Appearently one of the things Bush is planning on taking on this term is tax reform (well, in theory anyway). This has been a political third rail in the past and no serious reform has ever come out of such an effort…people are quite divided on exactly HOW taxes should be reformed (or even if they should be), and there are tons of special interests out there protecting their little group of clients.
So, I thought I’d bring up the various methods Bush is appearently looking at and see if anyone wanted to debate the various merrits (or problems) with the proposed methods of tax reform Bush is looking at. I’ll try and list a quick and dirty cite for each if I can find one quickly:
Fair Tax Act of 2003 : My understanding of this is that it would (essentially) abolish the IRS.
Value Added Tax (VAT): A general consumption tax assessed on the value added to goods and services.
Flat tax: Taxes are levied at a single rate and deductions are eliminated. Usually the level of taxation starts at some level above the poverty line so ‘the poor’ essentially don’t pay tax (but also don’t get back a refund for more than they are taxed at like they do now).
Note that the cites above were quick and dirty using a search engine. Also, I’ve seriously glossed over each of the system in an effort to allow people who wish to debate the various methods to make their own definitions. Also, there are other tax reform methods…these are the ones I’m aware of the Bush is considering. There may be others I missed. Feel free to talk about any other ones you wish too.
My dream solution: Possible only in a theoretical sense. Not ever really going to happen because it steps on too many toes or nobody in power stands to gain from it.
My practical solution: Bush may be actually able to do this. Realistic and possible in the real world to some degree.
My dream solution to social security: Cancel it. At the very least, let me out of this ponzi scheme and pay me back the money I’ve poured into it. I’ll take my payroll taxes and add them to my IRA and 401K and retire with millions more than I would have. This program was a bad idea to start with and isn’t so much in trouble now as was never designed to work in the first place.
My practical solution: Allow younger workers like me to invest part of all of our payroll taxes into personal accounts. Let the money in these accounts be invested in index funds and maybe even specially approved mutual funds. This would take money away from the SS pool that needs to be paid to retirees now. But, it will be well worth it to get some people out of the failed system. After a while, everyone will opt to invest rather than not and SS will go away gradually.
My dream solution to tax rates: Cut tax rates even further. Lower them to half what they are now. Cut social programs to make up the difference. Pass an amendment to prevent the government from ever being able to tax anyone more than 1/4 of what they make across all levels (Fed, State, Local).
My practical solution to tax rates: Make the tax cuts permanent. Make more tax cuts if possible. Cut spending so that we don’t need so much taxes in the first place. Take steps to cut capital gains taxes and keep away the death tax.
My dream solution to the tax code: Throw it away. Cut the tax code from 20,000 pages (or whatever it is now) to a single page. Flat tax, no deductions. Let the legions of attorneys and accountance who do nothing but tinker with tax returns find useful employment in society.
My practical solution: Try and simplify the tax code wherever possble. Work under the goal of “reducing loopholes” and make sure to close them for the rich whenever possible, that will help get support from the voters for the effort. Get rid of corporate welfare as much as possible. Cut out special tax deductions, incentives, etc and you can just lower taxes for everyone with the money saved.
I looked at the site about abolishing the IRS and replacing it with a national sales tax. He basically says that prices of retail items will fall by 20%, the sales tax will add 23% to the cost of the item; and that peoples’ real incomes will grow because they will keep all of their paycheck.
I think anyone who thinks that peoples’ paychecks will not shrink after a hypothetical abolition of the income tax, is a complete fool. I sure as hell know that my boss would cut my pay by (murmur) percent, seeing as how I no longer needed to pay income taxes. Christ, I have no idea how I’d be able to afford my mortgage payment if it weren’t for the interest deduction.
And the idea that the government would send a check at the beginning of every month to low-income folks in order to compensate them for the sales that that they will pay is just nuts. Just plain nuts. It won’t take anti-welfare conservatives but a week before they start targeting that government giveaway of taxpayer money.
I just think it’s kind of funny that Bush is claiming a “mandate” for his secret tax plan when he didn’t bother to tell voters before the election what his tax plan would be.
Well, we’ll be debating this for another 4 years, mind as well get cracking now…
Let’s start with the Fair Tax Act, that is, abolishing the income tax in favor of a 23%ish sales tax. I can’t even begin to understand how this monstrosity is supposed to work.
For starters, more then 25% would be added to the price of items, as most manufacturers would have to pay 25% tax on the various items they need to make an item, and pass this cost onto the consumer as well as add the extra 25% for sales tax on the finished item. This would also create a huge incentive to create vertical monoplies, which is generally considered a bad thing.
Also, their would be a huge incentive to smuggle things from other countries, (or buy them legit, if sales tax is not imposed on imports), which would futher hurt job creation in this country as well as mean a huge loss of income for the gov’t, since they’ll loose the tax on these items. It will also lead to a large expansion in gov’t to fight smuggling and regulate taxes on legal imports.
They claim that this will abolish the IRS, but of course a similar agency (whether 50 different state agencies as the linked article seems to suggest or one federal) will be needed to monitor all sales, etc.
Thats enough for now, I’ll be back with Part II of why this is a terrible idea later. There will almost certainly be more then two parts.
What’s more, his reasons that prices will fall by 20% seem to be that producers will no longer be passing the cost of paying their employees payroll tax on to the consumer, the “embedded tax”. That is, people will make more money because their employers will pay them the same as under the current system, but items will cost less because employers will be paying their employees less.
He basically contradicts himself in the space of two paragraphs.
I hope this guy doesn’t go to bed dreaming of a Nobel Prize for Economics in his future.
In regards to empirical evidence, do you have any statistics that show how much incomes decreased in response to the various tax plans imposed over, say, the last 30 years? In 1981, when Reagan cut the top marginal rates from ~70% to ~35%, did salaries decrease a corresponding amount that year? Did the rich actually get poorer?
On the other side of the table, how do you think I’m going to automatically deduct 15% (or more) from everybody’s paycheck when they are expecting a corresponding 15% increase? What percentage of the company would walk out if I dared suggest a thing? How much goodwill will be lost? What would the press coverage be like? There’s a lot more to making such decisions than looking at a spreadsheet - if that’s the type your boss is, my condolences.
From a financial perspective why would I even want to? For current employees, income taxes are already budgeted in their paychecks… actually, income taxes don’t even get considered when calculating employee cost. When you determine employee cost you add salary+benefits+payroll/unemployment taxes+misc. costs. You ignore income tax because it is all paid by the employee - there is no employer portion of the income tax as there is to Social Security.
So if you’re making $30,000 a year, it doesn’t matter to me, the employer, what the income tax rate is because it’s all coming out of your pocket. Same thing with Social Security - if that tax goes, you’ll get your 7.65% back (and if you’re smart and approach me, I might throw in a couple of percent extra from my 7.5% windfall).
I believe in another thread on this subject, two things were also noted about this 23% VAT:
(1) When it is claimed to be 23%, it really means that the tax comes out to 23% of the total cost of the good including this tax. So, by more standard ways of calculating sales tax (where you express it as a percentage of the base price without the tax), the tax is really ~28%.
(2) It has been argued that even this rate of tax is not high enough to make the plan revenue-neutral, at least unless you apply it to nearly everything including services as well as goods. (There is also the issue of whether it gets applied to big-ticket items like houses.)
Of the three reform options listed, I believe the “fair tax” probably has the most congretional support (Republican power broker, Tom DeLay supports it), and the greatest chance of passage. The flat tax would be a distant second, and the value added tax would be so confusing and open to abuse it isn’t even worth discussing. Here are the reasons I believe the fair tax trumps the flat tax:
First and foremost, it eliminates the IRS and the IRC. Period. The flat tax doesn’t. The IRS is an outlaw government agency that routinely violates American citizen’s 4th and 5th amendment rights to due process of law, right to privacy, liberty and property. Above all else, it needs to be abolished. Although the IRS says the filing of individual tax returns is"voluntary" (without distraint, coercion or force), they make a mockery of this in practice, and the courts, by and large, let them get away with it. The flat tax–which would still require the reporting of income-- would not eliminate this; the fair tax would.
Whereas the income tax, in reality, provides a choice only at the risk of substantial loss of property and liberty, the fair tax–which is a pure retail consumption tax–actually provides a real choice of whether or not one wants to pay it. It is conceivable that one could live without paying the tax (used items, and resale items are non-taxable).
Since the fair tax is based solely on retail consumption, the “rich” will definitly pay their “fair share.”
This is problematic and open to debate, but I believe the fair tax will foster long term and sustained economic growth through fostering the rebuilding of our savings and investment base. This in turn will lead us out of the debt cycle we’ve been in for the last 60 years.
This last has always been my take on it. I’m all for a National Sales Tax to replace the Income tax as long as it applies to all transactions.
Buy a car? Pay tax.
Buy an apple? Pay tax.
Buy 1000 shares of Microsoft? Pay tax.
I made my broker turn green with that last one.
But the minute you start saying “A NST is a good idea…but only on SOME things.” you’re right back where you were before with lobbyists and a huge tax code for what is and is not included in such a tax.
So if you want to do it you make it for EVERY transaction.
Bill Gates wants to buy Cisco out of petty cash? Pay tax.
One of the drivers behind a sales tax instead of income taxes is that sales taxes make American exports more competitive, and imports less competitive.
Currently, if an American company builds a product and sells it for a profit abroad, it pays taxes on the profit. This is in essence a tax on American exports. On the other hand, if a foreign import comes in from a country that uses a VAT instead of income tax, then the import isn’t taxed like American goods.
A sales tax evens the playing field. Imports pay sales taxes along with American goods, and American exports don’t get taxed.
Aside from sales taxes, flat taxes are better from an economic efficiency standpoint because they don’t distort the market.
Since Russia went to a 13% flat tax, its economy has boomed. This has caused a lot of countries to sit up and take notice. Is it possible to do the same in the U.S.? 13% isn’t possible without losing revenue, but I believe something like a 17% flat tax, coupled with perhaps an 8% VAT, would. Would that be a better tax system than the complex system of progressive scales and loopholes that exists today? Probably.
And bonus, it makes those shirkers who have no income contribute taxes too! And all the [strike]rich guys[/strike] job creators who make much more than they spend get an even bigger tax cut than they already had.
That makes it not only not regressive, but negatively regressive.
OTOH, it is called The Fair Tax, so it’s got that going for it.
Post hoc. Russia’s economy could hardly help but boom, it was in a coma, then entered into a phase of vigorous entreprenuership, of the kind favored by Al Capone. Nonetheless, Russia has huge natural resources to exploit, a relatively educated work force. Downside: Russia is still a miserable place to live, so nobody is sober any longer than they have to be. Hidden downside: an ongoing ecological catastrophe, you want heavy metals like cadmium, you can mine the Volga river. Sure as fuck can’t drink it.
At any rate, Russia is so whack I would hesitate to use it as an example of anything that implies any rational set of parameters.
The Pubbies are following a tax/economy plan that is considered innovative and experimental. It involves starting a hugely expensive war, with no end in sight, and compounding the innovative experiment by cutting taxes at the same instant. This is currently known as innovative and experimental, it used to be called batshit crazy.
Over time, this will fade, and we will recognize this policy as totally batshit crazy. You didn’t hear it here first, but you heard it here again.
That a national sales tax will eliminate the IRS seems obviously false to me. The IRS wouldn’t need to keep track of income anymore, but instead it would need to track all sales made, which seeems like it would require a gov’t agency at least as intrusive. The gov’t would also need to expand to fight the large increase in smuggling that would follow, not to mention the huge welfare department that would be needed to figure out how much to refund all the low-income people for thier sales.
Except that in most of the schemes I’ve seen, savings and investment aren’t taxed. Rich people are also more likely to buy big ticket items and services from aborad and have them shipped in. Thus a large share of richfolks money will go untaxed, while the middle class will be asked to pick up the slack.
Also, do you really think the economy will do better if we encourage people to put their money into savings and not consume.
