FairTax vs. Flat Tax? Point/Counterpoint
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sonnylax
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 Posted: 09/29/05 - 08:32 Post subject: FairTax vs. Flat Tax? Point/Counterpoint
The Fair Tax seems better and better, the more I read & hear.
| Quote: | FairTax vs. Flat Tax
Sep 28, 2005
Debating the next big step in tax reform
FairTax
by Neal Boortz
There are essentially three tax reform proposals being considered by Congress. There’s Rep. John Linder’s (R-GA) FairTax, the flat tax, and the politically (though not popularly) preferred method of incrementalism.
Before we dwell on the differences between the flat tax and The FairTax Book co-authored by John Linder and myself, let’s acknowledge one political reality illustrated by the success of both The FairTax Book and Steve Forbes’ Flat Tax Revolution: the people of the United States are ready for bold and decisive tax reform NOW. They don’t want the incremental approach. The FairTax Book would not have debuted No. 1 on the New York Times Bestseller List if people were disinterested in wholesale tax reform.
Pleasantries aside, let’s illustrate the superiority of the FairTax plan over a flat tax. Flat tax advocates propose a flat 17% tax on all earned income with just a few allowable deductions. Nice try, but we’ve been there --- done that.
In 1986 Congress passed what was essentially a flat tax. The main difference between the 1986 effort and that proposed by Dan Mitchell, Steve Forbes and others was that the earlier effort set forth two flat tax brackets: one at 15% and the other at 28%. It’s now 2005, some 19 years after this attempt at a flat tax … and the tax code has been amended nearly 10,000 times.
A flat tax leaves politicians room to tinker, to manipulate the tax code for the benefits of large campaign donors or specific constituencies. As we’ve seen, with a flat tax it is all too easy for the political class to decide to add just a “small” surcharge to high income taxpayers; after all, the surcharge will only affect a small percentage of taxpayers, and the money can be used to buy votes from an even larger percentage! Under the FairTax, the national retail sales tax, there is no way to raise the tax rates on the rich, or to favor any one particular business group. The FairTax treats each and every citizen exactly the same, playing no favorites among people or business entities. You can’t raise the rate without raising it for everyone, nor can you offer one particular product a break since the tax is applied universally. Nobody, rich or poor, has to pay the FairTax on the basic necessities of life, because the prebate* is applied universally.
The FairTax would constitute the largest transfer of power from government to the people since the Revolutionary War. The flat tax takes no power from government. The FairTax is a revolution. The flat tax is an idea that’s been tried before, and found wanting.
*Prebate? Read The FairTax Book … you’ll love this idea.
Flat Tax
by Daniel J. Mitchell
The internal revenue code is a disgrace, both morally and economically. In a competitive global economy, America can no longer afford a loophole-ridden, class-warfare tax system.
There are two main contenders to replace the IRS – the flat tax and the FairTax.
Both are great ideas since they are based on the principle that all Americans should be treated equally, meaning no loopholes or special favors. Indeed, they are different sides of the same coin. The flat tax grabs a slice of your income, but only one time and at one low rate – when it is earned. The FairTax, meanwhile, grabs a slice of your income – but only one time and at one low rate – when it is spent.
But while both tax reform plans are theoretically equal, the flat tax is politically superior. First and foremost, the flat tax is more popular. A recent poll showed the flat tax is almost twice as popular as the national sales tax – and the same poll showed that the sales tax is tied with the current system.
Moreover, I'm concerned whether a national sales tax is politically viable.
Senator Jim DeMint had an unexpectedly tough race in South Carolina last year because his opponent demagogued against the fair tax. Republicans also may have lost the Colorado Senate race because their candidate was zinged for supporting a national sales tax. And the GOP lost a Senate seat in Louisiana back in 1996 because the candidate backed the wrong tax reform plan.
The flat tax, by contrast, is battle-tested and has been implemented in more than 10 countries. The FairTax cannot match this real-world track record of success. Indeed, there is not a single jurisdiction in the world that has ever replaced an income tax with a sales tax.
This is not just a question of which plan is more politically popular. We also have to think about the long-term impact. Many Washington politicians desperately want a national sales tax – but only as a source of additional revenue, not as a replacement for the income tax. I don't want them to pull a bait-and-switch on us, which is why America should not adopt any national sales tax (or value-added tax) unless the 16th Amendment is repealed and replaced by an ironclad provision that unambiguously prevents an income tax for the rest of time.
Europe's experience should make us very cautious. Politicians promised to lower or eliminate other taxes when they adopted national sales taxes, but in every case they kept their income taxes and used the sales tax revenue to expand the welfare state.
Moreover, it is very difficult to amend the Constitution. We can't even get a two-thirds vote for a watered-down balanced budget amendment. Does anyone really think we can get the votes to permanently preclude an income tax? And how about the challenge of getting 38 states to ratify such a proposal?
There is a downside to the flat tax, of course. Politicians in the future could change the system and we could degenerate back to what we have now. While this is a possible outcome, it is not nearly as bad as the downside of having a national sales tax added to the current income tax!
The FairTax is a great idea. I have testified in favor of a national sales tax, written in favor of a national sales tax, and debated in favor of a national sales tax. But if we actually want to get rid of the IRS and adopt a simple and fair tax system, the flat tax is the only horse that can make it to the finish line.
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MastrBrewr
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Posted: 09/29/05 - 09:55 Post subject:
While I think I like the Fair Tax idea better, Boortz needs to get a clue and not use the "politicians have fiddled with the other motheds beyond recognition so they are no longer what they intended" argument. They'll do exactly that to a fair tax scheme also. It wouldn't be that difficult to bastage a sales tax, really. NC already does it some form - food tax = 2%, everything else = 7%.
But did Mitchell just say no jurisdiction has done the sales tax in lieu of an income tax? I could've sworn that at least one state in the US did that.
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copteacher
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Posted: 09/29/05 - 10:43 Post subject:
a consumption tax is fair across the board. Since the rich buy more they would pay more tax. As long as essential items i.e. food are not taxed, I am all for it.
Heck I am for a flat tax across all income levels with no tax returns or a national sales tax with no income tax.
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sonnylax
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Posted: 09/29/05 - 11:14 Post subject:
| MastrBrewr wrote: | | While I think I like the Fair Tax idea better, Boortz needs to get a clue and not use the "politicians have fiddled with the other motheds beyond recognition so they are no longer what they intended" argument. They'll do exactly that to a fair tax scheme also. It wouldn't be that difficult to bastage a sales tax, really. NC already does it some form - food tax = 2%, everything else = 7%. |
His point is that they (politicians) couldn't tax different groups at different rates if we went to a Fair tax. Everyone would pay the same percentage regardless of how the Congress raised/lowered the national tax rate. Under the Fair Tax, they couldn't fiddle with the tax code and buy votes by offering tax breaks to certain groups or businesses. We are all in the same boat.
| MastrBrewr wrote: |
But did Mitchell just say no jurisdiction has done the sales tax in lieu of an income tax? I could've sworn that at least one state in the US did that |
Florida has no state income tax. They collect through a gasoline sales tax which everyone who buys gas in the Sunshine State pays.
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MastrBrewr
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Posted: 09/29/05 - 11:23 Post subject:
| sonnylax wrote: | | His point is that they (politicians) couldn't tax different groups at different rates if we went to a Fair tax. Everyone would pay the same percentage regardless of how the Congress raised/lowered the national tax rate. Under the Fair Tax, they couldn't fiddle with the tax code and buy votes by offering tax breaks to certain groups or businesses. We are all in the same boat. |
Okay, I can understand that. I'm just not convinced that the Fair Tax can't be manipulated with by greedy politicians. I would agree that it'd at least be harder, but it wouldn't be impossible.
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prohemp
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Posted: 09/29/05 - 12:36 Post subject:
I don't think either author makes a persausive argument. I agree with the brewer that either system would continue to be manipulated by politicians - that's why they're there, no? it's not for the salary, its for the power and what it gets you.
A flat tax could simplify the tax code but I don't see it shifting the tax burden in any direction. Eventually the Congress will gradually start adding exemptions, deductions and credits to the point we're back where we started.
A fair tax or national sales tax could be effective:
I posted a week ago about this book i'm reading on the history of salt. UNTIL about a 100 years ago salt was the most sought after commodity - and if a government / king etc wanted an effective way to raise funds...they taxed salt.
NJ raised its cigarette tax last year - they projected income from the tax to actually go down based on the premise that the added high cost of cigarettes would decrease sales of same. This is from memory but I believe they collected what they projected for a whole year in half a year.
But I think people are dreaming if they think we'll obolish our current tax system for a national sales tax.
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sonnylax
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Posted: 09/29/05 - 14:28 Post subject:
| prohemp wrote: | | But I think people are dreaming if they think we'll obolish our current tax system for a national sales tax. |
You have to start somewhere and I think we all agree the current system is a complete mess.
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prohemp
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Posted: 09/29/05 - 19:45 Post subject:
| sonnylax wrote: | | prohemp wrote: | | But I think people are dreaming if they think we'll obolish our current tax system for a national sales tax. |
You have to start somewhere and I think we all agree the current system is a complete mess. |
I agree it's a mess
and
I'm sure many things that we take granted for today started as a dream many years ago............but.......
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MechEngDropout
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Posted: 09/29/05 - 20:09 Post subject:
| MastrBrewr wrote: | | sonnylax wrote: | | His point is that they (politicians) couldn't tax different groups at different rates if we went to a Fair tax. Everyone would pay the same percentage regardless of how the Congress raised/lowered the national tax rate. Under the Fair Tax, they couldn't fiddle with the tax code and buy votes by offering tax breaks to certain groups or businesses. We are all in the same boat. |
Okay, I can understand that. I'm just not convinced that the Fair Tax can't be manipulated with by greedy politicians. I would agree that it'd at least be harder, but it wouldn't be impossible. |
Exactly. It can and will be manipulated. There are already tax exempt purchases for certain groups, though it is mostly for government now.
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sonnylax
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Posted: 09/29/05 - 22:21 Post subject:
| MechEngDropout wrote: | | MastrBrewr wrote: | | sonnylax wrote: | | His point is that they (politicians) couldn't tax different groups at different rates if we went to a Fair tax. Everyone would pay the same percentage regardless of how the Congress raised/lowered the national tax rate. Under the Fair Tax, they couldn't fiddle with the tax code and buy votes by offering tax breaks to certain groups or businesses. We are all in the same boat. |
Okay, I can understand that. I'm just not convinced that the Fair Tax can't be manipulated with by greedy politicians. I would agree that it'd at least be harder, but it wouldn't be impossible. |
Exactly. It can and will be manipulated. There are already tax exempt purchases for certain groups, though it is mostly for government now. |
I don't think you guys understand the proposed system. Politicians wouldn't have the ability to tinker or manipulate the system/tax code and the IRS would be abolished. All current tax "exemptions" would end under the Fair Tax. Everyone would be treated the same.
Benefits of the Fair Tax:
* Make America's tax code truly voluntary, without reducing revenue
* Replace today's indecipherable tax code with one simple sales tax
* Protect lower-income Americans by covering the tax on basic necessities
* Eliminate billions of dollars in embedded taxes we don't even know we're paying
* Bring offshore corporate dollars back into the U.S. economy
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prohemp
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Posted: 09/30/05 - 09:31 Post subject:
| sonnylax wrote: | | MechEngDropout wrote: | | MastrBrewr wrote: | | sonnylax wrote: | | His point is that they (politicians) couldn't tax different groups at different rates if we went to a Fair tax. Everyone would pay the same percentage regardless of how the Congress raised/lowered the national tax rate. Under the Fair Tax, they couldn't fiddle with the tax code and buy votes by offering tax breaks to certain groups or businesses. We are all in the same boat. |
Okay, I can understand that. I'm just not convinced that the Fair Tax can't be manipulated with by greedy politicians. I would agree that it'd at least be harder, but it wouldn't be impossible. |
Exactly. It can and will be manipulated. There are already tax exempt purchases for certain groups, though it is mostly for government now. |
I don't think you guys understand the proposed system. Politicians wouldn't have the ability to tinker or manipulate the system/tax code and the IRS would be abolished. All current tax "exemptions" would end under the Fair Tax. Everyone would be treated the same.
Benefits of the Fair Tax:
* Make America's tax code truly voluntary, without reducing revenue
* Replace today's indecipherable tax code with one simple sales tax
* Protect lower-income Americans by covering the tax on basic necessities
* Eliminate billions of dollars in embedded taxes we don't even know we're paying
* Bring offshore corporate dollars back into the U.S. economy |
Politicians would be the ones needed to actually propose and pass it - I'd hazard a guess that by the time it's passed into law there will be wiggle roow for some future manipulation.
Also, the fair tax would not be truly voluntary because we'd still need the merchants who are collecting the taxes voluntarily pay them over the IRS or its equivelant.
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AlaninTX
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Posted: 09/30/05 - 09:44 Post subject:
Isn't "prebate" just a term for "non-taxable item?" And who is to say Congress wouldn't tinker with either prebate rates or extension of it to items?
I still keep thinking that what kills this idea is when people see it would be approx. 23% on top of their state sales tax they take blanch.
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sonnylax
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Posted: 09/30/05 - 10:53 Post subject:
| AlaninTX wrote: | | I still keep thinking that what kills this idea is when people see it would be approx. 23% on top of their state sales tax they take blanch. |
Yeah, but when everyone started receiving their whole paycheck AND then saw how quickly prices dropped on goods/services (due to the elimination of all the embedded taxes).... I don't think they wouldn't blanch. It won't be easy, but educating more folks about the proposed system is key to having any chance of fixing the tax code.
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sonnylax
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Posted: 09/30/05 - 10:54 Post subject:
| prohemp wrote: | | Also, the fair tax would not be truly voluntary because we'd still need the merchants who are collecting the taxes voluntarily pay them over the IRS or its equivelant. |
And that is different from the current system now? Law-abiding citizens will follow the rules. Criminals will not. That won't change one iota under a Fair Tax, Flat Tax, or the current tax system.
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prohemp
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Posted: 09/30/05 - 11:41 Post subject:
| sonnylax wrote: | | prohemp wrote: | | Also, the fair tax would not be truly voluntary because we'd still need the merchants who are collecting the taxes voluntarily pay them over the IRS or its equivelant. |
And that is different from the current system now? Law-abiding citizens will follow the rules. Criminals will not. That won't change one iota under a Fair Tax, Flat Tax, or the current tax system. |
No it's the same. We've long since turned our employers into tax collectors. Ever hear of trust fund taxes? It's the $$ your employer withholds for FICA, medicare and your federal withholding and is then supposed to pay over to the IRS. Trust fund taxes are one of the biggest compliance issues that the IRS has.
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