Flat Tax v. Fair Tax
Posted by Adam Graham in : Taxes[youtube]http://www.youtube.com/watch?v=zTTMLH9jsag[/youtube]
This video points out the inequities of our current tax code, but raises concerns about a Fair Tax for fear that without the repeal of the 16th Amendment, the Federal Government could impose both taxes. It proposes a United Effort to put the Flat Tax in place and then only ratifying a fair tax when a constitutional amendment is passed repealing the 16th Amendment. At the end of segment, the video’s creator asks viewers to answer two questions: 1) Do they prefer the Fair Tax or the Flat Tax? and 2) What do they think of the video’s proposal? I e-mailed my answer which follows below:
I favor a Sales Tax. A flat tax solves some problems, but it doesn’t solve all the problems associated with the tax including the huge compliance costs. (Although, the lack of deductions may save a little money.) As an Independent Contractor who freelances for various companies. This past tax year I have a W2 from my main job, and 8 different 1099s. Of these, the Flat Tax would get rid of 2 of these (one for a savings account that earned more than $10 in interest and another for some stock dividends.) My biggest challenge is calculating my income, not futzing with deductions or figuring out tax rates. In addition, the Fair Tax has several added benefits over a Flat Income Tax:
- Taxing the underground economy.
- Increased personal privacy and less reporting requirements for individuals.
- Control over the incidents of taxation.
I could write many more arguments for the sales tax, but I’ll keep it pithy. As to your proposal of enacting a Flat Tax and refusing to enact a Fair Tax until a Constitutional Amendment passed 2/3 of Congress and is ratified by 38 states. While I think the flat tax would be an improvement on the current tax code, I believe the premise of the proposal you present is founded on a faulty premise.
The big fear you cite with the implementation of a Sales Tax without the repeal of the 16th Amendment is that politicians could doublecross us and we could end up with both an income tax and a sales tax and so therefore implementing the Flat Tax is a safeguard against a doublecross from shifty politicians who would implement both taxes. This to me raises a series of questions:
The first is, “What stops politicians from implementing both taxes right now?” There is no constitutional prohibition against a sales tax. The fact that we continue to have an income tax in no way stops Congress from imposing both taxes.
Secondly, if we cannot trust politicians not to try and bring upon us a twin curse of both an income and sales tax, how can we trust them to keep a Flat Tax flat? As the top income tax bracket did not begin at 91% (the point it reached prior to JFK’s tax cuts) and become a minefield of special interests loopholes overnight, it’s easy to see how the Flat Tax could be unflattened. Somebody says, “We really need a deduction for this or that very important thing (be it college tuition, health insurance, etc.) and we ought to make it so the middle class doesn’t pay so much and the wealthy pays a little more.” Within short order, you can unflatten the tax code gradually and you end up back where we are now. How can we keep the Flat Tax flat? Will special interests just give up as long as there’s money to be had, and favor to be curried. I think not. If we’re looking for a tax code that allows us to avert our gaze and trust our politicians, no such system exists. Without citizen involvement, either the Fair Tax or the Flat Tax will be corrupted.
Under a National Retail Sales Tax, it really becomes hard for Congress to bring back the Income Tax. H.R. 25, the Fair Tax Bill, repeals the old Internal Revenue Code and its onerous series of taxes and withholding. The most likely attempt to revive the income tax will come, not from the Congress that would enact the Fair Tax but a subsequent one, 2-4 years down the line. Unlike with the Flat Tax, with the Fair Tax, we’ve taken the system of income and payroll taxes and taken a sledgehammer to it. Unlike, gradually adding in loopholes and making the Flat Tax “more progressive,” those who’d like to bring the income tax would have to reconstitute the whole system, re-recruit tax collectors who’d moved to other jobs. Imagine being that hearty politician who steps to the floor of the House and proposes reconstituting the IRS and all that went with it. It would be political suicide, and no one in their right political mind would even go there.
If we’re not vigilant, however, no tax system will protect us: Fair Tax or Flat Tax.
Comment by Eric W
I tend to think that income taxes are theft because they involve no voluntary component. That said, I prefer a Flat Tax to a Fair Tax. I don’t think the Fair Tax is actually fair. It’s regressive, which means it disproportionately affects the poor. If a compromise were offered that kept necessities tax-free (as they are in PA), I’d be willing to reconsider.
Comment by Adam Graham
The Fair Tax provides a prebate to every American for spending up to the poverty level of income. Thus, it will not be regressive. The poor will do very well under the Fair Tax, because the Fair Tax would get rid of the embedded taxes that Corporations pass on to the rest of us. Corporate Income Tax, the Employer portion of the payroll tax, and all the rest come down to the consumers, the Fair Tax eliminates all those built in taxes. So, it is not regressive at all.
Comment by MFWIC
Excellent Post Adam ! And the FairTax would also be a legal and constitutional tax sense it is an apportioned tax, right?
I could never figure out how the IRS gets away with taxing us with an illegal, un-constitutional, un-apportioned tax. Oh wait a minute. They bully us into it, thats right.
Comment by Greg from WI
A “Fair Tax” sounds great because of the reasons mentioned, but the negatives should come to light, also. Some people illegally request cash payments in order to avoid paying income taxes (cash payments aren’t reported to the IRS), while others run criminal operations such as drug smuggling, etc. Some earnigns of the “underground economy” would be taxed by the Fair Tax, but the underground economy would also grow at a tremendous rate. Once everything is taxed at a rate of 20% or more, the incentives to illegally buy and sell will trump more reasons not to do so.
Comment by Adam Graham
I disagree with the risk of the underground economy. The reason is that only retail goods are taxed. So, people who want to avoid tax can by used cars. Those who want to sell illegally would be selling retail merchandise. They would need a supplier and they would be the ones that would bare the burden and be left holding the bag, and in order to make a profit, they’d have to be selling below the market price. It’s a lot easier to hide that you’re making under the table income than it is that you’re buying a hundred plasma TVs a week and reporting no sales. While, it may happen, every tax system has cheats, and I think it’s probably not going to be a huge problem.