How Would You Change the US Tax Code?

Lots of suggestions on how to change the US tax code on my post titled Is This Right? 60 Million American Adults Don't Pay Taxes? Here's what one commenter suggested:

Simple tax solution:

Get rid of income tax (and property tax - BS!) and increase sales tax to 25-30%. The more people buy, the more they get taxed. People making min. wage shouldn't be buying expensive stuff like Gucci purses (even though they do) and that way, they won't be taxed as much. It may hurt the economy for the first year or so when people see the large costs to buy something, but Americans don't care - they have credit cards. The rich don't care either, they want to look high class with their 200 jeans and beamer.

or

People with incomes under 15k or 20k pay no taxes. People over that pay a straight 20%, no deductions or any need for a tax advisor or software. If you make 1mil/year, you're taxed 200k. You make 100k, you're taxed 20k a year. Seems fair to me.

Another option:

The spending is the problem. A sales tax to replace all income, payroll, and capital gains taxes would be best because it would give people the incentive to work, save and invest, but as long as government keeps spending the money there's no solution. I read a study in college that showed that all the governments in the world spent about 10-15% of GDP on defense, roads, public safety, and law. Right now we spend more than 35% of GDP on all levels of government. I've seen some estimates that the U.S. economy would grow by almost 7% per year if taxes were cut by 25% (to about 27% of GDP) , but to cut total taxes to 10-15% of GDP, we'd have to cut taxes by more than 65%.

There are a lot of idiots who think they paid no taxes when they get a tax refund, but they forget the gas tax, sales taxes, property taxes, hospitality taxes, car taxes, fees, etc. It's still bad that a lot of people don't pay income tax though, because they will obviously vote to increase the tax they don't pay rather than the ones they do pay. The system will become even more unjust, and people with mobility will leave America or never come in the first place. We are in a global economy and the countries that treat entrepreneurs and business as sponges to be squeezed to pay for welfare will soon find their competitiveness decline. Kind of like the U.S. today. India, China, Russia, Eastern Europe and even the socialist EU countries are having to cut or are cutting taxes big time. The U.S. is falling behind.

And another:

I, for one, would like to see a per-capita tax. Take the total annual spending of the US government, divide it by the number of non-disabled working-age adults, and send those people a bill for their share. It's perfectly efficient, because no wealth would be destroyed in the process of trying to avoid it. Also, disenfranchise anyone who doesn't pay their share of the taxes so that the entire electorate clamors for less and less spending each year.

My contention is that we could fix the whole budget deficit if we simply found a sharp businessperson to identify all the waste in government. This commenter agreed:

The real problem is government spending. I work for a government contractor, and I can tell you from firsthand experience that government can't help but use resources stupidly. People deciding how to use other people's money will never do as good of a job as people deciding how to use their own money.

Now, eliminating the income tax in favor of a national sales tax would probably eliminate some waste associated with collection and compliance, but as long as the government decides how to allocate upwards of 40% of our resources, that staggering waste will dwarf whatever changes we make in the tax system.

So, let's say you were made king or queen of the US. How would you change the tax system? (Assuming you wanted to raise enough money to only cover legitimate government expenses -- not just to fund your own kingdom!) ;-)

Comments

[Chris]

I don't know! But I would like to see the system streamlined and simplified. The tax code is too complex. How much does running the IRS cost taxpayers every year? How much more do we pay for an accountant to file them to ensure the maximum deductions?

[Susan]

If we are going to keep it as it is, I'd say at a minimum just get rid of every deduction and credit. Have a simply table that says, you made this much, then you pay this much. And don't worry about filing a silly form since the correct amount would be automatically deducted anyway.

But really, I'd rather have them scrap the whole system and replace it with a national sales tax system, exempting taxes from basic needs such as groceries, basic clothing, housing, utilities, etc. That way cheapskates like me who don't buy any luxuries would not pay taxes. ;)

[Compounding]

The Fair Tax!

Eliminate ALL taxes that currently exist. Eliminate the IRS. Have a 23% Federal sales tax added to everything, only at the consumer level (because businesses don't pay taxes, they pass them off to customers as a cost of doing business). Exempt taxes for everyone up to the poverty level through a system of prebates (take the poverty level and muliply by .23, and issue a check). The net cost of consumer goods would remain roughly the same (or perhaps slightly lower), and we would have a revenue neutral system that is efficient, and will save tax payers the dread of April 15th.

This would necessitate the repeal of the 17th amendment so that the income tax, et. al cannot be reinstated without a new amendment.

I would recommend something similar at the state level, but each state could choose its own path... that is the nice thing about our dual-sovereignty system... if we could learn to respect it.

[Scott]

A flat income tax that starts somewhere around $20k a year. No deductions, no credits, no adjustments period.

[Matt]

On the "sharp businessperson to identify all the waste" idea: I was the original commenter quoted below that sentence in red, and I'd like to clarify and expand what I'm saying a bit.

Both Milton Friedman and P.J. O'Rourke have talked about The Four Ways to Spend Money. I like O'Rourke's wording best, so I quote him:

"1) You spend your money on yourself. You're motivated to get the thing you want most at the best price. This is the way middle-aged men haggle with Porsche dealers.

"2) You spend your money on other people. You still want a bargain, but you're less interested in pleasing the recipient of your largesse. This is why children get underwear at Christmas.

"3) You spend other people's money on yourself. You get what you want but price no longer matters. The second wives who ride around with the middle-aged men in the Porsches do this kind of spending at Neiman Marcus.

"4) You spend other people's money on other people. And in this case, who gives a s**t?"

Number 4 is the pattern of government spending. It is the nature of government spending to be wasteful. No businessperson, no matter how sharp, could fix it, because the incentives are so perverse. The only solution is to reduce the role of government through privatization.

If I were king for a day, here's what I'd do:
1) Sell all public transportation systems (buses, trains) to the highest bidder, with the promise of no regulation or price control.
2) Sell all land owned by the department of the interior, especially land controlled by the US Forestry Service to the highest bidder.
3) While we're at it, let's disband the entire Department of the Interior. That takes care of the Bureau of Indian Affairs too.
4) Scrap the entire USDA and all the programs it administers. Its 100,000+ employees will go find productive employment, and farmers can sink or swim in the economy, just like every other business. We'll rely on brand names for safe food.
5) End all corporate welfare.
6) Peel social security back to disability only. Old age alone would not entitle you to anything.
7) Ban all collective bargaining by public sector employees. Why should anyone have the right to collectively bargain against taxpayers? NATCA: gone. NEA: gone. Policemens' benificent associations: gone.
8) A constitutional amendment similar to the 14th, but instead of equal protection under the law, it would be equal benefit. If you pay corn farmers not to grow corn, you have to everybody who isn't growing corn not to grow it. Forget campaign finance reform. If you take away congress's power to play favorites, then the wealthy and powerful will stop trying to curry favor anyway.
9) Sell limited access highways (e.g. the Eisenhower Interstate System) to the highest bidders. The ones that aren't already would simply become toll roads, presumably with fully electronic tolling. The only role of national government here would be to standardize the electronic tolling system and perhaps distribute the transponders with license plates.
10) Privatize air traffic control
11) Eliminate the following remaining departments: Department of Labor, Department of Education, and Housing and Urban Development.

I figure it should be possible to get government spending at all levels down to 5-10% of GDP, and through the asset sales, eliminate some debt.

Now I've gotten pretty far off topic (how to reform the tax code, remember?), but spending really is the key. If the government only spends 5%, how bad could any tax code be?

Nevertheless, I think the tax code should tie tax liability to usage of or need for government services. The best way to do that is for the remaining government-owned road infrastructure to be paid for entirely through gas taxes and tolls. The rest would come from a combination of a per-capita tax and property taxes, since we all benefit from national defense and a legal system, but property owners have a greater stake and need even more protection.

[xaargh]

"Fair" tax?

At 23%, if two people buy a couch for $1000, the tax would be the same $230. But say person A makes $100,000 a year, and person B makes $40,000 a year. Person A's tax rate would be 2.76% of his monthly income, while person B's would be 6.9%.

This just seems like another way to stick it to the middle class to me.

[Zook]

Xaaargh-

In that case, maybe the person shouldn't buy a $1000 sofa. Maybe they could buy a $750 sofa or even better yet, since the fair tax [as far as I believe] is subject to only NEW sofas and NOT used, maybe they could craigslist/eBay a sofa will minimal wear and not pay a dime in sales tax to the federal government.

The fair tax is the way to go. Neil Boortz had a quick read a couple years ago on the national flat tax and it really made cents.

[xaargh]

What about groceries? Would you tell your middle class friends they they should suck it up and shop at the grocery outlet because suddenly Safeway is out of their price range? Used food?

My point is that the Fair Tax idea just doesn't scale. You can't expect a rich person to suddenly start spending relatively more money to match the percentage paid by someone in the middle class.

[beef]

Exactly Zook!

Not only that Xaargh, do you really think the typical American making 100k will buy only a 1k couch or a 10k couch would a bunch of gadgets? I would guess the later.

The rich will and SHOULD be spending more than the poor, which will in turn cause them to spend much more in taxes.

My friend works at a bread store and you would be AMAZED at how many people pull up in Mercedes and pay with food stamps. What a joke. Another example of the "poor" not only taking advantage of our system but buying/leasing expensive things they shouldn't.

[emily]

This is the worst article I have ever read. Stop complaining about taxes. The way it is now is fair. Maybe they should ease up on the middle class incoem ranges, but do you realize how taxes really work? If you make more money you do not get your whole paycheck taxed at the higher rate, you only get the money made in that tax bracked taked at the higher rate. Also, for those of you who want to get ride of deductions... I am sure you have never properly used them. I had income from stocks, dividends, and deductions last year and I did my takes online through H&R block. Personally I do believe that the government is not responsible with our money, but decreasing taxes wont help, and changeing the system when we are trillions in debt (thanks to Bush) will not solve anything. Everyone stop your bitching.

[Susan]

One of the benefits of sales tax based systems is that illegals, drug dealers, dog fighting ring kennel owners, etc. will actually pay taxes. Our current system subsidizes these individuals with the hard earned dollars of the honest.

[beef]

- Emily

You are obviously very ignorant when it comes to understanding taxes (and how messed up our tax system currently is) and lack the knowledge to make an educated comment. People like you will continue to hamper any improvements our country can make.

[plonkee]

Having once had the misfortune to need to fill in a US tax return, the first thing I'd do would be to have everything translated into English. In the UK almost all government documents for the public are in 'Plain English', its not perfect, but its a good start.

[Matt]

Regarding the Fair Tax:

I'll grant that it's a better idea than the mess we have now, but it has its problems too.

The most obvious is the discouragement of consumption. Suppose I'm willing to pay $10 for a shirt, and someone else is willing to sell me a shirt I like for ten dollars. Making that trade creates wealth, because both parties gain something they value more than what we started with (me the shirt, the other guy ten bucks).

Now imagine that there's a tax of $3 added on to that transaction at the retail level. In the math of Fair Tax advocates, that's a 23% tax, because $3/($10+$3) = .23. Most people would call that a 30% sales tax, but that's beside the point. If I'm still only willing to pay $10 for the shirt, and the other guy is still only willing to sell if he can get $10 for it, the transaction simply won't happen. We're each left with something we value less than we would have if we could have traded. When trades that would have taken place are prevented by a tax, that means that wealth is being destroyed.

Now, the income tax destroys wealth too. It just does it on the labor side. It's hard to say which would destroy more wealth than the other, but a good clue is to figure out which side gives you more choices and alternatives. Usually it's harder to change jobs than it is to choose a cheaper television, so my guess is a sales tax will tend to destroy more wealth, but I don't have hard data to back that up.

That's not the only problem with the Fair Tax either. Since it avowedly doesn't address spending (it's supposed to be revenue-neutral after all) there is a danger that 10 years after its introduction, you would have a 30% sales tax AND an income tax. It is the nature of a government granting special favors to constituents to grow and grow. You would need a constitutional amendment to hold that back.

The best kind of tax from a standpoint of creating wealth (or preventing its destruction) is one you can't avoid by modifying your behavior. That's why I like a per-capita tax. It's the simplest tax imaginable. Were you a non-disabled, working-age American this year? You owe $33,100 (about 40% of GDP divided by 160 million people of working age), payable in biweekly installments of about $1275. Doesn't matter how much you made, how much you gave to charity, what you spent on healthcare, or how much mortgate interest you paid. Depending on how much you make now, that might not sound very affordable. Well, current levels of government spending aren't very affordable. Now of course this is politically impossible, but theoretically it is optimally efficient.

The most realistic option I would prefer is a Steve Forbes-style flat tax for personal income, plus gas taxes for transportation infrastructure and other third-party costs caused by driving (like global warming, if you think it's anthropogenic). Other activities that cause third party costs (industrial or agricultural pollution, for instance) could be directly taxed too. Zero taxes on corporate income, capital gains, and interest. Effectively every kind of investment would be like a Roth account, but with no contribution limits or early withdrawal penalties. Eliminate payroll taxes for Social Security and Medicare, and just roll that into general revenue. In elections, you would get one vote just for being a citizen, plus another vote for every $10,000 you pay in income taxes. Those who shoulder a greater burden of government should have more say in it.

[a4dble]

xaaargh,
With all due respect, your logic has huge gaps. You start out talking 23% as a consumptive tax (based on purchase price). Then you jump over to apply the actual dollar spent to compare it to income. Taxing income as compared to consumption are two different disciplines entirely.
Taxing income penalizes productivity. Taxing consumption encourages productivity but regulates extravagance. Those who can afford extravagance don't mind the tax. Those who can't afford extravagance aren't taxed for it.

[Kevin]

Even if you have a flat tax on income with no deductions, credits, adjustments, etc., "Income" still has to be defined. There are several sections of the IRS Code devoted to this. Do we just use those or create something new? Not everyone has a W-2 or 1099 for their income. There are always going to be loopholes whether it be a flat tax, fair tax, sales tax, etc.

[Todd]

I'd like to see the federal income tax and the IRS abolished. The government shouldn't have any information on anyone's income. A national sales tax would pay for federal expenditures - up to a point. Those expenditures would be for basic functions of government - defense, roads, etc. Those who want government to provide welfare and social security could contribute to funds for those things with their own money.

[Matt]

Let's explore the issue of fairness as it relates to both the "Fair" tax and the income tax (present progressive graduated system or "flat").

I think that the most fair thing to do is pay taxes based directly on your usage of government services (including national defense, a legal system, law enforcement). It seems to me that to the extent they're related, both consumption levels and income levels have a relatively low correlation with the enjoyment of those services. In fact, in some cases it may trend in the other direction: if you've seen the show Cops, it seems like the police spend a lot of their time dealing with situations where both perpetrators and victims are poor.

So xaargh, why are you so fixated on taxation as a percentage of income as your measure of fairness? Is there some underlying belief that higher income levels are somehow ill-gotten?

[Anne]

"People with incomes under 15k or 20k pay no taxes. People over that pay a straight 20%, no deductions or any need for a tax advisor or software. If you make 1mil/year, you're taxed 200k. You make 100k, you're taxed 20k a year. Seems fair to me."

I hope this person means a straight 20% tax on anything over the first $15,000 or $20,000. Otherwise, getting a $100 raise from $20,000 to $20,100 would result in a tax liability of $4,020 rather than $20.

[Beef]

- Anne

You brought up a good point. However, isn't that similar to what happens now?
I am making up numbers but isn't something like:
0 to 40k - 20% tax bracket
40k to 100k - 25% tax bracket
100k or higher - 30% tax bracket

Anything is better than the dreaded tax system that we have now!

[Anne]

Beef, the current system is progressive so whatever "bracket" you are in, that is your marginal tax rate. Your entire income isn't taxed at your marginal rate. Using your numbers, if you make $45,000, the first $40,000 is taxed at 20% and the next $5,000 is taxed at 25%.

[Rick]

Matt, when are you running for president or Congress? I'd like to vote for you.

[Minimum Wage]

The current system is "progressive" only in a nominal sense, and only at very low and at relatively high (over $100K) incomes. Once you figure in all the oddles of tax breaks (mortgage interest deduction, property tax deduction, IRA, 401(k), employer-provided fringes, in-home business deduction, rental "depreciation" (get a writeoff on an appreciating asset - is this a great country or what?), 1031 exchange tax deferral, homeowner capital gain exclusion up to $500,000, etc etc - the tax code isn't very progressive after all.

[Easy E]

How about this? Our government used to function without an income tax and everything worked out just fine. Then one day everyone decided that they had to get their share. What ever happened to the idea that people should be providing for themselves and not sitting there with their hands out? Our government was founded on the idea of people being free, because the rest of the world wouldn’t let them be. Now that same government has mutated into something of an oppressive form in which everyone is treated unfairly. I say the government shouldn’t be treating anyone. We are no longer a government based on freedom; instead we are a government based on free lunch. The fact that those of you who recognize the simplicity and fairness of the Fair Tax, yet realize the impossibility of it ever becoming law, perfectly illustrates the ineptitude of our government.

Emily,
The real point is that the whole system of taxes is too complicated. Why should you have to use any program to do your taxes? Why should businesses have to hire tax attorneys? Why should everyone be bewildered by the enormous mountains of paper work that must be sifted through? Why should we be wasting the millions of man hours every year just to make payments to our government? Why should our government be so immobile that broken systems are never dealt with but are instead piled higher and deeper? Simplicity is the key, but alas, without all the complications we couldn't have candidates offering new deductions to woo new voters, we couldn't have lobbyists vying for great new tax breaks to spur their industries. The whole system is a bunch of bull. We are swamped with regulations and rules to the point that a court case can't even sort through it to figure out what someone really owes in taxes. Anyone here about the guy who successfully fought the income tax in court? So, do we have to pay income tax or not? No one really knows because no one in Washington ever thinks anymore, they just do. They keep doing and doing but only what's best for 'the little guy,' right?

[Compounding]

xaargh,

Your idea of taxes is the same that is used to make it look like the poor pay a higher federal tax rate than the rich. It is absurd, at best, and fraud, at worst. People use your exact same argument with our existing progressive income tax... yet it is strange, because the upper 50% of wage earners pay nearly 100% of the taxes... how could poor people that pay 0% in federal income tax pay a higher effective rate than anyone that pays federal income taxes? It simply doesn't add up.

Second, the Fair Tax is the ONLY tax system that completely eliminates the tax burden on the poor. Currently, all goods have a series of embedded taxes. This occurs though the value-chain. Each time a company touches something that goes into the final product, they have a certain amount of taxes they pay, and they are embedded in their costs of doing business, and passed on to the next step in the chain, until it reaches the consumer. The consumer then pays the entire embedded tax all the way through the value-chain... this includes poor people. With the elimination of other taxes, the embedded taxes go away, and through the forces of competition, the prices of goods drop to what they would be without the embedded taxes. It is estimated that goods have about 22% of their price wrapped up in embedded taxes. Let's take an example of a good that is $100.

Before Fair Tax Implemented: $100
After Fair Tax Implemented, before Fair Tax applied: $78 (e.g. $100 x (100 -.22))
After Fair Tax Implemented, Fair Tax Applied: $95.94 (e.g. $78 x 1.23)

So, the final price is actually less with the Fair Tax applied than with our current system. This, in and of itself, will increase consumption, which will grow the economy and the revenue. It is estimated that we will double our economy every 15 years with the Fair Tax (using the Rule of 72, that means at a rate of 4.8%, annually).

Now, since EVERYONE will get a prebate up to the poverty level, the poor will still not be paying any taxes.

There is no way to skew this without creating a falsehood (that is my nice way of saying what "critics" are actually doing).

[F. Morana]

ABOLISH the tax-free status of not-for-profit organizations, and let them pay their fair share of federal, state, and local tax just like everyone else. This would increase the tax base by TRILLIONS of dollars, and forestall the immanence of huge tax increases for everyone else.

Not-for-profit, as it presently exists, is nothing but a sham and a tax-dodge. The Internal Revenue Service should NEVER have been empowered in the first place to grant tax-exempt status to any organization, no matter how convincingly the organization may profess to benefit society.

If not-for-profit organizations really feel that they have a genuine, socially advantageous mission to perform, let them do so on an after-tax basis.

[Anne]

Minimum Wage: To be fair, you should also consider the Alternative Minimum Tax which tempers your argument quite a bit.

[Minimum Wage]

The FairTax takes the existing tax penalty faced by involuntary renters and makes it larger and more explicit, while a large portion of a homeowner's housing consumption is exempt from tax.

If the urban poor ever got their property rights restored, the FairTax would be voluntary and fair. Until then - don't hold your breath - it's not fair.

[Minimum Wage]

p.s. allI ever got from an expanding economy is soaring rents - five rent increases in the last half of the 1980s. I'm not sure how much more economic growth I can afford!

[Minimum Wage]

Anne - yeah, there IS the AMT. I would retroactively increase the threshold up to where it would be if it had always been indexed to inflation, and then index it from now on, so that only very high incomes would be affected. Congress is too chicken to do the right thing because the AMT is generating tons of tax revenue. This to me is one of those cases where the "fairness" call is a no-brainer. (I also don't like the stealth phaseout of various tax breaks above $100K or so. A higher marginal rate is one thing, nibbling more around the edges is piling on.)

[Lord]

I am not sure that the current system of taxation is not the most efficient and effective. A flat tax would be efficient but would have difficulty generating the amount of revenue that todays does because income is distributed too unequally, but indications are we are in fact very close to a flat tax overall, so it could be an improvement. Now if you want to make it less effective and efficient, I can not think of a better way than the fair tax or a sales tax. All the complexity of the income tax would have to be spent on its enforcement. The underground economy would be the economy. People would earn their money here and go elsewhere to spend it. A per capita tax would be wonderful at accountability but most would free ride on it and that would lead to anarchy. Any single tax would be a mistake as it would divert production into all non-taxed areas. There is a place for govt, only through the joint action of private and public can we be most productive, and I am against as Galbraith put it Private Splendor, Public Squalor, so I am not in favor of proposals that would largely abolish it. There are no easy solutions.

[garyatk]

As long as we have an out of control central government, what difference does it make in how or who pays the taxes? The only answer is to bring our federal government back to the limitations our founding fathers placed in the origonal constitution to protect us from a government that is out of control. The answer is to stop supporting the Democrats and Republicans, and bring in a new (old style) government. But if you like this huge, wasteful government, get your checkbook out and stop complaining. Just please leave me alone!

[Matt]

Compounding: the fair tax multiplier is 1.3, not 1.23. They call it 23% because $100 * 30% = $30. $30/$130 = 23%. At least that's the theory if it's to be revenue neutral.

I think Lord makes an excellent point that Fair Tax advocates understate its real-world complexity if actually implemented. He says the underground economy would be the economy. I think he's right, but at first it would be more subtle than that. The first thing that happens is everyone gets a business license and sets up an LLC as a "retailer". Then they start buying everything at wholesale to avoid the retail sales tax. With a tax rate of 30%, it becomes worthwhile to go to previously ridiculous lengths to try to avoid it. The next step is that the government either gives up on a retail-only tax and moves to a value-added tax, or raises barriers to entry into business (with all the elaborate bureaucracies necessary to implement that) to make it less worthwhile to try to exploit that loophole. Of course this has disastrous effects to actual entrepreneurs, and essentially we've turned ourselves into India. Or it might be a new golden era of the mafia.

Plus, who knows if it would even be revenue neutral at all though? As economic activity at the retail level is pushed underground, revenue goes away. What happens then? Does that tax rate rise to grab a bigger chunk from the honest?

Now, I'm no fan of the current tax system and would welcome even drastic reform. But it seems to me that the Fair Tax is riddled with problems even before you consider the transition issues. I won't address those, because I think the case is strong enough without it.

I think a lot of the complexity of our current tax system can be traced back to the levels of spending by our government. How did that complexity get there? Well, I'm sure part of it is government bureaucrats keeping themselves busy and justifying their employment. But they had help--they always do. The overall level of taxation is so high that it pays the rich to hire lobbyists to get congress to put in all sorts of wacky loopholes, and then hire lawyers and tricky accountants to exploit them. But the middle class gets in on it too, because politicians need to pander to them even when they don't have organized lobbies, so you end up with the mortgage interest deduction and child tax credits. Then professional associations of accountants do their own lobbying. Do you suppose they lobby for tax forms just anyone could figure out?

I just can't imagine a tax code that would remain simple and cheap to administer as long as present government spending levels are maintained, nor a tax code that would get very complex if total spending at all levels of government were more like 5% of GDP.

[Zook]

What about groceries? Would you tell your middle class friends they they should suck it up and shop at the grocery outlet because suddenly Safeway is out of their price range? Used food?
-Xaaagrg

So it's a class warfare thang? And now you are jumping to another point that I will try and counter-point. Rather than have 500-posts on this, maybe you should simply look into the national flat tax a little more.

And I buy used ALL THE TIME and I sure am not buying the same stuff a person more than DOUBLE my income is buying. Just curious, whats the income cutoff for folks buying the same $1000 sofa? Does Bill Gates buy this $1000 sofa that the $40K/year employee buys as well?

As far as groceries come into play, read the book my Neil Boortz on the tax idea. Basically it allows a tax allowance for food and other consumables needed to live. The fair tax that I speak of allows both the billionaire and the hundredaire the ability to buy 'milk' at the same price and with the same allowance.

As far as all of the little 'got ya' comments about loopholes....WIth the tens of thousands of pages in the current tax code we currently have, of course the flat tax would need to be put in place with some of its own tax code. It's not like tomorrow we end the current structure and use the flat tax code written on a martini napkin. It would take some time, but now is the time to end the insanity.

All of the hours and time wasted, WASTED on just complying with the tax code is enough to make a drastic change and why not tax consumption in a society based on cunsumption?

[EMF]

1. Do away with the corporate income tax,
but also
2. Do away with long-term capital gains treatment for individual income taxes.

Warren Buffet has pointed out that his secretary has a higher marginal tax rate than he does. The change I propose would reverse this.

[Jimbo]

The problem with all of your suggestions is that they are terribly regressive -- meaning that they tax lower income folks at the same rate (or in some cases the same amount!) as the super-rich. That would effectively give the wealthiest a huge tax break, because presently they pay at a much higher rate. At this time in history, when middle class families are being squeezed while the top 1% is doing very very well, I believe such a shift is fundamentally wrong.

Some people will respond -- but the rich use tax loopholes to avoid taxes, and we should close them. The predicate is a true to a degree -- the wealthy do take advantage of tax avoidance opportunities, but they still pay a might higher rate than the middle class, on average.

Ultimately, that response arises from a myth that certain political groups have intentionally created -- that a FLAT tax and a SIMPLE tax necessarily go together. They don't. You can have one without the other, and we should.

There is a solution that makes the tax system both fair and simple. Eliminate all deductions, just like the proposed flat tax, but still leave a graduated, progressive tax system. You could still do your tax return on a postcard. It would still save billions in tax avoidance efforts by lawyers and accountants. And it would not cause a massive shift in tax burden from the very rich to the rest of us.

[Michele]

Okay, putting aside all arguments of whether progressive or regressive taxation is more fair and ignoring the attacks of many here on the poor and working class as lazy, here's one big problem with the fair tax -- its implementation effectively results in raising prices only on the poor.

For illustrative purposes:

A widow with two kids works full time at minimum wage ($12,169/year) and, under the current system, pays no income tax. Her yearly grocery bill is $2400 ($200/month) -- with the fair tax, she'd now be paying 30% more ($3120) with no offset from reduced income tax.

In contract, a person who makes more money and pays more income tax will having any increases in sales tax offset by the decrease in income tax.

[Minimum Wage]

Actually, in the above case, the "advance rebate" (or "prebate") would almost certainly be sufficient to offset all the tax she would pay on a minimum wage income. If she owns her home, she'll even wind up with free money from the government because a large portion of her housing expenses will be exempt from tax.

[xaargh]

@ Zook

"So it's a class warfare thang?"

Yes. It is. It's war on the middle class. That's why it will never fly.

Hey, I'm not fan of our tax system. Color me libertarian. I don't want the Government in my wallet, bedroom, or pot garden. I think they should manage their money the way I do -- on a budget and within reason. But you know, the past 7 years we've being run by a group of rabid tax(cut)-and-spend Republicrats who lower taxes for the white men in their Rotary club yet spend like drunken sailors with a stipend. Absolutely ridiculous. No amount of Fair tax blah blah blah will change anything unless those in power are reined in.

And besides, your fair tax system would really only be fair if the uber-rich only used their "fair" share of public resources. Driving that Hummer 50 miles each way to go to work at the law firm does not equal taking public transit to go to work at Nordstrom.

Do I know the answer? No. All I can do is try to survive.

Cheers.

[xaargh]

I quite enjoy that every time a logical criticism is brought up (groceries, poverty level), the Fair tax proponents pipe up that, well, THOSE cases will be covered by a complex set of exemption rules. All you have to do is qualify for x, y, and z.

Hm. This whole Fair tax thing is starting to sound veeery familiar...

Cheers.

[xaargh]

You know, after reading the wikipedia article on Fair Tax, I have to say, it's really not much more insane than the crap we have now.

I change my mind. I say we switch over. Shake things up a little. Why not?

In the meantime, I'm going to incorporate so I never have to pay my "Fair" share.

Cheers.

[Ed]

I am a CPA and work with taxes about 12+ hours a day. As much as I would love to see an over hall of the IRC for personal and/or social economic reasons, I have to say that I do not see an extreme makeover to the code as being feasible in the near future.

Although everyone seems to have their theories about what should be done, how is should be done, and to what extent, the fact of the matter is that the problems within the US tax system does not lie within the code itself, and lord knows there are many problems in there, but within the body that controls the funds received due to the system.

The problem is not the tax system, the problem is the uncontrollable government spending. And, as with any problem, you will never come close to a solution unless you attach the driver of the problem itself. The US tax code is not the problem. The tax code is a derivative of the problem. I like to compare it to the people that refinance their homes in order to pay off credit card debt. Not only is the debt still there, although in a different form, the problem itself that caused the debt in the first place is as well, which is in many cases, the uncontrollable personal spending.

From compliance prospective, the Service could currently not handle a change as dramatic as many of you suggest, i.e. Fair Tax. Many who are for such a change state that it does not matter anyways because the Service will no longer be needed. The only problem with that argument is that the Service will be needed.... And unfortunately, sales tax is BY FAR a larger compliance burden for businesses than the current income tax system has even been.

People should focus their efforts on changing government spending and not the revenue generator. If spending comes down, taxes will fall. Once the government takes care of the spending problem, which will most likely never happen in the near future, they can then focus on overhauling the tax system.

Our current income tax system gives our government the power to control the economic position of the US, not only within our borders, but also our economic position in the world. I would even go as far as equating it to the federal reserve’s power to alter interest rates and the US dollar's place in the world.... Take that power away and you will most likely not like what you see.

[Matt]

@Jimbo: You say regressive like it's self-evidently a bad thing. Why should the rich pay more for government? When the rich are made to do so, everyone loses out, because that's money they could have otherwise used to do things that result in the whole economy growing (and thus better employment opportunities for the poor). It's not like it's just free, unused money sitting around, waiting to be confiscated. Meanwhile the poor get a free ride? How is that fair?

On the other hand, you're right to point out that there's a false dichotomy between a flat tax and a simpler tax.

@Ed: Sorry for beating up on your profession in an earlier post; that was unfair. I think you see the issue very clearly.

[Big Cheese]

With regard to the FAIR tax, a few comments:

1. Corporations aren't required to pay tax on earnings? How about when corporations buy goods and raw materials, shouldn't they get hit with the 23% (or 30%) sales tax as well? Otherwise people will use corporations to shelter purchases (like they do today).

2. I believe an underground economy based on barter will quickly emerge (as I already see in rural Maine where people want to avoid paying cash for new things as well as sales tax!) and thereby avoid paying the high sales tax. This could be quite significant.

General comment: I live abroad and out of the US for 340 days a year yet I have to file and pay tax in the US (I have to do this abroad as well, end up paying the higher of the two taxes). This is nonsense as I don't get any benefits from the US while living abroad. The US is nearly the only country who does this? How about a change? Of course it will never happen because Americans working abroad are a minority and can't get enough representation to get their voice heard.

-Big Cheese

[Easy E]

Michele you're obviously not reading anything that's been discussed here. You haven't read a thing about the Fair Tax. Yes the widow pays full price for her groceries including the embedded tax, but she along with everyone else GETS A CHECK TO COVER THE COST OF THE TAX UP TO THE POVERTY LEVEL INCOME!!!!!!!!!!!!!
Plus the embedded taxes that businesses have to pay and pass on to consumers won't be included in the price anymore.

Xaargh, compare the current tax system to the Fair Tax and tell me which one is more complicated and which one is more burden some and which one makes it well known to the entire population what they are actually paying in taxes. Here's a tip to help you figure it out, Read The Fair Tax Book (Unless of course you're afraid of being informed because then you might actually understand something that you talk about.)

[Matt]

@Easy E: Are YOU reading what's been discussed here? Apparently you missed the post where Xarrgh came around to the fair tax.

But how about answering some of the concerns Ed and I have raised about the fair tax proposal?

First, there are two types of inefficiency to answer for: the inefficiency of enforcement and compliance, and then the inefficiency of tax avoidance (assuming no cheating) which destroys wealth. The most efficient kind of tax is least responsive to changes in the behavior of taxpayers. For more on that, check this article out: http://www.slate.com/id/2030/

Now the most important argument: that the tax code isn't the real problem, it's spending. Any tax code will be (or will soon become) complex, unfair, wasteful and difficult to enforce as long as the government spends 45% of the national income. Is there any example anywhere in the world where this was tried and lasted and achieved its stated objectives?

[Minimum Wage]

How about letting business fully expense their (non-RE) equipment in the year of purchase, instead of limiting expensibility and then depreciating other assets? ACRS, MACRS, it's got to be a huge headache and compliance burden. That alone would be a big simplification.

[Rich Schmidt]

How did we get through this whole thread of comments with no one mentioning Ron Paul? :) www.ronpaul2008.com

Return federal government to its Constitutional levels of responsibility. Spending will be dramatically reduced. Abolish the IRS and replace it with nothing.

I've read in multiple places recently that if we could just return federal spending to the level it was at in 2000 (just 7 years ago!) we could do away with all personal income taxes. How hard could it be?

[Matt]

Ron Paul has my vote, no matter how hopeless his candidacy may be, nor how batty a couple of his ideas are. He's the only candidate that seems to understand how important the issue of government spending is.

To bring home how utterly disgusting government spending can get, here is an example from current events:
http://article.nationalreview.com/?q=NTdhN2QyM2JiYWQ4NTViMDRmNjhjNDI1ZDE3MzFiODA=

Here's my quick summary of the article:
The federal government spent $127 BILLION on the hurricane Katrina recovery effort in New Orleans. That includes tax relief, but not private donations.

"So what?", you may wonder. Government programs always seem to involve big numbers. Why is this one so impressive?

Let's put it in perspective. The GDP of the entire state of Louisiana is $141 billion. Only 300,000 people lived in New Orleans when Katrina hit. If we'd simply split it up among them as direct payments, everyone--not every household, mind you--every man, woman and child would have received $425,000.

So if you were in New Orleans when Katrina hit, would you rather have the levees and pumps rebuilt and still wonder if they're up to snuff, have other infrastructure rebuilt that's still not back to pre-Katrina levels, an ineffectual police force that leaves the murder rate at twice the level of other dangerous cities like Newark, or just take the money and run?

I'll tell you what I want as a taxpayer. I want that money back in my pocket. And I want the federal flood insurance program ended. If people want to spend their own money to rebuild there, and assume ALL of the risk for doing so, let them, but not with my money.

[Ed]

That article brings up a great point.

In my humble opinion, it is indeed the people of this country that motivate and/or drive a lot of the government spending. If people would take responsibility for themselves from a financial perspective instead of looking toward the government to clean up a mess when a problem occurs, the spending that occurs within government would most likely dramatically drop.

If you take a way the reasons for government to spend, you take away the opportunities for them to do so. Social programs are social programs, and they arguably have their place in our world, however many of the social programs that are currently in place obviously have little to no impact on what they are set up to do. The fact is that more social programs there are… the higher taxes will be…. The richer political leaders will get… and fewer problems will get solved.

We all want our money back in our pockets, however, you must keep in mind that it is indeed not our money. There are laws in place that dictate that when you earn a dollar, you are only earning 70-80 cents for yourself, and earning 20-30 for the machine we call the US government. I am a firm believe in that we should only waste our time worrying about things in this world that we can control. We cannot, at least not in an individual capacity, control taxes. But, what we can control is what we do with the 75 cents we earned. And we can control how much we earn in the future.

Accept that taxes are what they are… and do everything in your power to turn your 70 cents into a million.

The only thing I would change about the tax code is to make it more complex so it will confuse more and more businesses, and I can turn my 70 cents into a million a little quicker.... I am kidding of course.... or am I? =)