SensibleTaxReform Blog

8. A Federal Consumption Tax (B)

The federal consumption tax (FCT) that is proposed under Sensible Tax Reform—Simple, Just and Effective satisfies all three of those goals: simplicity, justice and economic effectiveness.

A Simple Tax

The FCT will be a simple tax:

• A single rate,
• Federal tax,
• On retail purchases only,
• Applying to virtually all retail purchases (goods and services),
• Easy for everyone to understand,
• Very difficult for tax lobbyists to manipulate and
• With no longer any annual reporting obligations for households

Very simply, the tax will apply to most of what individuals and families consume. It will be much broader than any existing sales tax in order to keep the tax rate as low as possible. We will pay the tax whenever we shop. The tax will be included in the listed sales price, but shown clearly on the sales receipt. Unlike now, we will know how much we are paying to the government, since it will be primarily the sales taxes that we pay.

A Just Tax

The FCT will be a just tax, applying:

• To all consumers (even those with illegal income, such as drug dealers),
• From any commercial seller (whether in store or online),
• With special provisions for only four high-priority categories of consumption (healthcare, homes, cars and higher education),
• With a rebate of the tax on purchases up to the poverty level.
• Everyone will be treated exactly alike—paying the same taxes and benefiting from the same special provisions.

In sharp contrast to our existing federal tax system, Sensible Tax Reform will treat everyone the same–all consumers and all retailers.

An Economically-Effective Tax

The FCT will be economically effective. It will:

• Apply to retail purchases only and will not apply to businesses;
• Stimulate savings, since savings will all be pre-tax;
• Level the international playing field so that American businesses can compete more effectively in export markets and against imports;
• Reduce the need for the US Government to borrow so heavily abroad;
• Keep American companies home;
• Create millions of jobs in this country; and
• Be phased-in over a five-year period.

Sensible Tax Reform—Simple, Just and Effective will be a workable and easy-to-understand tax system. The next post will discuss several categories of expenditures, such as the payment of taxes and investments, which will be exempt from the FCT.

Tags: #tax reform

7. A Federal Consumption Tax (A)

Federal Taxation of Income

The Internal Revenue Code (IRC) is focused heavily upon income taxes. [In 2012, more than 46% of federal revenues came from personal income taxes, almost 35% from Social Security and Medicare taxes and another 10% from corporate income taxes.] The mass of complications, contradictions, injustices, etc. of our tax system is primarily income-tax based.

Most of the tax proposals coming out of Washington are mere manipulations of that Code (“rearranging the deck chairs on the Titanic”). That is also where the bulk of the intransigence in discussing serious tax reform exists:

• There is great animosity when our politicians discuss tax reform among themselves.
• There is much heat when constituents discuss tax reform with their congressmen.
• And, tax lobbyists throw billions of dollars every year at politicians to influence tax changes for the advantage of their clients–seldom to the advantage of the American people in general.

The result is that little of real value ever seems to be accomplished to this income tax-based system. Much further harm gets done to the IRC every year.

Federal Taxation of Consumption

Sensible Tax Reform–Simple, Just and Effective is a proposal to replace most of our income-tax-based federal tax system with a very new system that is based primarily upon a federal consumption tax—a national sales tax.

Blog #3 compared taxes paid by Americans with taxes paid in many other major countries. In every one of those other countries a national consumption tax, called a value-added tax, is an important part of their tax system. Only in the United States is their no federal consumption tax (FCT). We do have state sales taxes in most states and some local sales taxes as well. However, the federal government has chosen to not use a federal sales tax.

An FCT has been shown to be very workable in almost every other country in the world. It is time for America to seriously explore the feasibility of a federal consumption tax. Yet, we do not want to add more complexity to what already exists. We do not want to add an FCT to our existing code. We should want to very greatly simplify our federal tax code, as well as make it much more just and much more effective.

Sensible Tax Reform–Simple, Just and Effective will replace most of the existing code. Our tax system will be based largely on what we spend, rather than personal income and business earnings. The consumption tax will be very simple:

• A flat rate,
• Applied to the purchase of most goods and services,
• With only a few preferences and
• Coupled with protection for the poor.

Replacing our existing tax code with a consumption tax would have many advantages:

• For the federal government, tax revenue would be more predictable, since consumption varies much less than does income.
• For businesses, the elimination of their existing federal tax burdens would completely end those tax payments (more than $240 billion annually). It would end their tax-compliance expenses too, which also cost American businesses hundreds of billions of dollars every year.
• For households, there would be the end to withholding taxes. The $420 billion of Social Security and Medicare taxes as well as most of the $1.1 trillion of personal income taxes will actually be received by individuals and households. Take-home pay would increase greatly. Also, real income would be much greater.
• The new system would be much more transparent, much easier to understand and very difficult for lobbyists and their Washington clients to surreptitiously distort the taxes as they do now.
• We would all have a much clearer idea of how much we pay in taxes.

The next post will further discuss the federal consumption tax.

Tags: #tax reform

6. Sensible Tax Reform–An Economically-Effective Tax

The two previous posts have focused upon the simplicity and justice aspects of Sensible Tax Reform–Simple, Just and Effective. This post will examine the third element: economic effectiveness.

Efficient or Effective?

Some analysts would describe our Internal Revenue Code as “efficient.” That is not always an adequate attribute. As Blog #1 noted, the tax historian, Charles Adams, has colorfully observed 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.” As Adams’ observation notes, the existing tax code may be efficient—it collects a lot of taxes. However, in the process, it does a lot of harm. Efficiency alone is not sufficient. What we need is a wholly new tax system that is not only economically efficient but also, more importantly, effective.

Efficient and Effective!

Unlike our existing tax code, which has very many negative impacts upon the American economy, Sensible Tax Reform—Simple, Just and Effective has been carefully designed to be economically effective—for all sectors of the economy:

• For families, STR will raise income, increase both the ability and incentive to save and eliminate most of our current tax-compliance costs and burdens.
• For businesses, STR will eliminate most of their federal taxes, their tax-compliance costs and the distortions that tax incentives encourage.
• The overall economy will be very strong and millions of jobs will be created.
• For the federal government, under STR the collection of taxes will be much simpler and more predictable, with less avoidance and evasion.
• Interest rates will decline and a strong economy will likely yield a strong stock market.
• Despite the lower interest rates, both households and businesses will have less incentive to borrow as heavily as they do now. That lower debt will be safer for them and for our overall economy and society. That would greatly reduce the terrible cost of another Great Recession such as we had in 2007-2010.
• Internationally, American businesses will be much more competitive in both export and import markets, our trade and current-account deficits will shrink greatly and our government’s need to borrow abroad will decline massively.
• American companies will no longer have a tax incentive to use deceptive accounting techniques to move profits abroad. Much of the profits that are hidden abroad now will return home.
• The United States will become a veritable tax haven. American companies will stop moving their headquarters abroad for tax reasons. Foreign companies may even be attracted to moving here.

Simplicity, Justice and Effectiveness

Many tax proposals claim to be trying to simplify and improve the justice of our tax system. We have observed that not only do they almost all fail badly in those tasks but they also almost always harm the American economy. Sensible Tax Reform—Simple, Just and Effective is different.

• It is simple—very simple.
• It is just—very just.
• And it is economically effective—very effective.

The next few posts will examine the specifics of the STR proposal.

Tags: #tax reform

5. Sensible Tax Reform–A Just Tax

The simplicity of Sensible Tax Reform–Simple, Just and Effective was explored in the previous post. In this one, the justice element will be shown.

An Unjust Tax System

Will Rogers was not only a famous humorist but also an astute commentator on America and its problems. I think that he spoke for most Americans when he quipped that “people want just taxes more than they want lower taxes.”

Unfortunately, one of the greatest of the very numerous flaws of our existing Internal Revenue Code is its injustice. However when our federal tax code was first written a century ago, justice was one of its primary goals. The so-called “Gilded Age” of the late 1800s and early 1900s had brought great public scrutiny and disapproval of the excesses of the very rich. Even the Gilded Age’s most prominent financier, J. Pierpont Morgan, warned strongly about the dangers of an economic and social system that was perceived by many of the very rich (as well as by most of the rest of the country) to be a dangerous condition. Morgan warned against “the tyranny of mere wealth, the tyranny of plutocracy.”

There was a very different political environment 100 years ago from what we have now. The government passed aggressive legislation, including the creation of the Federal Reserve and the introduction of the federal income tax. That progressive government had a Republican president (Theodore Roosevelt, a member of the moneyed classes himself), a Republican Senate and a Republican House. There was broad bipartisan support from Democrats as well as Republicans. Political differences were put aside by the majority to do what was good for the country—not just politics as usual, which is clearly the norm in Washington today.

The new tax code, which first required a constitutional amendment (the 16^th Amendment) was progressive and very simple. Very few people, only those with high incomes, paid any personal income taxes at all. The tax rates ranged from 0-7%–less than what some states charge today. It had very few loopholes and did not impose a heavy burden on anyone. It was widely perceived to be just.

Unfortunately, in the intervening 100 years, that simple and just tax system deteriorated drastically into the 77,000-page disaster that we have today. Not only was simplicity sacrificed but so was justice–our current federal tax system is loaded with provisions that benefit some groups while harming others:

• Warren Buffett, America’s 2d-richest man, has publicly condemned a tax system that taxes his secretary at a much higher tax rate than someone like himself with tens of millions of dollars of income.
• Capital gains and dividends are taxed at a much lower rate for those wealthy enough to invest outside of an IRA or 401k retirement account.
• Salary earners may pay taxes at almost a 40% rate while speculators who qualify under special tax provisions called “carried interest” pay the same tax rate as for capital gains. That rate is 16% points less for their unearned and largely risk-free income (which in some cases amounts to billions of dollars) than that paid by most wage and salary earners.
• Companies like Apple and General Electric use financial tricks to pretend that their American earnings have been made abroad and avoid most or even all US taxation–indefinitely. Small and medium-sized businesses can seldom afford the same tricks.
• Many of the tax advantages that the lobbyists of big companies, the very wealthy and other very influential groups have been able to wrangle behind closed doors in Washington are not available to small companies and less-wealthy households.
• Wealthy people with expensive houses can obtain up to $500,000 of tax-free capital gains on the sales of their homes–and they can do it every two years if they have multiple homes.
• Although no estates smaller than $10.5 million are taxed by the federal government, huge estates often pay much less than mid-sized estates.

Almost everyone, wealthy as well as poor, can legitimately complain about the inequity of some parts or other of our existing Internal Revenue Code. That is not just. That is not even smart for the country as a whole.

Creation of a New Tax System that Focuses on Justice

When Sensible Tax Reform–Simple, Just and Effective is adopted, everyone will be treated exactly alike. That is how a just tax system must be designed.

• All businesses, whether large or small and whether corporation, partnership or proprietorship, will be treated exactly alike.
• All households, whether rich or poor and whatever the source of their income, will be subject to the same rules.
• All estates will be subject to the same rules.
• All purchases will be subject to the same rates.
• All retailers, whether in-store or online, will be treated exactly the same.
• Any special provision, such as the rebate to protect the poor, will be available to everyone.

This new tax system will be easy to understand. It will treat everyone alike. There will be no secret manipulations for the benefit of only a few. Sensible Tax Reform–Simple, Just and Effective will bring true tax justice.

The next post will detail the third key element of this new tax system: Its very dynamic impact upon the growth of the American economy.

Tags: #tax reform