romney fashion, he didn’t say much. From the WSJ interview:

…it’s hard not to conclude that the candidate is trying to avoid offering any details that might become a political target. And he all but admits as much. “I happen to also recognize,” he says, “that if you go out with a tax proposal which conforms to your philosophy but it hasn’t been thoroughly analyzed, vetted, put through models and calculated in detail, that you’re gonna get hit by the demagogues in the general election.”

This is perfectly in keeping with Romney’s 59-point plan, which I broke down in this post. Not a single point of the 59-point plan could be described as “bold”, “controversial”, or “original”. It’s a plan designed to be the least-offensive to the largest number of people.

Romney’s tax proposal is equally vague and inoffensive:

“What I like—I mean, I like the simplification of a flat tax. I also like removing the distortion in our tax code for certain classes of investment. And the advantage of a flat tax is getting rid of some of those distortions.”

He says this in regard to either a consumption tax or a “true flat tax”.

In other words, he’s playing both sides of the tax debate- some people like consumption taxes, some (like me) like flat income taxation, so Romney says he likes either.

Here’s the interesting part:

He says he doesn’t “like the idea” of layering a VAT onto the current income tax system. But he adds that, philosophically speaking, a VAT might work as a replacement for some part of the tax code, “particularly at the corporate level,” as Paul Ryan proposed several years ago. What he doesn’t do is rule a VAT out.

I think it’s important to pause here and give the reader a refresher on the VAT. I hate to say this, but it’s true: The extent of the average American’s knowledge of the VAT tax can be summed up as “VAT = Europe” and “Europe = Good (for a Democrat) or Bad (for a Republican)”.

I know of no better explanation of the VAT and its dangers than this discussion with Murray Rothbard (via Reason.com, and I highly encourage the reader to read the entire article):

The VAT is essentially a national sales tax, levied in proportion to the goods and services produced and sold. But its delightful concealment comes from the fact that the VAT is levied at each step of the way in the production process: on farmer, manufacturer, jobber and wholesaler, and only slightly on the retailer.

The difference is that when a consumer pays a 7 percent sales tax on every purchase, his indignation rises and he points the finger of resentment at the politicians in charge of government; but if the 7 percent tax is hidden and paid by every firm rather than just at retail, the inevitably higher prices will be charged, not to the government where it belongs, but to grasping businessmen and avaricious trade unions.

While consumers, businessmen, and unions all blame each other for inflation like Kilkenny cats, Papa government is able to preserve its lofty moral purity, and to join in denouncing all of these groups for “causing inflation.”

It is now easy to see the enthusiasm of the federal government and its economic advisers for the new scheme for a VAT. It allows the government to extract many more funds from the public — to bring about higher prices, lower production, and lower incomes —and yet totally escape the blame, which can easily be loaded on business, unions, or the consumer as the particular administration sees fit.

As you can see, it’s no surprise that VAT taxes are instruments of big socialist states.

The question, then, is whether or not Romney is proposing a VAT tax, but avoiding the conservative slings and arrows of such a proposal (by pointing out that Paul Ryan proposed a VAT at one point)?

Jim Pethokoukis believes so:

You can have a value-added tax that is economically efficient and pro-growth but does not have the transparency issues that Norquist and other small-government advocates worry about. Many flat taxers, for instance, like the 19 percent Hall-Rabushka flat tax, a plan which has served as the model for many flat tax proposals. As with the X tax, businesses under a Hall-Rabushka system would deduct cash wages from the cash flow on which they calculate the VAT.

Being a flat taxer, and one who has recommended Hall and Rabushka’s book in a previous post, I have to make a point on this subject: The VAT-like effect of their plan comes from the fact that they propose taxing business expenses, something most flat taxers (in my experience) find objectionable. This is, in fact, my principal disagreement with the Hall-Rabushka plan (and one of my several disagreements with consumption taxes of all forms)- taxing business expenses creates a barrier to entering self-employment, and a barrier to small businesses’ ability to compete against large businesses. There’s no way to make this barrier “gentler”.

By this standard, the Forbes flat tax– which includes a deduction for business expenses- is definitely preferred by the majority of flat taxers I know (though it’s possible there’s a large community of flat taxers somewhere, whom I haven’t met, and who favor taxing businesses in this fashion).

And on the subject of Paul Ryan: I like the man, but I am not a Paul Ryan cheerleader like some others, precisely because some of his proposals aren’t all they’re cracked up to be. Let’s remember that, in addition to propising a European-style VAT, he recently partnered with Ron Wyden (D-OR) to craft a new Medicare proposal, which Dean Clancy aptly described as “Obamacare for Seniors“. Romney’s name-dropping effort shows that Ryan’s name recognition among Republican voters is far greater than his plan recognition.

In sum: Mitt Romneycare used Christmas weekend, when nobody reads or watches political news, to announce- in a vague and weasly way- his support of a VAT tax. And no matter how you slice it, VAT- in any form- is a bad idea.