Tax Reform? Dream On

Kiplinger.com ^ | January 2006 | Knight Kiplinger

[Eaglewatcher]

Let's face it: When it comes to true income-tax reform, Congress still prefers the devil it knows.

There are a lot of tasks I'd rather do myself than pay someone to do for me, but preparing my tax return isn't one of them. I'm among the estimated 60% of taxpayers who use a professional. It's not that the return my wife and I file is complex -- no exotic tax shelters, rental property or day trading. But given that the IRS's own hotline provides incorrect information about half the time, I'll leave the task to my savvy CPA.

Like millions of Americans, I yearn for genuine tax simplification, and I'm not fussy about what form it takes. Any of the radical reform plans would be better than our present Rube Goldberg contraption -- some 60,000 pages of arcane code, regulations and IRS rulings that distort our economy, penalize saving and unfairly reward special interests.

1040 on a postcard How about one low-rate tax on all income, with absolutely no deductions? No write-offs for mortgage interest, charitable donations, state and local taxes, or anything else. Yes, I could live with a flat tax, and we really could file our return on a postcard.

Or how about a national sales tax, levied only on consumption, rather than on earnings and investment income? I like this concept even better. At some rate to be determined (probably pretty hefty), it could replace all federal taxes on income, asset gains and estates. It could even replace the regressive payroll taxes that fund social security and medicare -- taxes that, for most low- and middle-income earners, exceed their income-tax bill.

A federal retail sales tax would be easier to administer than a value-added tax, which is levied at all stages in the production-and-distribution chain, because a sales tax could be collected by the states and forwarded to Washington. Poor people would get all their sales taxes rebated. Big-spending rich people would pay a bundle in sales tax, and super-savers at all income levels would pay relatively little. America's woefully low savings rate would soar, lessening U.S. dependence on foreign capital. (For more about a national sales tax, see www.fairtax.org.)

Supporters of tax simplification assure us that their plans would be "revenue neutral" -- that is, they'd generate the same amount of money as the present tax code.

But I wouldn't mind paying even a somewhat higher federal tax bill than I do now in exchange for true simplification. I would feel better knowing that, with the demise of countless tax breaks for favored individuals and industries, everyone would be paying his or her fair share.

Realistically, what are the odds that these plans will be enacted? Sadly, slim to none.

There were hopes that President Bush's bipartisan Advisory Panel on Federal Tax Reform might endorse a truly bold plan. Instead, the panel proposed reducing the number of tax brackets, lowering the top marginal rate to 30% or 33% from 35%, ceasing the taxation of dividends, and trimming the top rate on capital gains (but only on stocks) from 15% to about 8%. Abolition of the hated alternative minimum tax would be funded by trimming the mortgage-interest deduction, limiting the exclusion for employer-paid health insurance, and ending the deduction for state and local taxes.

It's not a bad plan, but Congress probably won't go along with even these modest reforms, given the powerful lobbies that defend every current deduction.

Don't hold your breath True tax simplification will remain an elusive dream. Congress will say it's too risky to gamble on a flat tax or national sales tax, given the unknown effects they might have on an economy that is addicted to the countless stimuli in the present tax code.

Let's face it: When it comes to true income-tax reform, Congress still prefers the devil it knows to an unpredictable devil it dares not imagine.

Columnist Knight Kiplinger is editor in chief of Kiplinger's Personal Finance and of The Kiplinger Letter and Kiplinger.com.

[Taxman]

It will be most interesting to see how the latest scandal du jour works out. What with virtually every Sinator and CongressCritter running for the tall grass re: Abramaoff, there may well be a wholesale turnover in the Congress come November.

We need to make that happen!

HST, it behooves those of us who support fundamental tax reform (i.e., the FairTax) to actively recruit fresh faces to run against the entrenched CongressCritters and Sinators who are linked to that scumbag.

This may be the window of opportunity we have longed for for Lo! these many years.

[pigdog]

There are over 600,000 people involved in the FairTax movement and it's growing all the time.

You can help by not only writing, faxing, emailing or whatever means you have to communicate with your Congressfolks to let them know that you want --- no, DEMAND!!! --- the FairTax. Go to the townhall meetings most of them have and just mention "FairTax" to bring the meeting to a boil (much to the consternation of the pol involved) ... they don't want to hear it, of course, since it rocks their tidy little boats ... but that's exactly what's needed; the more boat-rocking the better.

And don't forget to contact the Big Guy in DC, too. The President has to sign on to any such reform (and I have a sneaking hunch he will). After all, he had a copy of The FairTax Book on his desk in Air Force One just recently.

It IS do-able. You can help greatly.

[pigdog]

Nomnsense - WE own the pols (via votes). If you don't think so, just see how pale one turns when he/she realizes enough people are pissed as to prevent reelection.

One of the very things that makes the bribery you mention possible is the tax code. It's time to get rid of that and get back to the real world.

[pigdog]

Then it's time for hell-storming. Lets get rid of those who try to keep us chained to such a lousy system that they can easily manipulate.

Why let them do that to us??? Are we all as cowardly as they are???

[RockyMtnMan]

I guarantee a popular vote of the people would select the Fair Tax if such a mechanism was available. Given that statement it should illustrate just how "representative" our government really is.

[Hank Rearden]

Congress will say it's too risky to gamble on a flat tax or national sales tax, given the unknown effects they might have on an economy that is addicted to the countless stimuli in the present tax code.

Republicans are useless.

[Muleteam1]

>>Why let them do that to us??? Are we all as cowardly as they are???<<

For those of us old enough to have wasted at least two to three months of our past life wrestling with 1040s, I will say that never before in my life have I seen a time when America was more ready to throw the IRS out on its ear. In truth though, the rail for tax reform runs far beneath the third rail of social security and we see where SS reform went. It could happen but I expect to see a "million pig flyover" over my house before the IRS is sent home. I'm with you though.

Muleteam1

[xcamel]

There are always a couple of lemmings that refuse to go over the cliff... this guarantees there will always be more lemmings. You like GST? VAT? then move to france. or anywhere in the EU no PU. A true flat fair tax of 17% (10/5/2) provides for the constitutional needs of government. No withholding, a monthly or quarterly check. Period. This would need to be a constitutional amendment as envisioned by some of the founding fathers (not all). Foreign Aid? Gone. You want our help, you buy it.

Trust me, as the sole proprietor of a sub-s $150 million dollar corporation, your request for my "openmindedness" is as hollow as the words "I'm from the IRS, and I'm here to help..." because 100% of my profits are taxed as personal income at the top rate with zero deductions for anything - not one single thing. Then plow 80% of what ever is left into working capital for the next year...
So when I'm sitting there writing out a personal check for over a million dollars on April 15th to pay in advance for income I have not yet earned... Stand close by and tell me your tax tales of woe.

Did I mention I live in New York, too?

/Jaded sarcasm off.

[Mind-numbed Robot]

There aren't enough politicians with a set to make true tax reform happen.

Which reminds me of another benefit of the FairTax. With many lobbyists devoted to changing the tax laws the FT would mean the near end of K-Street and would do more to take the money out of politics than campaign finance ever could.

[n-tres-ted]

Good post. Faint hearts aplenty are nothing new. At least Kiplinger seems to be honest and relatively clear-minded in its commentary on the advantages of the Fair Tax design for a consumption, which is much better than even the Tax Reform Commission was able to muster.

[ancient_geezer]

You like GST? VAT? then move to france. or anywhere in the EU no PU.

Only problem with that characterization is that the FairTax legislation is anything but a GST or VAT, as businesses do not pay it on their business use purchases as is done in either of those cases.

 

Definition [ http://www.encyclopedia.com/articles/13330.html ]:

value-added tax
levy imposed on businesses at all levels of production of a good or service, and based on the increase in price, or value, added to the good or service by each level. Because all stages of a value-added tax are ultimately passed on to the consumer in the form of higher prices, it has been described as a hidden sales tax. Originally introduced in France (1954), it is now used by most W European countries.

 

 

Collection of Value Added Tax

Issue: What Is the Best Way to Collect a Value Added Tax?

A value-added tax (VAT) generally is a tax imposed and collected on the value added at every stage in the production and distribution process of a good or service. Although a VAT may be computed in any of several ways, the amount of value added generally can be thought of as the difference between the value of sales and purchases of a business.

Several administrative systems could be used for a VAT: the credit-invoice method, the subtraction method, and the addition method. The credit-invoice method has been the system of choice in nearly all countries that have adopted a VAT. A subtraction-method VAT is also known as a business-transfer tax. The addition method is a mirror image of the subtraction method and will not be discussed here.

Credit-Invoice Method VAT. Under the credit-invoice method, a tax is imposed on the seller for all of its sales. The tax is calculated by applying the tax rate to the sales price of the good or service, and the amount of tax generally is disclosed on the sales invoice. A business credit is provided for all VAT taxpayers on all purchases of taxable goods and services (that is, on inputs) used in the seller's business. The ultimate nonbusiness consumer does not receive a credit for his or her purchases. The VAT credit for inputs prevents the imposition of multiple layers of tax on the total final purchase price. As a result, the net tax paid at a particular stage of production or distribution is based on the value added by that taxpayer at that stage of production or distribution. In theory, the total amount of tax paid with respect to a good or service from all levels of production and distribution should equal the sales price of the good or service to the ultimate consumer multiplied by the VAT rate.

To receive an input credit, a business purchaser generally is required to have an invoice from a seller containing the name of the purchaser and the amount of tax collected. At the end of a reporting period, a taxpayer may calculate its tax liability by subtracting the cumulative amount of tax stated on its purchase invoices from the cumulative amount of tax stated on its sales invoices.

Subtraction-Method VAT. Under the subtraction method, value added is measured as the difference between a business's taxable sales and its purchases of taxable goods and services from other businesses. At the end of the reporting period, a rate of tax is applied to this difference in order to determine the tax liability. The subtraction method is similar to the credit-invoice method in that both methods measure value added by comparing sales to purchases that have borne the tax.

The subtraction method differs from the credit-invoice method principally in that the tax rate is applied to a net amount of value added (sales less purchases) rather than to gross sales with credits for tax on gross purchases. A business's tax liability under the credit-invoice method relies on the business's sales records and purchase invoices, while the tax liability under the subtraction method may rely on records that the taxpayer maintains for income tax or financial accounting purposes.

 

 

The only sales tax under the FairTax legislation is upon the purchaser for the consumption of goods and services at retail level, and then only for the first time through the ringer, subsequent sale of such items are not taxed again.

 

 

A true flat fair tax of 17% (10/5/2) provides for the constitutional needs of government.

As though any income tax can ever be truly constitutional when it requires intrusion into the financial privacy of individuals without warrant contrary to the intent of the 4th amendment.

You say you want a "flat tax", now there is a VAT with progressive wage tax to boot. As characterised by its orginators.

 

http://waysandmeans.house.gov/fullcomm/106cong/4-11-00/4-11kotl.htm

"Robert Hall, one of the originators of the proposal(Flat Tax), who describes his Flat Tax as, effectively, a Value Added Tax. A value added tax taxes output less investment (because firms get to deduct their investment.)"

"The Flat Tax differs from a VAT in only two respects. First, it asks workers, rather than firm managers, to mail in the check for the tax payment on that portion of output paid to them as wages. Second, it provides a subsidy to workers with low wages."

 

The Flat Tax; Chapter 3, by Robert Hall and Alvin Rabushka

• Here is the logic of our system, stripped to basics: We want to tax consumption. The public does one of two things with its income—spends it or invests it. We can measure consumption as income minus investment. A really simple tax would just have each firm pay tax on the total amount of income generated by the firm less that firm’s investment in plant and equipment. The value-added tax works just that way. But a value-added tax is unfair because it is not progressive. That’s why we break the tax in two. The firm pays tax on all the income generated at the firm except the income paid to its workers. The workers pay tax on what they earn, and the tax they pay is progressive.

• To measure the total amount of income generated at a business, the best approach is to take the total receipts of the firm over the year and subtract the payments the firm has made to its workers and suppliers. This approach guarantees a comprehensive tax base. The successful value-added taxes in Europe work this way.

• The other piece is the wage tax. Each family pays 19 percent of its wage, salary, and pension income over a family allowance (the allowance makes the system progressive). The base for the compensation tax is total wages, salaries, and retirement benefits less the total amount of family allowances.

 

As well as others in both the legal and the tax world:

 

FLAT TAX, VAT TAX, ANYTHING BUT THAT TAX; Duke Law Magazine, Spring 96:

• "The flat tax is essentially a VAT, with a personalized element for wages. Thus, the business tax allows deduction of all purchases -- as does a VAT -- but also allows deduction of wages. The wage income that is taken out of the VAT base, however, is also taxed, but is assessed against the individual wage-earner, not against the business."

 

Concerning Proposals for a Flat-Rate Consumption Tax
Before the Joint Economic Committee, Statement of Robert S. McIntyre
Director, Citizens for Tax Justice May 17, 1995

• The Hall-Rabushka flat tax, and its Armey and Specter variants, would replace the current personal and corporate income taxes with a new tax that is conceptually identical to a "subtraction-method" value-added tax, a version of a national sales tax, with two major modifications: First, imports would be exempt from the flat tax, while exports would be subject to tax. Second, to mitigate the regressivity of the VAT, cash wages, pensions received and other cash earned income would be taken out of the VAT base (i.e., deducted by businesses) and taxed directly to individuals, with exemptions. Thus, structurally, the flat tax is exactly equal to a value-added tax with an import incentive, an export disincentive and a personal rebate based on a percentage of a capped amount of cash wages, pensions and other earned income.Businesses compute a typical "subtraction-method" value-added tax by adding up their taxable gross receipts and subtracting the cost of previously taxed items. Thus, in computing the VAT, businesses deduct their purchases from other businesses, whether for supplies, services, machines, land or whatever. (In another, more common form of a value-added tax, known as a "credit-invoice" VAT, businesses get a tax credit for taxes paid on purchased items. In general, this produces the same result as a "subtraction-method" VAT.) Ultimately, the total tax base for a VAT is equal to retail sales of taxable items, and a VAT is thus equivalent to a retail sales tax. As noted, however, the flat tax base differs from a usual VAT, however, in that wages are deducted by businesses, and taxed at the personal level

CONSUMPTION TAX PROPOSALS; 1996 Deloitte & Touche LLP

• One concern associated with the flat tax is whether the low advertised rates will produce the same amounts of revenue as the current income tax. A June 7, 1995, Treasury Department analysis of a flat-tax plan similar to the Armey proposal, concluded that a rate of at least 22.9 percent would be needed to make the plan revenue neutral, that is, it would allow the government to raise as much revenue as is currently raised. Although the proposal is designed to raise less revenue than present law, the extent of the shortfall will concern policymakers.

• The Armey bill, H.R. 2060, would replace the current corporate income tax with a tax on business activities equal to 20 percent (17 percent after 1997) of business taxable income. The tax would apply to every person engaged in a business activity, whether an individual, partnership, corporation, or otherwise. Taxable business income would be gross active income (that is, income other than investment income) reduced by an array of business deductions.

• This business activity tax resembles a VAT computed by subtracting the costs of inputs from gross receipts, except that H.R. 2060 allows a deduction for cash wage expenses. Note that, under the bill, cash wages are subject to tax at the individual level at the same flat rate applicable to business profits. Thus, the combination of the business activities tax and the individual tax is roughly equivalent to a VAT. In addition, taxing wages at the individual level allows a generous personal exemption that makes the personal tax more progressive. To ensure that compensation is taxed once, tax-exempt entities that pay compensation other than as cash or retirement plan contributions would be subject to an excise tax.

[phil_will1]

"I guarantee a popular vote of the people would select the Fair Tax if such a mechanism was available. Given that statement it should illustrate just how 'representative' our government really is."

As much as I would like to agree with you, Rocky, I can't. Most Americans still don't know anything about the proposal. Heck, I met with Congressman Linder on Monday and he said that most members of congress still don't know anything about it and that is AFTER his book hit the NYT best seller list for several weeks and many members were sent copies by their constituents.

Those who have taken the time to study the issue and have had their questions answered overwhelmingly support it but, unfortunately, there aren't enough of those yet.

[RockyMtnMan]

I would hope the concept itself would be enough to sell the majority on the idea even without knowing the details of the bill. This time of year is the best time to emphasize the need to reform our insanely un-American tax system.

Globalization is quickly making America a less attractive place to locate new businesses. Without fundamental tax reform, better controls on spending, and tort reform we will be overtaken by events in a very negative way.

[Ouderkirk]

A flat 10/5/2 is.

It is not flat at all. it is still progressive.

A truly flat tax is where the Federal Budget is:

2.2 Trillion/ 265 Million = $8300 per citizen.

That is a flat tax. After I paid my 8300, I'm free.

Don't give me this....the poor can't pay that and so forth. Fair is fair and flat is flat. Every citizen owes 8300 per year regardless of income (kids too)...or in the alternative

2.2trillion/165million filed tax returns = $13500.00 per filer.

take your pick but do not call a bracketed system flat!

[xcamel]

I never mentioned anything about a "bracketed" system. 10/5/2 is 10% federal, 5% state, 2% local. everybody pays the same rate. the 10/5/2 system has been discussed on and off for 30 years (at least).

[Ouderkirk]

Oops, Please accept my appologies. I thought that you were suggesting 10%, 5%, 2% brackets in federal...guess that I am so used to dealing with bracketed solutions when I see fair/flat tax proposals.

I like the owe $8300/per year no exceptions. If they are a child then you owe per child in addition to yourself.

Lets see how long the poor lay about and produce more kids.

[pigdog]

In fact, the FairTzx greatly helps overcome the S/S problem (which I still think should be eliminated) with funding that it has right now.

And so ...

... we'll see you soon!!

[pigdog]

No constitutional amendment is needed for the FairTax since it is an excise which is specifically allowed by the Constitution. It also has only oine rate - no exemptions.

Have you read the FairTax bill or checked the FairTax website? There's a lot of fine information in both. In your situation, you would no be taxed on income of any sort but on what you choose to consume that is taxable.

[Hostage]

Author nails it. Too many special interests and ordinary Americans are too dense to understand the hole they let themselves be put in.

Tax revolution will come eventually because of demographics, about 15 years off.

[Hostage]

I think Women's suffrage was waged under entirely dofferent circumstances. Women were WILLING to protest.

Tax protestors usually end up in jail.

Women were backed by a 'modern' European movement in Women's rights.

American taxpayers see Ireland and Russia with simplified tax structure and a few others but those economies are still tiny.

Demographics will eventually kill the US Tax monster, that would be about 15 years off.