RAHN: The end of the progressive income tax

Washington Times ^ | July 7, 2014 | Richard Rahn

[1rudeboy]

July 1 might go down in history as the beginning of the end of the comprehensive, progressive income tax. A progressive income tax, in which the government attempts to tax all labor income and capital income, such as interest, dividends and capital gains more than once, cannot help becoming so complex that it eventually dies of its own weight. This is particularly true when the government attempts to tax the worldwide income of its “tax persons” rather than the income located in its own territory. The complexity is caused by the never-ending attempt to define what income is and what should be exempt (loopholes).

Press reports now state that the U.S. tax code is more than 77,000 pages and growing at a rapid rate. [] When laws are too complex and increasingly subjective in their interpretation, it inevitably leads to corruption. All but the willfully blind now understand that the IRS has both become corrupt and incompetent.

On July 1, the IRS extended its reach to perhaps 100,000 foreign financial institutions and millions of other non-Americans who receive or make payments to Americans. This global power grab was the logical extension of the effort to tax the worldwide income of all Americans, which requires the IRS to know about all payments to and from the United States and which financial institutions are involved in the transmittal and holding of accounts. The paperwork is unending and incomprehensible. (If you think I am overstating the case, download the new “W-8BREN-E” tax form from IRS.gov, which certain foreign recipients of U.S. payments are required to complete. Even tax lawyers tell me that it is nearly impossible to fill out the form without perjuring oneself, owing to the form’s endless ambiguity and lack of clarity.)

[Principled]

You don’t think the current system suffers even worse for these points?

To the contrary, I do. The points enumerated are problems in any income tax - flat or graduated. My position is that the income tax itself must go.

Canada has a national sales tax and I don’t see it solving any of the issues you raise.

Canada has a value added tax or VAT they call a "GST". It is not a retail sales tax. I do not support a VAT national sales tax at all - and sure don't support a national sales tax in conjunction with income tax! EGADS MAN! That's what 0bama wants.

I support a national retail sales tax - an excise - which is quite different. It is by definition a consumption tax of course - not a VAT like Canada has.

Everyone - even the poor... should pay tax. And +1 on the idea to have net tax consumers not vote! Love it!

The best option is very clearly a consumption tax that is border adjusted. Personally, I want the tax system to the maximum extent possible, refrain from having hidden taxes. Any income tax does that - a lot.

Flat income taxers also need to be straightforward w/ the rate explanation - the rate bandied about is 17% tax inclusive [20.5% tax exclusive] but that does not include 15.3% t/i FICA. With FICA, tax inclusive becomes 32.3% tax inc or 47.7% tax excl.

The nrst excise has a rate of 23% tax inclusive or 29.9% tax exclusive. And that includes FICA payments.

Both are approximately revenue neutral.

But the base for retail consumption is so much larger, the rate can be lower. It collects as much from the illegals, the tourists, and anyone who spends as it collects from us citizens.

[Taxman]

Great comments, Principled!

Spot on the money!

[econjack]

The Value Added Tax only taxes the contribution that one stage of the production process makes to the sale of the product. That is, if the inputs cost $100, and they pass it one to the next stage of production at $150, the $50 is taxable, not the $100. That’s not the way the Canadian system works.

VAT taxes are horrible because of the bureaucracy they create. Something as simple as a loaf of bread has 67 production steps. A GST would only tax the loaf.

I understand the issues with the flat tax and a national consumption tax. I also understand how it is designed to capture and tax everyone. I just would never support it until they get rid of the prebate.

[Principled]

Canada combines income taxes and sales/VAT taxes too. Notwithstanding cannuck nomenclature, they have more kinds of taxes than you can shake a stick at. They do not have an excise tax alone. We can't use their experience to generalize to us.

I just would never support it until they get rid of the prebate.

That is a political question that is until now preventing passage. The prebate is not desired from me b/c it raises the rate almost 3%. But that is the only reason for me. Nothing about it is worse than the functional analog in the income tax and most if it is better.

Congress may, at it's discretion, change the amount of the prebate just like now they can change standard deductions, etc or anything in the tax code. But under the income tax, they can allow some to deduct but not others - they can make Peter pay more or less just because they do or don't like him.

That is not possible in an excise environment. The gov does not know the total of how much you make, where it comes from, or how many square feet of your home you dedicate to your home business. It doesn't even know who is paying the tax.

There will be a game-changing downside to increasing the rebate so there will not be an appetite to do so. If the prebate level is raised, less revenue is raised. Hence to increase the prebate, they'd have to increase the excise rate on everyone [including the poorest who the prebate helps most.]

As Hamilton said, excises are self-limiting.

Before I go on, I want to say that I appreciate the reasonable discussion.