T Nation

Tax Reform


#1

Two words "Flat Tax". I believe Mr. Forbes has hit the nail right on the head. One sinple rate for everybody.

I know this has been discussed before, however I would like to hear the reasons (if any) why we shouldn't progress towards the flat tax.

One Simple Rate
A flat tax would unleash a stupendous economic boom.

BY STEVE FORBES
Sunday, August 21, 2005 12:01 a.m. EDT

A major domestic battle looms this fall, when tax reform--a centerpiece of the president's bold domestic agenda--will finally be on the table. The President's Advisory Panel on Federal Tax Reform is expected to release its findings by the end of September. After the political shellacking the White House took on Social Security, the administration will be strongly tempted to take a conciliatory path that supports only superficial reforms, essentially preserving the status quo of our hideous income tax code.

Such a course would have perilous consequences, economically and politically. In fact, the administration has an opportunity here to boldly retake the initiative, to recover lost political support and thrust an already decent economy into high gear and, at the same time, make America better able to meet intensifying competition from China, India and others. How? By junking the entire federal income tax code and starting over with a flat tax. A growing number of countries are doing this--and so should we.

The current system is beyond redemption, a beast whose complexity, confusion and outright unfairness have corrupted our economy and society. Americans waste more than $200 billion and over six billion hours each year filling out tax forms. They engage in all kinds of useless economic activity intended to take advantage of the code's maze of deductions and to reduce taxes--from deducting donations of old socks to making unwanted investments. The waste of brainpower--at a time of increasing global competition--is incalculable.

The code corrupts our system of government by encouraging the crassest political conduct and by creating a massive, intrusive federal bureaucracy. One-sixth of the private-sector employees in Washington are employed by the lobbying industry. Half their efforts are directed at wangling changes in the tax code. Few people realize that our health-care system, with its runaway costs, is, in fact, the ultimate product of the tax-code distortion in our economy. And last, but most definitely not least, we simply pay too much in tax. When you take into account all the taxes, fees and tolls paid to the government, the typical American pays somewhere around half or more of his income in taxes. Why do we the people accept this?

My flat tax plan has one simple rate, on the federal level: 17% on personal income and 17% on corporate profits. There would be generous exemptions for individuals: $13,200 for each adult; $4,000 for each child or dependent, and a refundable tax credit of $1,000 per child 16 or younger. A family of four would pay no federal income tax on its first $46,165 of income. Exemptions for a family of six--mom, dad, four kids--would be $65,930. No anti-risk-taking capital gains levy; the capital gains tax would go to zero. The abusive Alternative Minimum (really maximum) Tax would be abolished. No more death tax: You'd leave the world unmolested by the IRS. No taxation without respiration!
Corporate profits would be taxed at a rate of 17%. Companies could expense all investments at once: no more depreciation schedules. If these instant write-offs produce a loss, that could be carried forward to use against future profits for as many years as necessary to use it up. And businesses would be taxed only on income made in the U.S.

The economic boom the flat tax would unleash would be stupendous, ushering in a long-term, noninflationary expansion of historic proportions. The current expansion would pale in comparison. Once again, we would be the clear global leader in high-tech and medical innovations--unlike today, when our lead, thanks in no small part to the tax code, is now under increasing assault.

How would a flat tax do this? What so many "experts" can't grasp is that taxes are not only a means of raising revenue for governments but also a price and a burden. The tax you pay on income is the price you pay for working; the tax on profits is the price you pay for being successful, and the levy on capital gains is the price you pay for taking risks that work out. When you lower the price of good things, such as productive work, success and risk taking, you get more of them. The flat tax does that dramatically.

Experience demonstrates time and time again--the Harding-Coolidge tax cuts of the 1920s, the Kennedy cuts of the '60s, the Reagan cuts of the '80s and the Bush reductions of 2003--that lower tax rates lead to more economic activity, which leads to more government revenue. Fiscal Associates of Alexandria, Va., an economic consulting firm, did an analysis of the flat tax. Its findings: Between 2005 and 2015, the Forbes Flat Tax Plan would generate $56 billion more in new government revenue than the current income tax. More important, an estimated $6 trillion in additional assets would be created, an immense boost to our nation's balance sheet. This study also predicts that that flat tax would lead to nearly 3.5 million new jobs by 2011--jobs that otherwise would not exist.
To avoid puerile and divisive debate about who would gain and who would lose, my flat tax is designed to be a tax cut for all. Because some people will only focus on what they lose in the way of deductions under the flat tax--ignoring the fact that their income tax payments would go down--my plan gives you a choice: When the flat tax is implemented, you can file your postcard return under this new, simple system, or continue to file your tax returns, with all of their mind-numbing complexity, under the old system. See for yourself which is better. I think most would conclude that the flat tax is best.

Other countries are getting the message, even if we have yet to. Hong Kong has successfully had a variation of the flat tax for 60 years. Lithuania, Latvia and Estonia enacted flat taxes in the 1990s that have been hugely successful. Russia put in a flat tax four years ago, and revenues have more than doubled in real terms. Ukraine, Slovakia, Romania, Georgia and Serbia have also successfully enacted flat taxes. How ironic that onetime Communist nations have been reaping the benefits of a flat tax before that bastion of free enterprise, the U.S.

President Bush should understand that trying to tinker with the tax beast won't work. In 1986, Ronald Reagan simplified the tax code somewhat: A number of tax shelters were eliminated and the number of tax brackets were cut to two: 28% and 15%. But the code remained intact. No sooner was the ink of Reagan's signature dry than Washington politicians slid back into their bad, old habits. Since his day, the federal income tax code has been amended 14,000 times. The tax system today is 60% larger than it was after the Reagan reforms. The flat tax's very simplicity makes such backsliding difficult: Any change would trigger a national debate. For insurance, the Forbes Flat Tax also contains a supermajority provision--taxes can't be raised unless approved by a 60% vote in both the House and Senate. Few tax boosts in recent decades have surmounted such a barrier. The usual objections to the flat tax don't hold up. The flat tax will help housing--personal incomes would go up and interest rates would go down--and boost charitable giving. Experience demonstrates that when people earn more they give more.

What about a national retail sales tax? The most prominent plan encompassing this idea proposes a sales tax of 30% to replace the income tax and payroll tax. This 30% tax poses many challenges, among them repealing the 16th Amendment, which allows Washington to impose the income tax--a lengthy, onerous process. Otherwise, we would likely end up with both an income tax and a sales tax.
The national sales tax would dramatically raise prices of many goods and services. Imagine a couple buying a new house costing, say, $200,000, coughing up an extra $60,000 in sales taxes. A new dedicated bureaucracy would be necessary to collect the tax and to disburse rebates (which the plan's advocates propose) from Uncle Sam to tens of millions of Americans every month to repay them for a portion of the sales tax they pay on food and clothing. Under the circumstances, the flat tax seems the best alternative to the current abomination.

That's why President Bush should pull a Ronald Reagan--he should demand that Congress destroy this hideous tax system, the way Reagan demanded that Mikhail Gorbachev tear down the Berlin Wall. Should the president make such a plea, the American people would surprise the Washington cynics and give him a grateful, full-throated cry of support.

Mr. Forbes, editor in chief of Forbes Magazine and president & CEO of Forbes Inc., is the author of "Flat Tax Revolution: Using a Postcard to Abolish the IRS" (Regnery, 2005).


#2

I would have voted for Forbes if he'd won the nomination, and still would.

Bush won't support the flat tax, primarily because Forbes does, but also because it's smart and makes too much sense.

All a national sales tax would accomplish is the creation of a huge underground, internet-based, black market economy that thrives while the government slowly starves.

Obviously I have no expectation whatsoever that Bush will do the smart thing.


#3

This is the only reason Forbes got my vote in the primary.


#4

I agree completely that a national sales tax is not a good idea for the reasons above. I would love too see the IRS go Bye Bye.


#5

It's getting harder for anti-flat taxers to argue with the flat tax. But with so many good ideas in government it's being ignored for several reasons. It's simple, it makes sense, and it works.

The World Is Flat
But America is a laggard in the tax-reform revolution.

Monday, August 29, 2005 12:01 a.m. EDT

Next month's report of the White House tax reform commission will likely stop short of advocating a complete scrapping of the tax code. But look for it to have warm words for how well the flat tax is promoting economic growth in the more than dozen places--ranging from Ukraine to Hong Kong--that have adopted variations of it.

It's about time the concept of taxing all income at a single rate, which presidential candidate Steve Forbes and then-House Majority Leader Dick Armey broached a decade ago, once again takes center stage. It's increasingly popular overseas, with Romania and the republic of Georgia adopting it last January. Greece is likely to introduce a 25% single rate for both corporate and personal income next month. If Poland's opposition parties win next month's elections they are likely to introduce a flat tax. In Italy, the Bruno Leoni Institute has just published an interview with former finance minister and current defense minister Antonio Martino detailing his support of the flat tax.

Even Germany, normally a center of intellectual stagnation when it comes to tax policy, has gotten the bug. Angela Merkel, the candidate of the conservative Christian Democrats in the Sept. 18 election, has appointed radical reformer Paul Kirchhof as her spokesman on taxes. While her party's manifesto falls far short of advocating Mr. Kirchhof's idea of a single rate of 25% for companies and individuals, she has stoutly defended his approach: "It's important that there is a man who wants to go further in principle and, when there is room for maneuver, says, now we can go the next step."

To everyone's surprise the stodgy German media are now consumed with debate over the flat tax. Berlin's left-leaning Der Tageszeitung noted that under Mr. Kirchhof's proposal generous exemptions would mean a family of four would pay tax only on its portion of income that was over $42,000 a year. With the current German tax system now operating with 90,000 rules and 418 tax exemptions it asked, "Isn't an understandable tax system good for all? . . . Kirchhof stands for clarity." The center-right Frankfurter Allgemeine Zeitung, Germany's most respected paper, noted that while the idea has been predictably attacked by unions and some business interests, "massive resistance by people representing particular interests and associations is the most certain sign that this is the right path to take."

In Britain, die-hard opponents of the flat tax, such as Chancellor of the Exchequer Gordon Brown, were caught censoring portions of an internal Treasury paper on the subject that was obtained under the recently effective Freedom of Information Act. The unexpurgated version, leaked to the Daily Telegraph, found that a flat tax would likely make Britain more attractive to foreign investors, eliminate economic distortions and create a "mini-economic boom." The paper noted that under flat-tax systems in other European countries the rich end up paying a larger share of total tax revenues. In flat-tax countries, taxpayers in the highest brackets move from consumption or tax-sheltered investments to more productive, taxable investments. Many higher earners work harder or take additional risks, rewarded by higher after-tax returns.

Indeed, the Brussels-based Center for a New Europe notes that none of the countries that have adopted the flat tax are seriously contemplating any retreat from it. Flat-tax pioneer Estonia is even reducing its rate by two percentage points a year until it drops to 20% in 2007. Since the tax's inception in 1994, Estonia has had an average growth of 5.2% a year, and now also ranks fourth (out of 155 countries) in the Index of Economic Freedom, published by The Wall Street Journal and the Heritage Foundation.

After being mired in stagnation for years, in 2001 Russia implemented a flat tax of 13% for individuals, along with a 15% rate for most business income. The economy grew 7.3% last year, thanks in part to underground activity going legitimate, more than doubling revenues from income taxes. Even the New York Times, which opposes a flat tax in the U.S., has praised, President Vladimir Putin for "radically simplifying the code and slashing rates." On a trip to flat-tax Slovakia earlier this year, President Bush, extolled those who are using the flat tax "to attract capital and create economic vitality."

Here at home the flat tax is still routinely ridiculed. When Mr. Forbes floated the idea in 1995, President Clinton joked that Republicans were becoming "the party of flat-earthers and flat-taxers." But he has also told friends privately that he got a real scare during the 1992 primaries when Jerry Brown championed a flat tax. Mr. Brown won applause from audiences by pointing out that under our current system the rich will always be able to hire experts to lobby for tax loopholes and avoid the higher rate traps set for them.

That logic and the practical realization of it in country after country is winning adherents from all walks of life in the U.S. Donald Trump is full of praise for Mr. Forbes's new book, "Flat Tax Revolution." Actor Clint Eastwood praises a flat tax because it would mean "a little old lady on a home computer [could do] the work of all these thousands of bureaucrats and accountants." A variation on the flat-tax idea, junking the income tax in favor of a single-rate national sales tax is also gaining popularity. "The Fair Tax," a new book by Rep. John Linder and radio talk-show host Neal Boortz, is currently topping best-seller lists.

So here's hoping the Bush tax reform commission is bold enough to at least propose some steps towards a dramatic flattening of the income tax code. It may be a matter of long-term economic survival. America's taxes on profits are around 40%, when you combine federal, state and local levies. With the possible exception of Japan, that rate is about the highest of any developed nation in the world today. If the U.S. doesn't adopt the flat tax it may find itself losing jobs, capital and ambitious entrepreneurs to nations with a more ambitious growth agenda.

Alvin Rabushka, a senior fellow at Stanford's Hoover Institution, believes it's only a matter of time before an emerging economic superpower like China or India goes the flat-tax route. His book on the subject has just been published in Chinese, with a preface by Lou Jiwei, the vice minister of finance. If China adopted a flat tax, more than a quarter of the world's population would be filling out tax returns on the back of a postcard. That would leave them a lot of time and money to eat our economic lunch.


#6

There is no better idea for taxing people than the flat tax. The system that we have now discourages making more money and encourages all kinds of cheating.

I think a flat 20% with no loopholes is the way to go. Also, anyone making under 30-K per year is exempt. Will we see it? I actually think that it has a chance if people begin to speak out and support such a plan.

I supported Steve Forbes in the republican primary simply because of his flat tax indea.


#7

I think Forbes' idea was to make the first $30K or so exempt, so folks making less than that pay $0, and everybody else is just taxed on what the make over $30K.


#8

Definitely. That's why I'm going to start sending this stuff to my senators and congressmen too.

More people need to remember that they work for us and light a fire under their ass!


#9

Absol-fuckin-lutely


#10

The 20% flat tax sounds really good - I supported Forbes over Bush in 2000 as well.

But-

Does the 20% include SS/Med tax? If not, then tack on another 7.65%. If you happen to be self employed, make that 15.3%. A small business owner would cringe at paying 35.3%.

But I could be wrong.


#11

I like the idea but I believe it will never happen. Everyone will want their deductions.


#12

It won't be so simple as a one flat tax. I think there will have to be several brackets or levels of the flat tax, not just a 20% across the board.

If you make 30K and under you pay nothing. But if you get a raise to, say 32K your tax will be 6400. So you will bring home 25,600 if taxed at the 20% rate. The only way for you to bring home the 30K, you will need to get a raise to 36K. So you see even with this basic math this system is already showing serious errors.

The flat ta will never pass, this is a platform tool used to get poeple rallied up and vote for a politician. A marketing of sort if you will. Yeay! Flat tax, flat tax, i hear people say. A Flat tax is like minnimum sentencing, think about that for a moment.


#13

I think you are misunderstanding the 30K cutoff. No one would pay tax on their first 30K. Period. It is a 'deduction' that everyone gets.

So - using your example your 32K guy would pay $400, not 3200.

I think that the non-taxable level should be raised to 50K.

I'm telling you - a flat tax, and privatized SS is the way to go.


#14

Interesting analysis on what the flat tax wold do for housing. Just one more example of how beneficial it would be to pump more cash into our economy.

http://www.ncpa.org/pi/taxes/tax72.html#business

Mortgage Deduction Overrated
Those who argue for retaining the deductibility of home mortgage interest payments from the federal income tax overstate both its importance in encouraging home ownership and its effect on housing prices.

Housing prices generally rise or fall with changes in gross domestic product and personal income. An increase in personal income raises the demand for housing, increasing the value and selling prices of existing homes and the demand for new home construction.

Less than 25 percent of all income tax filers in 1991 claimed a deduction for mortgage interest. Since mortgage interest is deducted from income, the value of the deduction increases with the income of the filer. Thus most of the benefit of the deduction goes to higher income taxpayers.

For those filers with incomes of $20,000 to $30,000 per year, the average tax saving is $785; for those making $30,000 to $40,000, the saving is $849; and for those making $40,000 to $50,000, it is $1,704.

Those taxpayers in the $50,000 to $100,000 range save $2,164 on average, while those making more than $100,000 per year save an average of $5,581.
If tax rates were lowered, say by a flat tax, the value of the deduction would fall for higher-income taxpayers along with their tax rates. But interest rates would also fall, since interest income would no longer be taxed. Mortgage payments would therefore be lower or fixed-rate mortgages could be refinanced to take advantage of the lower rates.

Source: Rebecca S. Schaefer, "The Mortgage Interest Deduction: A Home for Special Interests," Issues and Answers, August 17, 1995, Citizens for a Sound Economy Foundation, 1250 H Street, NW, Suite 700, Washington, DC 20005, (202) 783-3870.


#15

And besides the under ground it would create it would be a new tax and I would be willing to bet the Government would not do away with all the old tax. They would say ?WE need to keep social security afloat


#16

where can i find the email adresses of my Govenor and Senators and representatives?

I want to email them the flat tax thing written by forbes and tell them I support it. I need to do something, I hate just sitting and watching people make poor choices.


#17

http://www.senate.gov/general/contact_information/senators_cfm.cfm

http://www.house.gov/writerep/


#18

Flatter-y Will Get You Everywhere
On tax reform, Steve Forbes has the right idea.

BY PETE DU PONT
Wednesday, August 31, 2005 12:01 a.m. EDT

September arrives tomorrow, Congress goes back to work next week, and a week or two after that President Bush's Advisory Panel on Tax Reform will present its report on "revenue neutral policy options for reforming the Federal Internal Revenue Code."

Chaired by former U.S. senators Connie Mack (R., Fla.) and John Breaux (D., La.), the panel was instructed to come up with ways to "(a) simplify federal tax laws to reduce the costs and administrative burdens of compliance . . . (b) share the burdens and benefits of the Federal tax structure in an appropriately progressive manner . . . and (c) promote long-run economic growth and job creation."

The panel will surely conclude that America has an abysmal tax system. It is politically motivated; members of Congress amend the code to reward their friends and punish their enemies. And as every taxpayer knows, it is maddeningly complex, sometimes incomprehensible, time-consuming to comply with, and frustrating. Steve Forbes's new book, "Flat Tax Revolution" (Regnery) defines the problem:

The tax code has been amended 14,000 times and is 60% longer since Ronald Reagan's presidency.

The cost of compliance in terms of taxpayer time has risen 67% in the past decade and a half.

Americans spend more than six billion man-hours each year filling out tax forms at a cost to the economy of $200 billion.
So what should the president's panel recommend? A tax code that will raise at least current revenues and is simpler and easier to comply with, demanding less cost, time and effort by all of us.

One option is to replace personal and corporate income taxes, Social Security and Medicare payroll taxes, capital gains and estate and gift taxes with a 30% national sales tax. We would pay taxes when we buy things instead of when we earn income, and get a refund from the government to offset the purchases of essentials like food and clothing. But as Mr. Forbes points out, raising by 30% the cost of housing and college education, along with government purchases such as military and medical supplies, would be economically devastating. And managing such a system--let alone integrating it with the many different state and local sales tax systems across the country--would be costly and challenging.
Most important, before the national sales tax is enacted we would have to repeal the 16th Amendment, which authorized the personal income tax. Otherwise we would quickly have the current income tax burden and a national sales tax.

There is a better solution, one advanced almost 10 years ago by the National Commission on Economic Growth and Tax Reform (of which I was a member): "a single, low tax rate with a generous personal exemption"--a flat tax.

Under a flat income tax there would be one rate--Mr. Forbes recommends 17%, with a personal exemption of $13,000 per adult and $4,000 per child or dependant, along with a $1,000 per child tax credit. Thus a family of four would pay no federal income tax on its first $46,000 of income. There would be no double taxation of dividends, no capital gains taxes, death taxes, or taxes on Social Security benefits. The tax return would be simpler and easier to fill out: From your wages and salary subtract your personal and dependent exemptions and multiply the result by 17%. It would almost be a tax on a postcard, a huge improvement over the massive complexity of the Internal Revenue Code. (Corporate profits would be taxed at a flat 17% too.)

So what would the impact of such a system be on Federal tax receipts? Very positive, because income tax rate reductions tend to raise income tax receipts. The Kennedy income tax cuts of the 1960s reduced top rates from 91% to 71% and boosted revenues by one-third, raising the four-year average annual tax revenue growth from 2.1% to 8.6%. The Reagan tax rate reductions of the 1980s saw tax revenue increase 56% over eight years.
The reason for such increases in tax receipts is economic growth--lower tax rates mean higher economic growth, more investments, more jobs, greater incentive for people to work harder to earn more money, and thus the economy expands, which in turn means more government tax revenue.

If you don't believe it, consider my home state of Delaware. In the 1980s top income tax rates were gradually reduced from 19.8% to 5.9% (the rates for lower brackets were similarly reduced). The result was economic growth averaging 5.4% a year for a quarter of a century, which more than tripled the state's personal income tax revenues over the same period.

Opponents of the flat tax say it would unduly help the rich. But a lower flat tax rate is joined with the elimination of deductions and loopholes; tax manipulation by the wealthy would vanish and all taxpayers would be playing by the same rules. Charitable giving would drop, critics say, but historical experience says that is not true either. Over the past 40 years tax rates have risen or fallen many times, but charitable giving has constantly risen. When people have more money, they contribute more money.

President Kennedy had it right, lower tax rates are "the rising tide that lifts all boats." Steve Forbes estimates his 17% flat tax would increase annual federal revenues $56 billion. A simple flat tax instead of the complex current IRS tax system would free up six billion hours a year of our time and many billions of our income dollars, which are currently expended complying with our tax laws, to spend working harder and investing more in our communities.
Such a tax reform plan meets America's goals: It is simple and understandable, applies to everyone, gets government the revenues it needs, and would end congressional manipulation of the tax system. Most important, America needs stronger economic growth, and the flat tax would help generate it.

Mr. du Pont, a former governor of Delaware, is chairman of the Dallas-based National Center for Policy Analysis. His column appears once a month.


#19

The dems will figure out a way to demagogue the issue and convince the old folks and poor that the 'evil rich' are at it again. Amazing how numbers, facts, logic, are irrelevant to the grab for power.


#20

Ok ok i see now. So a 50K earning would fetch the gov 4K in taxes because only the 20K would be taxed @ 20%. If this is right then it should really work.

Unfortunately i just don't see the enormous infastructure the current tax system generated going away any time soon.