Posted on 04/15/2002 3:58:03 PM PDT by ANAGM
OKAY Freep-peeps... Now open for discussion, the FLAT TAX thread. I for one think the flat tax is a great idea. My only issue with it is that it would likely put thousands of CPA's out of a job, but it would also do away with the majority of the IRS. I want to hear opinions from everyone. I myself, am self-employed so the flat tax is very appealing. I currently set aside about 30% of what I make to meet my tax "obligations". For info on the old ARMEY proposal got to flattax.house.gov Look forward to hearing from you all.
Under the ARMEY proposal, you forfeit your deductions (weep), and the tax form is the size of a postcard. The simplicity of it all demands that CPA's and the IRS would have to reduce their numbers.
Sorry, but the Armey proposal does little to change the code that defines what taxable income is, it only monkey's with the rate structure, and removes a few deductions to assure revenue neutrality(i.e. increase the tax base).
It does not however, remove any of the federal payroll taxes (SS/Mediscare/unemployment etc.) nor do much more than lip service simplify the stituation in regards the taxation of businesses.
It isn't the size of the report card that characterises the complexity of the income tax code, its what it takes to determine what taxable income is that creates the problem and the complexity.
Read,
Flat Tax as Seen by a Tax Preparer
by Vern Hoven
for a clear understanding of what is actually involved.
The essential problem comes down the the fact that the Armey Flat Tax is prone to the problems involving the European VATs as long as taxation can be hidden in prices by increasing the levy on businesses through redefinitions of taxable income.
The Armey/Shelby Flat tax is still an income tax with VAT, requires an IRS, and still taxes business passing on such taxes in higher prices to consumers, lower wages to employees, and lower returns to investors/retirees.
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. (e.g. Revenues - Costs = Taxable Business Income)
***
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 flat tax is a VAT. None other than the father of the flat tax, Robert Hall of Stanford University (along with Alvin Rabushka), in his 1995 Ways and Means Committee testimony said, "The Hall-Rabushka flat tax is a value-added tax."
Which was pointed out again in additional hearings in April of 2000:
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
| In our system, all income is classified as either business income or wages (including salaries and retirement benefits). The system is airtight. Taxes on both types of income are equal. The wage tax has features to make the overall system progressive. Both taxes have postcard forms. The low tax rate of 19 percent is enough to match the revenue of the federal tax system as it existed in 1993, the last full year of data available as we write. 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 base for the business tax is the following: Total revenue from sales of goods and services less purchases of inputs from other firms less wages, salaries, and pensions paid to workers less purchases of plant and equipment 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. |
The Flat Tax is a VAT in that it is a levy imposed on businesses gross receipts less allowed deductions(i.e. business costs as defined by congress) at all levels of production, it is passed on to the consumer hidden in the price of goods and services.
As long as government is able to play a shell game with hiding taxes from the Voter(i.e. individual) it can rely on the old maxim:
A government which robs Peter to pay Paul can always depend on the support of Paul.
-George Bernard Shaw
and keep right on growing without bound.
Russia was flat ass broke. They (The Gov) could not extract anything more out of the "people". They had no choice (IMO) but to try something radically different (from that countries original way of thinking).
Personally, I am for NRST and NO INCOME TAX. I like the idea of no one being able to escape the tax (Crooks, illegals, dealers, etc..). But as with any "solution", it will never be full-proof against the crooks in D.C. They will always find a way of taking more. Their problem is they have no accountability. They know not the concept of cutting back spending and flat out dropping programs that simply don't work. D.C.'s answer to everything is "throw more money at it"...
Even if flat tax, NRST or whatever is a huge success, the pinheads we call congress-critters will always find a way to spend it ALL and still "need" more...
The founder's didn't think so
Patrick Henry, Virginia Ratifying Convention June 12, 1788:
- "the oppression arising from taxation, is not from the amount but, from the mode -- a thorough acquaintance with the condition of the people, is necessary to a just distribution of taxes. The whole wisdom of the science of Government, with respect to taxation, consists in selecting the mode of collection which will best accommodate to the convenience of the people."
and for good reason, the base issues do not revolve about how much, but rather the intrusiveness and cost of complying with a given tax system:
From Adam Smith's book, The Wealth of Nations (Book V, Chapter II), there are really only four things to be considered as guiding principles in designing an appropriate tax system -
I. The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state . . . .
II. The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person . . . .
III. Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it . . . .
IV. Every tax ought to be so contrived as both to take out and keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state . . . ."
Unfortunately, any income tax fails on all four counts.
Furthermore in Wealth of Nations pp. 561-64. Here is what he had to say about bad taxes:
1. A tax was bad that required a large bureaucracy for administration.
2. A tax was bad that "may obstruct the industry of the people, and discouraged them form applying to certain branches which might give maintenance and employment to great multitudes. While it obliges the people to pay, it may thus diminish, or perhaps destroy, some of the funds which might enable them more easily to do so."
3. A tax was bad that encouraged evasion. "The law, contrary all the ordinary principals of justice, first creates the temptation, and then punishes those who yield to it. "Evasion is also bad, says Smith, because it tends to "put an end to the benefits which the community might have received from the employment of their capitals."
4. A tax is bad that put the people through "odious examinations of the tax-gatherers, and exposes them to much unnecessary trouble, vexation, and oppression...It is in one or other of these four different ways that taxes are frequently so much more burdensome to the people than they are beneficial to the sovereign"
Unfortunately income taxes pass the above criteria for a bad tax with flying colors.
Just what makes you think that a different method of taxation will reduce the load imposed by the tax?.
Going to a single rate, single stage, broad based Retail Sales Tax will reduce complexity to one rate, on all goods and services. The burden imposed by complexity, simply vanish.
Under the income/payroll tax system OTOH, complexity has a severe price tag we all pay:
Where Have All the Dollars Gone?
How the government robs Peter to pay him back.
By James L. Payne, Reason Magazine February '94When the overhead costs are added together, (24 percent compliance costs, 33 percent disincentive costs, and 8 percent other costs), they total 65 percent of tax revenue.
Actually, that's the only way it can be done. And it won't.
The best known of these [consumption tax] proposals is the one put forth by Hall and Rabushka (H&R) [1995], which they call a flat tax. The H&R proposal, a version of which was the centerpiece of the 1996 presidential candidate Steve Forbes' campaign, has two tax-collecting vehicles, a business tax and an individual compensation tax. The coordinated use of these two instruments allows the government to levy a progressive tax.
The calculation of the business tax base begins with a computation like that of a consumption-type VAT--sales less purchases from other firms. The key difference is that the firm also deducts payments to its workers. Firms then pay a flat rate of tax on the final amount.
The base for the individual tax is the payments received by individuals for their labor services. No capital income is taxed at the individual level. [i.e., no cap gains tax] In principle, any tax schedule could be applied to this base--the tax rate could be flat or increasing, and an exemption might or might not be allowed. H&R propose only one rate (19 percent), and it is the same as the rate that applies to cash flow at the business level. H&R build progressivity into the system by allowing an exemption of $25,000 (for a family of four). No other deductions are allowed. This is what permits the rate to be so low.
At this point you might be wondering why the H&R [flat] tax is a consumption tax. To see why, consider that a VAT that taxes all goods and services at the same rate, say, 19 percent. It has already been shown that this is economically equivalent to a 19 percent retail sales tax. Now consider an H&R-type flat tax that taxes both individuals and firms at 19 percent and that has no exemptions or deductions at the personal level. Recall that under the VAT, the firm's tax base is sales minus purchases from other firms. Wage payments are not deductible. In effect, then, wage payments are subject to a 19 percent tax. Under the H&R tax, wage payments are deductible at the firm level, but they are taxed at the individual level. The amount of tax is exactly the same as under a VAT; all that changes is the point of collection for part of the tax. The personal exemption simply builds some progressivity into the system. [solving heleny's dilemma posed in post 75] In short, the H&R flat tax is essentially equivalent to a VAT or a retail sales tax. Hence, any results pertaining to the economic effects of one apply to all.
MY COMMENT: Since a flat tax and other consumption taxes are mathematically equivalent and are better than the current awful tax system, choosing the best one to support need only be a matter of implementation, transitional, and political considerations. I, for one, am not opposed to some progressivity, so I prefer a flat tax over a VAT or sales tax scheme. However, I'm not totally opposed to the other two. The most important reason to move away from the current system to any of the three is to eliminate abuses and economic distortions caused by loopholes, most of which come from the presence of multiple tax brackets. Social engineering by the government also derives from the bracket structure. For instance, with a single ("flat") bracket, the marriage penalty (which for some, though few, families you might be surprised to know is a marriage reward) goes 'poof'. I would respectfully disagree with Chuckster (post 57) that the flat tax is a productivity tax from a mathematical perspective, although from a perceptual perspective I see his point. Indeed, taking net present value into effect, if you take away the brackets, everything you earn (INCOME) you eventually spend, or CONSUME, whether you do so today or tomorrow (or, with the elimination of the estate tax, by your children). The problem with the current income tax is that (1) you can't possibly capture all instantaneous changes in income to make it mathematically equivalent to the VAT/sales/flat tax [baseball cards value is the stock example] and (2) it DOES punish savings because savings are more likely to be taxed at a higher bracket in period two. With a flat tax, the savings punishment disappears b/c, once again, the existence higher brackets is responsible for the punishment. I took a semester of public finance with a professor who has lent his academic support to the group that advocates the "Fair Tax" that Free the USA mentions in post 49, so I hope I don't sound like I'm spouting total b.s. :-)
Then tax only for defense and courts. Disband everything else, and not another penny in transfer payments (welfare) for anyone.
Untrue.
Socialism requires that the federal govt. be financed far beyond....
If we only paid for military, and only used them in defensive missions, we could get away with tariffs or a very low flat tax or sales tax.
End SS. End welfare. End Medicare. End Medicaid. End all transfer payments - every single one.
Under the ARMEY proposal, you forfeit your deductions (weep),
Unfortunately, not quite true, for the Flat Tax is neither "Flat", with its large personal exemption and standard deduction nor without deductions for those who qualify for them, it is a two bracket income tax (0% below the exemption level, and some % for the rest) with corporate VAT, and payroll taxes in the guise of "Social Insurance".
H.R.1040 Sponsor: (introduced 3/15/2001).
Freedom and Fairness Restoration Act of 1999 - Title I: Tax Reduction and Simplification - Amends the Internal Revenue Code to impose a 19 percent tax (17 percent after December 31, 2000) on the taxable income of every individual.
Redefines "taxable income" to mean the amount by which wages, retirement distributions, and unemployment compensation exceed the standard deduction. Increases the basic standard deduction and includes an additional standard deduction for dependents. Includes in taxable income the taxable income of each dependent child under the age of 14. Provides for inflation adjustments.
(Sec. 102) with a Replaces the current tax on corporationstax on every person engaged in a business activity equal to 19 percent (17 percent after December 31, 2000) of the business taxable income of such person. Makes the person engaged in the business activity liable for the tax.
Imposes a tax of 19 percent (17 percent after December 31, 2000) on the value of excludable compensation provided during the year by an employer for the benefit of employees. Makes the employer liable for the tax.
(Sec. 103) Repeals: (1) numerous provisions relating to pension plans; and (2) provisions imposing a tax on any employer reversion from a qualified plan.
Revises requirements regarding transfers of excess pension assets.
(Sec. 104) Repeals from the Internal Revenue Code: (1) the part relating to alternative minimum tax; (2) the part relating to credits against tax; (3) the subtitle relating to estate and gift taxes; and (4) subject to exception, the chapter relating to normal taxes and surtaxes.
With its large "personal exemption." it acts to sustain and actually increase that natural constituency for spending spoken of by Walter Williams:
Walter Williams, World Net Daily, 10-25-2000
According to the most recent U.S. Treasury Department figures, ... the top 50 percent ($36,000 and over) paid 96 percent of income taxes. Guess what the bottom 50 percent of income earners paid?
If you're among those who pay little or no federal income taxes, what do you care about tax cuts? Moreover, if you think tax cuts pose a threat to government handout programs, you might be openly hostile and support Al Gore's silly "risky scheme" talk. So many Americans paying little or no federal taxes makes for a natural spending constituency. It's like me in the restaurant: What do I care about extravagance if you're footing the bill?
Here's how overall federal tax rates come out for the Armey/Shelby Flat Tax as it was proposed in '95, a flat individual/corporate income tax, leaving all SS/Medicare, Federal Unemployment, excise taxes and tariffs in place and unchanged.
http://www.library.unt.edu/govinfo/subject/vital.html
- "The chart below shows a hypothetical set of flat tax rates and allowances that would result in revenue neutrality. This model, produced by the Congressional Budget Office shows that all federal income tax revenues could be fully replaced by a system with a flat tax rate of 13.1 percent and no deductions. Allowing total deductions for a family of four to reach $36,800 (more than double the amount allowed in 1995) would require a 19.9 percent rate."
Joint Economic Committee
Revenue Neutral Tax Rates for Alternative Allowances and Exemptions Under a Flat Tax Standard Allowances Option 1 Option 2 Option 3 Option 4 Option 5 Single $13,100 $13,100 $ 6,550 $ 6,550 $0 Joint $26,200 $26,200 $13,100 $13,100 $0 Head of Household $17,200 $17,200 $ 8,600 $ 8,600 $0 Dependent Exemption $ 5,300 $ 2,650 $ 5,300 $ 2,650 $0 Revenue Neutral Tax Rate 19.9% 19.4% 16.8% 16.3% 13.1% Source: Congressional Budget Office, 1995.
Under the Armey "flat" tax, as it is currently proposed, a single person would pay:
7.65% ---- 7.65%(SS/Medicare) tax on wages/salary income below $13,600,
26.65% --- 19% + 7.65%(SS/Medicare) tax on wages/salary and other taxable income from $13,600-$75,000
20.45% --- 19% + 1.45% Medicare tax on wages/salaries and other taxable income from $75,001 up.
0% -------- on savings & bond income and stock dividends.
And that single person's business/employer pays,
19% ------ on earnings (Gross Receipts less allowed business deductions, exemptions and credits)
13.65% ---- 7.65% on SS/Medicare employment excises + 6% federally mandated unemployement excises levied on each employee's on wages up to $75,000.
7.45% ----- 1.45% on Medicare employment excises + 6% federally mandated unemployement excises levied on each employee's wages greater than $75,000.
Plus additional selective excises and tariffs dependant upon the nature of business engaged in.
Note: The base "Flat Tax Rate" is subject to meet revenue neutrality requirements under the Budget Enforcement act. The 19% rate stated in the Armey/Shelby Flat Tax proposal does not meet these requirements and would of necessity be adjusted upwards, and/or personal exemptions and business deductions be reduced to meet revenue neutrality criteria for enactment.
In fact the budget scoring required by law to assure revenue neutrality and phase in for all tax reform bills, for the "Flat Tax" gives a rather grim picture of Armey's plan especially since it does not do away with withholding nor the 15.3% SS/Medicare payroll taxes.
Essentially, each bill has a provision to untax the necessities of life for everyone, without having to have the necessities of life defined in the tax code.
On reflection, I think you will agree that some sort of mechanism which compensates family units on the taxes they pay for necessities is better than codifying what those necessities are.
A signal strength of the NRST is that every consumer will pay a visible tax on each good or service they purchase for their own use, enjoyment or personal consumption, and all will pay at the same rate.
Trying to define things leads to social engineering, which has really screwed the current code up and created a vast sub-economy here in the WDC area for lobbyists who cause the Congress to manipulate the code to benefit or punish some group, company or industry. We aim to eliminate that sort of class warfare and blatant discrimination by removing the temptations (and the rewards) of tax code manipulation.
Therefore, neither bill has any exemptions, save education expenses, which are not deemed to be consumption.
Once the candidates get to DC they forget all about a better tax system, vote themselves another big raise and send us a middle digit. Sorry to be so pessimistic, but I've been waiting and voting for tax change for many years in vain.
I'd submit that one logical course of action would be to support the Democrats and speed the destruction of the nation.....
Correct. Take this logic a bit further...
Only defense and courts (these type things) are MORAL public goods.
That means that Bill Gates and You each equally benefit from National Defense...
So why not let everyone ante up $100.00 each year, no matter how much they make?
There's also an interesting idea (search Google, I can't remember the mans name) - Contract insurance.
One moral thing government does - is to insure against fraud, by the court system. The idea is that each sales contract, house sale, etc. would have a small percentage fee added to it. Since Capitalism requires honest dealings, no fraud, etc.. the gov't (well, at least for now) has a legit role in upholding fair trade among the citizens..
Even I cannot argue against this.
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.