Tax Reform: Flat or Fair?

The only Constitutional purpose of taxation is, or should be, to obtain revenue for essential government operations.  Adam Smith said in An Inquiry Into the Wealth of Nations, his great work on market economics, that governments may tax citizens to provide for national defense and a police force, a judicial system, and to provide essential government services that cannot be provided through the market.  As a market economist, I heartily agree.  Other reasons for taxation are highly suspicious.  Taxes are now used to implement social change, redistribute income earned by those who work to those who don‘t work, and, worse of all, to punish those in political disagreement. In the past, those on Nixon’s enemies list and those who disagreed with FDR on anything.  But none of these compared to Obama’s current war on conservatives.  Thinking Americans believe that the solution is to do away with the IRS.  I am a thinker.  

 People are always looking for a tax that is “fair” and will do away with the IRS, which most compare to Hitler’s Gestapo.  Steve Forbes, in his numerous campaigns for president has always advocated a flat-rate tax.  He would junk the present tax code and replace it with a 17 percent tax rate with exemptions so that a family of four with income of $36,000 would pay no tax at all.  Pensions, Social Security, and savings would be exempt.  According to Forbes the tax would be simple enough to b filed I a postcard, be pro-growth, and IRS agents would be forced to seek retraining for honest jobs.  Congressman Armey a flat tax in H.R. 4585 (Freedom and Fairness Restoration Act) in 1994.  It was not much different for that proposed by Mr. Forbes.  It failed to pass.

 The “fair tax,” a consumption tax favored by former radio talk show host Neal Boortz and former Georgia Congressman John Linder would replace the current income tax, Social Security and Medicare taxes, corporate taxes, gift taxes, and capital gains taxes with a 23 percent sales tax.  In order to make the tax progressive, the proposal includes a “prebate” of taxes paid on purchases up to the poverty level.  Nothing  except purchases of used goods would be exempt from the sales tax.   Would a 23% rate be sufficient?  I ran data from 2005 for my book All You Really Need to Know About Economics and found that government revenue from was $1.999.6 billion.  Consumer spending for that year was $8,742.4 billion.  Fair tax revenue would have been $2,010.75 billion.  With federal spending at $2.47 trillion, the deficit would have been only $307 billion instead of $318 billion.  It would have worked then, but now?  Hard to tell.   I might run the figures on that on a rainy day when I have nothing to do.

Of the two options, I prefer the fair tax.   The claim is that the IRS would disappear.  Tax attorneys and accountants would no longer be needed and along with IRS agents, be forced to find honest work.  No one would be exempt.  The 50% that now pay no income tax and our foreign visitors to Disney World would pay tax along with the rest of us.  Costs of production would be lower through the elimination of payroll taxes and corporate income tax.  Success would no longer be punished.

Will it ever happen?  Hardly.  The power to tax and destroy is too valuable to give up.

Posted by at June 15, 2013
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