Tax reform

[gasgod]

I suspect everybody would agree that our present Federal tax code is far from optimum. But what should replace it?

FairTax? (National Sales Tax) In many ways, I like the idea, but IMO it has problems. First, it encourages Americans to spend their money abroad, and it discourages foreigners from coming here to spend their money. Second, there are enforcement problems. It hardly pays to evade a 6% sales tax, but a 20% or higher tax would encourage evasion.

A Value Added Tax simply adds complexity to an already complex system. To me, the VAT is a non-starter.

Corporate taxes are insanely complex, and the costs of compliance/avoidance are so high that its efficiency is only about 50%. Briefly put, the consumer pays a dollar in (hidden) taxes, the corporation pays its accountant $.50 to calculate the tax, and the government gets the other $.50.

As distasteful as it seems, I would think the ideal tax system would be some form of income tax. After all, the consumer is the one who bears the true burden, so why make taxation complex? mThe only winners in the complexity game are the lobbyists and the Congress.

To shield the ideal tax system from Congressional meddling, I would propose a Constitutional amendment. There would be but one principal tax, the individual income tax. Perhaps certain other specifically enumerated taxes would be allowed. Congress would be allowed to impose import and export taxes, because we must be prepared to respond to similar taxes by other governments. Probably a gasoline tax would be retained as part of our energy policy. Maybe a very few others. But there would be no taxes levied on business.

My ideal tax would have only two exemptions: First, a personal exemption based on the poverty level. Second, an exemption for all income that is put into a Qualified Investment Account. (Withdrawals are taxed as income.)

No other exemptions, credits, deductions, or tax breaks of any kind would be allowed. None whatsoever. The tax rate would be flat, or perhaps mildly graduated. (Flat seems better, but mildly graduated might be more politically acceptable.

The benefits are manifest. You could do your taxes in 15 minutes or so, and you could be sure that every other taxpayer was pahing his/her fair share. The United States would instantly become the location of choice for any multi-national company, which would be a huge boost for our economy. Congress would only be empowered to set tax rates, and would not have the power to write millions of lines of tax code. Thus, they would be more accountable to the voter, rather than to the lobbyist.

OK, that's just my utopian tax idea. What's yours?


GG

[InchoateHand]

And every company with more than a few million in gross would have CEOs and VPs on small compensation packages, purchasing swimming pools on the company dime.

This would shift the tax burden even further downward.

[fimbulwinter]

sales tax is, precentage wise, a regressive tax, so i don't support it.

income tax penalizes wage earners and stagnates meritocracy, so i don't support it.

three-step flat taxing the top 70% of Americans would allow a massive tax break simply in the beaurocracy cut by such a simplification. I therefore support this idea.

fim

[bholdr]

[ QUOTE ]
sales tax is, precentage wise, a regressive tax, so i don't support it.

income tax penalizes wage earners and stagnates meritocracy, so i don't support it.

three-step flat taxing the top 70% of Americans would allow a massive tax break simply in the beaurocracy cut by such a simplification. I therefore support this idea.


[/ QUOTE ]


i aggree. however, the tax code is a powerful tool that may be used to create incentives for progressive/ benifical development and spending, and to give that up in the name of mere simplicity is a mistake, IMO. this is what the rhetoric about 'flat taxes' etc overlooks.

[gasgod]

[ QUOTE ]
[ QUOTE ]
sales tax is, precentage wise, a regressive tax, so i don't support it.

income tax penalizes wage earners and stagnates meritocracy, so i don't support it.

three-step flat taxing the top 70% of Americans would allow a massive tax break simply in the beaurocracy cut by such a simplification. I therefore support this idea.


[/ QUOTE ]


i aggree. however, the tax code is a powerful tool that may be used to create incentives for progressive/ benifical development and spending, and to give that up in the name of mere simplicity is a mistake, IMO. this is what the rhetoric about 'flat taxes' etc overlooks.

[/ QUOTE ]

The problem with using the tax code as a tool to create incentives, etc. is that complexity comes at an enormous cost. Estimates vary, but our tax code probably costs the nation several hundred billion dollars a year.


GG

[gasgod]

[ QUOTE ]
sales tax is, precentage wise, a regressive tax, so i don't support it.

income tax penalizes wage earners and stagnates meritocracy, so i don't support it.

three-step flat taxing the top 70% of Americans would allow a massive tax break simply in the beaurocracy cut by such a simplification. I therefore support this idea.

fim

[/ QUOTE ]

I don't understand. Why is this not an income tax?

GG

[Felix_Nietsche]

First, it encourages Americans to spend their money abroad,
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Not at all. Taxes are part of the cost of every product and service you buy. Most of these taxes are 'hidden' as part of the cost of the product. E.g. Lets say you buy a loaf of bread that costs $1.00. If there were no taxes, the same loaf of bread might now only cost $0.80 Taxes are bulit into the costs of foreign products and when you buy foreign goods, you are indirectly paying their taxes....


and it discourages foreigners from coming here to spend their money.
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1. Again 'hidden' taxes are built into the costs of all products. If you buy a German car, you are indirectly paying German taxes....
2. Because of tariffs, my understanding is a national sales tax actually makes US good CHEAPER to buy for foreigners... If 20% tariffs were being levied on a $1.00 loaf of bread the foreign consumer pays $1.20. With a national sales tax the 20% tariff is applied to a $0.80 loaf of bread and the foreign consumer pays $0.96 for that same loaf of bread.
So does that not make US goods more attractive to buy?


Second, there are enforcement problems. It hardly pays to evade a 6% sales tax, but a 20% or higher tax would encourage evasion.
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No, if anything it makes it easier. Right now the IRS monitors 280,000,000 Americans. If the income tax dies, then the IRS monitors 10,000,000 businesses (I'm not sure of the exact figure).
It is easier to monitor 10M vs 280M...


The sales tax is just a more VISIBLE for of taxation. Consider this example.
A man owns an apartment complex. After paying a $50,000 property tax, he makes $300,000 per year. The state decides to double property taxes the next year. So the apartment owner raises the rents to cover his increased costs and he still makes his $300K/yr and the renters bear the burden of the increased property tax...
Again, the tax increase is 'hidden' in the cost of the rent... You're INDIRECTLY paying taxes that your not even aware of.

[Dead]

[ QUOTE ]
The problem with using the tax code as a tool to create incentives, etc. is that complexity comes at an enormous cost. Estimates vary, but our tax code probably costs the nation several hundred billion dollars a year.


GG

[/ QUOTE ]

You are 100% correct. Our tax code is a disaster. I am not sure what the solution is, but it does cost businesses billions of dollars in compliance costs. It is very taxing(no pun intended) for small businesses to spend all of their time trying to figure out our tax code and the measures required to comply with it.

[DVaut1]

[ QUOTE ]
First, it encourages Americans to spend their money abroad,
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Not at all. Taxes are part of the cost of every product and service you buy. Most of these taxes are 'hidden' as part of the cost of the product.

[/ QUOTE ]

I think it takes a special kind of arrogance to assume Americans don't know the products they buy are taxed multiple times at both the production and distribution levels before they get their hands on them. I believe it’s disingenuous to call this ‘hidden.’

[ QUOTE ]
E.g. Lets say you buy a loaf of bread that costs $1.00. If there were no taxes, the same loaf of bread might now only cost $0.80 Taxes are bulit into the costs of foreign products and when you buy foreign goods, you are indirectly paying their taxes....


[/ QUOTE ]

At a rate almost always below 20%; almost always substantially less so.


[ QUOTE ]
Second, there are enforcement problems. It hardly pays to evade a 6% sales tax, but a 20% or higher tax would encourage evasion.
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No, if anything it makes it easier. Right now the IRS monitors 280,000,000 Americans.

[/ QUOTE ]

First, theres 295 million Americans now. Secondly, the IRS is only 'monitoring' 130 million of us.

130 Million Personal Tax Returns Filed Last Year (http://http://www.irs.gov/taxstats/article/0,,id=102886,00.html)

But what's 150 million between friends?

[ QUOTE ]
If the income tax dies, then the IRS monitors 10,000,000 businesses

[/ QUOTE ]

Not quite. What defines a 'business' is murky in tax code at best, but, if we count businesses as anything from a multi-national corporation to anyone who hires as little as 1 employee, there are 35 million businesses in the United States (refer to link above).

By claiming that removing the income tax would make enforcement ‘easier’, does this imply the IRS is so overworked now with personal tax returns that they’re letting rampant tax evasion among business go unabated? Or do you mean that, if compliance is high now, imagine how high it could be if we could free the hands of the IRS bureaucracy from income tax and let them deal with the enforcement of the sales tax? I doubt you mean the former; if you do in fact mean the latter, then I believe the increased ability of the IRS to be vigilant about sales tax compliance would be more than outweighed by the motivation of businesses to evade such a tax.

[ QUOTE ]
A man owns an apartment complex. After paying a $50,000 property tax, he makes $300,000 per year. The state decides to double property taxes the next year. So the apartment owner raises the rents to cover his increased costs and he still makes his $300K/yr and the renters bear the burden of the increased property tax...
Again, the tax increase is 'hidden' in the cost of the rent... You're INDIRECTLY paying taxes that your not even aware of.

[/ QUOTE ]

Again, this seems like a lot of hubris to characterize our hypothetical tenants with such ignorance/stupidity. It's not as if information about property taxes is under code clearance at the Pentagon, and I don’t see why we should assume our hypothetical tenants couldn’t put two and two together in regards to their rent increase; in other words, I believe it’s wrong to assume people are so uninformed about taxes that they should be characterized as ‘hidden’ merely because they apply at various levels.

[gasgod]

Are you saying that raising the direct cost to the consumer by 23% would have no effect on his buying habits? Sorry, but I find that view naive.

In part, FairTax seeks to replace taxes paid by Americans with taxes paid by foreigners. If I were a foreign tourist, I'd look for more friendly vacation spots. If I were an American tourist, I would do the same.

The problem with FairTax is that is places the entire tax burden on retail purchases, not just a small part. Whatever you tax, you discourage, at least to the extent that the taxed activity can be avoided. Discouraging purchases in the U.S. is not in our national interest.

Let me give you an example of the sort of evasion FairTax would encourage. Suppose I want to buy a $20,000 automobile. The dealer and I make a deal: I get a substantial discount, but only if I sign a contract that obligates me to pay a much higher interest rate. (FairTax would not tax this.) Or perhaps I get a substantial discount with the understanding that I give the car dealer a substantial discount on what I might sell to him.

It's true that it would be difficult to evade the tax on a loaf of bread, but big ticket items are quite another matter.


GG

[Felix_Nietsche]

"Are you saying that raising the direct cost to the consumer by 23% would have no effect on his buying habits? Sorry, but I find that view naive."
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No.....that is not what I'm saying.
I was making the point if we remove the 'hidden' taxes from goods and services and then we replaced it with a sales tax, the costs would be fairly close to each other...


Just for fun. Lets say a person makes $100K per year and they pay $30K per year in income taxes which leaves them a take home pay of $70K (lets ignore SS taxes to makes things simple). The have a spending power of $70K. Now lets eliminate the income tax and place it with 23% sales tax. Now the person has $100K in take home pay. If they spend all $100K in a year then their spending $81K on goods/services and $19K(assuming 23%) on taxes. Since $81K > $70K, then is it not true that the tax payer is better off with the sales tax? As for businesses, if they can eliminate most of the record keeping overhead, then they can sell their product/service for a lower price....which again benefits the consumer...

Foreign tourists could get stuck paying the sales tax but if congress chose to they could pass laws allowing tourists to save receipts and get a rebate if they chose to... US products sold overseas are not subject to the national sales tax but are subject to foreign tariffs...

As for paying higher financing to avoid the national sales tax, there are solutions to every problem... If someone finds a loophole to avoid paying the sales tax, then congress has the power to close it...

[InchoateHand]

Here's my tax solution. Get rid of 90% of government programs. Keep the military, the courts, law enforcement, a very few others. Get rid of everything else. We make taxation voluntary. Donations can easily support the dramatically reduced budget, along with a little bit of an inflation tax. And get this, people actually keep what they earn. And here's the kicker, if they don't earn it, they don't get it. At least not from the government. I'm guess without taxation, there'll be more tyhan enough private charity to make up the difference for those who really need it.

[Dead]

[ QUOTE ]
Get rid of 90% of government programs.

[/ QUOTE ]


Inchoate! /images/graemlins/shocked.gif /images/graemlins/confused.gif

It's good to see you coming to terms with your homosexuality. /images/graemlins/smirk.gif

[James Boston]

DISCLAIMER: I have NOTHING to back this up, but still beleive it to be 100% true.

I actaully think lowering, or eliminating, these taxes could be good. Since corporations are legal entities unto themselves, the decision makers are making their decisions based on priorities. I believe the list goes as such:

1) CEO's, high-ranking officers, etc...
2) shareholders (which include all of group 1 usually)
3) consumers
4) employees

3 & 4 are always going to get screwed when 1 & 2 try to ensure they still get plenty of money. So why not create a system where we go after the money from 1 & 2 directly rather than tax a legal entity where the tax will get passed on to 3 & 4.

[jakethebake]

Tax the rich. Seriously. Those fuckers get away with murder.

[James Boston]

That's basically my point. If we want to get "corporate tax dollars," we have to get it from those who end up with it. Taxing the corporation allows a handful of decision makers to decide where the effects of taxation will be felt, and it ain't in their bank account. Tax them, not the money they control.

[jakethebake]

The problem with this, however, is that the same money will simply be diverted back to the corporation---suddenly the CEO will live in a house owned by the corporation (and thus avoid paying taxes on it), he or she will have umpteen first class tickets to wherever, and they will be "corporate" business. Basically, if you only tax a CEOs income, you encourage them paying themselves with even more outlandish perks than they already enjoy. Its a catch-22 and I don't see a simple way to rectify it, though intuitively I agree with your assessment.

[Dead]

What's up with all this CEO hatred?

CEOs are the greatest people in the world. They provide all the goods and services to people on welfare. They should be given large tax breaks for their trouble.

[natedogg]

[ QUOTE ]
If we want to get "corporate tax dollars," we have to get it from those who end up with it.

[/ QUOTE ]

There are no "corporate tax dollars". Corporate taxation is a tax on employees and consumers, period. This is basically fundamental economics. You gain no ground taxing corporations.

natedogg

[James Boston]

[ QUOTE ]
They provide all the goods and services to people on welfare.

[/ QUOTE ]

I have no idea what that means.

[James Boston]

That's what I said in my first post. Sorry if I didn't communicate it well enough.

[James Boston]

[ QUOTE ]
if you only tax a CEOs income, you encourage them paying themselves with even more outlandish perks than they already enjoy. Its a catch-22 and I don't see a simple way to rectify it

[/ QUOTE ]

Tax perks....seriously.

[Dead]

[ QUOTE ]
[ QUOTE ]
They provide all the goods and services to people on welfare.

[/ QUOTE ]

I have no idea what that means.

[/ QUOTE ]

It means that CEOs are the greatest people in the world, and that everyone else is scum. Duh. /images/graemlins/tongue.gif

[gasgod]

[ QUOTE ]
There are no "corporate tax dollars". Corporate taxation is a tax on employees and consumers, period. This is basically fundamental economics. You gain no ground taxing corporations.

natedogg

[/ QUOTE ]

If only it were true that you gain no ground -- that is, that it makes no difference. In actuality you lose ground in many ways. (As I'm sure you know, natedogg)

1. It costs money to calculate and avoid corporate Income Tax. Lots of it.

2. The people who bear the burden of the CIT have no practical way to exert control on those who levy the tax.

3. The CIT offers Corporations an incentive to locate outside the USA.

4. It leads to lobbying efforts that border on -- and sometimes cross over into -- bribery. We can't eliminate this, but the CIT adds to the problem.

I could go on with 5, 6, and 7, but you get the idea. The CIT is among the very worst taxes in the country.


GG

[lehighguy]

Yes, corporate taxes should be eliminated.

No, it won't happen because people think corp. tax money is free, justified, etc.

[The Dude]

[ QUOTE ]
sales tax is, precentage wise, a regressive tax, so i don't support it.

[/ QUOTE ]
The FairTax bill the OP referenced has a solution to this. They give a rebate to all taxpayers based on the consumption tax that would be paid at poverty level spending. Using 2000's poverty numbers (I don't have updated ones in front of me), a Married couple with 2 children would get a monthly rebate check based on $22,500 annual spending - the poverty level for a family of 4.

More information can be learned at www.fairtax.org. (http://www.fairtax.org.) When I first heard of this, I was opposed to it. The more I've learned about it, the more I like it.

[The Dude]

[ QUOTE ]
And every company with more than a few million in gross would have CEOs and VPs on small compensation packages, purchasing swimming pools on the company dime.

This would shift the tax burden even further downward.

[/ QUOTE ]
No, it wouldn't. Businesses already do this, and they get a tax break for the expense.

[The Dude]

[ QUOTE ]
the tax code is a powerful tool that may be used to create incentives for progressive/ benifical development and spending, and to give that up in the name of mere simplicity is a mistake, IMO. this is what the rhetoric about 'flat taxes' etc overlooks.

[/ QUOTE ]
The consumption tax has an even better ability to encourage/ discourage behavior than an income tax. Under the FairTax proposal, all education expenses, for example, are tax free. The consumption tax rate for a gas-guzzling SUV, cigarettes, liquor, or anything else teh government would like to discourage for economic/ social purposes would be higher than other products/ services.

[The Dude]

[ QUOTE ]
our tax code probably costs the nation several hundred billion dollars a year.

[/ QUOTE ]
Much, much more. It is estimated that $225 billion is spent every year in tax planning, consultation, preparation, and collection. FairTax.org thinks the consumption tax system would cut that by 90%.

[The Dude]

[ QUOTE ]
Let me give you an example of the sort of evasion FairTax would encourage. Suppose I want to buy a $20,000 automobile. The dealer and I make a deal: I get a substantial discount, but only if I sign a contract that obligates me to pay a much higher interest rate. (FairTax would not tax this.) Or perhaps I get a substantial discount with the understanding that I give the car dealer a substantial discount on what I might sell to him.

[/ QUOTE ]
Your first example is valid. Your second example is absurd.

Do you have any idea how much income tax evasion occurs right now? Do you have any idea how easy it is to get away with it, because the IRS simply can't monitor (audit) very many people, and because income is relatively easy to hide? I've talked to two economists (both with PhD's in economics) about a consumption tax, and they both agree that (legal and illegal) tax evasion would be reduced under this system.