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More just than the Fair-Tax, and simpler than 9-9-9, it’s just one… JUST ONE-Tax.

In the interest of full disclosure I’m no lawyer or accountant, I don’t like the idea of a national sales tax, I think the current system is out of whack, the government needs to get off our backs, and if our elected leaders can’t fix it, then I want my money back. Oh, and Rick Perry is my first choice.

Neither earning great amounts of income nor consuming great amounts of goods and services is inherently evil or bad for the economy in fact the converse is truer, so why overly penalize either? Instead, why not keep things simple and stick to one type of tax so its easier to keep rates low and just for everyone?

THE PROPOSAL

I’d like to propose a national flat tax on income to replace all other national taxes on income; one national tax that taxes individual, corporate, and capital gains (indexed for inflation) income at the same effective rate, allowing businesses to fully expense all new equipment in addition to the other currently deductible costs of doing business, and with no double taxation (which means no separate payroll tax, and no tax on dividends, inheritances or repatriated dollars).

The JUST-ONE Tax:

  • Just one national tax on individual, corporate and capital gains income
  • No double taxation (no FICA, dividend, or inheritance tax)
  • With just one low effective rate (10%)

THE TAX BURDEN

Even without all our favorite deductions (save business expenses), exemptions and credits, the impact of the tax burden from a flat tax on income can be moderated by keeping its marginal rate as low as possible.  I recommend a rate of 12% or less because most employees already pay about this amount in payroll taxes (15.3% in FICA taxes) on our income under $107,000.

Employees pay directly 6.2% for Social Security and 1.45% for Medicare, and their employer matches that for a total of 15.3%. Even Fair-Tax proponents argue that employers once unburden from income taxes, will eventually pass some of these saving to their employees in the form of increases in salary, wages, and benefits.  So it seems reasonable to argue that if these same employers are unburdened with their share of payroll taxes, they will also then pass some of these savings on to their employees.  The extent of this increase may be debatable, but some increase to employees is likely.

By removing all the other deductions and exemptions and keeping the tax rate the same for all, everyone has an interest in keeping the rate low. On the contrary, under our current tax code, because of offsets and payment many are insulated from high tax rates while also enjoying other generous government benefits at the expense of those of who are not shielded from paying income tax.  The sheltered class has little reason to demand low rates or less government spending.  And so, the inequity inherent with our progressive tax system creates great tension pitting one class against another in our country, when they should be working in the same direction to promote the welfare of all.

Shifting to a single flat rate and eliminating all deductions, exemptions (beyond the double taxation mentioned), and credits will give all income earners (skin in the game) and an equal appreciation of the taxman.  Both rich and poor who may have effectively paid no or very little taxes on their incomes because of offsets and payments will now come to appreciate the yoke that has burdened the rest of us who have for years paid more, and will help diminish the squabbling and class conflict that gridlocks efforts to mend our fiscal problems.

For some the burden will be greater, but for most in the middle the actual amount paid in taxes will change very little because they already pay effectively close to 15% on their income in the form of individual income and payroll taxes. The family of five above (considering its current amount of FICA payroll withholding) will only pay about $50 more a month under a 10% flat tax on income.

The biggest barrier to enacting a pure flat tax is that it necessarily requires that personal and dependent exemptions and other deductions are excluded from the tax code. This of course raises the complaint that this makes the tax burden extremely regressive.  Much of this criticism can be deflected by the extremely low rate of taxation  that the stripping away of these offsets will effect or rather allow (i.e. 10%).   Even with the extremely low tax rate, without the payments: The refundable credits for children and the Earned Income Credit, the tax burden will still be seen by many as being too regressive.  However, this complaint too can also be deflected by arguing that a pure flat tax like the one proposed here does not have to necessarily eliminate any such payments just because they are removed from the tax code and are no longer applied for and paid out on the basis of one’s tax return.  More precisely, these payments can still exist but as stand alone welfare programs (which after all they are welfare just not standalone programs) cut-away and removed from the tax code.  Ideally under this flat tax proposal there would be no need for most people to file a tax return. Do taxpayers file a return each year in regards to the social security tax they pay? No they don’t, and the same should be true of any true flat tax in which everyone pays the same effective rate, but I digress. Once such payments like EIC and the child tax credit are removed from the tax code and properly placed among the other welfare programs their expenses can be better controlled. For example if we could put a time limit on other welfare programs, then why not on these, let’s say four years?

Even with an extremely low rate of 10% a pure flat tax may be too much of a shock for most people, so the only hope of ever enacting a flat tax is to at least start with a modified version that has personal exemptions and a higherrate of taxation (i.e. 20%).

Any flat tax may very well increase the deficit, but this prospect may do more to help focus lawmakers to reign in the rising burden of entitlement spending than if we simply continue to bury entitlements into the tax code.  Again such a muddling of the tax code only makes it more difficult to achieve lower tax rates and to cut   spending because the discussion inevitably grinds to a halt over the issue of class: Rich vs. Poor.  And although it can’t be denied that lowering the rate of taxation to 10% will initially cause deficits to rise, it also can’t be denied that it will have an explosive effect on economic growth as these tax savings are injected into the more efficient and innovative private sector of the economy.  Not only will this growth result in higher revenues for the government softening deficits, but it will also result in higher wages and incomes softening the negative impact this new tax code will have on taxpayers.

REGRESSIVE vs. PROGRESSIVE

Some will argue that a flat tax is regressive and thus hits the lower-income earners disproportionately harder and thus is unfair, but they’re only looking at the costs and not the benefits of taxation. A LOW flat tax, even if regressive is FAIR and more just because we lower-income earners generally receive a disproportionately higher share of the direct benefits provided by (the government) taxes.  The key of course to this assertion is that the rate of the flat tax is low enough so that the tax burden it imposes on lower-income earners is equally low.

For example, under a 10% (effective) flat income tax rate, a family of five who earns $25,000 (in wages) a year will only pay $2,500 in federal income taxes, but in return they qualify for tens of thousands of dollars in direct benefits like food assistance, Pell grants, Medicaid, Social Security, disability, and Medicare, etc., and many more thousands of dollars in indirect benefits like infrastructure maintenance, subsidized mail delivery, public safety inspections, law enforcement, and military protection to name just a few.  Even under a flat tax they’re making out like bandits, and the rich are still paying more: Anyone making 10 times more than this family will pay 10 times as much in taxes. If they earn a million dollars they will pay 40 times as much, if they earn 10 million dollars they will pay 400 times as much in taxes, and so on.

If any form of taxation is unfair it is progressive taxation because it attempts to squeeze even more from the upper classes to give the lower classes more benefits at little or no cost to them.  Under such a system, the lower classes have no incentive to demand taxes be kept low as they rarely have to pay them, nor do they have much incentive  to demand that government benefits (spending) remain modest as they are the primary recipients of much of that (entitlement) spending.  And since the lower classes comprise a majority in society, they simply can use their political (numbers) power to discriminate unjustly against the minority and use the instruments of government to legally take their property.  Under our current progressive income tax, the family of five above will not only receive the same benefits identified above, but they will pay nothing for them, and in addition can receive over $8,000 in refundable tax credits. So not only are they given benefits for free, but they’re being paid further to enjoy them.

“FAIR” IS NOT SO JUST

The Fair-Tax purports to be more fair because the marginal tax rate is the same for everyone and everyone generally gets about the same size prebate payment.  Some have argued that the Fair-Tax is also a regressive tax because most consumption taxes are.  However, with its use of prebate payments; the Fair-Tax does attempt to shield the lower classes from some of the tax burden much like  a progressive tax does.  There is nothing wrong with helping the poor, but doing so through the tax code only muddles the whole issue of fairness in taxation, and effectively frustrates any hope of achieving a reasonable and “just” tax code or keeping one (let alone bringing spending under control).

Under the Fair-Tax, the above family of five will still qualify for the same government benefits, and they will most likely consume a large percentage of their income.  However, for argument sake let’s say they only consume $18,000 and save or spend the rest on non-taxed consumption.  The Fair-Tax rate is 23% so their tax burden on this consumption would be $4,140, but they get a prebate payment (check from the government) of $7,562 to offset their tax burden so their effective tax burden is -$3,422.  This is about a third of the payout the family would have received under our current progressive system, but just like with our current system, they’re getting tens of thousands in government benefits for free, and then a surplus ($3,422) to help make it all the more enjoyable (maybe they’ll spend it on a vacation living large in Mexico or Canada so they can avoid the Fair-Tax there too).

Clearly, at least on the surface the Fair-Tax is better than our current progressive tax, but not by much.  At first glance, it seems to spread the tax burden evenly to all citizens, while shielding those and at the bottom.  However, it doesn’t take a genius to see how this so-called “Fair” tax will devolve into a tax haven for the rich and possibly the poor.  Thus one of the biggest problems with the Fair-Tax, and why it is not as “just” as a low flat tax, is that the upper class can easily afford to avoid the Fair-Tax (in this case by doing most of their consumption abroad), the lower classes are given a break (the prebate subsidizes a large share of their consumption), and the middle class is left holding the bulk of the tab.  It doesn’t take any stretch of the imagination to see how effective rates graphed for the various income groups under the Fair-Tax would resemble a bell curve with those rates for the poor being negative then increasing initially as income and consumption increase, reaching a plateau with the middle classes and then sinking as income continues to rise and people are more capable of taking their consumption to a jurisdiction where consumption is not so penalized.

Strangely, Fair-Tax advocates tend to minimize the very real threat that revenue may fall short of expectations due to the inflationary effect and availability of substitutes such as after-market and black market goods, and cross border living and consumption. What’s apparently insignificant to them has led many critics to assert that the Fair-Tax’s marginal rate will inevitably rise in order to make up for shrinking revenue, and this will lead many to demand the prebate amount also rise to shield a lower classes further from the higher rate. Under such steps, not only would the tax system become more progressive, but consumption and economic growth would suffer as more consumers seek alternatives to taxed consumption.  Skirting the Fair-Tax I fear will become as fashionable and acceptable as flaunting Prohibition was for 1920s Americans.

Because it offers less of a sticker shock than the Fair-Tax of 23%, Herman Cain’s 9% national sales tax proposal, will arguably have less an impact on consumption especially in the lower and middle classes.  However, what seems to be most understated or ignored about Cain’s 9-9-9 plan is that 9+9= 18, or nearly an 18% flat tax (as  many will not consume their entire available income).  Alas, for the lower and middle classes who are less able to avoid consuming basic necessities that are taxed, and for which such things make up a larger proportion of their income, their effective tax rate is very likely to be over 15%, while for the upper class, like many ultra liberal actors who make millions from films but live abroad, their effective tax could easily be closer to 9%.  At least under the Fair-Tax, the lower classes will be spared paying an effective tax rate of over 15% (with the prebate and no income tax), but this offers little consolation for the middle class especially when the upper class can easily get away with paying an effective rate closer to zero (but I digress). This is not to say that Cain’s tax is excessive, except in comparison to a single low effective flat tax rate of 10%.  Instead, more than anything, it illustrates how his (Cain’s) tax hits harder the lower classes.

Cain’s 9-9-9 plan places a higher burden on lower and middle class people; with the Fair-Tax the burden is carried by the middle, while both plans favor the upper class with effectively lower rates.  How fair is that? One could argue ( I won’t) that if the lower classes receive more of the direct benefits of taxation, then they should pay a higher effective rate of taxation in support of those benefits than those who receive less of them.  Such an argument however, fails to include the cost of indirect benefits in the assessment.  What about the indirect benefits, like national defense and the courts?  Isn’t it true that someone with more wealth has more to lose, thus more to protect, and the more one has to protect, the greater their cost for that protection should be?  It seems only fair that this also be considered when assessing the tax burden of each class.  If the lower classes receive a larger share of the direct benefits (payments) and the other classes receive a larger share of indirect benefits, then don’t their benefits balance out in the end?  All things being even, why not erase the existing tax code and simply keep one low flat tax on income for everyone?

Our current tax system is clearly out of whack, it is as unjust as it is overly complicated, but the answer to fixing it should never include adding an entirely new type of tax like the consumption tax that make up the Fair-Tax or the 9-9-9 plan.  Advocates for these plans claim that their new tax will remain fair and low, but no one can guarantee this.  Suggesting otherwise is naive at best.  At least with a plan to lower and flatten the income tax, we are not handing  the government yet another tool (tax) with which to squeeze and attack our liberty and property.

 More just than the Fair-Tax, and simpler than 9-9-9, it’s just one… JUST ONE-Tax 

I’d like to propose a national flat tax on income to replace all other national taxes on income; one national tax that taxes individual, corporate, and capital gains (indexed for inflation) income at the same effective rate, allowing businesses to fully expense all new equipment in addition to the other currently deductible costs of doing business, and with no double taxation (which means no separate payroll tax, and no tax on dividends, inheritances or repatriated dollars).

The JUST-ONE Tax:

  • Just one national tax on individual, corporate and capital gains income
  • No double taxation (no FICA, dividend, or inheritance tax)
  • With just one low effective rate (10%)

ACHIEVING A FLAT TAX IN 6 EASY StEPS:

First: Exorcise (get a priest if necessary) all payments/credits (EIC and ACTC) from the tax code, and set them aside as standalone programs.  They are rightfully welfare programs, but only apart from the tax code will they be properly viewed and treated as such by the general public. However in fighting for this change, do not call these credits/payments welfare; people who think they’re still in the middle class don’t like to be told they’re on welfare. When it’s a tax credit it’s not welfare and they may oppose this change just so they can look themselves in the mirror lie with a straight face. Eliminating or changing them should be a separate and later debate(separating them will make this task easier);under taking that debate now or allowing these paymentsto stay connected to the tax code will only act as a barrier to simplifying the tax code. Retaining these payments if only as standalone programs will helpto defuse much of the regressive tax criticism that a flat tax invites since they’re a large part of the reason why our current tax code is progressive.  Thus, we can argue that the new flat tax code is essentially no more regressive than our current progressive tax code, and more importantly, it begins theprocess of disciplining the public to evaluate the regressive nature of a tax on the basis of how much the a person receives in (welfare) benefits from the government as oppose to comparing the proportion of their disposable income that is left after being taxed with that of others.

Second: Adopt a modified rather than pure flat income tax.  The easiest and best way to modify a pure flat tax is to offer a generous base exemption for each person, while allowing an individual to claim the exemption of dependents. The public generally likes the idea of everyone paying the same income tax rate, and that everyone pays at least something towards the income tax, but once the reality of that burden on themselves or the poor sets in they will be swayed by the argument that a pure flat tax is too regressive.  The combined exemptions of a household should cover enough of their basic living expenses so that most other existing offsets (deductions) can be eliminated. However, include a corollary that the total amount of one’s exemption(s) cannot exceed certain percentage of their total income, like 95% so that everyone will pay something for the income tax even if it is a token amount. This gives everyone an incentive to demand that the rate stays low. If this invites regressive tax criticisms remind them that the payments and credits of the old tax code still exist just apart from the new tax code and this more than effectively zeros-out the tax liability of most lower-income earners.

Third: Structure your rates and exemptions so that supporter of this flat tax can legitimately argue that in most cases taxes will go up only for those who currently don’t pay taxes or who don’t currently pay their fair share.  The poor won’t lose a thing, under this new arrangement, the only thing different is how they get it. One could even argue that instead of receiving refundable credits once a year in one lump sum, they now can have the money disbursed in smaller more frequent payments just like with other forms of public assistance. Finally, argue that just as it is only fair to insist that everyone whether rich or poor (especially those who currently don’t pay income taxes) ought to pay something, it is also only fair that those who currently have their income double taxed (overseas profits, dividends, estates, etc.) just have their income taxed once under any new code.

Fourth: Make the rate low enough to help spur economic growth and make the rate the same for corporations as it is for individuals; try not to distinguish between the two, but begin the formation of the mindset that this is just one tax to help make raising one over the other in the future just a little more difficult. Allow individuals and corporations to deduct all expenses related to the development, production, distribution, and sale of goods and services including 100% of investment into the means for future production, distribution, and sales of goods.

Fifth: Introduce the flat tax in phases. In the first phase, the flat tax could be an alternative to the existing progressive tax code with taxpayers given the choice between the two. The second phase would be to require all people follow the flat tax and completely do away with the old tax code including the payroll taxes. The third phase would make the tax code even more pure: exemptions would be reduced in exchange for a lower rate (15%). An initial high rate high rate of 20% and the corollary that no one may exempt more than 95% of the income from the flat income tax will make this transition to a purer flat tax an easier pill to swallow. The fourth phase would also initially be optional, but it would be a pure flat tax with no exemptions and a rate of 12%. The fifth phase would be mandatory and rates would be lowered to 10%.

Sixth: Make the flat tax one part of a broader plan to revive the economy. The foundation of this revival must be based on encouraging the growth of the more efficient and innovative private sector of the economy by decreasing the size and influence (regulatory reform) of the more wasteful and parasitic public sector of the economy. Deficit reduction is never as important as cutting overall spending – the public needs to be made aware of the difference. Some will argue that a low flat income tax will not generate nearly the same amount of revenue raised by the current progressive tax and deficits will rise, but the deficits caused by the reduction of taxes are not nearly as debilitating as deficits caused by increases in government spending because whenever the government spends money it represents economic activity that could have been done by the more efficient and innovative private sector.  Moreover the politicians that create deficits by increasing spending above what can be supported by current taxes and rates are obsessed with raising those taxes as the only means for addressing the deficit they created. Government attempts to stimulate demand with increased spending are never sustainable and generally the demand lasts only as long as does the government money.

Cutting and capping spending now and further controlling it in the future with a balanced budget amendment will not only help to eliminate deficits, but it will enable taxes to be dropped further.  Just like a person that is overburdened and overworked is more susceptible to ailments and breakdowns so too is an economy over-yoked with excessive taxes and regulations.

Clearly, a flat tax is an easy way to simplify and lower taxes and the costs associated with tax compliance.  And even though critics argue that revenue will decline and deficit and our national debt will rise,  in the long-term, a low flat tax will lead to an explosion of growth in the private sector, and this will in turn (more than) make up for the initial loss of tax revenue.  This growth will be even greater if the flat tax is part of a broader plan to further encourage growth in the more efficient and innovative private sector by decreasing the size (spending cuts) and influence (regulatory reform) of the more wasteful and parasitic public sector of the economy, and by enacting legislation to help lower other costs (i.e. energy and torts), while working to expand access to foreign markets and to promote fairness in that trade.

Finally, no serious effort to cut spending can be honestly deemed successful, unless the $1 trillion white elephant in the room is targeted. Entitlements are destroying the moral fabric of our nation while they continue to pile on to the burden of those Americans who still find it worthwhile to be productive here.  Really who wants to learn to fish or even fish for themselves, when fish are (readily) given away for free? No wonder we have problems with education.  Is it any wonder that the lowest standardized test scores come from children raised in households that are maintained by entitlement programs? We are killing ourselves as a nation with this quilt-affair with entitlements. Enough is enough.

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