WSJ: One Simple Rate - A flat tax would uleash a stupendous economic boom, by Steve Forbes

They're not the same thing. I have income... and I have wages.

It's not as hard as you are making it out to be.

Filing a sales tax return is a piece of cake compared to an income tax return. Remember, there ARE no exemptions, so it's not a matter of what constitutes a taxable sale.

I have a hard time imagining what the reprocussions would be when this segment of our economy, which is larger than retail, will be involved in becoming a tax collector for the government.

That's because there aren't any repercussions. You don't consider withholding income and FICA tax from their employees as being tax collectors for the government? These businesses won't be burdened with filing income tax returns anymore. They won't have to issue W-2's to their employees or withhold taxes. They won't have to issue 1099's. That and the fact they will no longer have to pay taxes has far, far less repercussions than filing a simple one page sales tax return.

Yeah...as a boat anchor!

Dear rwrcpa1,

Yes, for the self-employed, you're right.

But most folks aren't self-employed. For my staff, they got the contribution to the SEP IRA without any payroll taxes taken out.

sitetest

Actually, no, s-test, typically they will pay more in taxes than they do at present (due at least partially to all of the tax dodges and loopholes you outline). I've observed that the very rich prefer to buy NEW rather that USED (cars, homes, or anything else). In fact many of them will tear down a perfectly good, liveable house to put up a much more ostentatious one.

Not everyone has tax-advantaged savings my friend and even with those that do they will take a tax hit when it is spent either in the case of taxable withdrawals or in the form of higher prices caused by embedding tax costs into prices. These sorts of penalties are part and parcel of any income-based tax system.

And I note that some of your examples use already taxed income to tell us how it is possible to invest. Certainly that can be done, but that's not the point since using untaxed wages (with payroll taxes now back in the net pay as in the FairTax) helps anyone accumulate some measure of wealth faster. And even with taxed wages one has to spend a good bit of effort in trying to navigate the tax laws (and I've noted that some doing this sometimes stumble since the requirements are not always clear). Why have such unnecessaruy nonsense?

It is clear that you haven't read any studies of the effects of lifetime taxation which apply to the very well to do. The point is that most in the "tax specification business" believe that such wealth is eventually spent for consumption and in the intervening time is invested in some form helping our economy prosper.

I'm afraid it's a little tough to see if, as you say, that "... capital gains can be put off indefinitely ..." how the very rich could pay less in tax under the FairTax. Clearly just the opposite is true. Present investment is certainly not free of tax costs since there is always at least compliance costs involved in making and maintaining these investments. And many of them are actually dictated by the tax laws and can therefore be politically manipulated and lobbied for advantage by the K Street fellows. In some cases an investor will have to switch to other types of investments as tax laws ebb and flow.

I'd much prefer to see investments unencumbered by these sorts of manipulations and distortions so that capital could flow more efficiently to where the market might determine rather that the tax laws or politicians, or lobbyists. That's called economic freedom.

And no - buying used was in no way mentioned by me as a tax dodge ... that seemed to be what you were inferring in trying to present that "the rich" would buy only used things to not pay taxes. That certainly does not comport with the lifestyles of the rich I know. Used is seldom in their vocabulary (nor is unostentatious). BUT if they do, then that's fine since it is quite legal under the FairTax and the money can be invested tax-free to further the economy with no consideraaation of tax law requirements, etc., but strictly by investment reasoning.

If these folks "avoid" income taxes now (which you claimed in your post as though it were somehow easy to navigate the present tax laws), then it certainly no more "sinful" for them to "avoid" the FairTax by buying used things. Cant' be "good" one place and "bad" the other.

Dear Mind-numbed Robot,

"I apologize for the gratuitous questioning of your intentions. I had second thoughts about it when I wrote it."

Apology accepted.

You are far from the first insulting NSRTer.

You are far from the first to question my motives and intentions.

However, you are the ONLY NSRTer to have ever apologized for it.

For that, I have respect.

"However, do you consider this less offensive?"

LOL. You, in a long line of NSRTers, insult me, and you're offended that I might point out in strong language that there is something wrong with you folks for constantly questioning the motives of those with whom you disagree?

Sorry, no sale.

"I plead guilty that the advantages to the Fair Tax seem so obvious to me that I can't understand those who don't support it. That you think it is a tax scheme that '...(is) half-baked and half-assed? ...this asinine system,' ...this hare-brained scheme is a puzzle to me. However, I am aware that I have been wrong in the past though not on things I have investigated as well as I have this. Still, I know I could be wrong and that is why I apologize."

That's part of the point, Mind-numbed Robot.

To me, the whole thing really DOES seem half-baked, asinine, and hare-brained. It does.

It's tough for me to figure out why you folks think otherwise.

But:

1. Even though I think you favor a foolhardy system, I don't take you for fools; and

2. Even though I can't figure out WHY you would support this system, I don't think that you support it for dishonorable intentions.

It's inexplicable to me why you think it's a good idea, but that doesn't seem to me to be a reason to assume that you're either stupid or evil.

I wish you guys could acknowledge the same with us, and cut the insults.

Several of us, including a poster I've pinged, have come to these debates unsure what we think, looking for answers to our questions, and when it turns out that we're not buyin' what you're sellin', you NSRTers jump on us with denigration and insults. We're stupid, we have hidden agendae, we know nothing about the business world.

And then, should we say even 1/10 of what you say back at us, oh! My! WE're so nasty! LOL.

You guys have turned off more folks than you realize.

If you'd give the benefit of the doubt to your opponents, you might persuade more folks.

"Your situation in life, even from the start of your married life, is a little higher on the rung than I was imagining for the middle class in my argument. Although you were definitely middle class I was thinking a little lower on the rung."

Maybe by this point. Nonetheless, what I say applies to everyone. I know folks with less income than me who have done very well with real estate. I know folks with less than me who have carefully nurtured retirement accounts to which they made tax-deferred contributions.

This stuff isn't rocket science, really.

"One can be really, really poor and choose not to consider himself such. It is strictly an attitude and values thing. However, you and those who react like you are the exceptions who make the rule."

I don't think so. Words have meaning. "Poor" doesn't mean someone who can't afford a new car this year, or the trip to Europe. At the very least, "poor" means someone who has need of some basic necessities in life, whether food, decent housing, decent clothing, basic healthcare, or whatever.

Although in my younger days, there were times I didn't have more than a dollar actually in my pocket, there were times when I couldn't "afford" to do otherwise than brown-bag my lunch, the fact is, I never wanted of plenty of good and nutritious food (even if sometimes it was lentils and chicken dogs), nor of adequate shelter (I told you, we always owned our own home), nor of decent clothing (I've always held professional jobs requiring professional clothing), nor of any other basic necessity.

There were years that vacation was at "porchville." There were lots of times when we couldn't do all that we wanted (Heck, that's STILL true today! I STILL haven't gotten my Grand Tour of Europe!)

But, it's a stretch to say that folks would live as if they were poor to put a little aside each year to invest.

"I suspect that most of that is taking advantage of 401Ks rather than individuals making independent investment decisions. If it weren't for the structure of the tax system there would be no need for them to be confused by the variety of IRAs, etc., to avoid or delay taxes. Those are developed to be attractive in the losses they avoid instead of the money they make."

Could be.

I haven't argued that the current system isn't needlessly complex.

Just that I don't think it's true that folks can't currently make significant tax-advantaged investments. That WAS what we were discussing.

" This is another area in which we disagree. Building wealth by avoiding taxes is like staying healthy to avoid death."

Hmmm, I didn't say that folks are building wealth BY avoiding taxes, only that current law permits folks to accumulate wealth while largely avoiding taxes.

Which makes it comparable to the proposed taxing regime.

Which was my only point.

"I suppose it is a matter of opinion as to whose point is being proved here. Rent IS taxable income but an investor can offset that with depreciation and other expenses applied to the property. Eventually, the property will be fully depreciated and that write off will be gone. In any case, a person is having to play the tax system in order to make it all work for him."

Well, the depreciation is taken over a period of 27.5 years, and at any time during that period, one could do a Starker Exchange, and wind up with a new property to depreciate all over again. It isn't too tough to arrange 50 years' of tax-advantage income.

That's not too bad. Then, when you die, your heirs get a stepped-up basis. If you have a relatively modest estate, they pay no federal inheritance tax, and if Mr. Bush has his way, they will pay no federal inheritance tax at all. Works for me!

As for "playing the tax system," well, that's one perspective. Another perspective is that depreciation of structures is a legitimate expense of ownership, and the principle of INCOME taxation is to tax INCOME, not REVENUE.

"Why not eliminate that?"

Certainly, if we eliminated income taxes, we would.

But I know of no real estate investors who really have a problem with this.

"The elimination of all the embedded costs would also allow the landlord to lower his rent if he cared to or if competition forced it while still making the same margin."

Sorry, as someone who has owned rental property in the past, I can tell you that nearly all my costs came from two sources: the cost of the property, often as reflected in the property's mortgage; and property taxes.

I don't think my property taxes are going to go down. Just don't see it in the cards.

Although some of the more optimistic NSRTers think that mortgage rates will fall dramatically, I disagree with that analysis. So, I don't think I'm going to see that cost go down.

But, you know, in the not-too-distant future, I'm thinking of buying run-down properties in Baltimore all-cash. In that scenario, if I buy pre-enactment of the NSRT, sorry, my money's already spent. There isn't even the "embedded cost" of mortgage interest to be reduced. Now, you're asking me to actually give up part of my PROFIT (which isn't currently taxed, so it's not like I'm getting back some money from the demise of the income tax) so that I can lower my rent.

For the real estate investor, PROFIT = INCOME (roughly speaking). For the real estate investor, because he's ALREADY paying little or no income tax on current income, he's not getting anything back from the implementation of the NSRT.

Thus, even WITHOUT lowering the rent, he's behind in this game, because he's not recapturing income taxes with which he can then pay the NSRT.

But now, you're suggesting that this landlord, who is ALREADY getting it in the backside, because he recoups no saved income taxes, but still must pay the NSRT on his personal purchases, must take it AGAIN in the backside, to lower his rent to accommodate the renter who will now have to pay 30% sales tax on his monthly rent.

I don't think this is working out so well for the landlord.

" I agree. I would think you would want to end that by ending the tax system which makes it appealing."

LOL. I expect that results right after human nature is changed entirely.

I have no doubt that we will come to see all sorts of modifications of the NSRT. Food will be exempted as the tax on the amount over $50,000 on vehicle purchases is increased from 30% to 45%. Healthcare (and health insurance premiums) will be exempted, as homes that sell for over $500,000 or $1,000,000 will be subject for amounts over the threshold to an additional 10% or 15% tax.

The general rate will be increased, as the "prebate" is increased, so that poorer folks won't be affected, but richer folks will.

It doesn't appear to me that there is anything inherent in the structure of this tax to prevent our politicians to appealing to class envy to favor the poorer classes over the wealthier classes. ESPECIALLY once folks understand just what a boon this will be to the very wealthy.

And then, we'll also get the call for a reintroduction of the federal income tax. For the wealthy, only, we'll be assured.

To me, to think otherwise is to suggest the repeal of human nature.

"That I don't understand at all. How can the loss of the ability to manipulate a tax that no longer exists be harmful? They will be made whole on the sales taxes for necessities and they can pick and choose what and how to buy the rest. If you are suggesting that the use of tax advantages makes that group nonpayers then that just adds to the number who pay no taxes, putting a greater burden on the rest. Even then they won't be able to avoid SS and Medicare taxes even if they are self-employed, thus negating a portion of their gain, or more correctly, adding back some of the costs they are avoiding."

Well, the bottom line is that there are folks in the upper middle classes, who have household income in lower six-figures, who just don't pay anywhere near a total of 23% inclusive of their total compensation in federal income and payroll taxes. Because the payroll taxes top out at $90K, and because certain benefits like health insurance are tax-free and in some states can be very expensive (in my company, the average family policy is around $10,000 per year), and because currently mortgage interest is deductible, I know folks who have very much minimized their federal tax liabilities.

The new system would cost them dearly. They will not receive much back in saved federal taxes, but will have the full burden of the 30% NSRT to bear. This is especially true of my friends with bunches of kids in private schools. I know families who are currently paying in excess of $25,000 per year in tuition. They will now get to pay an extra $7,500 per year.

And then, folks who generate income from investments, whether passive or active, often don't pay payroll taxes, and have very light tax burdens, besides (real estate investors, folks who live off stock investments), these folks are also going to take it in the neck, because they're not going to see their incomes rise much as a result of recouping income taxes (that they're already not paying) but they're still going to the NSRT on their personal purchases.

Even if the effects of the tax are revenue neutral, if some folks turn up winners, some folks have to turn up losers.

"To my knowledge there are no exemption certificates in the Fair Tax."

For now. It won't be long. And even that's not quite true. Every business entity will require the equivalent of a sales and use tax license, that will exempt them from paying the tax for business expenditures. Based on some phony reasoning, it will be said that So-and-So, the friend of the Chairman of the Ways and Means Committee, needs something similar for his own personal purchases.

It's easy to bury this stuff, tougher to tease it out.

That's why Jim Wright got away with doing it with the income tax.

"Regrettably, the 1986 Tax Reform and Paperwork Reduction Act was an increase, not a tax cut."

I never claimed otherwise. I only claimed that it got rid of large numbers of mechanisms to shelter income from taxation, and that my accountant saw that his clients who previously paid little or no income taxes wound up paying signficant income taxes under the 1986 law.

"I agree that the super rich are unlikely to spend most of their income on new purchases no matter how many mansions or yachts they buy. But they will still buy more new items than any other class and therefore carry their share of the tax load."

Maybe. The rich buy a lot of little new things. They don't go to Goodwill, usually, to buy their Armanis. But they often spend very large chunks of their income to buy "used" estates, "used" yachts, and "used" artwork, antiques, classic cars, and the like. That's because some of these assets are not reproducible (God only made so much waterfront property, Van Gogh is dead, no one's making Deusenbergs), or age doesn't dramatically affect value (100-foot yacht), or may actually enhance value (17th century furniture).

"Notice I didn't say fair share because that is a greatly misused term."

I don't use the term, either, but nonetheless, I acknowledge that the idea is important in the head of most Americans, and will be abused by plenty of politicians.

"As far as the revenue neutral thing, that was determined by people a lot smarter than I am. Maybe someone else will cover that for you"

Well, I've looked at the numbers in the aggregate, in a variety of ways, and they don't add up to me. There are experts who think they do, and experts who think they don't. I have enough knowledge to hazard my own rough guess, and my own rough guess is that we can't get there from here. At least not in the way that the NSRT's proponents claim.

I could be wrong, but in the absence of consensus on the subject, I gotta go with what I can see my way clear to.

Finally, although I'm dubious about the NSRT itself, I'm adamantly opposed to any sort of broad-based consumption tax being introduced until AFTER the repeal of the 16th amendment is accomplished. To me, it's insanity to do it the other way around.

"I will say, to be as pisssed as you were you remained amazingly cool when writing this."

Thank you.

There are advantages to this type of communication. One of them is the "Preview" button.

I try to use it wisely.

sitetest

Those wishing to "bring back" te income tax would have far more than just a little fight on heir hands since keep in mind it there is enough support to pass the FairTax, that means the income tax and payroll taxes are eliminated and the income tax records destroyed.

Aside from the political and grassroots resistance to re-institute any income tax you have some extremely formidibale obstacles which will be fought for (to keep them as obstafcles) evey step of the way.

What you posit isn't even reasonable. When the income tax is gone it'll remain so for a considerable period of time.

Yes. That is like a profit sharing contribution. We have PSC in my company, with no FICA or PIT taken out.

I misunderstood who was making the contribution.

Curent Fair Tax proposal is 23%. No friggin way at 23%. I don't care if we get to really take home everything. With the rich finally kicking in a bit and no real cheating possible, I'd say 13 to 15% should do the trick. By the way, the poor could pay that too. If you exempt anyone, they'll be a cottage industry in fakifying tax exempt cards. Either that, or states like WA will exempt anyone willing to send in a hardship letter.

Fishermen, Teachers, Loggers all crying boo hoo and saying (at least in the case of loggers and fishers) "We need to be on unemployment until our season starts again."

Not true and you know it, Nightie. The normal method that will be used under the FairTax is the use of the resale certification and that is specified in the bill.

The mechanism mentioned by Linder is there for use in certain exception cases where it's use would be helpful, but not as the typical method.

Well, OK. I'll grant you a sales tax return is easier than accounting for payroll taxes.

But it's my understanding that the flat tax would also eliminate withholding, which to my mind is the biggest culprit in reducing productivity for the average American.

Which brings me to another question. Which system do you think would make it easier for the average American to make Congress accountable for it's spending?

Like the rest of the flat tax plans, the Forbes plan adds the payroll taxes right on top of the "flat" tax. Just take the tax rate he is pushing and add the 15.3% payroll tax rate to it.

This for all you lurkers who are reading this thread but don't post.

We must let Congress know that we support the Fair Tax Act of 2005 (H.R. 25/S. 25). The only way this will get passed, is with grassroots support.

If you haven't written your congressmen since "The Fair Tax Book" came out, please write them an email. It doesn't have to be elaborate, telling all the advantages of the Fair Tax. Just tell them "I support the Fair Tax Act of 2005 (H.R. 25/S). Please support it and co-sponsor the bill." That's all you need to say. They know about the bill, and the buzz about the book has helped. They just need to know you want them to support it.

You can write your senators here: http://www.senate.gov/general/contact_information/senators_cfm.cfm?State=TX

You can write your congressman here: http://www.house.gov/writerep/

Let’s make it happen!

You might spend some time seeing what your effective rate would be under the FairTax. It wwill undoubtedly be lower than you suspect. Try this site:

http://www.fairtax.org/research.html

But it's my understanding that the flat tax would also eliminate withholding, which to my mind is the biggest culprit in reducing productivity for the average American.

Nope, still there, as well as withholding FICA taxes.

Which system do you think would make it easier for the average American to make Congress accountable for it's spending?

Well, obviously I'm going to say the Fair Tax. We would see the tax everytime we bought something. And we would all be paying the same rate. They couldn't pass a tax hike without us knowing about it because the rate would be transparent and one rate means they couldn't pull the class warfare stuff. Everyone would get teed off everytime they bought something big, and hopefully would get more involved in pointing out government waste.

I don't think the flat tax would do anything to make Congress accountable. It is still virtually the same system we have now, just retooled, and past experience shows the result.

Dear pigdog,

"Actually, no, s-test, typically they will pay more in taxes than they do at present (due at least partially to all of the tax dodges and loopholes you outline)."

When the rich actually bother to generate income, they pay plenty of taxes, although often less than wage earners.

What you miss is that the rich may decide not to generate income that they don't want to immediately spend. Thus, they may decide not to take capital gains from a particular investment, because they have nothing to spend the money on.

That's the primary "loophole" the rich have.

Even then, it doesn't always apply.

"I've observed that the very rich prefer to buy NEW rather that USED (cars, homes, or anything else). In fact many of them will tear down a perfectly good, liveable house to put up a much more ostentatious one."

You've asserted, but haven't demonstrated. I've seen "tear-downs," but believe it or not, upper middle class folks are more likely to do those than really rich folks.

I live in an area that abounds with folks with lots of money.

Although there are many new homes being built with seven-figure price tags, and even larger number of already-existing exclusive homes is sold, as well. The fact is, most of the good waterfront is already gone. You want deep water on the South River (feeds directly into the Chesapeake Bay)? Lots easier to buy a $3 million property with a 10,000 sq ft house that's 10 or 20 years old than to try to find a couple of acres of still-undeveloped waterfront to build your own.

Now, will the new owner possibly do a $200,000 renovation? Maybe. Maybe not. But the $3 million for the property and house itself were entirely untaxable under the NSRT. At least, the fellow had to pay a bit of tax on the income to buy the property under the old system.

Cars?

Well, lemme tell ya. I love new cars, myself. Preferably Benzes. But guess what? I have a two-car attached garage and a four-car detached garage. I have three cars right now. One was purchased new. Another was purchases a couple of years old, because it was low mileage. But the third was purchased 15 years old. Because it's a classic model, and I wanted one. And I'd like to acquire a few more over the coming years. I'd like to get one model of Mercedes SL that ran from the late '70s through the '80s (broadly speaking). I'd like to pick up a couple of old 300Es for my kids as they learn to drive over the coming years (great, reliable, safe, fun sedans). And in a few years, maybe I'll pick up a used diesel E-series.

It's fun to have new cars, absolutely, and I can afford 'em. But after one or two new cars, if you're well-off and want to have a collection of cars, it's more likely that you'll be picking up "used" vehicles that happen to satisfy your personal interests and tastes.

As well, for art, antiques, etc., by the very definition, these items are bought "used."

"And I note that some of your examples use already taxed income to tell us how it is possible to invest."

I noted that an initial real estate investment may be with after-tax money (although by borrowing most of the money and paying the mortgage back with the pre-tax cash flow of the property, one even minimizes that), that the tax-free income stream then will buy plenty of real estate with tax-free money.

"Certainly that can be done, but that's not the point since using untaxed wages (with payroll taxes now back in the net pay as in the FairTax) helps anyone accumulate some measure of wealth faster"

Not really. Since this is SUPPOSED to be revenue neutral, most folks are likely not to have a lot more income than under the old system, when one takes into account that they'll be paying 30% sales taxes.

"It is clear that you haven't read any studies of the effects of lifetime taxation which apply to the very well to do. The point is that most in the 'tax specification business'' believe that such wealth is eventually spent for consumption and in the intervening time is invested in some form helping our economy prosper."

The merely modestly wealthy spend most of their bucks. I've been talking about the very wealthy. They don't spend most of their bucks. They pass 'em on to their heirs. Mr. Bush has already repealed the death tax, and is working on making that permanent. The very wealthy don't need much more than that.

"I'm afraid it's a little tough to see if, as you say, that "... capital gains can be put off indefinitely ..." how the very rich could pay less in tax under the FairTax. Clearly just the opposite is true. Present investment is certainly not free of tax costs since there is always at least compliance costs involved in making and maintaining these investments. And many of them are actually dictated by the tax laws and can therefore be politically manipulated and lobbied for advantage by the K Street fellows. In some cases an investor will have to switch to other types of investments as tax laws ebb and flow."

This paragraph appears self-contradicting. Get back to me when you've decided whether the rich will pay more or less under whichever system you decide.

I think the rich will pay a lot less under the new system than the existing system.

"And no - buying used was in no way mentioned by me as a tax dodge ... that seemed to be what you were inferring in trying to present that "the rich" would buy only used things to not pay taxes."

No, I said the rich DO buy lots of used things, and in that way, will avoid a lot of sales tax. But even if they didn't already buy lots of used things, they sure would start now.

Rich folks don't get rich by spending money unnecessarily.

"Used is seldom in their vocabulary (nor is unostentatious)."

I know a guy who is worth $300 million who drives a Ford Explorer. I know a guy who has so much money, he leads a group that is vying to buy the Washington Nationals baseball team, for something in the neighborhood of half a billion dollars (a purchase, by the way, that would be entirely tax-free, as it would be an investment, no??). He drives an older domestic car.

The very rich often aren't very ostentatious at all. Not in proportion to their wealth.

"If these folks 'avoid' income taxes now (which you claimed in your post as though it were somehow easy to navigate the present tax laws), then it certainly no more 'sinful' for them to 'avoid' the FairTax by buying used things. Cant' be 'good' one place and 'bad' the other."

Issues of morality don't enter into it for me, not under the proposed NSRT, nor under existing law. My view is, if you can legally avoid the tax, good for you!

I only point out that the very rich will do very well under the proposed new system.

As will the poor, the working class, and the lower middle class.

I think pretty much, under the proposed system and proposed rates, only the upper middle class, and certain types of investors, are going to take it in the neck.

But that then raises the question, if nearly everyone is prospering from this (and if the very rich are prospering a whole bunch from this), how can it be revenue neutral??

I know, I know, "reduced compliance cost" and "increased taxation of the underground economy."

Well, I know that "compliance costs" have been exaggerated beyond what is defensible, and I suspect that we're not going to get quite as much out of the underground economy as some folks think.

Which means:

1. Upper middle class folks, and certain types of investors, are still going to get crushed; and

2. It may be that rates may have to be higher than 30%, anyway, in which case, it's gonna get ugly.

sitetest

No - read the bill or visit the FairTax website. The prebate is monthly and the registration is yearly.

With the flat tax, don't forget to add payroll taxes onto the flat tax quoted rate as those are in addition and not eliminated.

Correct and much the same is true with the FairTax.

Once the consumer has purchased and received the specified receipt, he is no longer responsible tor the tax - the merchant is ... and the merchant has agreed to collect and forward the tax and is paid for doing so.

It's in the bill.

If everyone ........ spent as much time in productive work that they spend trying to get around ........cumbersome laws..............

Regulations are a tax on our time, money and CREATIVITY