ARC's 1st Law: As a "progressive" online discussion grows longer, the probability of a nefarious reference to Karl Rove approaches one

Wednesday, November 28, 2007

Free to Choose

Excellent editorial in today's Opinion Journal on Fred Thompson's Flat Tax Proposal:

Flat Tax Fred
Thompson's reform leads the GOP field.

Wednesday, November 28, 2007 12:01 a.m.

Fred Thompson's Presidential campaign has been struggling, in part because of a sense that he lacks passion and an agenda. But late last week he unveiled a tax reform that is more ambitious than anything we've seen so far from the rest of the GOP field.

Mr. Thompson wants to abolish the death tax and the Alternative Minimum Tax and cut the corporate income tax rate to 27% from 35%. But his really big idea is a voluntary flat tax that would give every American the option of ditching the current code in favor of filing a simple tax return with two tax rates of 10% and 25%.

Mr. Thompson is getting aboard what has become a global bandwagon, with more than 20 nations having adopted some form of flat tax. Most--especially in Eastern Europe--have seen their economies grow and revenues increase as they've adopted low tax rates of between 13% and 25% with few exemptions.

A common refrain from the Left is that we must be like other countries when it comes to health care... But they'll rarely point to economic growth that's being experienced abroad because of the lower tax rates.
The main political obstacle to such a reform in the U.S. has come from liberals, who favor punitive taxes for "class" reasons, and K Street corporate lobbyists who want to retain their tax-loophole empires. The housing and insurance industries, states and localities, charities, bond traders and tax preparers are all foes of low tax rates.

When there are a million loopholes, the only people that can exploit them are the people who can afford a bevy of tax accountants and tax attorneys. These people tend not to be the poor.
That's why the idea of a voluntary flat tax--introduced on these pages a dozen years ago--makes political sense. The Thompson plan would allow taxpayers to keep their mortgage and charitable deductions if they prefer, by adhering to the current tax code and rates. But it would also allow the option to abandon those credits and deductions except for a single allowance based on family size ($39,000 for a family of four). Most taxpayers would pay a 10% rate on income above that allowance, with a 25% rate kicking in at $100,000 for a couple. There would only be five lines on the tax form and most taxpayers could fill it out in minutes.

I can just see the lobbyists for Financial Services firms screaming!
Liberals are already objecting that the plan is not "paid for," by which they mean it doesn't raise taxes the way they hope the next President will. But Mr. Thompson is right in refusing to play by the "static revenue" scoring game that demands that one dollar in estimated tax cuts be offset by one dollar in estimated tax increases somewhere else. "The experts always overrate the revenue losses from tax cuts," Mr. Thompson says, and history supports him going back to the Mellon reductions of the 1920s, the Kennedy tax cuts of the 1960s, the Gipper's in the 1980s, and this decade's success with President Bush's reductions.

Mr. Thompson's plan is based on one introduced by GOP Representatives Paul Ryan and Jeb Hensarling that is in any case not designed to lose revenue. It is intended to allow federal receipts to grow at the rate of the economy, which would leave them at some 18% or 19% of GDP--roughly their average of recent decades. When critics object to revenue losses, they are really saying that the tax share of GDP should be allowed to rise to 20% and higher, which is where we are headed if the Bush tax rates expire.

Paul Ryan for President!!!!
We'd prefer a flat tax with one rate instead of Mr. Thompson's two. Once the concession is made that richer people should pay a higher tax rate, the political temptation is always to raise the rate on the wealthy. The virtue of the single-rate flat tax isn't merely its efficiency but also its moral component: It treats all taxpayers equally. If a person makes five times more money than his neighbor, he should pay five times more taxes, not 10 or 20 times more.

However, what's refreshing about the Thompson plan is that it goes well beyond the current Republican mantra to make "the Bush tax cuts permanent." That is certainly needed, but the GOP also needs a more ambitious agenda, especially with economic growth slowing. The flat tax has the added political benefit of assaulting the special interests who populate the Gucci Gulch outside Congress's tax-writing committee rooms. Lower rates and simplify the tax code, and you instantly reduce the opportunities for Beltway corruption. It is both a tax policy and political reform.

The two apparent Republican front runners, Rudy Giuliani and Mitt Romney, should be paying attention. Both have called for tax cuts in general but have dodged any endorsement of the flat tax--presumably because they think it is too politically risky. The politically calculating Mr. Romney has questioned whether the flat tax is "fair." Mr. Giuliani is more open to the idea, saying the flat tax "would be a lot easier. It would probably bring in a lot more revenue and it would not have some of the burdens on the economy that the massive tax code has." That's right, so why not go all the way?

Mr. Thompson's voluntary proposal is one way to deflect some of the inevitable political opposition. Anyone who prefers the current tax code can stick with it. The rest of us can have a better choice.

Now, I have supported the Fair Tax as described by Neal Boortz in the past (and which is currently being proposed by Mike Huckabee), but I have some reservations regarding the effects of a national sales tax and the way in which it would be administered.

However, I have always been a fan of a flat tax system and think that the two tier system proposed by Thompson is a much needed step towards tax reform.

The key provision of Thompson's plan is the freedom of choice - to choose whether to continue paying taxes under the current system (with its myriad rates, deductions, and hours of paperwork) or to simply fill out the 1 page Thompson Tax Form and send in your check.

The Left often accuses the Right of being anti-choice, although its most often the Left that eliminates or reduces the choices that individuals can make (see Education, Healthcare, Taxation, Property Rights, Free Speech, etc, etc). I think Thompson (and the GOP in general) could benefit greatly from making such a policy prescription a major item in the 2008 campaign.

However, given the MSM's proclivity to cover only the personalities, the gotcha moments, the lost war that doesn't look so lost anymore, and the media's own coverage of said topics in Campaign 2008, perhaps it's impossible to get anyone to pay attention.

Fred can significantly improve his position with this issue and endear himself to the conservative base that has been completely demoralized by the big government programs of compassionate conservatism. Candidates like Romney and Giuliani could also improve their positions by aggressively challenging the current tax codes and the Dems' desire to make it more complex and more painful.

When I watched the last Democratic debate, I commented to my wife that if they were to take power of the legislative and executive branches, our economy would be doomed. I hope that Thompson's approach gains traction - quickly.

Your Co-Conspirator,
ARC: St Wendeler

Comments (4)
Ian said...

Below is an excellent repudiation of the "flat tax" (VAT), which maintains an extensive, continually-evolving tax code benefiting no one but politicians and lobbyists:

(Paraphrased) Reply by Dan R Mastromarco (LL.M., Taxation, Georgetown, principal in the Argus Group, adjunct professor at the University of Maryland, International Management Program, and research consultant to Americans for Fair Taxation - FairTax.org) to:

"A National Sales Tax Doesn’t Add Up" by Bruce Bartlett, December 29, 1999

Many engaged in true tax reform find Bartlett-type attacks exasperating, if not embarrassing. I'd like to convey perspective of both flat taxers and sales taxers who believe that such attacks are counterproductive, but first provide some political history by which to frame said perspectives.

For years Conservatives have posited that a VAT is bad policy (when liberals were discussing it), fearing it would become additional to an income tax (it was called a "money machine"). Circa 1980, conservative intellectuals touted Hall-Rabushka "subtraction method"[ H-R ] VAT which taxed business value added at the business side and labor value added at the labor side. Unlike European VATs (identical in scope), H-R became favorite of Dick Armey and Steve Forbes. It eliminated steeply progressive tax rates and tax on savings. Because of the prior VAT criticisms, H-R was packaged as the "flat tax" and is sold as an income tax to this day, rather than the VAT that its DNA characterizes it as being.

Some conservative commentators have called for the repeal of the 16th Amendment and for the adoption of the flat tax, (despite the fact that it is styled as a direct tax and could not be adopted with such repeal). Mr. Bartlett has called the national sales tax [ie, the FairTax] a VAT (which it isn't), castigated VATs as evil, and has said that sales taxes have become VATs in Europe (which they didn't). In the next breath, he "throws his arms around" the flat tax (which is a VAT). He quotes Bill Gale that the [FairTax] would have to be imposed at 60 percent, but glaringly fails to recognize that if the two bases are the same, he would have to impose that rate for the flat tax to be revenue neutral. In truth, all economists know that the two plans differ NOT in economic effect or base, but in administration.

An income tax taxes savings and investment multiple times. Both flat tax and FairTax are neutral as to savings and investment, tax income only once, and are both consumption taxes. Both are single rate taxes, have nearly the same base, and would improve the U.S. standard of living. Neither redistributes wealth.

While some have even suggested that hey are the same plans under different names, the flat tax taxes value added at each stage in the production process, but the FairTax prefers to tax it when it is added up at the end and eliminate the need to make everyone a taxpayer and collector.

Substantive commonalities between the flat tax and FairTax doesn't mean that there are NO key political and policy distinctions that could be exploited in pitting one against the other. If FairTax supporters wanted to retaliate in response to the Bartlett-type critique, they would have much material with which to honestly do so:

• The flat tax will make small firms and farmers pay the tax even if they have no profit
• The flat tax is opposed by many small business groups
• The flat taxers implicitly support big government by disguising even more of the overall tax burden as the current law
• The flat tax has been kicking around for nearly 20 years
• The flat tax makes everyone a taxpayer and collector, while the FairTax exempts 115 million filers [2000 figure] from ever having to deal with the IRS
• The flat tax is regressive, but the FairTax would enable everyone to keep his full paycheck.
• The flat tax has not only stalled, it has lost public and Congressional support.
• The FairTax is instantly understood, while even some proponents of the flat tax don’t understand it
• There are no transition rules developed for the flat tax and they would be very difficult to craft
• The flat tax taxes exports and relieves imports from tax
• The flat tax confuses tax reform with temporary tax reduction and makes both twice as hard
• The flat tax retains the entire income tax apparatus which erodes as quickly as you can say, “tax bill”


FairTaxers could advance these truthful points without resorting to bigotry associated with a cultic religious organization. However, for the most part, FairTax supporters have chosen not to attack the flat tax, but rather accentuate the commonalities between the plans - despite the above-noted differences. The reason is that, in the battle for tax reform, the real enemy is our current system.

Income tax advocates look down upon the articles of Bruce Bartlett with smug chortling, as Bruce is doing their work for them. The IRS and the liberals who want an income tax to ensure (1) taxes can be raised without the American people knowing it, and (2) wealth can be redistributed from the middle class to the poor, do not even need to fight us - we're killing ourselves!

Perhaps Mr. Bartlett believes that the flat tax will help elect Republicans, effect tax reform, and provide tax cuts; however, the real effect of his criticism is to divide conservatives, to delay serious national consideration of tax reform, and to fertilize the roots of the income tax.

(Source)

NOTICE: FairTax.org has worked sacrificially in helping to bring the FairTax bill into public view over the last nine years, and more recently winning over several presidential candidates implementing an effective pre-Primaries strategy. As has been revealed today, FairTax.org needs our help and ongoing financial support.

(Pass it on! May republish in whole or part. - Ian)

St Wendeler said...

I like the concept of a Fair Tax - anything is an improvement over the current system.

However, the Fair Tax plans that I'm familiar with have a component which establishes the amount of annual income which becomes exempt from taxation in the form of rebates. Intended to eliminate taxation of basic necessities, this provision still provides the federal government with the ability to determine what is "necessary" for an individual or family to spend. And I can just see the lobbyists lining up to make sure that spending on some certain product or service is exempted.

Thompson's Flat Tax isn't ideal - as the WSJ points out, I'd prefer a single rate. However, the selling point of Thompson's plan is that it would be optional and the taxpayer would be free to choose which system they would pay taxes under.

The Fair Tax, which I think is a good concept, cannot be implemented in such a mode - it would be impossible to provide that freedom to choose the tax system at the individual level. And the ramifications of taxation at the level of consumption could be troublesome. In addition, if you think the Dems would let a Fair Tax be the only method of taxation, you're kidding yourself. We could end up with a federal sales tax AND an income tax, albeit hopefully lower than the current rates.

Grant Delphey said...

So Fred is proposing that we have TWO tax systems: the existing one and the "simple" one. So now we have to do our taxes TWICE to figure out which system gives the lower rate. This is SIMPLE? The tax accountants are mailing their PAC money to Fred Thompson.

Ian said...

St. Wen, Since FairTax doesn't take money on the income side, the government doesn't have your money until you buy something. So, progressivity can't be addressed by bureaucratic-heavy credits, deductions, etc. The gov't simply uses Dept. of Commerce data on poverty-level spending, and the gov't issues a check, or EFT, of 23% of that amount divided by 12 months. No tax code required.

The moment one throws up one's hands, and says, "It'll never happen." What I hear is, "Let someone else try, I have no faith in myself, or in the citizenry."

A thorough understanding of FairTax should help to properly motivate you to action. Here is why I'm taking personal action to ensure that we replace the income tax system with the FairTax. The FairTax is...

• SIMPLE, easy to understand
• EFFICIENT, inexpensive to comply with and doesn't cause less-than-optimal business decisions for tax minimization purposes
• FAIR, loophole free and everyone pays their share
• LOW TAX RATE, achieved by broad base with no exclusions
• PREDICTABLE, doesn't change, so financial planning is possible
• UNINTRUSIVE, doesn't intrude into our personal affairs or limit our liberty
• VISIBLE, not hidden from the public in tax-inflated prices or otherwise
• PRODUCTIVE, rewards, rather than penalizes, work and productivity


Its benefits are as follows:

For INDIVIDUALS:
• No more tax on income - make as much as you wish
• You receive your full paycheck - no more deductions
• You pay the tax when you buy "at retail" - not "used"
• No more double taxation (e.g. like on current Capital Gains)
• Reduction of "pre-FairTaxed" retail prices by 20%-30%
• Adding back 29.9% FairTax maintains current price levels
• FairTax would constitute 23% portion of new prices
• Every household receives a monthly check, or "pre-bate"
• "Prebate" is "advance payback" for taxes payable on monthly consumption to poverty level
• FairTax's "prebate" ensures progressivity, poverty protection
• Finally, citizens are knowledgeable of what their tax IS
• Elimination of "parasitic" Income Tax industry
• NO MORE IRS. NO MORE FILING OF TAX RETURNS by individuals
• Those possessing illicit forms of income will ALSO pay the FairTax
• Households have more disposable income to purchase goods
• Savings is bolstered with reduction of interest rates


For BUSINESSES:
• Corporate income and payroll taxes revoked under FairTax
• Business compensated for collecting tax at "cash register"
• No more tax-related lawyers, lobbyists on company payrolls
• No more embedded (hidden) income/payroll taxes in prices
• Reduced costs. Competition - not tax policy - drives prices
• Off-shore "tax haven" headquarters can now return to U.S
• No more "favors" from politicians at expense of taxpayers
• Resources go to R&D and study of competition - not taxes
• Global "free (and equitable) trade" becomes possible for currently-disadvanted U.S. exports
• US exports increase their share of foreign markets


For the COUNTRY:
• 7% - 13% economic growth projected in the first year of the FairTax
• Jobs return to the U.S.
• Foreign corporations "set up shop" in the U.S.
• Tax system trends are corrected to "enlarge the pie"
• Larger economic "pie," means thinner tax rate "slices"
• Initial 23% portion of price is pressured downward as "pie" increases
• No more "closed door" tax deals by politicians and business
• FairTax sets new global standard. Other countries will follow


Renown economist Laurence Kotlikoff believes that failure to enact the FairTax - choosing instead to try to "flatten" what he deems to be a non-flattenable income tax system - will eventuate into an irrevocable economic meltdown, because of the hidden aspects of the current system that make political accountability impossible. Tom Frey, of the DiVinci Institute, foresees the coming collapse of the income tax system.

The income tax system must ultimately fail, if for no other reason than that Washington politicians cannot seem to wean themselves from being "sucked down the spending hole" while seeking ways to hide the magnitude of taxation from those who ultimately pay for all of it - every working American.

Perhaps the most ardent proponent of FairTax is Mike Huckabee, and it is the plan he hopes will permit him to hang the "Going Out of Business" sign on theIRS. Huckabee understands that, if elected President, Congress will have to present the bill for his signature. His call to action, therefore, goes beyond his candidacy: Main Street will have to demand that their legislators deliver the bill.


(Pass it on! Permission is granted to reproduce in whole or part. - Ian)