Practical tax reform

The Washington Times ^ | 1-26-06 | Richard W. Rahn

[JZelle]

Would you be willing to give up all of your tax deductions -- state and local taxes, mortgage interest, church and charitable contributions, etc. -- in exchange for sharply lower tax rates? With the return of Congress, the debate is about to begin again. One major obstacle to tax reform is the confusion in the minds of most Americans (and many members of Congress) about average versus marginal tax rates. Your average tax rate is the percentage of your total income that you paid in taxes, and your marginal tax rate is the rate you paid on your last dollar of income. The current federal tax rates range from 10 percent to 35 percent (the marginal rates). However, according to a new Congressional Budget Office study, effective tax rates range from less than 3 percent for the bottom half of income earners to 24 percent for the top 1 percent of income earners.

[JZelle]

I can't see our gov't doing anything this constructive.

[Chuck_101]

We made this deal in the Reagan era....we traded off most of the existing deductions for a MAX tax rate of 28%.

As soon as the Demos had the chance, they raised the rates to the current 39%.

The only way I'd go for this is for a supermajority to be required to raise rates again...otherwise we'll give away the few deductions left, and get screwed again at the first moment they control the congress.

[JZelle]

Sad but true.

[hubbubhubbub]

That was the first thing Clinton did if I recall. Even though he and hillary were in the top 1% of wage earners they never paid the 39% rate.

[Taxman]

Dr. Rahn would do well to recommend the FairTax rather than any form of "simplified" income tax.

Shame on him -- I know he is fully aware of the advantages of the FairTax.

Typical ITEB (Inside The Evil Beltway) thinking.

[mobyss]

I've got it - lower the existing income tax rates 1% per year until they are gone.

10 years for the 10%, 15 years for the 15%, etc, etc.

At the same time, increase Federal gasoline taxes by 10 cents per gallon per year to make up lost revenue.

Over time, higher gas prices slowly force consumption, while reduced income taxes free capital for growth. In 33 years there would be no income tax.

[jaydee770]

Of the tax-reform alternatives out there, it seems they all pit one group's preference against another's. It seems we'll never get beyond the perception that one tax-reform group is deciding for all. Not to mention that scrapping the current tax code requires one group of lawyers (congress) to cut the throat of another group of lawyers (tax industry).

An alternative that I've read somewhere (wish I could remember where) is that the Govt stops taxing individuals/businesses directly and only taxes the individual states for a percentage of each state's GDP.

How the states generate the revenue to cover that federal tax bill is left entirely up to the individual states.

After a bit, it should be quite obvious which state has the most popular tax plan by the individuals and businesses it attracts. The stinkers will be apparent by the mass exodus of their residents and businesses. the stinkers will be incented to model their tax plan after the more popular plans. Plus, this should be a winner for those who support returning power to the states.

I guess you could call it a market-driven tax reform plan.

[Final Authority]

Instead of a gas tax, I think there should be a 100% tax on greens fees during the working week. That way, only those who aren't working (they apparently can afford not to) or those who are retired will pay the tax. Good idea, huh? About as good as shifting the burden to those who must get in a vehicle to go to work every day. Don't you agree?

[Taxman]

A flat, low rate consumption tax on all services and new and used goods which abolishes ALL federal taxes, (e.g., personal and corportate income, estate, SS/Medicare, capital gains and most especially, excise taxes) would be the best tax reform plan the United States could implement.

HST, we have our work cut out for us just to get the FairTax enacted, much less a more comprehensive version as I outlined above.

My future efforts are going to be directed at passage of the FairTax (H.R. 25 and S. 25), and then work to make it the only tax imposed at the federal level.

At the state level, the replacement of income, property, net wealth and excise taxes with a comprehensive low-rate state sales tax on goods and services will be my goal.

[Mind-numbed Robot]

Are you aware that the price of gas affects the cost of everything? You are building in a constant inflation rate of at least 3% in addition to the other economic factors. Overtime gas would be unaffordable.

[Mind-numbed Robot]

....the Govt stops taxing individuals/businesses directly and only taxes the individual states for a percentage of each state's GDP.

Are all state governments honest? Who would determine state GDP? How would you collect? How would you audit? If a state refused to pay what the fed says they owe would you call out the military?

[Final Authority]

First, the reply I made was to show how ones opinion on what should be taxed, although contrived using good intentions, can be ludicrous depending on which side of the fence one is on.

Secondly, you need to provide me with a legal definition of "fair" before you affix it to a method of taxation. What may be seen as fair to you may not for me. It is subjective at best and any fairness can only be determined from where one is basing ones view. For example, it has been said that the so-called fairtax, heretofore to be known as the "farttax" as fart has as much legal meaning as "fair", will subject once untaxed property (Roth IRAs, savings, bonds, etc.) when such property is converted into consumption. I don't think you want to tell retirees and those who have planned for their retirement that their new effective tax rate will become more than double what they planned for. That is just for starters. Realistically, the farttax is DOA in Congress now for several reasons, one, if there is a "prebate" for everybody then there should be a "preindex" payment to compensate all of those who have put money away after taxation intending to retire with it. That "preindex" would potentially be $trillions and as soon as Congress got wind of it the complexity of a major changeover in the tax law stifled further action and debate.

Before we see a complete shift to a national retail sales tax (please, for honesty, call it what it is) we will see a further simplification of the income tax, moving to a modified flat tax (two or three simple brackets) and very possibly (to pay for prescription drugs tax or the war on terrorism) a low rate national sales tax on a select group of consumer items.

[Taxman]

Your ill-considered Sophomoric "renaming" of the FairTax requires me to categorically state that I will not engage in any conversation about it with you.

Had you asked your question in a polite and civil manner, I would have replied likewise.

Rules of the game, you know.

[lewislynn]

Are all state governments honest?

That's an odd question coming from someone who supports a federal tax plan that allows, asks, boasts about, the state's administration of federal funds.

[lewislynn]

A flat, low rate consumption tax on all services and new and used goods which abolishes ALL federal taxes,....

------

My future efforts are going to be directed at passage of the FairTax (H.R. 25 and S. 25), and then work to make it the only tax imposed at the federal level.

I suggest you first get your thoughts/stories straight.

[Mind-numbed Robot]

That's an odd question coming from someone who supports a federal tax plan that allows, asks, boasts about, the state's administration of federal funds.

Not surprising that it would be odd to you. You seem to be more of an aginner that just an SQL.

The state now has an audit trail to all those businesses who owe sales taxes. Under the NRST the fed would have the same trail. With a system that would estimate, or accumlate figures to determine, a state GDP that trail would not be there. Plus, the system proposed by the poster would leave it to individual states how they would tax, leading to a variety of systems to check. That would make things very difficult.

As with your other questions, that one was spurious and ill conceived.

[Taxman]

Almost a good catch, Lurkey. Thanks.

Clarified: My future efforts are going to be directed at passage of the FairTax (H.R. 25 and S. 25), and then work to make it the only tax imposed at the federal level, i.e., eliminate all other federal taxes.

[Final Authority]

You don't like the farttax? Well, I have been calling it that for over five years and the late Chief_Negotiator on these threads debated with me while overlooking my pointed opinion of the tax. He's not here anymore but I make an effort on a regular basis to point out all of the difficulty in a complete tax changeover to editorial boards and Congressmen. The long term planning in tax law makes it very difficult for families with trust funds and other tax law changes such as the new $500K minimum, investment trust, being voted on in the very near future. When that is passed, all bets are off for a NRST. In addition, the need for a "preindex" would be a divisive requirement which would divide Congress and stifle action on any superseding NRST.

[jaydee770]

Are all state governments honest? Who would determine state GDP? How would you collect? How would you audit? If a state refused to pay what the fed says they owe would you call out the military?

The states would want to be accurate and above board to continue attracting residents/business. It is in the state's best interest to be seen as attractive in order to grow their GDP. It's definitely one of those cases where "a rising tide lifts all ships".

[jaydee770]

...we have our work cut out for us just to get the FairTax enacted, much less a more comprehensive version as I outlined above...

To be clear, I personally feel most any alternative is better than the current federal tax code. Though, it appears to me that actually implementing a single alternative on the entire country is going to be such a challenge that saying, "we have our work cut out for us" is an immense understatement.

For one small example, the friction in this thread about the "FairTax" being either fair or unfair. That's an example of why I like the idea of the Federal Gov only taxing the state and leaving the state to figure out how to generate the revenue to cover it's federal tax bill.

Your state could have a sales tax; my state could have a flat tax, another state could have a lower flat tax combined with a VAT, "Kennedy-Kountry" could have a progressive, wealth-redistributing monstrosity similar to what we have today -- each state would be free to implement whatever plan it wanted to.

Over time, I would imagine that if a state wanted to grow it's GDP, it would be compelled to model it's tax plan similar to the sucessful states.

The Federal Gov will get it's cake; The states can implement the model that they feel best promotes their ability to grow their GDP; and no single group is seen as dictating to the whole.

But, I want to stress again -- I whole-heartedly feel that most anything is better than what we currently have.