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.Posted on 01/31/2013 6:05:49 AM PST by 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.
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.
The income tax has been both in its history labeled a direct tax and an indirect tax. It doesn’t matter. As a direct tax it was in effect a capitation tax from whence the ‘disproportionate burden’ argument arose. As an indirect tax it violated uniformity provisions when Congress tried to set multiple tax brackets.
No deduction for cost of goods sold or business expenses?
Flat Tax, with a few points:
1. Everyone gets a deduction on their return, maybe $5,000.
2. Every legitimate dependent claimed (such as children/spouse/old relatives) is an additional ~$1,000 deduction. They do NOT get their $5,000 deduction.
3. Flat tax of, say, 10 or 15% of the remainder.
4. Check box for whether you want withholding or not the following year.
Of course, within a few years we could make it even better. Eliminate the 17th Amendment, as well as the large majority on non-Constitutional spending from the feds. Then, take the year’s budget, and divide it by 636, with each Senator and Rep (plus DC’s) taking home an equal share of the budget. Their state can then decide how to tax it’s citizenry and pass it on to the upper Gov’t.
Thanks for the headsup on that individual.
“Everyone gets a deduction on their return, maybe $5,000.”
This is the analog of the “prebate” that’s causing controversy.
The property tax is arguably the most immoral tax in existance, followed closely by the inheritance tax.
With a property tax, you can never really own your land, just rent it from the government.
Why do those that denigrate a “sales tax” always somehow base that on a fear that “we will have both” and then immeditaly try to claim it is the same as a VAT? While advocating a flat tax and claiming it will not lead to the results we see today?
First, we started with a flat tax, so it is safe to assume that re-setting to a flat tax would result in a progressive system in a generation or two.
Second, a VAT is even more evil than the income tax. It is hidden in the cost of goods and hidden from the tax payer. It also compounds in the supply chain so that a 5% VAT could very well increase the cost of goods by 20%.
A sales tax, and I do like the “Fair Tax” proposal, would be open and honest with every voting citizen. Every person would see the cost of their government with every transaction. If we want to reduce the size and scope of government, hitting every voter over the head with a 30% National sales tax on every purchase would work wonders!
The one piece I do not like is the prebate check, but I do understand the political need for it...
“The chief fear of those who are running for political office about the “fair tax” is concerns about the “poor” getting hit.”
They say that, but they are lying. Their real fear is the loss of power and the loss of lobby money.
Good luck with that one.
I wish more people understood that...
“Again, we need to cut SPENDING.”
I agree. Now how do you propose motivating the electorate to shift gears from the largesse to fiscal prudence?
I’d bet that a 30% sales tax on every receipt would certainly go a long way to getting the electorate behind fiscal responsibility....
-——The chief fear .... about the “fair tax” is concerns about the “poor” getting hit.———
Which is why the solution that is chosen by the Eurocrats is the Carbon Tax. It is a trickle down tax. The tax is imposed on the energy providers who incorporate it into their bills and the poor pay their pro rata share. The whine about their electric bills, but they pay the hidden tax
I, for one, assume there will be no SS soon, or if it persists any actually productive citizens will be “means tested” out, so that it matters not what I “accrue.”
The income tax is a property tax, or rather they’re both head taxes. You pay either by status based on wealth accrued over the previous year, or ot is a tax on the money you own, which is in a sense your property, which came in the last year. The important part is they are laid upon an individual directly by the gubmint, and paid directly by the individual back to gubmint.
I don’t distinguish too finely between them.
Income tax started out simple and fair too.
Any simple and fair system is simple and fair - the problem is what mutations politicians inflict thereon. The biggest problem I see is how sales taxes start with tendrils into every single transaction; better to not give the gov’t such deep data mining powers from the start.
Bingo on spending. Some taxes are worse than others, but of primary importance is how much is being spent, for that determines how onerous taxes shall be. The worst kind of tax is relatively painless when governments don’t ask much. Likewise, the fairest taxes can grow intolerable should government’s need become desperate.
Then again, some forms of taxation deter spending growth. Transparent ones, for instance. Inflation is the wickedest of taxes, for this reason. It is almost utterly hidden. Even I, who obsess over the evil of the Fed, hardly think of inflation in day to day spending. Income tax withholding is wicked, as well, for this reason. VAT taxes are worse than sales taxes. Sales taxes are actually pretty good on this count, since businesses are happy to blame the price on gubmint. But if the feds introduce a national one they’ll likely outlaw printing the cost on receipts.
The apportionment argument held its ground for a while, at least. Has any tax ever been struck down for multiplicity? Our Republic violated the uniformity requirement right away, and spectacularly, with the whiskey tax. Unequal tariffs contributed to the nation’s worst nightmare, the Civil War.
I wonder, why don’t multiple brackets run afoul of the 14th amendment? Whatever reason the men in black felt like using that day, is my guess.
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