Changing tax systems

Every few years, interest in fundamental tax reform rises. The leading proposal has long been a flat rate tax on a consumption base, such as the Hall-Rabunshka plan. However, the interest always fades because the transition from our current system is too difficult, both politically and economically.

Consequently, in recent years, flat tax supporters have concentrated more on incremental tax changes that would gradually move us in the direction of a flat tax. If enough progress were made, then perhaps at some future date we would achieve something close to it. Tax reformer Ernest Christian has identified the key steps as the 5 easy pieces:

-- Lower income tax rates, especially the top rate, to get us closer to a single statutory tax rate.

-- Increase depreciation allowances, so as to move closer to immediate write-offs for investments in capital equipment.

-- Relieve the double taxation of corporate profits, and move toward full elimination of the corporate income tax.

-- Raise contribution limits for Individual Retirement Accounts, Keogh plans and 401(k) accounts in order to get as much saving as possible out of the tax base.

With last week's announcement that President Bush will propose expansion of deferred savings, we can see that he has proposed all five pieces, with three already enacted into law.

Like many conservatives, I was disappointed by the modesty of the tax rate reductions proposed by President Bush during the 2000 campaign. I was much more excited by the flat tax proposed by Steve Forbes and, to a lesser extent, John McCain. However, I consoled myself that Bush would propose something bolder after the election.

I was further disappointed when Bush sent Congress a plan identical to his campaign proposal in 2001. This was a lost opportunity, I thought. When it came time for compromise, Bush was bargaining from a weak position. The result was that a modest tax cut became even more modest by being phased in over many years. But again, I consoled myself that the party split in Congress probably made this the best deal that could be obtained under the circumstances.

Finally, I was disappointed that Bush didn't use his post-Sept. 11 popularity to push a meaningful stimulus plan through Congress. Instead, he settled for a temporary increase in depreciation allowances.

I was heartened, however, when Bush decided to ask for full elimination of the double taxation of corporate profits, rather than the 50 percent exclusion that was widely rumored. He correctly reasoned that he could not be attacked any more severely by Democrats for asking for 100 percent of what he wanted instead of only half. Bush also now understands -- if he didn't before -- that Congress is always going to demand its pound of flesh.

Moreover, by asking for full elimination of double taxation, Bush strengthens his hand by being able to argue the point as a matter of principle. Had he only asked for 50 percent, his position would not be as strong. And if forced to compromise -- a certainty -- he would be doing so from a weaker position. With many Democrats, like Massachusetts Senator John Kerry, favoring elimination of double taxation, they will have a harder time doing so as Bush has framed the issue.

Now we see Bush asking for expansion of tax-deferred saving. On Jan. 31, the Treasury Department announced that the president's budget would contain an initiative that will allow Americans to save more for their retirement.

With this last proposal, we can now see that Bush has had a strategy all along that conforms exactly to the five easy pieces. If he is successful in getting relief for double taxation and further elimination of saving from the tax base, he will have achieved meaningful legislative progress on every incremental change necessary to achieve fundamental tax reform.

One secret to President Bush's success is that he has always been willing to settle for what he could get in terms of taxes, so long as the principle is not compromised and it is enacted into law. Thus, he will concede to long phase-ins, if necessary, and then ask for the tax cuts to be speeded up. He is satisfied with such compromises because they always move the law in his direction, and that is what is important.

By Bush's second term, it is possible that we will have made enough incremental progress toward a flat rate consumption tax that we may finally see fundamental tax reform fully enacted into law. If so, it will be testament to a very clever, yet bold strategy that was initially invisible even to people like me, who study such things for a living. I am impressed.

Bruce Bartlett is a senior fellow at the National Center for Policy Analysis, a TownHall.com member group.

The leading proposal has long been a flat rate tax on a consumption base, such as the Hall-Rabunshka plan.

Problem is the Flat tax is still an income tax with a VAT. Take a look at the EU way of doing things lately? 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 stated it clearly for all to see, "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."

As well as in Hall & Rabushka's book on the Flat Tax:

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.

Consequently, in recent years, flat tax supporters have concentrated more on incremental tax changes that would gradually move us in the direction of a flat tax.

http://www.taxfoundation.org/foundationmessage03-00.html

"Under the WTO definition of the term, a sales tax is an indirect tax, as is an European-style VAT. The economic equivalence of an European-style VAT and a subtraction-method VAT is well-established. A subtraction-method VAT is essentially identical to a business income tax except that all purchases of plant and equipment may be expensed, rather than depreciated as under current U.S. law."

Flat tax is merely smoke an mirrors to accomplish what they couldn't do with honesty.

I would definitely favor a consumption tax provided it could be implemented such that the IRS and all state and local income tax agencies would be abolished (I can dream, can't I).

Well I suppose a tax could be enforced the way George Washington did it instead.

George Washington's Proclamation Whiskey Rebellion August 7, 1794:
http://www.yale.edu/lawweb/avalon/presiden/proclamations/gwproc03.htm
George Washington's address on October 20 1794
to General Lee at Bedford, PA

Washington LED Federal troops into Western Pennsylvania enforcing the federal tax of the time.

The IRS can go, with no problems, simply let states administer the federal tax system. You don't however expect a tax system to be totally without an administrative department do you? If so, I wouldn't hold your breath while waiting if I were you.

This would bring in revenues from the underground economy, the criminal economy and anyone who might be travelling in the US from another country.

Not without adequate means of collection and enforcement.

What about imposing the sales tax at the manufacturing/service provider or distribution (for foreign made goods and services) levels?

That is known as a VAT, a tax imposed upon all levels of production, which becomes mainly a mechanism for hiding tax burdens from the public view. The tax still gets passed down to the customer, along with all the costs associated with complying with a VAT. The biggest problem with a VAT or any tax paid by a manufacturer, wholesaler or other part of the production chain, is that it is not visible to the electorate. There is no way the individual to perceive the real burden of such taxes and hold government accountable. That is why the VAT and similar taxes are favored in socialist countries, it makes for the appearence that those mean ole corporations are paying the bill largess. The reality is the tax is simply embedded with the price and indistinguishable form inflation.

The business takes the political hit for high taxes, instead of the real culprit, government. Government is unfettered to grow without the electorate's oversight.

The Honorable James DeMint (R-SC)
United States House of Representatives
THURSDAY, APRIL 5, 2001
12:00 noon
"There has been a shift in the relationship between individuals and government, he argues, such that fewer and fewer are paying taxes at the same time that more and more are receiving increasingly generous benefits. If it becomes the case that most voters do not bear a financial burden for this largess, then there will be little to restrain--and significant political incentives to encourage--the continued growth of government. And at that point, DeMint warns, we have reached a major crisis in our democracy."

Milton Friedman as quoted by Northwest Florida Daily News, 10-16-2000:

"If we're to have an income tax, it's a good thing for everyone to pay at least a nominal amount," he said. "If non-taxpayers become a majority in society, what would restrain them from voting for ever higher taxes on others?"

Walter Williams, 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?

There would be far fewer points of collection than at the retail level.

Quite the contrary, as such taxes are passed through several stages instead of just one and accumulate costs of compliance as well as compounding of the tax rate. There are far more points of collection in the manufacturing, transportation, and service companies providing product for retail sale.

My main brunt on all of this is to hope that what each of us makes in income or profits remains private.

Retail Sales Taxes are based on gross sales receipts, and remitted by business. Individual profit and income is irrelavent to the collection of a sales tax.

What we do with the money is also our business, not the governments'.

How is state government collecting tax payments from gross sale receipts of retail businesses government watching what you as an individual do with your money?

How about issuing coupons to all individuals exempting them from X amount of dollars in taxes?

Why do that, just adds another layer of bureacracy and government interactions with business to collect and deal with coupons. Sounds to much like food stamps and the problems associated with the administration of them to me.

Make a fixed payment based on houshold size alone, payed from treasury to all households at the beginning of each month. That's what Linder's NRST HR2525 does:

All legal residents will receive a FCA equivalent to the FairTax paid on essential goods and services. The FCA will be paid in advance, in equal installments each month. The size of the monthly FCA will be determined by the government's Poverty Level for a particular family size, multiplied by the tax rate.

Every year, the Department of Health and Human Services [HHS] determine the "poverty level",(a fixed dollar amount adjusted for inflation over time), for each family size.

The 2001 "FairTax" Family Consumption Allowance Figures
Family Size	HHS Poverty Level	Annual FCA	Monthly FCA
One	$8,590	$1,976	$165
Two	$17,180	$3,951	$329
Three	$20,200	$4,646	$387
Four	$23,220	$5,341	$445
Five	$26,240	$6,035	$503
Six	$29,260	$6,730	$561
Seven	$32,280	$7,424	$619
Eight	$35,300	$8,119	$677

1) Federal Register: February 16, 2001, Pages 10695-10697).

[ The monthly FCA for each adult is .23 * (HSS poverty level for a single person)/12 to assure no marriage penalty due to the manner in which the poverty level is dependant on family size. The monthly FCA for each child is .23 * (the incremental increase of HSS poverty level for a family with one child over no child) ] A. Geezer

A family of four, for example, could spend $23,220 per year free of tax because they will have received over the course of the year rebates totaling $5,341. $5,341 is the amount of sales tax paid on $23,220 in expenditures. A family spending double the "poverty level" or $46,440 per year will effectively pay tax on only half of their spending and, therefore, have an effective tax rate of 11 ½ percent or half the FairTax rate.

The beauty of the FairTax is that you can control how much you pay in taxes. If you happen to save, invest or spend a portion on used [previously taxed] items, you can get your effective tax rate(with respect to your income) much lower than the marginal rate on consumption expenditure at the retail register.

H.R.2525 "The FairTax Act

Not only does every family receive a FCA based on family size, not income, but they will also receive 100% of their paycheck:

Fedup Smith makes $39K per year...once the FairTax is the law of the land he will receive an instant increase in pay of $200.00 per week. Since he has a family of four, he will receive a FCA of $445 per month, for a total of $1,305.00 additional income per month that he can do with as he sees fit

That could help take care of essentials for the poor. Just some thoughts.

Why should only the "poor" be compensated for their "essentials", no one should be taxed for that basic level necessary for existance. A properly constructed NRST with FCA, treats every person exactly the same under the law. That is the real measure which should be used.

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