Where the Flat Tax Goes from Here

The Hoover Institution ^ | 5/20/02 | Alvin Rabushka

[LarryLied]

In 1981 Robert Hall and I proposed a comprehensive 19 percent flat tax to replace the U.S. personal and corporate income taxes. The idea resulted in numerous congressional bills during the 1980s. It underpinned President Reagan's Tax Reform Act of 1986, which resulted in two rates, 15 and 28 percent, down from a top rate of 70 percent when Reagan took office in 1981.

In 1992 presidential candidate Jerry Brown, followed by Steve Forbes in 1996, reinvigorated the flat tax. Congressional Republican leaders chimed in with their support. Nonetheless, since 1991, the U.S. tax code has regressed; three new higher rates were added, with the top rate increased from 28.0 to 39.6 percent.

Despite regression in the United States, the flat tax has been successful in several new countries that emerged from the breakup of the Soviet Union. Estonia enacted a 26 percent flat tax beginning in 1994. Latvia followed suit with a 25 percent flat tax in 1995.

The biggest flat tax success story comes from Russia. In 2001 a 13 percent flat tax took effect, replacing three brackets with a top rate of 30 percent. The new code improved incentives and compliance. In 2001 revenue increased 28 percent in real, inflation-adjusted terms.

Effective January 1, 2002, the government reduced the corporate rate from 35 to 24 percent and recently proposed a major reform for small business enterprises (SBEs). SBEs with no more than twenty employees and turnover below $320,000 will be able to pay the lesser of a flat 20 percent tax on profits or a flat 8 percent tax on revenues. SBEs will be exempt from value-added tax, sales tax, property tax, and social insurance tax. Other former Soviet bloc countries may follow in Russia's footsteps.

In April 2002 Singapore proposed a major restructuring of its tax system. The centerpiece is a reduction in corporate and personal income tax rates. In the next three years, corporate rates will fall from 24.5 to 20.0 percent, and the top personal income tax rate, from 26 to 20 percent. With this measure, Singapore extends a process of marginal tax-rate reductions that cut the top personal rate from a high of 55 percent in 1961 to 40 percent in 1978, 34 percent in 1980, 30 percent in 1982, and 26 percent in 1985. During this period, the threshold at which the top rate bites increased from S$90,000 to S$750,000 (US$1=S$1.80).

To fill out the story, Hong Kong maintains a flat tax of 15 percent on personal income. The Channel Islands of Jersey and Guernsey impose a 20 percent flat tax. The Freedom Party in Austria proposed a flat tax during the 1999 national election and became part of Austria's governing coalition for the first time in modern history. Other European parties are considering the flat tax in their economic platforms.

All in all, the flat tax is alive and well overseas. Now if only in the United States!

[ancient_geezer]

On RUSH today, Roger Hedgecock said Russian SBEs were now paying a mere 6% Flat Tax.

Not quite, It is a proposal that has not be enacted yet to reduce their sales tax(i.e. VAT) from 8% to 6%, nothing is said of the "Social Insurance" payroll taxes they also pay, up to 28% of wages.

It would do nothing for the mid to larger size business that make up 90% of their economy, which will continue to pay the 8% VAT plus full net profits tax upto 35% which is currently in place.

RUSSIA:  PART TWO OF THE RUSSIAN FEDERATION TAX CODE

The key factor in all these tax measures is that they are trying to get people to pay taxes they have been avoiding thus far.

http://www.miami.com/mld/miami/news/world/3302863.htm

Miami Herald May. 20, 2002
Putin Proposes Small Business Tax Cut MOSCOW (AP) - At Russian President Vladimir Putin's request, lawmakers and government ministers agreed Monday to draft legislation that would cut taxes for small and medium-sized businesses - a sector of the Russian economy that has been slow to develop. "The present level of taxation and the way taxes are paid are not the best for the development of this sphere effectively," Putin said in televised remarks. Russian Economic Development and Trade Minister Gherman Gref said after the Kremlin meeting that the tax on sales would be cut from 8 percent to 6 percent, the Interfax news agency reported. Gref said that plans are also underway to reduce the net profit tax rate from 20 percent to 15 percent, according to the ITAR-Tass news agency. The tax cuts would affect businesses with an annual revenues of up to 15 million rubles ($469,000), a higher ceiling than the 10 million rubles ($312,000) proposed by the Kremlin earlier this year. Two years ago, Putin ushered in a revolutionary flat, 13 percent income tax in a bid to reduce the tax-dodging that had severely depleted state coffers. "We must ... create such conditions that will allow business to develop well and us to fulfill our obligations to the people," Putin said, according to ITAR-Tass. Businesses operating in Russia have long complained of the heavy tax burden, and Monday's initiative was the second this year by Putin to address the problems facing small and medium-sized businesses. Small businesses account for 10-11 percent of Russia's gross domestic product and employ 12 million people, according to the Russian State Council working group on small business. Putin and other top officials say they are committed to increasing those numbers and helping to create a middle class that could fuel economic growth. Among those attending Monday's meeting were lawmakers from pro-Kremlin parties and government ministers.

[ancient_geezer]

Suppose this is LurkeyLiarLooneyLou, redux?

Who knows, fits part of the pattern "LurkyLou, Lewislynn, Loosebolts", LarryLied?, not quite the same style though. We'll know when we see his arithmetic skills :O)

Nah, Just a LL wannabe so far.

[donozark]

Well, Putin requested it. Normally when he requests something it goes through. And most in Russian gov. have agreed to it.

Regardless, at least he/they are doing SOMETHING! Small business is the engine of job creation, here as well as Russia.

[donozark]

Yes, I too would prefer the NRST (member of NYU here), in America,however, that is not the issue. Rather, Putin's actions in Russia. I deem them positive. I do not know how anyone could conclude otherwise.

[ancient_geezer]

Regardless, at least he/they are doing SOMETHING! Small business is the engine of job creation

Personally that is one of many reasons I favor the NRST as described out in H.R.2525.

It opens the door to new introduction of small businesses of many kinds by litteraly removing federal taxes from their operations. And even for the retail business, the simplification introduced by the NRST as well as the fact the business is expressly compensated for collecting the tax is a big positive factor encourging business expansion and development.

Unfortunately the flat tax proposals out there are more cosmetic than real where tax changes for business is considered. In many respects the Armey/Spector version actually makes the burden worse for small businesses.

You, may want to review the following article about the flat tax proposals in this country:

Flat Tax as Seen by a Tax Preparer
by Vern Hoven

Merely moving to single rate VAT systems do not provide the relief from complexity that many attribute to them.

[donozark]

RE:#44 Should read NTU! National Taxpayers Union

[donozark]

See #44 (and #46).

[ancient_geezer]

Here's some links to the NTU positions on HR2525(FairTax) legislation:

1: -->Letter 07/23/2001
NTU Endorses FairTax Legislation in the House

2: -->Press Release, 2001-08-03
NTU and National Retails Sales Tax Coalition Endorse Retail Sales Tax Bills Sponsored by Bill Tauzin and John Linder

And the NTU site:

http://www.ntu.org/index.php3

For those interested for more information on taxreform and tax issues generally.

[Action-America]

Taxman,

Excellent job of debunking the unsubstantiated propaganda and sound bites that LarryLied can't seem to get past.

If there is one problem in our society that is more damaging to this country than a tax on income (flat or otherwise), it is the tendency of even well intentioned individuals to rely upon unsubstantiated sound bites.

Many people realize that we desperately need fundamental tax reform.  Yet, rather than take the time to look at the problem themselves, they foolishly rely upon sound bites, flawed logic and other totally unsubstantiated propaganda from the exact same people who benefit most from a tax on income.

What amazes me most is that even after all of the many authoritative sources that you and I and many others on this forum have cited over and over, there are people on FR still who cling to those unsubstantiated sound bites.  I suppose that it is a result of our rush-rush society that we live in, that they either don't have the time or don't want to take the time to look at the facts and make an informed decision.  But, that's an awfully sad statement about our society.

Regardless of the arguments about fairness, potential for passage or any of the other weak arguments, the one fact that should be obvious to any reasonable observer is that the IRS is directly responsible for driving our wealthiest taxpayers out of the country.  This is supported by IRS data, the Forbes Magazine lists of wealthiest people in the US and worldwide, the US Bureau of Consular Affairs, the US Census and many other authoritative sources.  If we don't eliminate the income tax in any of it's possible forms, this capital flight will continue until there is not enough tax base left to keep the government running.  It's time that those flat income tax ostriches take their heads out of the sand and realize just one fact, if this capital flight is to be reversed.

We don't have a choice!

The income tax (flat or otherwise) must end soon.  The only solution that is currently on the table that will do that is the National Retail Sales Tax (NRST).  It's that simple.  No sound bites.  No unsubstantiated claims.  Just hard facts.  But then, the lack of sound bites probably dooms this argument with those who blindly support the flat income tax, since they certainly won't take the time to even look at the data from the IRS, Forbes and others.  It's so much easier to just repeat sound bites.

 

[LarryLied]

Sounds bites? I'm the only one on this thread who has not copied and pasted the same NRST information we all have seen a million times. I could have done the same. Plenty of Flat tax sites out there. I could have spammed this thread just as the NRST people did. But I didn't. People can look for themselves. Everyone word I've written is my own.

And I haven't engaged in personal attacks and scatological language.

The latter seems to be the standard reaction when utopians of any stripe are told their grand theory ain't gonna become reality.

If we were setting up a tax system from scratch, I might go for a NRST. But we aren't. Face it, 280 million people are not going to shift from what is in place to a NRST. Socially, economically and politically, it will not happen. This is all nice theory but a waste of time.

Better to spend the time and effort on getting the Federal take of GDP down. If we ever get to the 10% mark, no one will care what kind of tax collection system we have. The bite will barely be noticable. And no one will have to sit around coming up with elegant theories of how to pretend a painful level of taxation is not painful.

[Action-America]

Sounds bites? I'm the only one on this thread who has not copied and pasted the same NRST information we all have seen a million times.

That's because there is massive amounts of credible, factual, substantiated NRST information to cut and paste from.

I could have done the same. Plenty of Flat tax sites out there.

Yes.  You could have cut and pasted a lot of stuff about the flat income tax.  And yes, there are plenty of flat income tax sites out there.  But, that only raises a big question.  With all of those flat income tax sites, where are the credible, factual, substantiated studies to support the flat income tax?  If someone could show me a credible, factual, substantiated study that proved that the flat income tax would cause 80% of major foreign corporations to build additional factories here, as the NRST would, or cause 20% of foreign corporations to move their international headquarters here, as the NRST would, then I would give the flat income tax serious consideration.  I have looked long and hard for such credible, factual, substantiated facts and considering the number of flat income tax sites out there, if it existed, one would think that they would all be touting it's existence.  Therefore, I can only surmise that such credible, factual, substantiated evidence does not exist.

I could have spammed this thread just as the NRST people did. But I didn't.

Could that have something to do with a severe lack of facts to support the flat income tax?

People can look for themselves. Everyone word I've written is my own.

That's exactly how propaganda works.  The spin machine generates thousands of sound bites and then they set back and let others rephrase those sound bites, knowing that just like rumors, every time passes to another person, it will get embellished.  The Republicrats in Congress would be proud of you.

Face it, 280 million people are not going to shift from what is in place to a NRST.

I'm glad that you used that statement.  It's a perfect example of what I was just talking about.

SPIN:  You will have to get 280 million people to go along with the NRST.

FACT:  Even if you were talking about a Constitutional Amendment, you would only need to convince about 100 million voters (based on an even mix of large and small states).  But, here's the rub.  We aren't talking about a Constitutional Amendment.

BIG FACT:  To pass the NRST will only require that we convince 270 people (half of the House - 218, plus half of the Senate - 50, the Vice President - tie breaker and the President) of the necessity, not the 280 million that the flat income tax people like to throw out.  Thank you for making my point.

On the other hand, when I point out that the wealthy are leaving the United States, I did not read that in any newspaper or hear a sound bite on FOX or CNN.  It seems that they don't want to talk about it.  I had to do the research myself (something that I constantly ask others to do) and even then, I only discovered it by accident.  But, once I knew about it, I was able to find lot's of substantiating data, which I post links to.

Most recently, I was looking at the Forbes list of 400 Richest Americans and the Forbes list of the World's Billionaires (note the links) and got to wondering if those lists reflected the alarming level of capital flight that I have been reporting on.  I was not surprised in the least to learn that between 1999 and 2001, the number of billionaires in the United States has dropped by over 13%, with a similar drop in average net worth, while the number of billionaires worldwide has increased by over 80%.  You won't find that information quoted in any media source.  I had to take it upon myself to do the research.  I copied and pasted the Forbes data for the last few years, from dozens of pages, into a spreadsheet.  I totaled up the number of billionaires for each year.  I totaled up the combined net worths of them all and used that to calculate an average.  If you want to go to that effort (3 to 6 hours, depending on the speed of your Internet connection), you will come up with the same results.

By doing the research yourself, eliminate a lot of the spin.  This is especially true, when you use non-political data, such as the Forbes lists.  Perhaps it is for that reason that nobody in the major media ever thought to use the Forbes lists in that manner.  I certainly don't believe that Forbes has been tweaking their lists to make a political statement, just waiting for someone to find that data.  In fact, this credible (remember that word?) information from a non-political source soundly substantiates (there's another one of those words) the information that I have derived from many political sources.

But, that just demonstrates the difference it the methodology of the NRST supporters and the flat income tax supporters.  It's the difference in demonstrable FACTS and sound bites.

It all comes down to credible, substantiated FACTS.  The NRST folks can prove that the NRST will reverse the alarming level of capital flight.  The flat income tax folks have shown no evidence that the flat income tax will even slow capital flight.  In fact, there is good reason to believe that the flat income tax would cause capital flight to increase.  But, since I don't have the source of that supposition, let's just ignore it.  Just show me a single credible, substantiated study that demonstrates that the flat income tax will reverse capital flight.  Please.

Enough with the spin.  If the flat income tax is anything more that a ruse, then let's see the FACTS.

But, in the absence of such FACTS, it becomes obvious that the flat income tax is simply a ruse to give Congress a way to "claim" tax reform, without giving up the bludgeon that they hold over the heads of each and every taxpayer - the IRS.

In fact, any attempt at tax reform that leaves the IRS intact, will only lead the US further down the capital flight road to ruin.  The flat income tax leaves the IRS intact.  The NRST dismantles the IRS.

No contest.

FACTS trump propaganda every time.

 

[LarryLied]

There are no "facts" to support a NRST. It is all theory. Detailed, endless theory. Metaphysical musings. Nobody knows what the result would be. Never has any program ever done what its adherents claimed it would do. And besides, even it it did become law (which it won't), the law would be nothing like what is proposed. Laws never are.

[dixie sass]

Are we seeing some of the same economic problems that effected the Weimar Republic? Hyperinflation, High unemployment, additional taxation?

[LarryLied]

We are coming very close to making the economic mistakes we did during Vietnam: massive increases in social and military spending plus attempts to strong arm the economy (wage and price controls then, steel and other tariffs now).

[Taxman]

In a word, no. Their is no hyper inflation or unusually high unemployment.

What we do have is a rapacious government which will gobble up all the peoples treasure unless they start fighting back.

[Taxman]

So, do you have anything positive going on in your life? Do you have anything you believe in? So you have anything that you are looking forward to?

What is the purpose of your life, LarryLied? Sit around and throw rocks? Make negative? Be negative?

I am damn sick and tired of you naysayers. If you don't think we can change the system, that's just fine. But go spread your poison somewhere else.

You are either part of the problem or part of the solution. So far, you are a part of the problem. And your defeatist attitude exemplifies to a large degree what is wrong with America right now.

So, you go ahead and walk unresistingly to the gas chambers. As for me pal, I am going to fight the bastards all the way to my grave!

[LarryLied]

Because someone does not agree with your tax plan does not mean they don't want profound changes in tax law. What is it with NRST advocates? Personal attacks combined with reams of NRST web site spam which, with the scattered bold type, underlining and font color changes, looks like it came from a ransom note causes people to think they are dealing with a manichæistic cult, not a serious political movement. The vicious frustration of ideologues, of true believers, is appalling to behold be they logical positivists, Puritans, marxists or NRST advocates.

Politics is the art of the possible. The NRST as proposed is not possible. Not now and probably not ever. It is utopian dreaming, dreaming which saps effort and distracts attention from achievable reform.

[Bigun]

The NRST as proposed is not possible. Not now and probably not ever.

Larry there have ALWAYS been those amoungst us with that type of mindset and if the rest of us had listened to them we would still living in caves shivering from the cold!

There are, and always have been, three kinds of people populating human kind. There are:

1. those who MAKE things happen,

2. those who watch things happen, and

3. those who wonder what happened!

It's pretty apparent which of those categories YOU fall into so, I suppose, the rest of us are just going to have to do it without you, or perhaps even despite you! Nothing new there!

[LarryLied]

Like talking to a brick wall around here. Oppose the NRST and you are content with the current system, you don't want serious tax reform.

I give up.

[LurkerNoMore!]

Hey you two! You know I love ya, but if you're going to debate this, do so as Bill Archer would to Dick Armey.
Two of the problems I see with a National Sales Tax are (1) that convoluted rebate check thing...try to explain THAT to Florida voters! and (2) competing National Sales Tax groups.

Larry, I love Rabushka. Thanks for posting this.