Flat Tax Vs. Fair Tax Vs. Herman Cain's 9-9-9 Plan

For a number of years now, people have asked me whether I prefer a “flat tax” or a “fair tax.” Both are problematic.

The “flat tax” is typically conceived as a replacement for the existing personal income tax. This is fine, but it ignores the payroll tax, which is really just another form of income tax. So, it is only half of an income tax reform. In practice, quite a few countries have gone this route, beginning especially with Russia in 2001, and the results have been very good. These countries have generally replaced their income tax systems, but have kept what amounts to relatively high payroll taxes.

I would like to see a top-to-bottom income tax reform, which includes payroll taxes. Or, I should say, which does not include payroll taxes: I would like to see the payroll tax system eliminated entirely and integrated into a single income tax system. Neither Hong Kong nor Singapore, which are models of what can be achieved with a flat tax system (or nearly so in Singapore), have a payroll tax. The result is that taxation on the lowest incomes is very low, and the overall system has a high degree of progressivity despite modest top rates.

Hong Kong’s flat tax system, with no payroll or sales/VAT taxes, generates about 13% of GDP in revenue per year, with a top tax rate of 16%. This is quite good, and shows excellent efficiency and high compliance. However, 13% of GDP is still rather short of the 18.5% of GDP that the U.S. Federal tax system has generated over the past several decades. So, we would have to decide either to reduce spending considerably — which might be nice, but is a separate discussion — or generate more revenue somehow.

No, because as a practical matter everyone will have to register their “family” unit. Also, the law is silent as to legal status. Thus taxpayers will be footing the bill for illegals.

The proposal is not a zero sum game.

As for the “any person” it means “any person.” This includes any entrepenue garage effort or kid with a lawnmower. Suddenly Jr. will have to register with NuIRS because they are selling lawn cutting service.

It is endless considering all the minor transactions that occur, sell a firearm in a private sale? you must be registered. Rent a room to a college student? you must be registered. Work as a handyman doing odd jobs? you must be registered.

In order for the government to assure all taxes are collected it will by its very nature have to be invasive. We have only discussed what is in the proposal under HB 25. it does not take much to go from voluntary to involuntary.

The proposal also fails to consider the lessons from universities that accept federal money. Once you accept the prebate for “government approved necessities” you are easily subject to their rules. Accept prebate? you must buy government approved health insurance from Obamacare, inc. Accept prebate? you may only buy goods from the government approved list.

I definitely think that transparency is key. Unfortunately, calculating it is the tough part. Corporate tax (and the cost of complying with them) is built into the cost of every item and passed on to the consumer. A label as to the amount being passed on would clear the way for a FairTax because people would see the embedded cost right there. If it also had to include the compliance cost then you would probably get a rate higher with the current system than under the FairTax. I used to be a Flat Tax proponent and still have the Heritage Foundation booklet within arms length. The problem is seeing what happened after the Reagan reforms. The rates were flattened and deductions were repealed but look what has happened to that now. It has become so convoluted with specialized deductions and complex rates that you can't tell what you really pay. Yes, a 23% or 30% rate can also be raised but I think that it would actually be more difficult. The rate is right on your receipt and people already are complaining it would be too high. Transparency is what has sold me. I am not convinced that keeping the current system and just flattening the rates will solve that. I want people to be able to see taxes being paid every day and throughout the day so they know how much the monster is truly feeding.

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.