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Why The Flat/Fair Tax Will Never Work

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May 27, 2013 – Comments (14)

Proposition: the IRC is an unwieldy behema

Proposition: the IRS has too much power

Proposition: the tax code is distorting the economic life of regular citizens

Proposition: the IRC must be simplified

Proposition: the flat/fair tax will accomplish same

Proposition: the previous proposition is false

 

I wonder if the supporters of the flat/fair tax have truly thought through what “tax simplification” really would entail. The following would disappear: IRA, 401K, home mortgage deduction, medical expense deduction, EITC, electric vehicle tax credit, exemptions for families with many children. Social Security checks will be taxable from the first $1, even if you are poor and that check is your only source of money. If you sell anything (stocks, bonds, house), you will be taxed on the gross receipts, no fancy calculations as to the “capital gain”. Ditto for any small business owner filing under subchapter S.

 

See, just compressing 5 or 6 tax brackets into 2 or 1 ain't gonna simplify nothun'. The reason the IRC, when the hardcovers are stacked up on the floor, is taller than a man, is because it has to define what is “income”. The tax bracket part takes up only 2 pages. The rest of the IRC gives taxpayers all those favorite “gimmies”. The only way to simplify is to eliminate all the gimmies. Even with the fair/flat tax, everyone will still have to hire a tax preparer to their 1040s every April, unless they are willing to give up all distinctions between different income sources.

OK, smarty pants, how would you fix the IRC?

Easy. I have always thought that taxing consumption is a more fair way to raise $$$ than taxing labor. Totally eliminate the income tax (including payroll tax). Instead, all federal funds will come from a national sales tax.

This will capture the underground economy, rich people with expensive accountants who are good at evading taxes, illegal immigrants who work for wages in cash under the table, etc. In addition, you will not have to mess with W-2 or W-4 or financial records, or even filing tax returns and hiring a tax service. Every time you go to the store to buy something, you are paying your federal tax.

Even better, the IRS (and its shenanigans under “BO”) will no longer exist.

14 Comments – Post Your Own

#1) On May 27, 2013 at 3:02 PM, Mega (99.97) wrote:

Congratulations, you have identified the only tax system more regressive than a flat income tax.

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#2) On May 28, 2013 at 9:28 AM, edwjm (99.87) wrote:

Food, clothing (non-luxurious), medicine, shelter (how would that be defined?), and essential services (more problems with definition) would have to be tax-exempt under you proposal, or else the result would be outrageously regressive.

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#3) On May 28, 2013 at 11:09 AM, amassafortune (29.72) wrote:

I support the idea of a national sales tax and eliminating all individual income reporting requirements.

The regressive nature of a national sales tax is always the first argument made against the proposal, often by more affluent people who don't want to pay 17% or more sales tax on their purchases.

As for food, food = any food item that can now be purchased under the SNAP or food stamp program. 

Where I grew up, childrens' clothing was exempted from state sales tax and that did not seem to be a big problem. 

When I was a college student and made less than $10K per year, I had no issue with paying taxes. Sure, I needed more money all the time, but I used the roads, appreciated the national security I benefited from every day, and expected to do my small, poor part to maintain public standards of infrastructure and services.

A single parent making $11/hr makes about $23,000 per year. Food at $100/wk takes that down to $17,800. Rent, assuming it is not taxed at $700/month further reduces possibly-taxed income to $9,400. If they own a vehicle, gas tax, registration, tolls, parking, - already take disposable income down to $5,000.

Say the low-income person ends up paying 17-19% sales tax per year on the $5k they earn that might not go to otherwise  tax-exempt spending. That's $950. 

I would have no problem with a $1K check going to low income people to eliminate the regressive tax argument from this issue, even though we all know people in a similar situation who spend that dear $950 of disposable income on cigarettes, etc.

I still think most who jump right to the regressive tax argument are not so concerned about the low-income $950 being taxed as they are about their own next $25K auto purchase that would have a new $4K+ tax added to the invoice.  

 

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#4) On May 28, 2013 at 8:24 PM, awallejr (77.17) wrote:

Flat tax/consumption tax just screws the poor.  Taking 10% from a guy making $50 million a year doesn't come close to the regressive effect of  taking 10% from the person making $30,000 a year.  That is the same with sales tax.  The poor basically spend all their money so adding another tax kills their buying power and even hurts the economy since the bulk of that GDP is 70% spending which comes from the 99%.

As I have argued elsewhere, we should be going back to the Eisenhower years where we basically capped the rich and forced them to "share" the wealth by spending otherwise taxable money back into their businesses.   And guess which years are always used as the most successful for the middle class? Yup under that tax system.

Bush basically knocked down the 1% tax burden and what did they do?  Instead of reinvest they destroyed jobs, shipped them overseas because now they got to keep most of it.

So these purported job creators were basically job destroyers.

Until the Average Joe wises up and takes back Congress this country will turn into basically a have(small pct)/have not (most people) society.

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#5) On May 30, 2013 at 5:28 PM, Melaschasm (53.67) wrote:

The major Flat tax proposals pushed by Forbes and others provided a very large personal exemption.  This kept the tax technically progressive, and insured that the working poor would not pay any income taxes.  

The Fair tax is a sales tax with a huge rebate for every citizen.  It is also progressive because those with low incomes would not have enough money to buy enough to pay enough sales taxes to offset the large tax rebate they would receive each year.  The one exception is non citizen immigrants who would pay the consumption tax without receiving a tax rebate.

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#6) On May 30, 2013 at 7:01 PM, awallejr (77.17) wrote:

And it also gives the rich a bigger break.  And it has been that tax policy (ala Bush years) that has pretty much screwed the middle class because it incentivized the so called job creators to outsource and ship jobs overseas.

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#7) On May 31, 2013 at 8:27 AM, drgroup (68.93) wrote:

So every month when it comes time to pay my mortgage, how much more do I have to be taxed? No thanks, flat tax is the answer...

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#8) On May 31, 2013 at 12:40 PM, edwjm (99.87) wrote:

MELASCHASM:

     I know a legal, but non-citizen immigrant (here because she is married to a US citizen) who would not appreciate your last sentence!

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#9) On May 31, 2013 at 3:52 PM, Stanley128 (< 20) wrote:

The author of this article clearly does not know what the Fair Tax is, since immediately after saying it won't work, he next proceeds to describe a solution that is in fact ... the Fair Tax.

The Fair Tax is just that - it is fair to all Americans. Here it is in a nutshell:

1) Every item is taxed only once - at the point of initial retail sale. There is no tax on wholesale items or hidden tax on businesses at the various stages of production, nor is there a tax when you sell your used car, etc.

2) Every single American, whether or not they actually made taxable purchases that month, receives a monthly refund check from the government in the amount of the tax that an average Americann will have to pay in tax each month buying the basic necessities of life, such as food, clothing, and gas, etc.  This takes away the concern about those below the poverty level, because NO American will be paying any tax on the basic necessities of life.

3) As mentioned in the article, the Fair Tax cannot be evaded by illegal activities. Every business will have to collect and submit the Fair Tax to the Federal Government. 

4) Because the Fair Tax is simple and fair, administering it will require a much lower overhead. Some estimates I have read indicate that a huge proportion of all tax dollars paid by Americans are eaten up by the mere overhead of the administration of the tax code itself.  This is a terrible waste of Americans' hard-earned money, and is immoral in itself.  Under the Fair Tax much, if not all, of the IRS can indeed be abolished.

5) Although the Fair Tax seems high (estimates are around 22%), it only seems so because most taxes we currently pay are actually hidden from view, such as at various stages of production. This will no longer be the case. The Fair Tax will be open and visible, and thus prices for goods and services (into the cost of which many taxes are currently built) will drop so as to make the actual cost to consumers as low as, or lower, than it is currently.

6) The Fair Tax is business-friendly. It does not penalize businesses or make it all but impossible to comply with costly and complex federal taxes at all levels of production.  The Fair Tax would instantly make the United States one of the best places in the world to do business, and would attract jobs from overseas rather than driving them away as our current tax code so often does.

7) The Fair Tax, unlike the IRC, is not vulnerable to special interests or lobbyists.  There will not be special carve-outs for this or that industry.  In other words, it will be FAIR.

8) The Fair Tax will replace our current unjust tax code which places proportionately more burden on higher earners, and leaves half of American tax filers paying no tax at all. All Americans should share pay tax in proportion to their participation in the economy, and a highly graduated ("progressive") tax structure is fundamentally unjust, showing favoritism toward some citizens and against some others. 

 

Yes, all the "deductions" will go away. But think of it this way: If you held in your hand a "$50 off" coupon for a purchase you were about to make, and someone offered you $100 cash for that coupon, would you really have to think of it all that much? And once you had that $100 in your pocket, would you really think you'd miss the "$50 off" coupon?

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#10) On May 31, 2013 at 5:56 PM, edwjm (99.87) wrote:

Stanley 128:

 

I totally disagree with your point #8.

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#11) On May 31, 2013 at 7:25 PM, awallejr (77.17) wrote:

Love when people say something is "fair" just because they think it is.  I find it tiresome when people keep ignoring the fact that INCOME tax is ONLY 47% of the Federal Budget.  Yet the 1% only discuss how they pay for most of that 47% while the 99% pay the bulk of the rest.

Do the 1% care that public transportation was raised?  Tolls on bridges were raised. Those little excise taxes were raised.  Parking meters were raised. And and on.  They don't care because it is peanuts to them.  They just want their income tax lower.

The poor may get rebates, but revenue has to come from somewhere.  You lowered the 1% income tax.  So they pay less, yet again. So who do we look at then.  Yup good old "Sir yes sir may I have another" Mr. middle class.

You are already taking 16% payroll tax.  Does that go away at least without cutting their SS and medicare, two things they have been saving into for decades?

And  Stanley128 I will ask you the same question I asked in this thread:

http://caps.fool.com/Blogs/baloney-boehner/782850

Show where during our history that the middle class actually thrived during low income tax rates for the top earners? I can show where the middle class thrived during a high income tax rate for the top earners, and that was mid 1940s through the 1950s.  

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#12) On May 31, 2013 at 9:09 PM, jerryguru69 (95.35) wrote:

I want everyone to whom this subject is important to carefully read all of the comments. No, no, do not summarily dismiss any of them. They all raise valid concerns. However, I wish to emphasize 2 points in my OP:

1) the "fair" tax ain't gonna simplify nothun': it envisions subsidizing the "poor". The only way to do that is keep the IRC in tact, lock-stock-and-barrel, to define "income" and then who qualifies as "poor". This means that not a single page of the IRC will get deleted, and not a single IRS employee will get fired.

 2) Yes, a national sales tax is regressive. However, the current taxation of labor is even more so. Every worker, even if the paycheck barely stretches to feed hungry children, must pay a 7.5% tax from dollar $1. More, the employer must match with an additional 7.5%. If we chartiably assume that the employer would give all as part of the employees wage, everyone, including those living paycheck-to-paycheck to feed his/her family, is required to fork over 15% of gross wage. Question: does this sound fair to the "poor"? 

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#13) On May 31, 2013 at 9:38 PM, awallejr (77.17) wrote:

Jerry the remedy really is simple, but it won't happen until the masses regain control of Congress.  I've given you the remedy.  History has given you the remedy.  Simply go back to the Eisenhower years.  Force the sharing of the wealth.

But this is all just talk since the lobbyists control Congress because they pay them.  We are never going to a Flat tax and we will always have a convoluted Revenue Code.

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#14) On June 03, 2013 at 3:49 PM, Melaschasm (53.67) wrote:

#8 I was not passing judgement, only pointing out that the rebates from the Fair Tax would only go to citizens.  

#12 The Fair Tax gives the same rebate to all citizens.  For someone making a 6 or 7 figure income, the rebate is small, and will not come close to offseting the national sales tax they would be paying.  For someone with a low income, the rebate would exceed the amount of national sales taxes they are paying, thus it would have some of the features of welfare.

I agree that the payroll tax is a disaster in need of correction, which could be replaced by a fair tax proposal.  However, we should fix the payroll tax even if we do not switch to a flat tax or a fair tax.

 

 

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