Flat Tax?

[MMMMMM]

I think Steve Forbes makes a lot of sense and raises some excellent points.

Any rebuttals of his specific points?

Comments in general?

"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). "

http://www.opinionjournal.com/extra/?id=110007139

[BonJoviJones]

I don't see how this could possibly happen. The amount of inertia involved is beyond comprehension.

[andyfox]

August 7, L.A. Times:

MICHAEL KINSLEY
Poking holes in the flat tax

The right is resurrecting another one of its hot-button ideas that go nowhere. This one's still a game of three-card monte.

IT'S TRUE THAT the Republicans are the party of ideas and the Democrats are the party of reaction. Republicans set the agenda, and Democrats try to talk the country out of it. But the Republican Party is hardly the Institute for Advanced Studies. The GOP uses ideas like seasonal sports equipment — taking them out when needed, then scraping the mud off and stuffing them back into the garage until they are needed again.

Remember term limits for members of Congress? The flag-burning amendment? The balanced-budget amendment? Each of these has had a moment or two of glory, when Republican politicians, conservative TV and radio hosts and the Wall Street Journal editorial page all decided simultaneously that implementing this idea was vital to the survival of Western civilization. Polls soon showed a majority of Americans agreeing with them. The idea seemed unstoppable. It had the winds of history behind it.
And then the wind died and the idea went away. I still can't figure out how we have avoided trashing the Constitution with an idiotic amendment against burning the flag. But the failure of these hot-button issues, in stunning contrast to the success of the party that has ridden them to power, suggests that for Republicans, ideas serve politics, rather than the other way around.

The so-called flat tax is another hobby horse of the right that swept the nation, then got swept away. But someone forgot to tell Steve Forbes, the amiably blank-faced magazine heir, who ran for president on the issue in 1996 and 2000. Now he has a book out: "Flat Tax Revolution." It's getting the full fair-and-balanced treatment — that is, unashamed open-throated puffery — on Fox News and other conservative outlets. So even though the idea looks pretty dead right now, a stake through its heart might still be prudent.

The flat tax is a game of three-card monte that deliberately confuses the issues of simplicity, fairness and the total tax burden on society. A simpler tax system would be a very good thing: good for the economy, and good for everyone's sanity. But contrary to what Forbes would have you believe, progressive tax rates — higher taxes on higher incomes — aren't what make the current system so complicated. It's as easy to multiply by 40% as it is to multiply by 17%. Even Republicans can easily do it — or hire someone to do it for them, if necessary.

The complications come in defining and calculating income. Some of the complications are unavoidable because people and companies have complicated affairs. The day may come when you can file your income tax on a postcard (millions come close even today, with the sorta-simple 1040EZ), but that day will never arrive for Steve Forbes. As for the unnecessary complications, most of them were not put there by people or interest groups pushing for higher taxes and bigger government. Quite the opposite: The complications are mostly special rules for people or companies trying to lower their taxes.

The nub of Forbes' proposal is this: Everybody would pay an income tax of 17%, with most deductions eliminated, but enough basic exemptions so a family of four would owe no income tax until it had income of more than $46,000. Of course, it would still pay the FICA Social Security tax. FICA, which starts at dollar-one, is already a bigger burden than the income tax for most people. But it tops out at incomes of $90,000 and doesn't apply to investment income at all. But that is just fairness talking.

Forbes figures that almost everybody would pay less under his proposal than under the current system. And just to make sure, he would let you opt to calculate your taxes under current rules, if you prefer. So everybody would pay less. That is swell. But it has nothing to do with the flatness or otherwise of the tax system. You could just as well combine a tax cut with a proposal to release all the animals from the National Zoo. People might like that too. A simpler tax system would be very nice. But find me some folks who would choose a flat tax over the current system even if it meant that they would pay more, not less. Then I'd be impressed.

And if everyone gets a tax cut, where does the money come from? Do you really have to ask? It seems that no amount of recent experience can put a dent in the wonderfully convenient belief that you can raise tax revenues by cutting taxes, because lower taxes inspire people to work longer and think harder, yadda yadda yadda.

Debate on this quickly becomes theological, so let's note only that tax rates were higher than they are now when Forbes had the inspiration to be born into a wealthy family, and higher still when his father, Malcolm, first built the family fortune.

Next idea, please. Or, heck, why don't we take the balanced budget amendment out for another spin? It's been a while.

[ptmusic]

Here's another topic where I lean conservative. I like the proposal. The key is simplification - if too many loopholes/deductions remain, I don't see the purpose.

Obviously, we need some method of supporting lower income families, and Forbes has addressed that. As for corporations, he does leave some grey areas that I noticed in a single reading: "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 plan should get rid of the word "could" - companies either depreciate or they don't. Set the rules and keep them simple. Also, not taxing income made outside of the U.S. is asking for trouble - it is setting up a loophole.

We should move the cheese of the IRS and tax accountants. Get rid of as much bureaucracy as possible in this area.

I'm not sure Forbes is the right guy to lead the charge, but he is headed in the right direction.

-ptmusic

[fluxrad]

[ QUOTE ]
No more death tax: You'd leave the world unmolested by the IRS. No taxation without respiration!

[/ QUOTE ]

Since abolishing the "death tax" would allow the wealthiest 2% of americans to evade the capital gains tax entirely, I think the second sentence should probably just be changed to "No taxation."

Of course, since we all know that we're going to be in the wealthiest 2% one day, we should totally abolish it anyway!

[ QUOTE ]
[ QUOTE ]
No more death tax: You'd leave the world unmolested by the IRS. No taxation without respiration!

[/ QUOTE ]

Since abolishing the "death tax" would allow the wealthiest 2% of americans to evade the capital gains tax entirely, I think the second sentence should probably just be changed to "No taxation."

Of course, since we all know that we're going to be in the wealthiest 2% one day, we should totally abolish it anyway!

[/ QUOTE ]

The tax system right now is so grossly inefficient that it relies on unfair taxes like the death tax. A simpler tax system is necessary. Another interesting solution is the Fair Tax. Read up on it at fairtax.org

[MMMMMM]

So what holes do you think he poked with this article?

The following appears the closest thing to any rebuttal of an actual point which he provided--and it seems awfully weak:

"And if everyone gets a tax cut, where does the money come from? Do you really have to ask? It seems that no amount of recent experience can put a dent in the wonderfully convenient belief that you can raise tax revenues by cutting taxes, because lower taxes inspire people to work longer and think harder, yadda yadda yadda."

Notice that Forbes at least provided some base evidence that cutting taxes has coincided with raised revenue periods (ostensibly through increased production). If I recall correctly, adios has done the same (and perhaps in more detail) on this forum. All Kinsley is doing here is jeering at the notion. Nice rebuttal Mr. Kinsley.

Forbes also calls for scrapping the entire federal tax code in order to, in essence, re-simplify things and largely eliminate the hundreds of billions of dollars that are currently being wasted on implementation and compliance. Kinsley doesn't even try to touch that.

Sorry Andy but you could have compiled a far better rebuttal yourself.

[MMMMMM]

I pretty much agree, ptmusic, but at the risk of a tangent my take on the following is a bit different:

[ QUOTE ]
Also, not taxing income made outside of the U.S. is asking for trouble - it is setting up a loophole.


[/ QUOTE ]

I am under the impression that other countries do not tax their own companies on profits made abroad. The USA may be the only country (or only major country, at least) with such rules which leaves us at a significant competitive disadvantage on the international front. I could be wrong and I'm sure there is more to it than just this, but perhaps another thread would be merited so that I don't hijack my own thread. Heh.

[cardcounter0]

You are avoiding the issue of how income is defined and computed. Do you think it really makes a difference that income is taxed at 32% or 28% or 17%? The real difference is how you define "earnings" and "income" to be taxed.

The only thing I see in this proposal in regards to that is to allow corporations instant 100% depreciation. That should reduce those corporate earnings to $0 rather quickly to apply that "fair" 17% rate to.

[Autocratic]

First of all, I think it's important to note, like the reply article did, that the problem with the tax code is not percentages, but income calculation. The flat tax seems to be a "simplification" of the code, but it's not at all.

When Russia switched over in 2001, conservatives essentially had a giant collective orgasm, because revenues rose 5% that year (http://www.nationalreview.com/murdoc...ck030102.shtml). However, Russia's success came primarily from the fact that before the flat tax was instituted, it had a terribly system, where oftentimes the very wealthy paid absolutely nothing. What Putin did to help the economy was cut down on loopholes and favoritism. While conservatives here took this as proof of the system's success, it hardly was. In the U.S. it's different, as while we have loopholes etc., we still have a system that the wealthy have trouble avoiding.

The problems with our system revolve around loopholes (especially with businesses, which recently were found to be paying far less than should be their share - I'll see if I can dig up the article).

I don't want to get into economics too heavily, as I'm honestly not knowledgeable enough to debate with someone who really knows their stuff. I just believe that the flat tax doesn't properly address what are actually the shortcomings of our code.