Alternative Tax Plans: Flat Tax and Fair Tax
This started out as reply to some really good, discussion provoking comments to my earlier article about taxes. Once my response grew past 3 paragraphs, it was time to move out of the comment box.
Like many issues in politics, the Catch-22 involved in reforming the tax code is apparent to everyone. A huge overhaul of the system as-is would require so much effort and money to enact that it seems insurmountable. On the other hand, things can’t go on like this much longer. Tax revenue is becoming more precious than ever, and it is being lost in the morass of complexity of the current tax code. My belief is that the Catch-22 doesn’t exist, really, beyond a marketing ploy to reinforce the status quo. The lobbying industry is very good at spinning information the way it needs to go, and they would be largely extinct without the current tax code. Our legislators have a vested interest in keeping things as muddy as possible too. Transparency is one of those key terms that is talked up a lot, but really, lawmakers have absolutely no interest in pursuing it.
An astronomical amount of money funds the IRS and millions of dollars go to simply deciphering and complying with the existing code. That energy could be converted to transferring the system to either of these programs or even another grand idea that hasn’t been thought of yet. Of course, then, eventually, we’d be seeing government bailouts for ex IRS employees. Both the Fair Tax and the Flat Tax plans are far better than what we’ve got out there, largely because they are simpler. The plans would also do a lot of loophole closing and general tax evasion. Each plan would do that in very different ways, but either would get rid of a lot of corruption as well. This would lead to more tax revenue by itself.
As I stated yesterday, the Flat Tax plan generally is proposed as a 17% flat rate for everyone, business and individuals alike, with nothing but a personal exemption. Dick Armey has been pushing for a flat tax plan since the early 90s, and Steve Forbes developed his own plan recently thereafter. Both plans are very similar and use that same 17% rate. The way the plan is laid out, it would be mildly progressive because of the personal exemption. Those below the poverty line would not be taxed. Globally, other nations have been adopting a flat rate, as do some of our states. It’s a far simpler, easier system than what we have, but the current hatred of the rich makes it a hard sell.
From my personal experience, the Fair Tax seems to be an even harder sell, and that may be its downfall. There are no deductions or exemptions for the Fair Tax. Yes, there would be some ability to exert control over how much taxes you pay in a year, because everything sold at retail level is subject to it. (Everyone would get a monthly “prebate” to offset the cost of basic expenses at the poverty level.) So, yes, if a family didn’t want to give a single penny to the government, they could find ways to buy second hand or be self-sustaining. The flip side of that is that sales tax is much easier to enforce than income tax. Never buying retail is a very rigid stance to take, and far more people currently evade income taxes than would bother to go to that extreme. It also completely does away with the income tax altogether, and is simply a sales tax, just like is already collected almost everywhere. Since those mechanisms are in place, it shouldn’t take much after the upfront changeover to add in another tax at the register. The back end of collection would mean a different way of collecting federal taxes, but there is existing infrastructure that could be converted to easily tracking the numbers. If the 16th Amendment is repealed, then there will be plenty of IRS officers looking for a new job.
The reason that the Fair Tax wins out over the Flat Tax for me, is that the Fair Tax is not an income tax. Income taxes are problematic for a number of reasons. Some people have equated them to slavery. While I wouldn’t go quite that far, stating that the return on my labor is owned in part by the government does chafe a bit. Philosophically, I’d much rather the tax be collected on purchased goods. The real issue is defining “income,” however. Income taxes can double tax some, and allow others to simply pass with no enforcement at all. That’s one of the reasons that what started as a fairly simple, temporary measure grew to be the monstrosity of tax code we see today. A flat tax today could be tweaked and coddled into growing back into a mess. While a national sales tax could be susceptible to over-legislation and corruption as well, it would not be as easy.
This crisis is the time to make some bold moves, no matter how scary it might be. Doing away with income taxes altogether might just be a bit too much change, and so the Fair Tax might not have the realistic shot that a Flat Tax would at being passed. I’m sure that many will argue that, at best, I’m idealistic and naive to believe that any bumps in transition from our existing income tax scheme to one of these simpler, superior ones would be shortly righted. I still want to talk about it, though. The types of change I’m ready for, the country isn’t, and I know that won’t change unless all those people getting mad and “teabagging” tomorrow start endorsing solutions that pull even more people in, so we can reject more of the same.
Your explanations are lucid, LG. I’m still not completely sold, though. I think that any tax system is subject to abuse and corruption by the powerful. Starting fresh, however you do it, would probably be like leaving the fox to watch the hen house. Small changes are more manageable and easily regulated, I believe.
Also, on a slightly different note, Alabama is one of the only states in the nation that still taxes grocery items. How do you feel about that?
This is one of the most frustrating issues that we have going on today. I can’t think of a person I know who has been happy about our government (state, federal) since I’ve known what government is. There have been folks that have thought that a particular piece is decent, or perhaps an individual legislator or member of the judiciary who does a good job, but by and large there have been very few positive remarks that I can recall regarding our government.
It’s sometimes a partisan issue. Dems don’t like Reps and like to lump anyone even close the other camp’s water cooler in with them. Sometimes the partisanship actually amounts to a disagreement with the ideology behind the party, but it’s usually just a shouting match.
It’s too often an “us versus them” mentality. It’s “We the People”, not “We The folks that have to deal with those People who got elected.” We’re the government, responsible for putting individuals into the legislature et al., and we’re responsible for calling them to task. Did your senator not do what he stumped? Fire him, and hire someone who will do what he says.
I think what it really boils down to is that there is an underlying status quo, a solid bedrock of cultural security in our country that gives us cause to grouse about unfair things are, but when push comes to shove, not do anything about those unfair things. Why? Well, to put it bluntly, we’re afraid. What happens when, if we demand change, that change actually happens? What if the change we demanded was actually wrong? What if it means that the bedrock shakes? We’re security-minded, and driven by fear of change. Our public servants know this and exploit it as a matter of practice.
When we talk about something like the tax code, you can’t find a taxpayer who says, “What’s wrong with the tax code? Looks fine to me”, and yet the code grows each year. With each level of bureaucracy come another way to grift. Yes, we do indeed have a country that has a very complex infrastructure. No, it is not impossible to change that infrastructure. I argue that the two alternatives presented by LG show initiative to not only embrace positive change, but also to directly address something with which taxpayers agree; the current system does not work, we need something better.
I’d prefer being taxed on my purchases rather on my wages, so I like the FairTax, personally, but I can see the Flat Tax’s merit. Perhaps there are other ideas out there that would be a useful alternative to what we have now?
While yes, abuse is possible, it is highly unlikely to be unnoticed when it is tried. It will be difficult to get around the Fair taxes charge on goods, and the Flat taxes, you made 1,000,000 you paid 170,000, the end. I certainly wouldn’t put it past out politician to try though.
My question Apollo would then be, if small changes are manageable and easier to regulate, why are we still complaining about loopholes?
Chris the only problem with being able to fire the representative that doesn’t do as they promised, is that we can’t. By time the next election comes up people have forgotten what made them mad, or what promise was broken.
My only real issue with the Fair tax comes from the fact that it’s on purchases/merchandise. What’s to stop a wealthier individual from making purchases outside the US, and bringing them back. Has that issue been addressed? I don’t remember seeing/hearing that topic being addressed.
Can’t…
I hate that word. Won’t is more applicable.
Oh, I agree Chris. We need to create some sort of Impeachment petition, so that we can get rid of them immediately. It’s just a matter of getting enough people to care/agree.
Wow, everywhere I turn today there is tax talk of some form or another. I’ve not even really addressed the stimulus package or the budget, but people are debating and researching it all over the place today. It really is on everyone’s mind, and I’m thrilled that the Tea Party movement has at least stimulated more conversation.
@Apollo – “Grocery items” is a wide net, and opens the same debate as the “income” question, which allows lobbyists and corruption. It’s far simpler to have a standard sales tax. In fact, on that note, I double checked my facts because I knew I was mixing up something crucial. I realized the Fair Tax does not exempt necessities, but provides for a monthly “prebate” check for the necessities of life. The argument for this is this ensures that the Fair Tax is progressive. The wealthy would actually get a disproportionate rebate if grocery items were exempt, since the rich spend a greater amount of money on food. The prebate check actually allows the standard tax rate under the Fair Tax to be much lower for everyone than it would by exempting grocery or medical items. I’m going to go back and correct that part of that paragraph right away.
@Chris – You didn’t ask me any questions, so I’ll just say, “Right on.”
(We need to do some huge firing of Alabama legislators, while we’re at it. WOW. I know I’ve mentioned how sad it is that the Free the Hops movement gives me the best information about what’s going on in our legislature.)
@LightBringer – In general, the cost of goods would go down for everyone because corporations always pass their tax burdens onto their customers anyway. Corporate taxation is a smoke and mirror game to make people think that big companies are paying their fair share, but really, as taxes and compliance costs go up for corporations, so do the prices of their goods, or else they lower their labor costs. In the long run, individuals always pay taxes. The free market would settle those artificially high prices down. Prices in the US market, would be much more competitive, even with the sales tax. This lowered cost would especially be shown in US goods, since foreign goods would not have that edge. In this way, the Fair Tax even works towards tackling our trade deficit. Smuggling goods into the country would simply cost more than actually buying them at home in most instances.
From the FairTax website FAQ:
Oh, as I was making sure all my ducks were in a row on this, I ran across another favorite bit of the Fair Tax for me… our current income tax doesn’t catch some of our biggest money makers at all. Crime lords would suddenly find themselves paying taxes, too.
Like I said before I don’t know quite enough about the Fair Tax system to argue for or against it but to imagine that crime lords/assholes in general couldn’t find a way around it is probably a huge mistake.
People always find loopholes.
You know what? Fair enough.
In fact, to provide a counterpoint to all I’ve said, TennZen posted this link after all the Tea Partying.