SensibleTaxReform Blog

1. Rearranging the Chairs on the Sinking Titanic

The American Internal Revenue Code is an absolute mess. It is

• Complicated
• Contradictory
• Unjust to both families and businesses, and
• Very bad for our economy.

We need major tax reform. We need a new and very different tax system–one that is:

• Simple and easy to understand
• Just and treats everyone the same
• Transparent and free from manipulation behind closed doors in Washington; and
• A strong stimulus to American businesses.

Many tax-reform proposals are offered every year–by economists, politicians and others. They invariably claim to simplify our taxes and make them just and economically effective. However, most of the tax proposals coming out of Washington only make the federal tax code longer, more complicated, more unjust and more harmful to our economy. They are little more than manipulations of a very unsatisfactory tax system. [They are like the proverbial rearrangement of deck chairs on the Titanic as the mighty “unsinkable” ship was already sinking.]

Our Federal Tax System Is Broken!

Our federal tax system is so bad that it needs to be completely replaced. The vast majority of tax-reform proposals involve plans for modifying our existing Internal Revenue Code, not fixing it. This is understandable because it is far easier to make changes in an existing tax system than to propose a completely new tax system–a much more ambitious task.

Unfortunately, the Internal Revenue Code is beyond repair. The tax historian, Charles Adams, declared that “the income tax…can be likened to a dirty industrial smelter that does an efficient job, but pollutes the air, poisons the streams, and kills the forest.”

Our current tax system cannot even be described as efficient. However, we can certainly agree with the assertion that it badly harms our environment–not the physical environment of our air and water but the social environment of our economy, society and political system.

An institution, virtually any institution, runs the risk that poor management and changing conditions can cause it to deteriorate beyond repair. Our Internal Revenue Code has reached that point.

Our Federal Tax System Can Be Fixed!

Sensible Tax Reform—Simple, Just and Effective is very different from most other tax-reform proposals. It will indeed be very simple, very just to all families as well as to all businesses and will provide a very strong stimulus to the American economy. STR offers not merely an ambitious revision of our existing tax code, but a proposal for instituting sweeping changes to create a very different and vastly better tax system.

The website, www.SensibleTaxReform.com, offers extensive details of the proposed tax system.

Sensible Tax Reform—Simple, Just and Effective is available in softcover, hardcover and ebook from the author as well as from major booksellers worldwide.

4. Sensible Tax Reform– A Simple Tax

Long ago, President George W. Bush’s own Treasury Secretary, Paul H. O’Neill, made the realistic and honest observation that: “Everyone who has anything to do with the tax code agrees that it is an unbelievable mess!” Our tax code is indeed an “unbelievable mess.” It needs to be radically changed.

Any truly significant federal tax reform must include three basic and critical aspects:

• Simplicity,
• Justice and
• Economical effectiveness.

Sensible Tax Reform—Simple, Just and Effective will offer all of those. This blog will examine simplicity. The next two blogs will examine justice and economic effectiveness.

A Broken Tax System

As was described in earlier blogs, and as almost all taxpayers know from their own personal experiences, the American federal tax system is broken. The Internal Revenue Code totals more than 75,000 pages (longer than 55 Bibles!). On average, there are more than two changes per day in the Code—more than 700 per year.

Every year, the Internal Revenue Code becomes:

• Much more complicated,
• Much more unintelligible,
• Much more confusing,
• Much more contradictory,
• Much more opaque and subject to behind-the-scenes manipulation,
• And much, much longer.

A fundamental goal of any major federal tax reform must be to truthfully create a simple tax system. Our political leaders have shown repeatedly that this cannot be done by simply reforming the existing Internal Revenue Code.

The Tax Reform Act of 1986, the last truly sweeping reform of the Internal Revenue Code was informally known as the “Tax Simplification Act of 1986.” In reality, it as well as all other “tax simplification” bills and laws, including President Trump’s 2017 tax bill, invariably complicate rather than simplify the tax code.

Yet lawmakers cannot resist the temptation to market tax bills as “tax simplification.” Some appealing but unsuccessful proposals::

• “The Seniors Tax Simplification Act,”
• “The Student & Family Tax Simplification Act,”
• “The Mobile Workforce State Income Tax Simplification Act” and
• “The Business Activities Tax Simplification Act.”

Every Congress elicits more calls for simplification—which seldom is true. Even if the original sponsors’ intent was legitimate simplification, once the bill gets into the legislative grinder, it morphs into something that should be called the “Tax Complication Act of 202X.”

Actually Simplifying Our Federal Tax Code

Real simplification of the existing Internal Revenue Code is effectively impossible. Too many congressmen and senators have too much invested in protecting favored supporters (both individuals and businesses). Simplification of our current form of federal taxes will not happen.

A truly new tax system that replaces our current system is needed. Sensible Tax Reform—Simple, Just and Effective will be very simple. In order to accomplish this, the long, complicated existing tax code will be largely removed and replaced by a very simple alternative.

Sensible Tax Reform will eliminate most of our existing tax code. Gone will be:

• Social Security and Medicare taxes,
• Estate taxes,
• Corporate income taxes as well as
• Most personal income taxes.

An income tax on very high incomes will be retained. However, the primary source of tax revenue will be a federal consumption tax. It will be a very simple, very broad-based tax with very few exclusions or exemptions:

• There will be very few tax rules.
• They will be very simple, easy to understand and very transparent.
• Everyone will be treated exactly the same.
• As a result, it will be very difficult for tax lobbyists to wrangle special tax favors for their deep-pocketed patrons.
• It will also be much more difficult for dishonest taxpayers to evade taxes than is true under our current Internal Revenue Code.

The next post will detail the justice of the new tax system. Much more information about STR can be found at the website: www.SensibleTaxReform.com.

10. Will Government Agencies and Businesses Be Taxed?

The federal consumption tax (FCT) that will be introduced by Sensible Tax Reform will only apply to retail purchases for consumption. It will not be applied to non-retail and non-consumption expenditures. It will not apply to the purchases of either businesses or government agencies.

Businesses

This tax plan will be incredibly beneficial to businesses in the United States. They will no longer be subject to most of the existing federal taxes, including income and Social Security taxes, and the corresponding compliance costs. That will save American businesses almost $1 trillion every year.

And of course, purchases by businesses (whether corporations, partnerships or proprietorships) will not be subject to the proposed federal consumption tax either, since it will apply only to retail purchases.

Most businesses therefore will have no federal tax obligations at all. Retailers will need to collect and process the FCT from retail customers—but not from other businesses or government agencies.

With tax and compliance-cost savings of almost $1 trillion annually, American businesses will have an unprecedented opportunity! They will have ample resources to invest in research and investment in new capital equipment. They will also be able to pay off debt and increase dividend layouts to their shareholders. And, they will become much more competitive against foreign competitors–both in foreign markets and here at home in import-competing markets.

Governments

Agencies of federal, state or local governments in the US do not generally tax other government agencies—even now. That will be even more true under Sensible Tax Reform—Simple, Just and Effective. Existing taxes will no longer be paid and the FCT will not be imposed on state and local governments or their agencies.

Some government agencies provide commercial services or goods to the private sector, such as water purification, garbage collection and electrical energy. Although those agencies themselves would not pay the FCT on what they buy, their sales to retail customers would generally be subject to the same tax rules as would a corresponding sale by a private-sector business. Those government agencies would collect the FCT and remit it to the federal government.

 

In summary, under Sensible Tax Reform—Simple, Just and Effective, only expenditures by individuals and families will be subject to the federal consumption tax. Expenses of all business firms and governments and their agencies will be exempt.

 

 

9. What Expenditures Will Not Be Taxed?

The federal consumption tax (FCT) under Sensible Tax Reform—Simple, Just and Effective will only apply to retail purchases for use or consumption. Neither businesses nor governments agencies will pay it.

Most expenditures by individuals and families will be subject to the tax. However, household expenditures that are not for use or consumption will not be taxed. The principal non-taxable household expenditures will be:

• The payment of taxes,
• Debt repayments,
• Investments,
• Charitable donations and
• Insurance premiums.

Payment of taxes: Other taxes that households pay will not be subject to the federal consumption tax. For example, property taxes, state and local sales taxes, state and local income taxes, as well as excise taxes will be exempt from FCT taxation. A tax on a tax will not occur. Even today, the federal government allows deductions from federal income taxes for state and local income and property taxes. The same principle will apply with the FCT.

Debt repayments: Debt is accumulated from previous purchases. Most of those purchases will have been subject to the FCT. Therefore, the reduction of debt principal will not also be subject to the FCT. That would be double jeopardy. [In fact, from an economic point of view, the payoff of debt is an alternative form of saving.]

Investments: A very major benefit from Sensible Tax Reform will be the great potential that it will offer for increasing personal savings, since no taxes will have been paid on funds that are not spent. The middle classes especially will enjoy a great financial advantage in this area. Of course, there are many ways that investable funds can be employed—for retirement, for children’s education, to buy a home, or maybe to start a business. STR will greatly increase national savings.

Charitable donations: Just as with the increase in savings, STR will allow most households to be much more generous in donating to charities. Financial gifts will not be taxed, since they will be for the benefit of the charity and not of the individual.

Insurance premiums: Insurance can be viewed as a form of investment—the prudent protection of health, assets and investments. Insurance premiums will therefore not be taxed. However, the proceeds from insurance may be subject to taxes: medical expenses covered by health insurance, casualty insurance for an automobile accident or for a house damaged by a storm, and life-insurance proceeds.

Under Sensible Tax Reform non-consumption expenditures will be tax-free.