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!

[LarryLied]

There would be an untold number of unintended consequences of a NRST. Garage sales might replace Walmart as the place to shop. I know I would buy truck loads of used goods to have on hand if I thought a NRST was going into effect.

There are people now who use their homes as furniture sales rooms. They are always having a moving sale but never move. Some of them even manufacture their own furniture. The ingenuity of the American people to save or make a buck is limitless.

That is why it doesn't matter much what system we have. It will always be gamed and a new system will, to stop the chearing, become as complex as the old in no time at all.

Which is why I say the only real reform is getting the Federal take of GDP down to at least 15%, preferably 10%.

That way it will not be worth the bother to change behavior and/or cheat.

[LarryLied]

Can't we all just get along?

Why not compromise and have two tax systems? Let the people decide if they want to pay income tax or a NRST. Or maybe give them a third or fourth or fifth option. We can't let people switch back and forth too often so we'll have to figure out a reasonable time you must be in one or the other. Problems might arise with a high income spouse opting for a sales tax while the spouse with a lower income goes for the current system. NRST free people might buy stuff, for a fee, for those who paying a NRST. But those are minor details we can hammer out. Or if that is too difficult, we can rotate systems. Income tax on odd years, sales tax on even years. Or maybe even switch monthly or bi-weekly if it is more convenient.

[lewislynn]

We'll know when we see his arithmetic skills

Your tax would increase prices by 30%, then you continue to spread the lie it's only a 23% tax, and YOU think I have a math problem...

[ancient_geezer]

Today you pay 23.6%(taxfoundation) of gross income for federal taxes.

That's 36% federal taxes added on to your current total consumption expenditure + savings & investment,(i.e. takehome pay).

Under the NRST(H.R.2525) you will pay 23.0% of (gross income minus state taxes, minus povertyline expenditure, minus savings and investment, minus used goods purchases).

That's 29.87% federal taxes added onto the taxfree shelf price of new goods and services you purchase.

I'll take H.R.2525 anyday.

[Taxman]

Still under wraps. I'll let you know when they are ready to go public with it; i.e., introduce it into the Congress.

[lewislynn]

Today you pay 23.6%(taxfoundation) of gross income for federal taxes.

No I don't.

That's 36% federal taxes added on to your current total consumption expenditure + savings & investment,(i.e. takehome pay).

Don't pretend to know what my "current total consumption expenditure + savings & investment" is ...My "takehome pay" is 100%.

you will pay 23.0% of (gross income minus state taxes...

No, You will pay 23.0% of gross income minus including state taxes...your "gross payment" tax, taxes the state taxes among others as well...Thereby REDUCING your disposable income.

That's 29.87% federal taxes ....

Which is it? 23% or 29.87%

You still didn't point out MY math problem, lies or half truths ...only yours.

If you have to lie and distort the facts to try and sell your tax scam, I'd prefer to keep the one we have. When you can come up with one that you aren't afraid to lay out all the facts on, let me know.

[ancient_geezer]

Don't pretend to know what my "current total consumption expenditure + savings & investment" is ...My "takehome pay" is 100%.

So you tell us. Now we are made aware of why you fight to retain the income/payroll tax system. The change would be to a tax you would end up not being able to avoid.

Walter Williams states the case clearly, World Net Daily, 10-25-2000:

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?

But then, you can't avoid the payment of taxes in any case under the current system, all you have avoided is filing returns, and have placed yourself in legal jeopardy while doing it.

The Individual Income Tax return(1040) that captures everyone's attention each April, is merely a partial VAT accounting sheet the government cons individuals, held at ransom, into filling out. Its misdirection puts blinders on the eyes of the electorate and provides the government means to hold every person in legal jeopardy of investigation and audit..

Every man woman and child in the nation, pays federal taxes through that VAT.

DO YOU PAY YOUR INCOME TAX
AT THE SUPERMARKET?
by D. Sherman Cox J.D. L.L.M. Taxation

The full impact of the federal tax system(taxes in gross wage/salaries & other compensation + business income/payroll taxes) added onto the base(taxfree) price of retail consumption goods and services is 36% for federal taxes alone.

All wages and the taxes on them are paid for out of sales receipts to business,(i.e. consumption expenditure).

• Total fed taxes as reflected through gross family income is 23.5% (taxfoundation)
• Total state taxes reflected through gross family income is about 10.2% (taxfoundation)
• The current net personal savings/investment rate is about 1.2%.(BEA)

Federal tax revenues collected as % of current family expenditure = fed/(1-state-fed-savings) =

23.5/(1-.235-0.102-0.012) = 36.09%

If we add in the cost of federal tax compliance, planning, litigation & enforcement, the percentage that truely represents the burden on the family due to the Federal income/payroll tax system, product prices are increased by more than 55% over taxfree prices.

Where Have All the Dollars Gone?
How the government robs Peter to pay him back.
By economist James L. Payne, Reason Magazine February '94

When 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.

Current total Federal tax revenues are about $1900billion, more than $1,000 billion additional dollars are added on onto consumption prices due to the business costs of complying with the federal income/payroll tax laws.

(Payne '97, Pilla '95, AGCCA 2000, Williams 2000)

The percent total current federal burden (taxes + compliance costs) of consumption dollars = 36*(1900+1000)/1900 = 54.95% economic burden added on to base retail(i.e. taxfree) prices.

Too bad that citizens don't get a receipt detailing those "hidden sales taxes" buried in their consumption purchases. If they ever did, some of those 70% of the public clamoring for more from government, thinking someone else foots the bill, might be tempted to change their mind.

[ancient_geezer]

Which is it? 23% or 29.87%

29.87% added to the tax free price of new goods and services as I stated. Which is the same amount as 23% of tax included payment.

$100.00(tax free shelf price) + $29.87(NRST) = $129.87(total payment)

$29.87(tax)/$123.00(total payment) = 0.23

[ancient_geezer]

$29.87(tax)/$123.00(total payment) = 0.23

OOPs! typo. Should be:

$29.87(tax)/$129.87(total payment) = 0.23

[Action-America]

Geezer, trying to explain complicated math to lewislynn is like trying to explain blue to a blind man.  But, it's good to have him and other math challenged individuals on these threads, to keep it bumped, so more people who have passed math 101 have the opportunity to learn of many the benefits of the NRST, through your excellent detailed explanations.

However, I am concerned that there may be some whose prior bias may keep them from following such detailed explanations all the way through and who may therefore, tend to take lewislynn's case on faith.  For that reason, I would like to point out what I believe to be the strongest case for the NRST.

This case provides strong reason for everyone except those in power to support the NRST.  It's reason for the wealthy and successful, to support the NRST.  It's reason for working stiffs and middle management to support the NRST.  It's even good reason for the poor, who are living on welfare to support the NRST.  So what is that reason?

The capital that pays all the bills is leaving this country!

I'm talking about the capital that creates and maintains jobs in this country - the capital that pays almost all of all taxes collected in the United States - the capital that pays for the enormous amount of welfare that our government pays out every year.  As that capital goes, so do jobs and welfare payments, resulting in higher taxes for those who can still afford to pay tax at all.  Regardless of who you are or your station in life, if the wealthy continue leaving, you will be affected.

As I pointed out in posts 51 and 67, the level of capital flight is now reaching disastrous proportions.

The only legislation that is currently on the table that will not only stop, but actually reverse this capital flight, is the National Retail Sales Tax.  And, here's just some of the proof.

"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

As long as any form of income tax remains in place, capital flight will continue...  Well, that's not exactly factual.  Actually, capital flight will only continue as long as any form of income tax remains in place or until the lack of investment capital causes complete economic collapse.  If that is allowed to happen, then as I said above, no matter what your station in life, if you are not part of the government, YOU SUFFER.

The method or level of taxation will be of very little concern to you.  You won't care how tax is calculated.  That's because you will be too busy trying to find your next meal.  If the government doesn't move to reverse capital flight, by eliminating the income tax and IRS, then it is only a matter of time.

The NRST is the answer.  But, it must happen soon.  When the money is gone, it will be too late.

 

[rwfromkansas]

I heard that Linder is going up against Barr in the primary. This does not look good for the FairTax if he loses, does it???

[rwfromkansas]

bump the the above post....I am concerned about the future of the Fairtax if Linder loses.

[ancient_geezer]

It would not be a happy thing, however there are others who can pick up the sponsorship of the bill in Congress in future sessions.

The issue is not what politician puts his name on the bill. It is whether or not we are willing to push it through regardless.

The commitment of those who support the bill, those who authored it in the first place are what is key to its passage not the political ups and downs of any particular politician or candidate.

[rwfromkansas]

good to know there are others who would take up the fight and re-introduce the legislation.

[Principled]

Yes Linder v Barr in the newly dem-drawn districts. It is far worse for the Republican party than the Fair Tax. Regardless of who wins, the Reps have lost a seat.

The Fair Tax may lose its principal in Congress if Linder loses, but he may not lose. A win would be big for the Fair Tax. A loss would mean someone else would have to pick up the Congressional duties.... and there already exist individuals to do this. There are Senators running on this issue as well, so we'll likely have a Senate sponsor next year.

Just who are the folks who would take Linder's Fair Tax responsibilities if he were to be replaced? I'll leave that for taxman to answer specifically.

But the Fair Tax is not doing anything but gaining momentum. It's never fast enough for its supporters though. The Fair Tax is a major change... it won't happen quickly. But the issue is growing in import... you will see it happen, regardless of who wins in Georgia this fall election, or the next 5 elections for that matter.

[LIBERTARIAN JOE]

Why not compromise and have two tax systems?

Great idea... the founders of this nation thought of it too, over 220 yrs ago. If we were still governed under the Constitution they gave us, we'd have as many as 50 competing tax structures to choose from.

Unfortunately, that Constitution is just a meaningless piece of paper, written by slave-owning evil white men, and completely irrelivant to our lives now. I hate to be a pessimist, but the only way to have real national tax reform is to build such a system in the ashes left from the fall of the current system. We've allowed the fedgov too much power to ever get it back peacefully. Don't believe me? Ask the Founding Fathers... they mapped out exactly what our gov't has become, and warned us that the vigilance of an armed, informed and involved citizenry was necessary to keep it from happening. We dropped the ball.

[carenot]

Dang! I almost thought you were serious!