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!

[LurkerNoMore!]

I meant Florida Democratic voters in that reply, of course...

[Bigun]

Like talking to a brick wall around here.

Wowie ZOWIE! Methinks Larry is UPSET! Someone has the AUDASITY, the unmitigated GALL, to question HIS (King Larry’s) pronouncement of the impossibility of the NRST!

Well that’s just to damned bad because I, and MILLIONS of others, think the NRST is inevitable!

[Taxman]

Good. That was my intent. You debate like a third grader. Good riddance!

[Taxman]

Hey, there, sweetie. Thanks for jumping in and asking a couple of good questions. Look forward, BTW, to seeing you in Lost Wages in August. :-)

Once you understand the reasoning, the "convoluted rebate check thing" is not hard to comprehend.

Basically, both the Fair Tax (H.R. 2525) and the Tauzin NRST (H.R. 4717) allow each family in America to purchase the necessities of life without having to pay the NRST on those necessities. Though the mechanisms are different, each is based on family size, not income.

The Fair Tax accomplishes this with a monthly "prebate" check and the Tauzin plan with a reduction in Social Security taxes (without a reduction in future benefits!)

There are, to my knowledge, only three single-purpose grassroot NRST support groups: The National Retail Sales Tax Alliance (NRSTA), The Americans for Fair Taxation (AFFT) and The Citizens for an Alternative Tax System (CATS).

There are other groups who support one of the two plans (or the generic NRST concept), but they are not single-purpose groups. The CATO Institute and the National Taxpayers Union are two of the better known generic NRST supporters, for example. But they also do other stuff. NRSTA, AFFT and CATS are single purpose groups.

CATS supports the Tauzin plan. AFFT supports the Fair Tax and NRSTA supports both. We are, all three working toward the same goal: replacing the income tax with a NRST and abolishing the IRS. I believe we complement each other, and we cooperate with each other in many different ways.

In the final analysis, neither the Fair Tax nor the Tauzin plan will be enacted into law: they are merely the starting points for what will be final version.

BTW, if I were "King for a day," I'd abolish ALL federal taxes in favor of a NRST. I am told that there is such a bill being written as we speak.

[Taxman]

I agree, LNM. I think Rabushka and Hall will eventually be recognized as Tax Reform heroes. After all, they got the debate re-started again when they published their book.

And, they got people to thinking about flat rate taxes again. The NRST would never be as popular as it is without their efforts, albeit for a Flat Income Tax.

I just don't much care for income taxes. I don't think it is anybody's business how much income a person earns, particularly a government person or agency.

What part of It is none of your damn business! do the income tax supporters not understand?

IOW, this is a FReedom issue!

[ClaireSolt]

I hate it when we are asked to follow other "developed countries" like Latvia and Estonia. Give me a break! Singapore and Russia, too. Off with their heads...is that it?

[Action-America]

No FACTS???

Gimme a break!

FACT:

"A recent survey was done, in Europe and Japan, of the major corporations and I was astounded at the results. They were asked, 'If the US abolished its income tax and went to a sales tax, would that have any impact on your decisions?' Eighty percent of the corporations said they would build their factories in the United States of America. Twenty percent said they would move their international headquarters to the United States of America."
—— as reported by Rep. Bill Archer, Chairman, House Ways and Means Committee

Those people were corporate decision makers saying what THEY would do.  They were not hypothesizing about what other people might do.  They were not theorizing about what others might do.  These were not metaphysical musings.  They were telling us what THEY, as decision makers, would do.

THAT'S FACT!

Granted that no program does exactly what it's adherents expect and perhaps some of those decision makers might change their minds when the time comes.  But even so, if 80% of those corporate leaders said that they would build more factories in the United States, I think that it's a safe bet that, at least 50% of those companies would build more factories in the United States.  But, let's be really pessimistic and say that only 10% would actually build more factories here.  That's much more than just a 10% improvement over what we have now, because now, we have corporations leaving.  But, the flat income tax adherents can't even claim a 10% improvement, without resorting to hypothesis, theory and metaphysical musings.

There are many other statistical studies, including studies that compare states that have adopted a state sales tax with states that have a state income tax or a combination.  But, even if you consider all of those studies to be based on hypothesis, the above survey is more than enough to justify the NRST, especially since the current system is the primary cause of capital flight and the flat income tax offers nothing that would remove that cause.  That cause, by the way, is the IRS.  I'll explain.

Having had my own import/export business and being involved in other offshore enterprises, I have had the occasion to meet many very wealth American expatriates.  Every time that I meet an American expat, I ask why they left and to a man, they always respond, "the IRS."  Actually, the exact phrase is usually, "the not to be sufficiently damned IRS."  My response is always, "Oh, you mean the income tax?"  And, the inevitable response is, "No!  the IRS."

As a friend of mine in a Central American country explained it to me, "I make $2 million a year.  I could easily afford to pay half that amount in taxes and I would still make more in one day than I could spend the next.  What I can't afford, is to have my entire fortune confiscated at one time."  He explained that if he had remained a US citizen, his entire fortune would be continuously at risk, because the United States is the only country in the world, where the signature of a single non-elected bureaucrat can result in all of your assets being seized, regardless of where the assets are domiciled or where they were acquired.  But, to make matters worse a single agency with NO OVERSIGHT has generated a profusion of unqualified, overzealous functionaries with that signatory power.  That agency? - the IRS.

I haven't talked to every one of the millions of expats, so I can't say that this is the reason for every expat leaving, though it might be.  The one thing that I can say is that it is the only reason given by every one of the expatriate millionaires that I have met (at least 30).  Furthermore, they all have gone to some length to make it clear that it was not the level of taxation or the type of tax that made them leave, but fear of an out-of-control IRS, that has the power to confiscate the entire fortune of any American Citizen that they target, with or without valid cause.

Again, these are not people who are hypothesizing about what they think others might do.  These are the people who have already left, stating why they left (past tense).  Granted that the number of samples is small, but the convincing point is that every person in the sample gave essentially the same response.  No musings here.  That's FACT!

Three different sources estimate that roughly 100,000 Americans left last year.  But, these are only estimates.  The thing that makes them much closer to FACT is that all three were determined by entirely different means.  The Forbes numbers that I quoted in an earlier post are further FACTUAL evidence of the ominous level of capital flight.  (A lot of those FACTS are discussed in more detail in the article, "Tick-Tick-Tick - The Economy Bomb".)

Combine all of this with the survey of foreign corporations and the reasons given by many expats for their decision to leave and another FACT emerges.  What is that FACT?

The IRS is the problem!

Simple logic should tell you then, that any attempt at tax reform that, leaves the IRS intact, will have the same effect as rearranging the deck chairs on the Titanic.  That includes the flat income tax.

The only proposal that is currently on the table that will actually reverse capital flight, is the National Retail Sales Tax (NRST).

 

[Taxman]

Good answer, A-A. FACTS!

Maybe LarryLied can be persuaded, but I doubt it. Perhaps others reading this thread will become interested enough to check out the NRST web sites I referred to in my post #64 above.

To the degree that his inane arguments kept the thread bumped for others to view, he may have helped us convince one or two other FReepers to check them out.

Check out those web sites FReepers. Become activists! Help us replace the income tax with a National Retail Sales Tax and abolish the IRS!

[Action-America]

To the degree that [LarryLied's] inane arguments kept the thread bumped for others to view, he may have helped us convince one or two other FReepers to check them out.

That's why, when any thread has the attention of certain nay-sayers, I never make my first posts too conclusive.  It's much more fun to start light weight, let the income tax supporters (flat or otherwise) repeat some of their unsubstantiated propaganda and then blow them away with hard FACTS.  That way, it keeps the thread bumped longer and gives more lurkers a chance to learn that the NRST is, in FACT, the only proposal on the table at this time, that offers any improvement at all, over the current system.

 

[carenot]

. A flat tax will have a far less impact on individual decision making.

Uhh, sorry to get here so late.
Are you saying we are not capable making our own decisions?

Heck, I ain't paid income taxes in years!

I favor the NRST because I want the IRS gone! People think because they can find a loophole and have to pay a little less they are doing good. But if they get their whole check, they will realise just what they are paying and that will go down. Because we won't put up with it.

The rich people are the ones that buy the new houses and new cars.

All us lower class folk buy the used houses, car and furniture. No NRST on that!

So are you rich and know how to find the loop holes in our tax laws?

Even if you are, wouldn't you love to not have to report your income? Or have your bank report on how much you take out of your bank?

I really do not understand people that still want the IRS to know what they make and what they buy and what they save.

Please research NRST. It is none of the Government's business how much we make.

Why do you want to pay some expert to tell you how to save some money and still have to pay the Government?
And you have to pay him, too.

[carenot]

They can eliminate entire classes of products and push others.

Have you read HR2525?
I have. Nothing is exempted. Not food or medicine. Everything is taxed at retail, if it is new.

For that matter the HR2525 figures that poor folk spend all their income for only what they have to have. No room for buying stocks and stuff. So they will get a prebate funded by NRST, acording to the size of their family. Everyone gets the prebate if they apply for it, even Bill Gates.

If you want, you may report your income to SS so you can collect SS when you retire. But you don't HAVE to.

How could you be against this bill?

[carenot]

Huh? Have I missed something? Isn't one of the selling points of the NRST the fact that individuals will not have to put up with the IRS and business will collect the tax?

But they already do. They have to collect the State and local sales tax already. Just a little fix and NRST will be in place.

[carenot]

. John and Jane Q. Public have settled back into their routine of buying six packs, and renting videos.

Yeah, DANGIT! I will have to pay the NRST tax for my 6 packs of Old Milwaukee!

[carenot]

There are no "facts" to support a NRST. It is all theory.

HeHee! No theory, it does away with the IRS. If that is all it does, I am for it! But it does so much more.

Cost of gov won't come down untill the well runs dry.

[carenot]

As for me pal, I am going to fight the bastards all the way to my grave!

I wish I were as young as you, I could fight longer. But I will keep fighting as long as I can.

[carenot]

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!

He he hee! This is SO fun.

Just tell'um they are going to get a check, every month that covers the NRST and I bet they would all want it!

I bet I don't get near as much money from my SS check and I want it!

I just don't like Government knowing how much money I have in the bank, or buried in the asparagus patch.

[carenot]

I am told that there is such a bill being written as we speak

What bill?

Tell me!

[LarryLied]

They (business)have to collect the State and local sales tax already. Just a little fix and NRST will be in place.

That is a huge "little fix." Friend of mine had a police helicopter hover over her house and call a ground unit because she had garage sales twice a month. Imagine Federal enforcement of a sales tax of this magnitude. The enforcement agency needed to pry 20% of nearly every retail sale out of the hands of consumers and sellers will make the days of the IRS seem like the golden years.

[carenot]

That is a huge "little fix." Friend of mine had a police helicopter hover over her house and call a ground unit because she had garage sales twice a month. Imagine Federal enforcement of a sales tax of this magnitude.

But Larry with the NRST garage sell items would not be taxed.

This is happening to everyone, everywhere with our current system. The Government is afraid someone will get some money that they don't know about.