Flat Tax or Fair Tax?

Townhall.com ^ | January 31, 2013 | Daniel J. Mitchell

[Kaslin]

I’m at Hillsdale College in Michigan for a conference on taxation. The event is called “The Federal Income Tax: A Centenary Consideration,” though I would have called it something like “100 Years of Misery from the IRS.”

I’m glad to be here, both because Hillsdale proudly refuses to take government money (which would mean being ensnared by government rules) and also because I’ve heard superb speeches by scholars such as Amity Shlaes (author of The Forgotten Man, as well as a new book on Calvin Coolidge that is now on my must-read list) and George Gilder (author of Wealth and Poverty, as well as the forthcoming Knowledge and Power).

My modest contribution was to present “The Case for the Flat Tax,” and I was matched up – at least indirectly, since there were several hours between our presentations – against former Congressman John Linder, who gave “The Case for the Fair Tax.”

I was very ecumenical in my remarks.  I pointed out the flat tax and sales tax (and even, at least in theory, the value-added tax) all share very attractive features.

• A single (and presumably low) tax rate, thus treating taxpayers equally and minimizing the penalty on productive behavior.
• No double taxation of saving and investment since every economic theory agrees that capital formation is key to long-run growth.
• Elimination of all loopholes (other than mechanisms to protect the poor from tax) to promote efficiency and reduce corruption.
• Dramatically downsize and neuter the IRS by replacing 72,000 pages of complexity with simple post-card sized tax forms.

For all intents and purposes the flat tax and sales tax are different sides of the same coin. The only real difference is the collection point. The flat tax takes a bite of your income as it is earned and the sales tax takes a bite of your income as it is spent.

That being said, I do have a couple of qualms about the Fair Tax and other national sales tax plans.

First, I don’t trust politicians. I can envision the crowd in Washington adopting a national sales tax (or VAT) while promising to phase out the income tax over a couple of years. But I’m afraid they’ll discover some “temporary” emergency reason to keep the income tax, followed by another “short-term” excuse. And when the dust settles, we’ll be stuck with both an income tax and a sales tax.

As we know from the European VAT evidence, this is a recipe for even bigger government. That’s a big downside risk.

I explore my concerns in this video.

Flat Tax vs. National Sales Tax

To be sure, there are downside risks to the flat tax. It’s quite possible, after all, that we could get a flat tax and then degenerate back to something resembling the current system (though that’s still better than being France!).

My second qualm is political. The Fair Tax seems to attract very passionate supporters, which is admirable, but candidates in competitive states and districts are very vulnerable to attacks when they embrace the national sales tax.

On dozens of occasions over the past 15-plus years, I’ve had to explain to reporters that why anti-sales tax demagoguery is wrong.

So I hope it’s clear that I’m not opposed to the concept. Heck, I’ve testified before Congress about the benefits of a national sales tax and I’ve debated on C-Span about how the national sales tax is far better than the current system.

I would be delighted to have a national sales tax, but what I really want is a low-rate, non-discriminatory system that isn’t biased against saving and investment.

Actually, what I want is a very small federal government, which presumably could be financed without any broad-based tax, but that’s an issue for another day.

Returning to the issue of tax reform, there’s no significant economic difference between the flat tax and the sales tax. What we’re really debating is how to replace the squalid internal revenue code with something worthy of a great nation.

And if there are two paths to the same destination and one involves crossing an alligator-infested swamp and the other requires a stroll through a meadow filled with kittens and butterflies, I know which one I’m going to choose. Okay, a slight exaggeration, but I think you get my point.

[Joe Marine 76]

Here’s the answer on how SS is calculated: “The FairTax does NOT change the way social security benefits are determined. Employers (including the self-employed) will still be required to report wages to the Social Security Administration even though social security benefits will be paid from Fairtax revenues. The FairTax allocates FairTax revenues to general revenue (for general government programs) and to the social security trust fund. The amount of funds allocated is based on the amount of payroll taxes that would have been paid on the total wages reported by all employers as if the tax rate of 12.4 payroll tax were still in effect.”

Karen Walby
Director of Research
FairTax.org

I cannot find if SS is means tested; I don’t recall reading if it was in the two books which I gave to folks who were interested in Fairtax.

That being said, sir, I have NO obligations to persuade anybody to do anything and have not since I retired from the Marine Corps seventeen years ago.

If you don’t like the Fairtax, then don’t adhere to it or its concepts. And, no, you don’t have an obligation to “to read volumes on the subject” - (actually both books are rather short) - but if you have any intellectual curiosity about the Fairtax then by all means go for it. Buy one of the books or do research on-line as I have.

I have pointed you in the right direction; I’m not going to build a road for you.

Have a good day.

[Daveinyork]

Fine. You have no obligation to persuade. But don’t be surprised when your ideas are not implemented. Politicians need to feel the heat before they see the light.

I personally have no problem with either version of a flat rate tax. There is no moral justification for taxing people at different rates. However, neither flat rate tax will solve as many problems as their adherents claim. Only weaning people from dependence on and obedience to the government will do that. With the levels of government expenditures as they are, no tax system is going to be anything less than horrible.

Half of the voters vote for candidates who promise to steal from the other half, and the kleptomaniac vote provides a lot of heat for politicians.

[RayChuang88]

In the end, I support phasing out the income tax in favor of FairTax (H.R. 25/S. 122) starting the 2017 tax year, which gives time for all the merchants set up the tax collection system that has to work in all 50 states plus US territories.

Because FairTax no longer taxes the very process of earning money, that means the USA would become one of the most business-friendly countries on Earth, period. And that would means easily cutting the unemployment rate to around 5% (based on the 2008 Department of Labor definition) pretty easily--5% is essentially full employment level.

[ctdonath2]

Neither.
Flat tax: Feds should not be taxing citizens directly.
FairTax: don’t conscript business into being tax collectors, esp. in states that have no sales tax. And don’t give the Feds a way in to POS data-mining - you’ll regret creating that monster (far worse than the one from Jekyl Island).

Send each state a bill and let ‘em figure out how they want to pay it. IRS should be two guys printing bills and cashing a few dozen checks for a few days a year.