Flat or Fair Tax? GET OUT THE ASPIRIN!

We have a tax code that consists of over 60,000 pages of regulations  that even the IRS doesn’t understand.  If you don’t believe me, call them up  and ask anyone of their 110,000 employees a question.  They can’t even guarantee that if you follow their advice you won’t be audited!

Taxpayers, businesses and non-profits spend over 6 billion  hours  and $300 billion a year trying to stay in compliance with laws that are so ambiguously written that they are open to various interpretations and numerous loopholes.

We need a simpler tax system that is fair to everyone.  No, I am not pushing the Fair Tax.  I have become so accustom to the  tax monster we face yearly, that I can’t get my head wrapped around either the Flat Tax or Fair tax.  But maybe it’s time we tried.

The Fair Tax or “Consumption” tax, as it is sometimes, called would place a federal sales tax on the final sale of all goods and services.

  • There would be no need for most of the 110,000 IRS employees that cost taxpayers more than $13 billion a year in salaries and benefits because  taxpayers would no longer have to file the dreaded 1040.
  • You would actually get  to keep most  of your paycheck  since federal income tax,  Social Security and Medicare would not be withheld but financed through the sales tax.  Of course, your state and local taxes would still apply.
  • No federal sales tax on used items.
  • Work related purchases  would not be subject to the federal tax.
  • All federal taxes such as gift taxes, estate taxes, corporate taxes, dividend taxes and interest income taxes would be eliminated.
  • Every family and individual would receive a monthly rebate of the sales tax equal to spending,  up to the federal poverty level, payable in advance and updated according to the Department of Health and Human Services poverty guidelines.

A family of 4, using the 2009/2010 federal poverty level of $22,050, would receive $5071.50 a year, in monthly installments, exempting a large portion of their income from taxes.  The amount of federal sales tax you would actually pay would depend on your lifestyle and spending habits.  Remember, however, state and local income taxes that you currently pay are not rebated, and  state and local sales tax would still  be added on top of the 23% federal sales tax on items.

According to FairTax.Org all taxpayers would pay the same rate and control their liability through spending habits.  Retail prices could fall (note “could”) since 20% of prices paid today represent  hidden income and payroll taxes built into the price of everything you buy.   Eliminating corporate and capital gains taxes would make the U.S. a better place to do business thereby creating jobs and reducing the price of goods and services.   Illegal immigrants not currently paying taxes on income would finally be paying their fair share as would all foreign visitors to our country, and the Fair Tax  would totally eliminate Congressional tinkering and manipulations of the tax code.

The bad part – the tax would apply to your utility bills, doctor visits, medicine, groceries, private school and college tuition, gas,  and the price of buying a home, etc.  If you purchased a home for $300,000 you would have to finance an additional $69,000 before all the other fees are added inAnd, remember, under the Fair Tax plan there is no deduction for mortgage interest or real estate taxes on that home.  As a matter of fact, there is no deductions, period.

The argument that a Fair Tax would eliminate Congressional tinkering is a joke.   Lobbyists would be all over D.C. wanting to exempt home sales, medical and education from the tax and we know how weak politicians are when it comes to re-election or lining their pockets.   Give the Fair Tax a couple of years and it would just as outrageous as our current tax code.

There is no guarantee that Congress would not  continue to “up” the federal sales tax to pay for all that special interest pork that gets them re-elected.

Adding a 23% sales tax to existing state and local sales tax is asking for the development of a massive underground black market economy.

The tax would not necessarily be fair to the poor because they don’t  pay income taxes under our current system.  The only savings would they would necessarily recognize is the income tax currently withheld from their paychecks.


The Flat Tax proposals are endless.

Steve Forbes’s proposed Flat Tax would start by scrapping the existing tax code and replacing it with what he calls a “pro-family tax cut that would lower tax rates to 17% across the board and expand exemptions so that a family of 4 would not have to pay income taxes on the first $36,000 of income.   Forbes thinks his proposal would eliminate political corruption, would be fair to all and millions would be off the federal income tax rolls.  There would be no tax on Social Security, pensions, savings, or capital gains.   Everyone would file their 1040 on a postcard.

Rick Perry released his flat tax proposal which I believe was either written by Forbes,  with Forbes,  or followed Forbes’ blueprint.   Perry’s plan would eliminate taxes on Social Security, estates, dividends and capital gains income.  He would lower the corporate income tax rate and personal income tax rate for those that chose to pay his 20% flat tax rate.  He would let everyone exempt the first $12,500 of their income plus an additional $12,500 for every dependent from taxes.  He would also keep deductions for mortgage interest, state taxes and charity gifts for families making less than $500,000.   A family of 4 making $60,000 a year would be able to exempt $50,000 of their income from taxes, still take deductions for mortgage, charitable and state taxes which could mean a zero tax base for the year.

New Gingrich offered his plan for a 15% flat tax rate.  People who make $1 million or more would have an effective tax rate of 24%. Cuts corporate rates to 12.5%, allows personal exemptions of $12,000 per person and maintains mortgage, charitable and state tax deductions.

Mitt Romney in his usual waffling format, loves a flat tax and doesn’t love a flat tax and so far hasn’t actually proposed one.  All he will say is he wants to keep the Bush Tax cuts and cut corporate rates.  But if the flat tax gains momentum with the voters, believe me he’ll come up with one, or maybe not, depending on his mood  or where he is in the polls, or who he is talking to.

Herman Cain’s 9-9-9 is almost as complicated a the current tax code and really doesn’t qualify as a traditional or modified flat tax.  While Cain claims that those at or below the poverty line would be off the hook for any federal taxes (which most already are), critics claim that his plan would actually hurt that group more than anyone else.  Cain is proposing a 9% corporate tax rate on sales less purchases  (net income) from  other businesses which is essentially a form of the dreaded Values Added Tax and would, in my opinion, raise prices for consumers.  Cain also proposes a national 9% Consumption (sales) tax on everyone and a 9% individual income tax.  The whole plan is rather confusing and would need to be clarified before I could understand it or support it.

A true flat tax would apply to all income with no deductions or exemptionsA modified flat tax would allow deductions for some items while still eliminating the majority of existing deductions.   Also, designing a flat tax would require defining when income actually occurs.  Would you really want to leave that up to the “let’s spend every dime we can borrow”, tax or steal  crowd in D.C?  They already tax everything except the air we breathe.  Oh wait, they do that too!

How do you eliminate deductions?   Businesses rely on deductions and if they’re  not allowed to deduct expenses then businesses with a profit margin below the flat tax rate could never earn any money since tax on revenues would always exceed their earnings.  That is not a good way to encourage investment or the development of new products or business expansion.  Let’s face it – people start businesses to make money.

Supporters of a flat tax like to point out that a positive effect would be to discourage increased  spending by government since any tax increase would affect all taxpayers equally.   It definitely would end the class warfare game politicians like to use but I am confident they would find a way around that.   Supporters also claim that it  would lead to  faster economic growth, spur savings and investments and provide an incentive to engage in productive economic behavior.   There is no guarantee that Congress would not continue to “up” the flat tax rate  or exempt certain lobbyist’s inspired exemptions for a select few.

According to Harvard Keynesian economist Dale Jorgenson,  tax reform would boost national wealth by nearly $5 trillion because all income producing assets would rise in value since the flat tax would increase the after-tax stream of income.  My question would have to be, whose wealth would increase?

Opponents of the flat tax contend that it would penalize low income families even with  annual personal exemptions.  They also believe that it could result in the loss of several hundred thousand jobs for accountants, lawyers and IRS employees – which might not, in of itself, be a bad thing.   Opponents agree that the worst part would be the loss of revenue to the government.  That also is not exactly a bad thing –  Unless it leads to more borrowing to continue their spending spree.

One of the concerns with many flat tax systems is that they are not a true flat tax and that fact  destroys the debate over the equitability of a flat tax.

There is a 3rd option that has been proposed on numerous occasions by the “let’s take everything they have” tax and spend liberals and Rhinos – the dreaded Value Added Tax.   VAT is similar to a national sales tax but is imposed and collected  at every stage of business production with consumers eventually bearing the brunt.   VAT is also in addition to other federal taxes we already pay.

Personally, I am waiting for the day when they propose that we just send them everything we make and they give us back an allowance based on what they think we should be able to live on.


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