Tuesday, September 27, 2005

Fair Tax, Sales Tax, Value Added Tax, Flat Tax?

One thing all reasonable people can agree on, America's system of federal taxation is broken. Much rhetoric has been spewed by politicians, but few serious plans have been put forward. In practice, the Democrats and Republicans have jiggled tax brackets, enlarged and decreased various deductions, and all manner of other posturing, with little real effect. Neither party has made any significant progress toward simplifying the tax system. Neither party has made it more "fair". What follows is a review of some of the more serious tax plans put forward. This review is an effort to find the "fairest" and best tax plan for America. The best plan will most closely follow the intentions of the nation's founders, it will provide maximum accountability to the citizen, and it will not discriminate against any citizen. The best plan will most thoroughly deprive the federal government of the powers it has unconstitutionally usurped from the states.

The first two plans to be reviewed are the most radical plans put forward by the two groups in power. And as is clear, they are the least radical of the plans to be reviewed. These plans, one put forward by the "left" and the other proffered by the President, ostensibly representing the "right" are not much different from one another. The leftist's plan punishes the so-called rich, those making over $120,000 per year. While this plan claims to simplify the tax code, primarily by closing so-called business loopholes, it simply shifts wealth from wealthy to poor by a new formula.

"We would revamp the income-tax rate structure by reducing it to three tax brackets with tax rates set at 15 percent, 25 percent, and 39.6 percent -- which we would also set as the tax rate on capital gains and dividends. The brackets would be set at taxable income levels of $0, $25,000, and $120,000, with a $10,000 standard deduction for married couples."

It does not begin to approach fair, and is cosmetic at best. The left has once again approached an issue, this time the tax issue, by pandering to its base, promising to take money from one group of people and give it to another.

The second plan, put forward by the President, is not much better. The President even provides charts and graphs to drive home the point that he is trying to be as unfair as the left, all in the name of compassion. The President is willing to give your money away, and enlarge certain deductions like the child tax credit and charitable deduction in order to buy the support of his base.

"Replacing the current tax rates of 15, 28, 31, 36, and 39.6 percent with a simplified rate structure of 10, 15, 25, and 33 percent ...Doubling the child tax credit to $1,000 per child and applying the credit to the Alternative Minimum Tax"

In both cases, these plans do not begin to address the issue of fairness, instead they appeal to the perceived fairness of specific voting blocks that want a lighter ride or tax burden on the backs of their fellow citizens.

Our next plan is called the "Flat Tax". The idea being that all taxpayers belong to one bracket, and thus pay the same percentage of their salary. This is much closer to fair than the two plans covered so far. Unfortunately, the more mainstream proponents of this plan do not follow the logic of a flat tax to its proper end, as they do not address Social Security and Medicare (payroll taxes), they also exempt "Capital Gains" from taxation, as if that is not income. Advocates of this so-called "flat" tax argue that only wage income should be taxed, as investment encourages economic growth and so taxing capital gains would be counter-productive. The motivation would appear to be to allow the rich, who already have huge non-wage assets like property, stocks, etc, to live tax free while those actually working for their money paid the taxes. This is almost the exact opposite of an income cap, where all income above a certain level is confiscated and given to the poor, something that one can be sure many socialists would love to impose. This plan is not fair and makes no sense, as most of those supporting it still seem to be in favor of various deductions. How is it flat if not everyone pays the same percentage?

One of our final tax plans, and one of the most radical is called the "Fair Tax. It is essentially a national sales tax. This tax would rely on the states, 45 of which already have some sort of sales tax, to do the collecting for the federal government. This plan is made up of all sorts of bizarre rules and assumptions. The centerpiece of this plan is a pre-bate to all holders of social security numbers in the amount of the mystical "poverty level".

"All valid Social Security cardholders who are U.S. residents receive a monthly rebate equivalent to the FairTax paid on essential goods and services, also known as the poverty level expenditures. The rebate is paid in advance, in equal installments each month. The size of the rebate is determined by the Department of Health & Human Services’ poverty level multiplied by the tax rate. This is a well-accepted, long-used poverty-level calculation that includes food, clothing, shelter, transportation, medical care, etc"

As if this weren't crazy enough, "Under the FairTax plan, poor people pay no net FairTax at all up to the poverty level! Every household receives a rebate that is equal to the FairTax paid on essential goods and services, and wage earners are no longer subject to the most regressive and burdensome tax of all, the payroll tax. Those spending at twice the poverty level will pay a tax of only 11.5 percent – a rate much lower than the income and payroll tax burden they bear today."

While its noble to want to help others, it is not fair to tax one person at one rate and another person at another rate, let alone letting someone get away with paying no taxes at all. See a previous post for more on this issue.

The Fair Tax as its called, is not fair as one can clearly see. Nor does it dramatically simplify federal taxation. Indeed, it requires 5 states to institute state sales tax systems, and compels states that already have sales taxes to continue those tax systems. This article does a fine job of attacking certain assumptions made by those that favor the Fair Tax. And here is a comparison of the Fair Tax and the Flat Tax done by proponents of the Fair Tax.

Before unveiling our final tax plan, the best tax plan we have investigated thus far, I want to take the opportunity to state that I had been prepared to lay before you my own tax plan. I will go ahead and do that, but now with the knowledge (after stumbling across a better plan) that my plan is only second best. I recently ran across the plan that I regard as the best and will cover it last.

The second to best, and second to last tax plan is a true, real, honest, flat income tax. Under this true flat tax, all income, whether it be from a typical job, from the sale of a property, to the sale of stocks, to interest earned on investments, etc, would be considered income. There would be NO deductions for children, mortgage interest, charitable giving, or anything else. Everyone would be taxed at the same rate, rich, poor, and in the middle. This makes it fair, as all citizens pay the same rate. The federal government, which has no business encouraging or discouraging legal behaviors or spending habits, would be unable to exempt any kind of income, and would be unable to grant any kind of deduction. That makes the true flat tax fair and non-discriminatory. In addition, withholding would be ended. All tax payers would need to pay the federal government according to some sort of schedule, quarterly, or yearly for example. By forcing the tax payers to actually write the check, or charge the tax bill, the true cost of the federal government, to each citizen, would be apparent. This would serve to increase accountability as presumably, once people realize taxes are their money, and they have to actually part with it after having it, citizens would take a greater interest in how the federal government spends money. The IRS would unfortunately still be needed to enforce this tax plan. But, it still manages to radically change the ability of politicians to steal from one person to buy another. While the true flat tax, as we are calling it, would accomplish many of the goals set out at the beginning of this article, it fails at least one test. It does not bring us closer to the system of financing the federal government as envisioned by our country's founders. While it seeks to make the government more accountable for its tax policy than the other plans reviewed, by forcing the taxpayers to consciously pay the required amount, it brings no other pressure to bear on the federal government.

There is one more tax plan to cover, perhaps the most radical. It would achieve all of our goals. This tax plan would bring about "fairness" through competition among the states. It would return our system of government to its principles and origins in the form of a Republic, rather than the tyrannical Democracy we have evolved into, providing a clearer and more effective chain of accountability as states would fund the federal government. Coupled with Senators once again being appointed by the states, local politics, the sort of politics that is most accountable to the citizen, would be much more meaningful. States would be free to tax as they desired, the free movement of citizens would quickly show the nation which tax plans were considered fair and acceptable. Socialists could be socialists within their own states, enacting whatever entitlements they could get through their state courts and constitutions, without inflicting that sort of madness on the rest of the country. The spending of the federal government, and its powers, would then be subject to oversight by the states. The federal government would once again serve the states, and therefore, the people of the United States, rather than what we have today, the people of the United States serving the federal government.