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. Clint Eastwood once put it this way, if the flat tax were passed the IRS would be replaced by a little old lady and a PC.
I understand that the tax code can be simplified by, among other things, eliminating various deductions. What I don't understand is the connection between uniform rates and simplification. Once I've waded through the deductions and the more complicated parts of the code, the simplest part of the project is to find the appropriate rate. They even provide a table for that and making the rates uniform won't significantly simplify that task.
I do understand the usual philosophical arguments in favor of uniform rates, but I don't think that they have much to do with simplicity. And I hate to see the effort to create a simpler tax code stymied by its being attached to the more controversial demand for uniform rates.
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)
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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.
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.