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Flat and Fair Taxes   3/7/09

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Flat and Fair Taxes

 

3/7/09 Update: Introduction and Comparison of typical Fair Tax and Flat Tax Proposals

3/4/09 Update: Flat Tax or Sales Tax? A Win-Win Choice For America

 

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Introduction

Comparison of typical Fair Tax and Flat Tax Proposals
Flat Tax or Sales Tax? A Win-Win Choice For America, by Daniel J. Mitchell, Ph.D.
Essence of the Forbes and Boortz Approaches

 

Introduction

 

Both the "Flat Tax" and the "Fair Tax" proposals provide for a flat tax rate above a given income level, and both are more fair than the current system. Both propose to be revenue neutral; that is, to collect no more nor less federal taxes than collected previously.

“Flat Tax” proposals typically cover only income taxes. “Fair Tax” proposals also include payroll social security and Medicare taxes in exchange for a higher flat rate.  Their main differences are in their historically proposed collection methods: “Flat Tax” proposals have used a pared down income tax, “Fair Tax” proposals, a national sales tax.

The table that immediately follows this section compares some salient parts of  typical proposals as reported a few years ago in The Fair Tax Book by Neal Boortz and Congressman John Linder and the Flat Tax as reported in the book Flat Tax Revolution by Steve Forbes. An ongoing Fair Tax explanation with accompanying detail is available at www.fairtax.org including its own plain English summary of the plan. There appear to be remarkably little changes from the Fair Tax reported in the Boortz book and further summarized (as is the Flat Tax Revolution) in a later section herein. The Flat Tax as well as the Fair Tax approach comparison, comprehensively discussed in the 1997 study by Daniel J. Mitchell, Ph.D as abstracted and linked to in the section immediately following the next, appear to differ little from the Boortz and Forbes proposals. The study exhaustively discusses the pros and cons of the two methods and promotes either plan's adoption as immensely preferable to the current taxation system.

 

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Comparison of typical Fair Tax and Flat Tax Proposals

 

  Boortz' Fair Tax Forbes' Flat Tax
   
Payment Method Sales Tax Income Tax
Payment Collectors Merchant Internal Revenue Service
Collector Payment 1/4% of amount collected None
Income Cut-off Method Prebate depending on family  Allowed deductions for family, 
members child care/earned income credits
Current Taxes Eliminated All currently paid on income as the Dividends, interest, social security
Forbe's plan plus payroll taxes,  benefits, alternate minimum tax,
explicitly excludes gift taxes capital gains, estate taxes, foreign
  income
Added Taxables Medical care, attorney fees, ?Provisions for deductions other
home sale income than business? For example
  education, personal medical costs
Tax Applies  At final sale When reported
Burden of Proof for Factual    
Reporting: Federal government, businesses As now, individual taxpayer
as to whether purchases for  
personal or business use  
Tax Rate 23% (as originall proposed) 17% (as originally proposed)
Real World Experience None Flat tax in several countries
Repeal 16th Amendment    
that Allows Income Tax Certainly desirable, and end aim  No
Uniformity across States No. Current sales taxes in place No. Current sales taxes in place
with state and local taxes with state and local taxes
(sales and income) inequity exists (sales and income) inequity exists

Susceptible to

 Government Abuse

Yes Yes

 

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3/4/09 Update immediately follows: I still have abstracted only a very small amount of the very worth-while profound commentary. I highly recommend your linking to and reading the original article in its entirety. This article although written in 1997 is still especially pertinent, given the need for a true economic stimulus that either approach provides. And the national sales tax [e.g. Fair Tax], approach pays more than the current payroll taxes to both the troubled Medicare and Social Security funds because they are paid into by everyone above the poverty level. [arguable]

 

3/4/09 Flat Tax or Sales Tax? A Win-Win Choice For America

  "The current tax code of the United States is irreversibly broken and should be repealed. The tax laws undermine the country's prosperity by imposing needlessly harsh penalties on work, savings, and investment. Although many taxpayers face confiscatory tax rates and often are forced to pay more than one layer of tax on their income, the politically well-connected can take advantage of special deductions, credits, preferences, shelters, and loopholes to minimize their own tax liability. The result of this double standard is a tax system that not only penalizes productive behavior, but also violates the fundamental constitutional principle of equal treatment under the law. . . .

  "[T]he flat tax and sales tax [for example, the "Fair Tax"] are almost identical in purpose and principle. Both rest on the fundamentally sound principle that all income should be taxed at one low rate and only one time, and that the tax should be collected in the least intrusive way possible. . . In both cases, income is taxed, but only once and presumably at a very low rate. . . .

  "For many Americans, the flat tax means simply that everyone would be taxed at "just one rate." Even though the 17 percent tax rate is a key feature of the flat tax1, it would be only one element of the comprehensive reform.2 The flat tax eliminates inequalities in the current tax code by treating all taxpayers--and income--equally. With the exception of exemptions based on family size, all income would be taxed, but only one time. For fairness and simplicity, there would be no deductions, credits, preferences, or loopholes. To achieve even further simplicity, taxes on most business and capital income (such as dividends and interest payments) would be withheld and paid at the business level. . . .

  "Under the flat tax, the current Internal Revenue Code's 480 forms would be replaced by two simple postcard-size forms. Individual taxpayers would receive a generous allowance based on family size (more than $33,000 for a family of four) but would be responsible for paying a tax of 17 percent on any wage, salary, and pension income above that amount. The tax on all other income, including interest, dividends, rents, royalties, and business profits, would be withheld and paid at the business level (much as an employer withholds and pays individual income tax for workers). Because the government would not be allowed to tax any income more than once, both the capital gains tax and the death (or estate) tax would be eliminated. The flat tax also would get rid of all itemized deductions like the write-off for home mortgage interest, charitable contributions, and state and local income and property taxes. On the business side,3 the flat tax wipes out all features of the current code that undermine U.S. competitiveness, including the alternative minimum tax, rules on pensions and deferred compensation, depreciation (which would be replaced with first-year expensing), international tax provisions, and uniform capitalization rules. (See Chart 1.)

  "Instituting the flat tax would not affect payroll taxes for Social Security and Medicare. Even though these programs, funded by payroll taxes, certainly require fundamental reform . . .

  "The national retail sales tax proposal [e.g. Fair Tax] would repeal the personal and corporate income tax code and replace it with a tax on all final sales of goods and services to consumers.4 Although such a tax resembles the state sales taxes most Americans pay already, a national retail sales tax is much broader in scope and would require a tax rate roughly equal to the rate imposed by the flat tax. All economic output, including such activity as services that traditionally escape state sales taxes, would be subject to the tax. Like the flat tax, a national retail sales tax would treat all economic activity equally, but taxpayers would receive a universal credit--a measure that would have the effect of protecting all taxpayers from having to pay tax on purchases up to the poverty level. . . .

  "The sales tax bill introduced in the House [in 1997] would eliminate the individual and corporate income taxes, along with all related provisions such as the death tax and capital gains tax. To replace these levies, the government would impose a 17.65 percent tax on the value of all final sales to consumers.5 [That bill unlike the Fair Tax did not exclude payroll taxes] To protect lower-income citizens from taxation, the legislation also would require the government to send all households periodic rebate checks, the net effect of which would be to offset the tax burden on purchases up to the poverty level. . . Retailers [under that act] would be compensated for their efforts to collect and then pay the taxes by receiving a rebate of 0.5 percent on any tax they collect or $200, whichever is greater. Finally, the sales tax legislation also provides a fee of 1 percent to any state that agrees to administer the tax. . . .

  "Americans for Fair Taxation has proposed an alternative sales tax that would eliminate not only all personal and corporate income taxes but all payroll taxes as well. Proponents of this approach--which has not been introduced in Congress yet--argue that Social Security and Medicare payroll taxes must be repealed if all direct federal taxes on income are to be extinguished. . . .

  "By almost every standard, the flat tax and a national retail sales tax represent two sides of the same coin. . . .

  "As similar as these two types of taxes are, there are differences, the most important of which center around how they would be collected. . .  "Regardless of which option is chosen, both the flat tax and sales tax would yield immense benefits for Americans. . . .

  "Tax reform will boost the economy's future performance, but it also will have a more immediately positive impact by increasing the country's wealth. . . .

  "The flat tax or a national sales tax would remove from the tax system the corrupting process of exchanging loopholes for political support. . . .

   "Numerous studies by such nonpartisan organizations as the Congressional Research Service,19 Tax Foundation,20 National Center for Policy Analysis,21 and Institute for Research on the Economics of Taxation22 have demonstrated conclusively that tax reform will not have an adverse impact on home values.

  "Criticism: Neither the flat tax nor the sales tax will capture the entire underground economy.

   "Response: This is true but meaningless. A drug dealer is not going to report his income under the flat tax and certainly will not collect taxes on the 'products' he sells under a national sales tax system. But the current system does not capture this money either, so this argument hardly serves as a reason to reject tax reform.

  "Criticism: Regardless of the type of tax, taxpayers will not be safe so long as lawmakers can raise taxes in the future.

   "Response: Any tax reform should be accompanied by legislation, even constitutional reform, that requires a supermajority to approve any future increase in tax rates.28. . .

  By George: This article although written in 1997 is still especially pertinent, given the need for a true economic stimulus that either approach provides. And the national sales Fair Tax approach pays more to both the Medicare and Social Security funds in trouble because they are paid into by everyone above the poverty level. [Arguable]

  "Conclusion The current U.S. tax system is an unmitigated failure. On both economic and moral grounds, the tax code should be repealed and replaced with a system that treats all taxpayers--and all income--fairly and equally. Both the flat tax and a national sales tax satisfy this standard, and both would improve the economy's performance substantially. . . .

  "[T]he flat tax and a national retail sales tax are so similar, lawmakers have no reason to champion one at the expense of the other. Advocates of tax reform should seek instead to highlight the benefits and similarities of the two plans and, when the opportunity arises, rally behind the one that has garnered more political and popular support.31 Both the flat tax and the sales tax would simplify the current tax code, boost income, stimulate the economy, and end the bias against savings and investment."

 

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The following was published here a few years ago around the specific Forbes Flat [income tax] Tax and the Boortz FairTax [national sales tax] plans. Nevertheless the above article -- that I highly recommend you're linking to to read the original in all its fullness -- written in 1997 is, in many ways, more pertinent.

 

Essence of the Forbes and Boortz Approaches

 

The Forbes flat tax plan is a flat federal income tax of 17% replacing the current complex income tax rules for individuals, businesses and corporations (eliminating dividend and interest taxes, income taxes on social security benefits, alternate minimum taxes, capital gains taxes, and estate taxes).   It allows expensing all investment property and applies only to income earned in the U.S. It reduces federal individual income tax reporting to a postcard. 

 

It just replaces the current complex income tax code with one flat rate after deductions minus a child tax credit and an earned income credit.  An individual or company can opt for the existing income tax.

 

It uses the existing IRS mechanism for collecting taxes. 

 

The Boortz "fair" tax plan replaces all current federal taxes (including social security taxes, medicare taxes, and all other federal payroll taxes, estate taxes, income – individual, alternate minimum, corporate and business, capital gains, gift) with one tax at final sale (not like the European Value Added Tax that taxes at every stage of production).  Unlike the current system, it puts the burden of proof for factual reporting on the federal government rather than the individual.

 

It would pay the states and individual businesses ¼ % of what they each collect. 

 

Forbes Plan

 

The Forbes plan flat income tax form for an individual:

1. Wages and Salary

 

2. Number of adults in the family

 

3. Number of children in family

 

4. a) Deductions for adults (Multiply line 2 by $13,200) or

 

    b) Deductions for head of household ($17,160)

 

5. Deductions for dependents (multiply line 3 by $4,000)

 

6. Total deductions (line 4 plus line 5)

 

7. Taxable income (line 1 minus line 7)

 

8. Pre-credit tax (multiply line 7 by 17%)

 

9. Child tax credit ($1,000 per child under 16)

 

10. Earned income tax credit (See EITC rules)

 

11. Total tax credits (line 9 plus line 10)

 

12. Total tax (line 8 minus line 11)

 

 

The above Forbes Plan source is from the book Flat Tax Revolution by Steve Forbes

 

Boortz Plan

 

The Boortz plan taxes medical care, attorney fees, internet sales, catalog sales, and the state, local and federal governments which may end unfair competition by the government with private enterprise.  The 23% tax counterbalances the currently taxes imbedded in product sales; competitive free market forces will drive all prices down correspondingly.

 

To cover basic necessities, everyone would get “prebates” in a monthly check from the federal government or “prebate cards similar to debit cards with the same monthly starting balances.  As an example, the prebates for 2005 would be as shown in the table on the next page

 

 

 

2004

 

 

Annual Prebate

Monthly Prebate

Single

 

 $2,201.16

 

 $ 183.43

 

Married Couple

 $4,402.20

 

 $ 366.85

 

3 in Family

 $5,151.96

 

 $ 429.33

 

4 in Family

 $5,901.84

 

 $ 491.82

 

5 in Family

 $6,651.60

 

 $ 554.30

 

6 in Family

 $7,401.36

 

 $ 616.78

 

7 in Family

 $7,558.44

 

 $ 629.87

 

8 in Family

 $8,901.00

 

 $ 741.75

 

Each additional

  

 

 

 

family member

 $2,904.00

 

 $ 242.00

 

 

 

The above Boortz plan information is from The Fair Tax Book by Neal Boortz and Congressman John Linder.  An additional source with accompanying detail is www.fairtax.org including its own plain English summary of the plan.

 

Either plan

 

U.S. History: when taxes go down, government revenues go up.

Harding-Coolidge, Kennedy, Reagan, Bush

 

Either would help U.S. companies overseas.

 

Loopholes are no longer there for those with the resources for armies of lawyers and lobbyists.

Each plan is designed to be revenue neutral.

 

 

Forbes Plan Use Experience:

Booming economic and government  revenues -- Hong Kong (separate tax system from the rest of China), Russia, Estonia, Latvia, Lithuania, Ukraine, Serbia, Romania, Georgia, Slovakia, Iraq (now by Paul Bremmer), Channel Islands.

 

Read Jack Kemp- http://www.townhall.com/opinion/columns/jackkemp/2003/11/10/170395.html and The Economist - http://www.economist.com/opinion/displayStory.cfm?story_id=3861190 for more on foreign flat tax experience. Townhall.com gives a favorable but muted book review - http://www.townhall.com/opinion/books_entertainment/reviews/joelkurtzman/141063.html

 

Boortz Plan Use Experience:

I believe, none.

 

Other Plan Considerations:

 

The Federal government now sends 48 million Social Security checks a month as well as checks to other government employees so issuing prebates as required in the Boortz plan is not a monumental problem and, of course, a prebate card similar to a debit card could also be used.

 

Forbes quotes comparing his plan favorably to a plan such as the Boortz plan:

 

“The flat tax is a better idea than the NRST [national retail sales tax] for a multiplicity of reasons. . .  . But it should be stressed that supporters of a sales tax have their hearts in the right place – they rightfully believe that what we have today is an abomination, that we are overtaxed and that we are all subject to abuse from the IRS.

 

Abstracts of Forbes claimed NRST problems (they refund monthly set amounts for necessities such as food, clothing, and shelter):

 

  1. Need to repeal the sixteenth amendment to the constitution that allows imposition of the income tax.
  2. If exempts used and business-to-business items, what is the definition of new?  What constitutes a business?
  3. Sellers may eventually lower their prices by the amount of the taxes they no longer have to pay and employers may be able to raise their wage in the long run, but is this certain and how soon?
  4. Fixed rebates favor those who live in low-cost areas.
  5. Temptation for bureaucracy to succumb to political pressure for another entitlement program to differentiate the rebates based on income.
  6. NRST would mean a new, high cost bureaucracy (effectively the IRS again)
  7. NRST would devastate the new home market.
  8. NRST would apply to already soaring education costs
  9. NRST would stifle the online industry
  10. In a recession incomes go down with no proportional income tax type relief.
  11. Business-to-business exemptions may not be honored as they frequently are not now for smaller businesses with the resulting cascading taxation.
  12. Requires uniformity across states as some states now exempt groceries, others just exempt prescription drugs, etc.
  13. NRST likely to increase tax evasion.  Organization for Economic Co-operation and Development: “Governments have gone on record as saying a retail sales tax of more than 10 or 12 percent is too fragile to tax evasion possibilities. . . “
  14. With NRST, retailers are put in the position of policing that purchased items sold will be used for business purpose
  15. Number of taxpayers would increase above the current system with NRST.
  16. NRST would apply to government purchases, further inflating government costs to the taxpayer.

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