Skip to comments.Flat Tax or Fair Tax?
Posted on 01/31/2013 6:05:49 AM PST by Kaslin
Im at Hillsdale College in Michigan for a conference on taxation. The event is called The Federal Income Tax: A Centenary Consideration, though I would have called it something like 100 Years of Misery from the IRS.
Im glad to be here, both because Hillsdale proudly refuses to take government money (which would mean being ensnared by government rules) and also because Ive heard superb speeches by scholars such as Amity Shlaes (author of The Forgotten Man, as well as a new book on Calvin Coolidge that is now on my must-read list) and George Gilder (author of Wealth and Poverty, as well as the forthcoming Knowledge and Power).
My modest contribution was to present The Case for the Flat Tax, and I was matched up at least indirectly, since there were several hours between our presentations against former Congressman John Linder, who gave The Case for the Fair Tax.
I was very ecumenical in my remarks. I pointed out the flat tax and sales tax (and even, at least in theory, the value-added tax) all share very attractive features.
For all intents and purposes the flat tax and sales tax are different sides of the same coin. The only real difference is the collection point. The flat tax takes a bite of your income as it is earned and the sales tax takes a bite of your income as it is spent.
That being said, I do have a couple of qualms about the Fair Tax and other national sales tax plans.
First, I dont trust politicians. I can envision the crowd in Washington adopting a national sales tax (or VAT) while promising to phase out the income tax over a couple of years. But Im afraid theyll discover some temporary emergency reason to keep the income tax, followed by another short-term excuse. And when the dust settles, well be stuck with both an income tax and a sales tax.
As we know from the European VAT evidence, this is a recipe for even bigger government. Thats a big downside risk.
I explore my concerns in this video.
Flat Tax vs. National Sales Tax
To be sure, there are downside risks to the flat tax. Its quite possible, after all, that we could get a flat tax and then degenerate back to something resembling the current system (though thats still better than being France!).
My second qualm is political. The Fair Tax seems to attract very passionate supporters, which is admirable, but candidates in competitive states and districts are very vulnerable to attacks when they embrace the national sales tax.
On dozens of occasions over the past 15-plus years, Ive had to explain to reporters that why anti-sales tax demagoguery is wrong.
So I hope its clear that Im not opposed to the concept. Heck, Ive testified before Congress about the benefits of a national sales tax and Ive debated on C-Span about how the national sales tax is far better than the current system.
I would be delighted to have a national sales tax, but what I really want is a low-rate, non-discriminatory system that isnt biased against saving and investment.
Actually, what I want is a very small federal government, which presumably could be financed without any broad-based tax, but thats an issue for another day.
Returning to the issue of tax reform, theres no significant economic difference between the flat tax and the sales tax. What were really debating is how to replace the squalid internal revenue code with something worthy of a great nation.
And if there are two paths to the same destination and one involves crossing an alligator-infested swamp and the other requires a stroll through a meadow filled with kittens and butterflies, I know which one Im going to choose. Okay, a slight exaggeration, but I think you get my point.
The chief fear of those who are running for political office about the “fair tax” is concerns about the “poor” getting hit.
I want a flat tax, preferably somehow tied to consumption of government services, but at least on consumption instead of income, profit, investment, and other useful things. Not only is there no good defense of progressive taxation, there isn’t any reason rich people should pay more in an absolute sense, even if the rates are equal. Not unless you subscribe to the “from each according to his abities, to each according to their needs” philosophy.
I wrote an article on this subject that Liberty was kind enough to publish in their April 2003 issue. It’s entitled “Why Tax Reform Doesn’t Reform.” Here’s the link to the archive. http://libertyunbound.com/archivesearch?date_filter%5Bmin%5D%5Byear%5D=2001&date_filter%5Bmin%5D%5Bmonth%5D=1&date_filter%5Bmax%5D%5Byear%5D=2004&date_filter%5Bmax%5D%5Bmonth%5D=1&type=liberty_print&keys=Welber
That’s one reason democracy doesn’t work.
And that’s been addressed (in Boortz’ book) with the “prebate” for sales tax on what is considered the “base” level of spending on necessities.
Everyone gets the prebate so there’s no complexity added to the system.
We actually had a flat tax, or at least the best one that our congresscritters could come up with. It was called the Tax Reform Act of 1986. It was flat, but it was not simple.
That and they don’t want more money in the hands of upper middle class and the tier above that. It would give that class which is mostly conservative more power to control their destinies and influence government. The super rich (most politicians and behind the scene power brokers) don’t pay income taxes they pay 20% on capital gains. They are UNAFFECTED and DON’T CARE!
Taxes are slavery, cut and dried.
It is like the false dream of home ownership. Ask the families who have family farms/ranches that are paid off or the family that paid of their mortgage only to lose that asset because they couldn’t pay their property taxes.
The old truism that once people realize they can vote themselves entitlements from the tax revenue democracy fails.
I think the Fair tax is more saleable to an ignorant populace but personally prefer the simplicity of the flat tax. I would gleefully accept either as a replacement to our current system.
The chief fear of politicians regarding the fair tax is the loss of their power. Plus the fact that the tax rate would be in every consumer’s face each day shining the light of the true cost of government.
You wrote: “I think the Fair tax is more saleable to an ignorant populace but personally prefer the simplicity of the flat tax. I would gleefully accept either as a replacement to our current system.”
With the “Fair Tax” there is NO filing and NO IRS. With the Flat Tax, you file each year with supposedly a “post card” and the IRS remains intact.
Legislate and institute the “Fair Tax” and get rid of filing and the IRS in one fell swoop, I say.
The reform of ‘86 was both a miracle and revolutionary compared to the preceding decades. Goes to show you how evil our tax system is that it hardly ended up mattering. Not to say things couldn’t have been worse without it, but does anyone anywhere think the current system is good? I mean, at all?
The super rich are hit in other ways. Capital gains taxes only hit after our VAT tax, the corporate tax, takes a bite out of profit. Then they pay all sorts of luxury, sin, and property taxes. Finally, upon death their legacy is gutted. We could have am aristocracy in thus country, and one based less on crime and corruption as throughout history, if gubmint would keep its greasy paws off private fortunes.
Ever wonder why we have no independent families which don’t Peter out in a generation or so? Why we conspicuously lack high culture? Why our great artists, for instance, are left to suckle on the dry teat of European tradition? Because we went straight from barbarism to decadence. Because as soon as we cut our way into the continent and built a civilization gubmint ate the profits up and belched out the damn TVA, public education, a couple of crappy World Wars, and cities no decent person wants to step foot in.
I have no real arguments with the author. I think the flat tax is a more realistic goal, because it has some hope of being obtainable.
I prefer the fair tax/sales tax, because I do think it’s the most fair, but the author points that we could push for the fair tax and end up with both a sales tax and an income tax. That would be terrible.
So, I’ll settle for a flat tax. I do, however, want individuals/families to have the same right to exclude expenses from being considered income.
The prebate is an ENTITLEMENT check.
it degenerates into a “living prebate” where the entitlement check pays for what is, thanks to the help of lobbyists on K street, determined to be a necessity.
that is what makes the “fair tax” nothing more than yet another tax scam.
It also has the federal government intruding into mandatory registration of all buyers and sellers.
It is simple ecconomics, the retailers will just inflate prices to include the “pebate entitlement” and you have instant inflation. (see those credits for digital converter boxes of a few years ago)
a serious tax reform plan can not include more entitlement checks.
Great find, Kaslin! Thanks for posting!
OKEYDOKEY FairTaxers, here is your chance to promote the FairTax.
Have at it!
My contribution: The Flat tax is still an income tax, and it does not rid the USA of the evil Internal Revenue Code or the Internal Revenue Service. People with guns will still take your earnings under cover of “The Law.”
Why don’t we replace the income tax with a National Retail Sales Tax, abolish the IRS and restore FReedom to the American people?
Fellow FReepers, the issue is FReedom, and there can be no FReedom in the USA so long as we have an income tax and an IRS!
For more information about the FairTax and to find out how you can help us, go to http://www.fairtax.org.
What do you have to say in response to the hostility of the previous post to the “prebate”?
I think it’s from lack of understanding, and you can’t argue with that.
It made a lot of sense to me, as explained by the fairtax book.
Bingo, which means a Fair Tax will never be seriously considered by the political class. It will take a grass roots tidal wave effort to reset from an income tax to a consumption tax.
I'm going to disagree with you; the Fair Tax is worse than the Flat Tax -- a Flat Tax* does not have added complexity (just multiply by the tax-rate), the Fair Tax has that [IMO] stupid 'prebate' which makes it in effect another progressive tax, more dangerous than the Flat Tax* because the conditions of the prebate could be altered into something more progressive than our current bracketing system.
* - The Flat Tax should be simple: no exceptions, exemptions, credits, or withholdings (which are either theft, or forcing the employer to commit fraud). It should also apply only to individuals, this would destroy the entire issue of "tax-exempt" that 'non-profit' or 'religious' institutions/corporations currently are entangled with.
We already have an income tax and a corporate tax, which is a VAT tax. Plus all sorts of consumption taxes, excise taxes, tariffs, property taxes, investment taxes, death taxes, the inflation tax, so on. I am wary to add new taxes, but that’s not my primary fear.
How many times does it have to be said that the Income Tax started out as a ‘Flat Tax’ and is always changed into a graduated series of ‘flat’ brackets that are tinkered with by politicians and IRS?
The first income tax in 1861 signed into law by President Lincoln was flat.
That tax and subsequent taxes were changed into more graduated income taxes and were shot down by the US Supreme Court until the worst President in US History Woodrow Wilson was able to push through the 16th Amendment allowing for the uniformity in indirect taxation to be sidelined by income however defined from whatever source.
The original tax provisions of the US Constitution had only one flaw: ‘the disproportionate burden’.
I was surprised to talk to a man now 43 years old from Lithuania who was raised in a communist family in the old Soviet Union and he raised the issue of the disproportionate burden argument before I broached it. Obviously this was taught in Soviet schools.
Another time that I saw someone raise the disproportionate burden issue was in a response letter from the office of US Senator Patty Murray where they raised it as a reason for sticking with the US Income tax.
The disproportionate burden argument has existed at least since the time of Daniel Boone.
But here is the bottomline, the FairTax eliminates actually eviscerates the disproportionate burden issue that was the only flaw if the original tax provisions of the US Constitution. If any amendment had needed to be passed in US history regarding taxation it would be a FairTax Amendment, not an income tax and not a straight sales tax but the complete FairTax package. In 1913 passage of a FairTax was not possible because the administrative technology and ability was not there. The income tax following on the heels of the 1913 16th Amendment was a Flat Tax on mostly the 2% of the wealthiest Americans.
The problem with the Flat Tax is.. it’s still a Tax on “income”.
As long as we tax income, we HAVE to have a definition of what IS, and ISN’T “income”... Hence, you will always have an IRS, a lengthy tax code, and loopholes... maybe not so many at first, by they will pass them every year... forever, until we’re right back in the same boat.
Taxing sales DRAMATICALLY reduces the number of people the IRS has to audit. (It will NOT go away... tax compliance will remain a challenge). But, the vast majority of us will have ZERO contact with the IRS. And they will have a LOT LESS information about our private lives.
Taxing income penalizes based on the measure of what someone adds to the wealth of the nation.
Taxing consumption penalizes based on what an individual consumes of that wealth.
The latter is more moral than the former.
You know, when you think about it “prebate” works just like food stamps, EBT, etc. If such items are really so necessary people will buy them anyway. All exempting such purchases from taxes does is defray the cost of other things. The gubmint buying your milk gives you more booze money.
Plus, we all know that within a week they’d be exempting cars, houses, gender reassignment surgery, etc.
Income tax is not the most evil tax we have: the property tax is -- for with the property tax there is no way that you can own your own land and protest [by not paying] government expenditures -- all other taxes are avoidable if you are self-sufficient.
Second, it must be acknowledge that the evil portion of the current income tax can differentiated from an income tax -- to wit: it is possible for an income tax to exist without withholdings. Withholdings are, in actuality, the most evil of the current income tax system for they are either theft or mandatory fraud; if the withholding occurs when the money is still yours, then it is theft (breaking into your effects and taking your monies before you have a chance to clam it), if the witholding occurs while the money is the employer's then it is fraud (because the employer is not paying you the full agreed-upon wage).
Many of the abuses of the IRS are not because of the income tax, per se, but are of our own justice-system. Under logical legal thinking income tax-codes are currently illegitimate and unlawful: it has been long established that Ex Post Facto laws are those which (a) make illegal some action which was legal in the past [and is then prosecuted] or (b) increases the punishments for some law, again, retroactively; theses prohibitions are held to absolutely apply to criminal law, of which ostensibly the violation of the tax-code is. The problem that comes into play is when we realize that the income-tax laws have been changed retroactively (read: in an Ex Post Facto manner), this should then, by all rights, preclude tax-law from being a criminal matter as such laws are indeed prohibited. This means that they could be pursued under civil claims, but not criminal-court -- and the 7th amendment would apply: that all controversies exceeding $20 have the right to jury-trial.
But the above is not the case -- the IRS uses criminal law to pursue, under color of law, the violations of the tax-code.
>>>The chief fear of those who are running for political office about the fair tax is concerns about the poor getting hit.<<<
There are many fatal problems with the “Fair Tax”. The fact that those promoting it (”Fairies”?)use Lefty, doublespeak, propaganda in naming and marketing it is a huge red flag. Let’s call it what it is, a National Sales Tax.
Also, the problem is not really taxes, it is SPENDING. The Federal Government spends many times more money than it should and mainly on things that it has no Constitutional authority to spend on.
A Flat or at least Flatter Tax makes sense. A true Flat tax would mean each American would pay 1/300,000,000th of Federal spending. Currently, that would be about $11,500 a year paid by every man, women and child.
A “Fair Tax” would be a disaster for the following reasons (and more I am sure):
1) It puts the Federal government in the middle of every purchase you make.
2) It is anti-growth. The wealthy and upper middle class will spend less and hoard their money to avoid the tax. This will greatly slow the economy and destroy jobs.
3) It will create a massive black market for untaxed goods. When everyone sees their neighbors avoiding the “Fair Tax” this way, they will feel they need to do the same to keep up. Nearly every American will become a “criminal” who can be thrown in jail through selective enforcement at the whim of the authorities. (Hint - those thrown in jail won’t generally be Liberals, Atheists, Muslims, Union Members, etc.)
4) The black markets will necessitate (or be used as an excuse for) the elimination of paper money and coins and will force everyone to use some sort of Federal Debit card for all purchases. This would have extreme implications on personal Freedom and could even become a “Mark of the Beast” type situation.
5) If anyone thinks an Income Tax won’t be reinstituted on top of the National Sales Tax, you are more gullible than Manti T’eo, and I am a really, hot girl, in a coma who would love to meet you.
6) It will never be simple. All types of execptions and credits (some perhpas legitimate, others for special interests) will be added to the “Fair Tax” code and you WILL need to file a Federal Fair Tax return that might be even more complex than your 1040.
Again, we need to cut SPENDING. The bill that Washington is running up can’t be paid by ANY tax scheme. If we cut spending to where it should be (or at least to double what it should be instead of 5 times what it should be) whatever tax plan we end up with won’t be so burdensome, no matter how it is split up.
No, the income tax is a direct tax. Prior to the 16th amendment it was restricted by the apportionment requirement, not the uniformity requirement.
You know, most all of the problems we face as a nation require simple solutions. Over spend? Cut the budget. Too many regulations? Throw them all out and start over. Maybe all rules and regulations sunset in five years and require line by line vote to keep the regulation in place every 3 years.
That is why we won’t see them implemented by our government. They will have to be implemented by the citizens somehow.
The problem with the 86 law was that it didn’t eliminate deductions and credits, except for the investment tax credit, it limited them, which meant that you had to calculate the benefit, and then calculate the limit. Thus, the flat tax was more complicated than the graduated tax. The graduated tax rates are the least complicated part of tax law.
The last time we had a flat tax it was very complicated. Can you tell me what the taxable income is of a self employed individual?
“With the Fair Tax there is NO filing and NO IRS. “
You believe that? How will social security know how much benefit you are accruing if you don’t file something?
>>>Taxing income penalizes based on the measure of what someone adds to the wealth of the nation.
Taxing consumption penalizes based on what an individual consumes of that wealth.
The latter is more moral than the former.<<<
Spending money does not “consume” wealth, it creates it for others.
We shouldn’t look at taxes as “penalties”. A big problem with our tax code is that it tries to encourage or discourage certain behaviors, rather than simply seeking to rationally allocate the legitimate costs of government among the citizens.
The problem is that Federa (not to mention state and local)spending is WAY too high. There is a reasonable amount of legitimate tax burden that needs to be shared somehow by the society. The main problem is not so much how to calculate each individual’s share of it, but the grossly excessive burden of illegitimate Federal spending.
If the Federal Government only spent what it should, finding a relatively fair tax system wouldn’t be that difficult. I’d rather pay an somewhat unfairly high percentage of a small tax burden, than my fair share of an overwhelming one.
All monies received as compensation of goods or services rendered.
I agree that the property tax is evil. HST, the property tax is a state tax, and must be addressed at the state level.
If I were king for a day, ALL taxes would be abolished at the local, state and federal level and be replaced by local, state and federal sales taxes.
The FIT is a national tax, and is TOTALLY evil, however it is collected. Whether taxes are with held FRom paychecks or one must write a check is immaterial. A distinction without a difference!
The income tax is evil, and it must be abolished!
I ignore longtermmemmory’s posts.
His/her arguments are nonsensical, and he/she does not contribute to the discussion or the solution.
TAXMAN BRAVO ZULU!
I disagree, there is indeed a distinction that makes all the difference.
Without witholdings there is no theft or fraud because of the government preemptively taking monies; in the "write a check" version you are seeing the full effect of government spending of the monies you pay.
The poor need to get hit ("have some skin in the game" as The Won would put it). If 50% of people pay nothing for government, you're in danger of an electoral majority that thinks big government is a good thing, and comes with no drawbacks, and who think I'm bound by whatever they vote for. That's simply unacceptable.
I favor the FairTax, as it taxes consumption not productivity and your taxes truly ARE voluntary! I don’t like the “prebate” but I understand why it is there. And, unlike most folks I understand how and why the tax percentage is calculated.
But otherwise, the answer is “Yes.”
The income tax has been both in its history labeled a direct tax and an indirect tax. It doesn’t matter. As a direct tax it was in effect a capitation tax from whence the ‘disproportionate burden’ argument arose. As an indirect tax it violated uniformity provisions when Congress tried to set multiple tax brackets.
No deduction for cost of goods sold or business expenses?
Flat Tax, with a few points:
1. Everyone gets a deduction on their return, maybe $5,000.
2. Every legitimate dependent claimed (such as children/spouse/old relatives) is an additional ~$1,000 deduction. They do NOT get their $5,000 deduction.
3. Flat tax of, say, 10 or 15% of the remainder.
4. Check box for whether you want withholding or not the following year.
Of course, within a few years we could make it even better. Eliminate the 17th Amendment, as well as the large majority on non-Constitutional spending from the feds. Then, take the year’s budget, and divide it by 636, with each Senator and Rep (plus DC’s) taking home an equal share of the budget. Their state can then decide how to tax it’s citizenry and pass it on to the upper Gov’t.
Thanks for the headsup on that individual.
“Everyone gets a deduction on their return, maybe $5,000.”
This is the analog of the “prebate” that’s causing controversy.
The property tax is arguably the most immoral tax in existance, followed closely by the inheritance tax.
With a property tax, you can never really own your land, just rent it from the government.
Why do those that denigrate a “sales tax” always somehow base that on a fear that “we will have both” and then immeditaly try to claim it is the same as a VAT? While advocating a flat tax and claiming it will not lead to the results we see today?
First, we started with a flat tax, so it is safe to assume that re-setting to a flat tax would result in a progressive system in a generation or two.
Second, a VAT is even more evil than the income tax. It is hidden in the cost of goods and hidden from the tax payer. It also compounds in the supply chain so that a 5% VAT could very well increase the cost of goods by 20%.
A sales tax, and I do like the “Fair Tax” proposal, would be open and honest with every voting citizen. Every person would see the cost of their government with every transaction. If we want to reduce the size and scope of government, hitting every voter over the head with a 30% National sales tax on every purchase would work wonders!
The one piece I do not like is the prebate check, but I do understand the political need for it...