Democrats & Liberals Archives

Watch Out for Tax Simplification

Bush’s tax simplification committee is issuing a report on November 1, 2005. But we already hear about the committee’s main recommendations. We can breathe a sigh of relief that there will not be a national sales tax. The simplification consists of reducing 52 schedules down to 10. That’s nice for the super-rich who play around with loopholes. But overall, at least to me, their plans - there are 2 - appear to favor those who invest over those who work for their money. The average guy will pay through the nose.

Three recommendations seem to get the more prosperous to pay more:

  • Elimination of the deduction for state and local taxes - This affects people with higher income more than those of lesser income. New Yorkers, with their high income taxes are complaining bitterly about this

  • Capping the deduction for mortgage interest - This will be replaced with a 15% tax credit. The cap is set at a little over $300,000. Californians are complaining bitterly about this.

  • Highest tax rate raised to 35% - Six brackets will be reduced to 4, stretching from 15% at the low end to 35% at the high end.
I am for all 3 of these actions. Why, in effect, should a resident of Arkansas pay taxes to support a resident of New York? As far as the mortgage deduction is concerned, the cap should be about $500,000. Anything higher does not encourage home ownership; it encourages taking advantage of the government. A high end of 35% increases progressivity, and conteracts somewhat the steep regressivity of the payroll tax.

Three other recommendations seem to favor the more prosperous:

  • Repealing the Alternate Minimum Tax - Though it was designed to catch rich people who pay no tax, evidently not-so-rich people are getting caught

  • Replacing most exemptions and deductions with tax credits - This may catch some extra income, but I don't kow

  • Reducing taxes on investment - The committee recommends 2 different plans. In one, the tax on dividends will be zero, on capital gains 8.25% and on interest the ordinary amount. In the other the rate will be 15% on dividends, capital gains and interest
I guess getting rid of AMT is OK. But I do not think we should replace exemptions and deductions with tax credits. We should get rid of them - at least most of them. Here is where the complexity of the tax code comes in. And the complexity is there to encourage loopholes and tax-avoidance schemes that the rich use to lower their taxes to a pittance.

What galls me most is the idea that investment should not be taxed or be taxed at a lower rate than income earned through employment. In the first approach the tax on dividends is zero. Under this system, it's possible for the heir of a billionaire to live like a king, do no work and pay ZERO income taxes, while a worker employed on 2 jobs to make ends meet, pays a 15% tax. You call this fair?!?

Republicans are trying to get rid of taxes on investment. This is wrong. It favors the rich. It punishes the non-rich. Besides, how are we going to build up America's competitiveness, if we discourage workers this way?

Watch out for tax simplification. Republicans are using it as a path for helping the rich investor at the expense of the non-rich worker.

Posted by Paul Siegel at October 20, 2005 5:59 PM
Comments
Comment #86942

Paul, flat tax makes the most sense. ANY and ALL earned income is added to one’s income and a flat tax is paid on it all. Same rate for working folks as investor rich folks. A floor would need to be adopted at or slightly above the poverty line, below which no tax is paid. This aids the poor elderly, minimum and somewhat above single parents with only one breadwinner, and of course, the laid off who see their taxes drop for the weeks or months there was no income.

Anything is better than a sales tax, including the current tax system. You just can’t get a more regressive American tax system than a sales tax. We all know, no matter how fair it would start out, it would be picked over and modified and loopholed, and wind up with working folks supporting the bulk of services and benefits provided by American governments enjoyed by the wealthy.

Posted by: David R. Remer at October 20, 2005 8:25 PM
Comment #86944

Getting rid of the AMT is a bad idea if some other mechanism is not installed to insure wealth doesn’t loophole out of taxes altogether. If kept of course, the kick in income needs to be elevated significantly to exclude downsizing the middle class incomes.

The inherent problem with AMT is regional and state differences in costs of living, which make a national single income level as a kick in amount, unfair comparatively depending on what state you live in. Housing in California is significantly higher than in Alabama or Missisippi, making AMT hitting Californians harder because cost of living and wages are higher there.

Posted by: David R. Remer at October 20, 2005 8:31 PM
Comment #86953

The poor pay almost nothing in taxes today. The lowest 40% of Americans actually nothing when all the payments are netted out. That is one reason why you cannot give tax cuts to the poor. What can you cut from zero? So the rhetoric about tax cuts for the rich is always technically true.

Taxes are in place to raise revenue. We sometimes forget that simple fact. We should raise that revenue in ways that create (or preserve) the most total wealth in the economy. We already raise most of our tax revenue from the top 20% of earners. That has continued and will continue because they have the ability to pay. But how you tax them is important. When you tax something, you get less of it. If you tax investment, you get less investment. If you tax income, people find ways to show less income. If you tax consumption, they consume less of the products taxed. So where do you want the wealthy to spend there money? Tax that less. That is the bottom line. All the rest is just rhetoric.

Posted by: jack at October 20, 2005 9:20 PM
Comment #86960

David
I’m with you on the flat tax. And we need to close ALL loopholes.
I’m afraid though that no matter what kind of tax plan we have the politicians will loophole it to death so that their big money contributors will be happy. So while the tax system is getting overhualed, campaign financing needs to be overhauled right along with it to stop the tax plan from being loophold to death.

Posted by: Ron Brown at October 20, 2005 9:50 PM
Comment #86961

Jack

I agree that incentives such as deductions and credits should be used to encourage spending that is helpful and discourage spending that is not. I think the trick is not necessarily to maximize total wealth, if it leaves the wealth concentrated into a few hands. Some are concerned that the economic distribution in this country is becoming too polarized. Quality of ife in the US has been good as long as there has been a strong middle class and the poor aren’t too poor. It is not correlated at all to the plight of the wealthy, given those other factors. If we don’t work at keeping the income from becoming too concentrated, we will destroy the middle class.

I think of it in terms of game theory: over the long run, even a small advantage on each transaction will give all the money to the advantaged. Non-zero sum aspects will stretch that time out, but the principle involved still dominates.

Without societal constraints those smarter, more powerful, or with more resources can take a bigger and bigger cut, until all but a few must content themselves with the meager scraps the wealthy offer. I realize this runs counter to the deeply held beliefs of the free-market true-believers, but even the wealthy will suffer non-economically with too much maldistribution. Game theory demonstrates many situations in which individuals operating on “self-interest” algorithm do worse than if everyone cooperates. The simplest example involves two routes to work: one through town that always takes an hour and the expressway that takes between half and hour and an hour, depending on traffic. My best bet is to take the freeway, because my commute will be shorter that way and never longer than through town. But if everyone does that, we all take an hour to get to work every day. If we decide as a group to alternate, half of us on the freeway, half through town, we all average 45 minutes a day, a win for everyone. But it takes forgoing narrow self-interest and looking at it from society’s viewpoint. Guy won a Nobel for more sophisticated versions of this principle.

Posted by: Mental Wimp at October 20, 2005 9:57 PM
Comment #86975

I like the consumption tax idea best. Fairtax.org is the model that I find most apealing.
Under this plan, no one pays any federal tax on income. What you earn is what you get. Everyone gets a “prebate” check every month to cover the taxes on necessities, thus the poor don’t pay any taxes. Since the rich won’t curtail their luxery purchases, they will be paying the most tax. Since taxes would be collected at the point of sale, all of the illegal money from drugs and other crimes would be taxed also.

I can think of no reason why the left, right, or middle would oppose this. The only legitimate opposition I can see is from those in power who would lose it if taxes could be more controlled by those who are being taxed.

Give me your honest thoughts on this please.

Posted by: tomd at October 21, 2005 6:36 AM
Comment #86979

The flat tax idea would actually hurt the poor even if there was a threshold below which no taxes were paid. Because the working poor actually get a larger refund than they have with-held due to the Earned Income Credit.

There is often talk about reducing tax on investment. What is the reasoning? If investment isn’t encouraged people will put it under their mattress? Not likely.

Posted by: Ms Schwamp at October 21, 2005 7:44 AM
Comment #86992

You go tomd!

I agree that the fair tax is the best solution, but there seems to be a significant portion of this blog that don’t like that option. So that leaves the flat tax as the most agreeable. I would vote for the fair tax in a heartbeat, but as long as the more well off have influence we will never see a change in our screwed up tax system. I say to hell with the IRS and thousands of pages of tax law we currently have and replace it with the fair tax!

Posted by: Richard at October 21, 2005 9:43 AM
Comment #86993

I like most of these proposals, however in a perfect world I would like to stay with the 4 bracket structure (makes those who can afford to pay the lion’s share do so), but get rid of every deduction except dependants. Capital gains would be untaxed, but interest and dividends would be regular income.

Taxes done in 15 minutes by the average citizen on the back of a postcard.

Posted by: Alan at October 21, 2005 9:49 AM
Comment #86994

Any tax system should be:
(1) fair,
(2) simple,
(3) pro-growth,
(4) practical,
(5) and require the least impact on remnants of the previous system that must still be preserved (e.g. Social Security and Medicare).

I prefer the 17% Flat Income Tax Rate because of (5) above (and of course, (1) through (4)). Unfortunately, we can’t ignore Social Security and Medicare. Accounting for those systems is necessary (how S.S. and Medicare are managed (or currently mismanaged) is a separate issue (e.g. some reasonable cuts in entitlement benefits may later be necessary, unfortunately).

There is no way anyone can argue that the poor get hammered, since no one pays any tax on N times the poverty level (e.g. N=1.5).

For example, given:
(1) a 17% flat income tax rate .
(2) and a poverty level of $12,000 .
(3) and (N=1.5)x($12,000) = $18,000 .

A’s annual income is 15,000 per year.
B’s annual income is 50,000 per year.
C’s annual income is 90,000 per year.

A’s annual income tax is 0 per year (since it didn’t exceed N times the poverty level of $12,000 ; i.e. it is less than $18,000 )
B’s annual income tax is (0.17)x($50,000 - $18,000) = $5,440 per year.
C’s annual income tax is (0.17)x($90,000 - $18,000) = $12,240 per year.

Thus, everyone pays 17% on all income above N times the poverty level . NOTE: Only income above N times the poverty level is taxed.

No loop holes, no deductions, no complications used to evade paying taxes, no upper-level income caps, no subsidies, no graduated tax brackets. All income is taxed 17%. Everything is as fair as it can be, and everyone should find that acceptable. Social Security and Medicare benefits received are not taxed.
That is not an exception to the rule.
Medicare benefits received are not taxed, because income tax, Social Security tax, and Medicare Tax was already paid once (on the gross income) when the income was earned. Taxing it again when benefits are received is double taxation. In fact, it’s a tax on a tax previously paid into the entitlements system. It’s also an accounting nightmare, and more unnecessary paper work. The tax system must be as fair as possible, or people will complain.

Thus, what could be more fair ? And, now you don’t have to (like you would with a graduated tax scale) explain or defend why anyone has to pay a larger percentage than someone else. That argument is history. After all, it should be sufficient that the higher income level is already paying more tax by virtue of the fact that 17% of a larger number is greater than 17% of a smaller number.

NOTE: It would be nice if the rate could be lower than 17%, but the looming shortfalls (due to continual plunder) in Social Security and Medicare require it. Also, something must be done to stop Congress from plundering these entitlement systems.

Posted by: d.a.n at October 21, 2005 9:53 AM
Comment #87000

Why not a national sales tax? If they lower the tax burden on income and investment, then a NST would ensure that everyone contributes. It would eliminate some loopholes and ensure the rich pay their share. Rich folks buy more “stuff” than poorer folks, so they cannot dodge Uncle Sam or Uncle George if you prefer. The status quo only ensures that the wealthiest people can continue to avoid any of the burden, even with “simplifications” that clearly favor these people. Short of a flat-tax, a NST is the “simplest” way to ensure fair distribution of the tax burden, and that is what we clamour for, a “fair” distribution, right? We could eliminate “income-based” taxing altogether, and those with the most purchasing power (the rich) would then be prevented from dodging taxes through the loopholes designed to allow them to do this. Why would’nt a tax system based on what we spend rather than the current income-based system which allows the rich to escape by moving money around the different “investments” designed to accomplish that escape. It makes good economic sense, and despite all the whining, it would ensure a fair distribution of the burden. No one escapes a sales tax, and, it only makes sense that those who buy more would pay more tax. Those who buy more are the wealthy. If set up correctly, a NST could be a much better system. Of course, the neo-cons would never allow a “fair” system, so my rant means squat.

Posted by: Steve A at October 21, 2005 10:20 AM
Comment #87001
I agree that the fair tax is the best solution, but there seems to be a significant portion of this blog that don’t like that option.

It’s a good thing, IMO, that this blog isn’t running the country. Can you imagine Paul Siegel in charge of anything related to your life in any way?

A large number of people on this blog do not like the idea of a fair tax because it is fair. They realize that by implementing it they would be losing their main tool for keeping and gaining power. Promising to get more of the rich’s earnings and pass it on to the poor is the bread and butter of the liberal movement since the death of John Kennedy (who cut taxes). In order to keep their power they will villify and misrepresent not only the plan itself but the people who support it (such as Steven did with Neil Boortz in another column recently).

Nevermind that it was a dem and rep who proposed the plan over a decade ago based on research from a Harvard economist. Nevermind that people on both sides of the aisle have seen the value of the plan and have at one time or another supported it. Nevermind that the plan elminates the current taxation of the poor who can’t even see or avoid the taxes they pay now. Nevermind that everyone would be given X dollars back from the tax revenue every year to help ensure that everyone, including the poor, will have enough to pay for the taxes on the necessities with the rest of the money spent, mostly by richer people, would be kept as the revenue by the federal government.

No, you have to throw all of that out and attack and smear the people who support the plan, a tactic many of them complain (rightly so) that the right uses when it is faced with a similar situation, of losing their power. It’s mindboggling in it’s scope, especially on this issue. But I expect nothing less, unfortunately.

Posted by: Rhinehold at October 21, 2005 10:23 AM
Comment #87002

I need some clarification here…

As I understand it, in the Fair Tax Proposal all taxes are collected at point of sale. Point of sale would involve who ; a) anyone who sells a product at retail ? b) private citizen selling a used car ? c) anyone selling a service? d) sale/resale of homes and/or property?

If a point of sale tax is collected on a new car, is it collected again on a used car? OR, any used item.

How is possible to collect and pay a tax on an illegal product (drugs, etc.)

How does the collected tax find it’s way to the government.

Posted by: steve smith at October 21, 2005 10:33 AM
Comment #87004

Steve A,
On my web-site, I promote two types of flat tax.
I prefer the flat income tax rate with a low-income-level tax exemption, primarily because it is easiest to implement while dragging a few remnants (e.g. Social Security and Medicare) within the new system with the least confusion and disruption. If it weren’t for that, I’d support the FairTax.org plan. I’m not dissin’ the FairTax.org plan (in fact, I’m a member), but the flat income tax rate in which no one pays tax except on income above N times (eg. 1.5) the poverty level, and all deductions and loop holes are eliminated, seems to me to be the easiest, quickest, most realistic thing to do, and raises the least questions.

No tax system is going to be universally accepted, but nit-picking the lesser negatives while ignoring the greater benefits of the proposed plans will simply continue to leave us the ridiculous tax system we have now.

Also, one major point: The big question about the FairTax plan that is continually asked is:
[X] Will everyone (excluding the poor) pay their fair percentage tax related to income ?

Interesting isn’t it?
What does that tell you?
It seems many people still want the end result to be that everyone pays an equal percentage of income (excluding those below the poverty level, which pay ZERO).

So, if we’re continually burdened with proving that any tax system, in the end, fairly taxes (excluding the poor) income the same percentage, then why not simply retain the income tax (except make it a flat tax rate of 17%), which will also mean no changes at all for accounting for Income tax, Social Security, and Medicare tax.

It simply means all income is taxed the same 17% (on all income above N times the poverty level), no more abused loop holes, deductions, subsidies, or other clever over-complications designed to evade paying taxes.

Posted by: d.a.n at October 21, 2005 11:00 AM
Comment #87005
(excluding those below the poverty level, which pay ZERO)

Unfortunately, in the current tax system, this isn’t the case.

If a single mother of 4 goes out to buy diapers, they are paying imbedded taxes on those diapers up to 25% of the cost she pays. That’s the idea behind the fair tax plan, to eliminate those hidden imbedded taxes so that those who are less fortunate can really pay no taxes on necessities.

Posted by: Rhinehold at October 21, 2005 11:09 AM
Comment #87007

Rhinehold,

That’s a sales tax issue.
And it’s a state sales tax at that.

I do agree though that the poor still get hit with a sales tax.

My recommendation is that states eliminate all sales taxes and implement a simple flat income tax rate system like the one I recommend for the national income tax (except a much smaller percentage). Some states already have income tax and sales tax. Perhaps the sales tax should be eliminated ?

Also, rather than pay allowances up front (as in the FairTax.org plan), the Flat Income Tax Plan would simply not tax income, except for anything over N times (e.g. 1.5) the poverty level.

An easy solution to that is to not tax certain items. In Texas, food and medical are not taxed.
Perhaps diapers should not be taxed either.
And, maybe store bought diapers is part of the problem. When I grew up, there was no such thing.

However, I think we often make a mistake of trying to overlap welfare and taxes.

If the poor are having difficulties, they need ot apply for welfare. As a tax payer, I’m more than happy for my taxes to help the truly needy.

Also, the N factor I spoke of above could easily take into account the impact of sales taxes in some areas, and set it accordingly (since it has to be done anyway, in either plan).

Posted by: d.a.n at October 21, 2005 11:25 AM
Comment #87009

No dan, you are missing the issue.

Comany A makes plastics. They pay employees for putting together the stuff to make the plastics. Those employees will have to pay income tax so the employer has to pay more for them to do the work (no one works for free) as well as payroll taxes. They add those assosiated costs into the product. Then the product is picked up by the diaper making company (let’s say Luvs). They are paying for those taxes and adding them to the final cost of their product along with their own employees and the taxes hidden away in the other prodcuts they need to make the diapers. They also pay for distribution, marketing guys, etc. All of these people are paid more than they are taking home, so they charge more in order to make ends meet, which passes those taxes on to the customer.

The CONSUMER in this current tax structure is paying all kinds of taxes, some sales, some income, by way of it being passed on to them. The final cost is larger than it would have been if the taxes weren’t there. This has all been detailed very well in the Harvard study that prompted the fair tax plan.

The plan suggests getting rid of all hidden taxes like this, put them out in the open. The final cost of the product would be the same BUT they will be known. They can then be accounted for in the refunds to cover necessities.

The 16th amendment was a mistake and should be repealed, just as the 18th was.

Posted by: Rhinehold at October 21, 2005 11:36 AM
Comment #87010

Steve,

If a point of sale tax is collected on a new car, is it collected again on a used car? OR, any used item

From wikipedia’s page on the Fair Tax Plan

“Spending on certain services (such as education) and used goods would not be taxed.”

There is more information at http://www.fairtaxvolunteer.org/smart/faq.html

Posted by: Rhinehold at October 21, 2005 11:41 AM
Comment #87011

Btw, from the same Wikipedia article:

The bipartisan President’s Advisory Panel for Federal Tax Reform, with the help of the Treasury Department, concluded that the FairTax is the only reform proposal that completely untaxes the poor.

Wow, how regressive is that!

Posted by: Rhinehold at October 21, 2005 11:50 AM
Comment #87012

Rhinehold,
I understand perfectly everything you said.
But, there would be embedded taxes too with FairTax.
It’s simply looking at it from the other end of a process. I really believe it all works out to be almost the same thing.

I’m not against FairTax. I simply believe it is runner-up to the Flat Income Tax Rate with a low-income-level-exemption.
Either system would be better than what we have now, and support both, but have a slight preference for the Flat Income Tax Rate plan, primarily because it’s already in place, doesn’t disturb Social Security and Medicare, removes the graduated tax scale that promotes class warfare, and taxes income equally (excluding the poor, who pay no income tax).

The state sales taxes are a separate issue.
They do hammer the poor, and states need to fix that, rather than federal taxes trying to subsidize and adjust for it, or overlap tax welfare and tax systems.

Posted by: d.a.n at October 21, 2005 11:51 AM
Comment #87014

d.a.n,

If no tax is collected on used cars or, any used items for that matter, will the market for “new” products be negatively impacted.

You can buy a year or two old vehicle, pay no tax on the purchase and possibly repeat this procedure throughout your lifetime. You will pay taxes on mechanical repairs, etc. but possibly be far better off always buying used cars.

What does this do to the automobile manufacturers and dealoers.

Will the same tax rate apply to imported vehicles.

Posted by: steve smith at October 21, 2005 12:21 PM
Comment #87022
You can buy a year or two old vehicle, pay no tax on the purchase and possibly repeat this procedure throughout your lifetime. You will pay taxes on mechanical repairs, etc. but possibly be far better off always buying used cars.

What does this do to the automobile manufacturers and dealoers.


Steve,

It probably makes their sales increase… The automakers (and the housing industry) will actually be better off selling their new products. Let me explain…

Typically by the time a new car or house hits the consumer level sale there is already a 25%-27% increase in the costs of the product because of the imbedded taxes it incurrs along the manufacturing chain. Remove that 25-%27% from the price of the vehicle (or Home) and replace it with the 23% FairTax on new Items. It is very possible that a new car (or home) would actually cost less after the FairTax is implemented, depending on how agressive the market becomes. If they want to keep that % as profit they will risk losing market share if their competitors do not. That will be up to the company. End result will be that a car (or home) will end up costing about the same as it does now. But the kicker is that you will have your entire income check to pay for it because you will not have paid Federal income tax or Social Security tax out of your check. You have more money in your check and the products you buy will be priced similar to how they are now.

It’s a thing of beauty if you ask me.

Posted by: BradM at October 21, 2005 1:14 PM
Comment #87051

BradM,

Very comprehensive post, thanks.

I am not sure why but, is your theory only valid if the imbedded tax is greater than the 23% FairTax or, is that inconsequential?

Posted by: steve smith at October 21, 2005 3:54 PM
Comment #87082

Under this plan, no one pays any federal tax on income. What you earn is what you get. Everyone gets a “prebate” check every month to cover the taxes on necessities, thus the poor don’t pay any taxes. Since the rich won’t curtail their luxery purchases, they will be paying the most tax. Since taxes would be collected at the point of sale, all of the illegal money from drugs and other crimes would be taxed also.

So, let get this straight, the government will give me money to pay their sales tax with.
Dream on! Even if it did them they would want to tell me what I can buy and cann’t buy.
Another thing, How do you plan to get a drug dealer, whose breaking the law anyway, to collect and pay the sales tax?

Posted by: Ron Brown at October 21, 2005 5:17 PM
Comment #87083

steve smith
Will the same tax rate apply to imported vehicles.

Of coarse not, we have to make sure that the Japanese economy doesn’t get hurt and continues to grow, even if ours goes down the tubes.

Posted by: Ron Brown at October 21, 2005 5:22 PM
Comment #87085
I am not sure why but, is your theory only valid if the imbedded tax is greater than the 23% FairTax or, is that inconsequential?

Steve, no problem. It’s a subject that I feel very strongly about (if you could not tell)

Actually most products that are on the market (according to research I have seen) fall somewhere between 19% and 24% imbedded tax currently, but most economists that have studied this agree that it is right around 22% on average. So to be honest, in total you would probably see a net increase of about 1% in the expense you incur purchasing the items you normally purchase. Again, much of that will depend on how agressive the companies are with their pricing to gain or maintain their market share (as is the case now). But considering on average the American worker will be bringing home 25% to 28% more pay I would imagine that most won’t mind. The auto and home market are normally the ones that people are the most concerned about because of the high dollar amount of the items.

It’s inconsequential in my book… On average you pay 1% more for items but can have my whole paycheck. I’ll take that deal any day.

Posted by: BradM at October 21, 2005 5:25 PM
Comment #87095
So, let get this straight, the government will give me money to pay their sales tax with. Dream on! Even if it did them they would want to tell me what I can buy and cann’t buy. Another thing, How do you plan to get a drug dealer, whose breaking the law anyway, to collect and pay the sales tax?

Ron,

The prebate checks will be sent monthly (probably via direct deposit or perhaps even a debit card) to every US Citizen head of household. The amount will be based off of the HHS poverty level that is already set by the Department of Health and Human Services each year. It works like this: HHS Poverty level for your family size X sales tax rate = Yearly Prebate amount. Then you divied that amount by 12 and you get your monthly prebate check amount.
For instance a family of 4 would receive $492/month in 2005. HHS poverty level for that family is $25,660 X 23% = $5902 / 12 = $492

Every head of houshold (rich or poor) will get the exact same checks based off of this formula. What you do with the money is your business. If you buy a TV with it then you are stuck footing the bill for the Sales Taxes you pay on necessities of life for that month. If you choose to live off of peanut butter and mac and cheese, used clothes, etc then you may very well come out ahead on the deal. If you buy all steaks and caviar, new clothes at expensive stores, etc then that $492 won’t go very far. The choice is yours.

As far as the drug dealer… Who said that we were going to try and have him tax the sale of his drugs? Obviously that is not happening. But he does spend that money. I don’t see very many drug dealers building portfolios on wall street with their ill gotten gains. The spend it. On flashy cars, jewelry, drinks, etc. Living it up. Every one of those purchases will be taxed. Voila, you have just collected taxes on the money that was received in the drug deal. It won’t get it all of course but it will get a lot of it, which is a helluva lot more than the feds get now which is exactly zero. This also applies to illegal immigrants and tourists also. Every purchase that they make in the states will assist us with our tax burden. And they won’t be getting the prebate to help them with it either.

Posted by: BradM at October 21, 2005 5:55 PM
Comment #87174

steve smith,
Sounds like BradM, Ron, and Rhinehold did a good job of answering that question (i.e. Will the same tax rate apply to imported vehicles).

Posted by: d.a.n at October 21, 2005 7:32 PM
Comment #87191
Will the same tax rate apply to imported vehicles.

Of coarse not, we have to make sure that the Japanese economy doesn’t get hurt and continues to grow, even if ours goes down the tubes.

Actually under the Fair Tax Imports are taxed at the standard 23% rate just like all the other items.

Exports however are not taxed when they are sold outside the US… This will give US companies around about a 20% less production cost which will immediatly make them more competitive worldwide.

Posted by: BradM at October 21, 2005 8:58 PM
Comment #87195

I am a Democrat and want tax simplification. I don’t see this as a partisan issue. Rupublicans and Democrats alike find taxes too complicated.

But as a Democrat my political values want to ensure that simplification does not make the tax system inequitable. In other words, let’s all be reasonable and fair.

In that vain, I want to respond to a previous entrant to this blog who suggested that poor people pay hardly any taxes. This is not true. You seem to forget that payroll taxes are charged on everyone *in additon* to their income tax burden. Social Security taxes are roughly 15% and Medicare about 3% taxed on *earned income* which means income earned through one’s labor. So a poor person pays 18% in taxes *before* they pay their income tax.

Rich people don’t pay into Social Security and Medicare at the same proportion as a poor person, because many rich people derive most of their income from unearned income like dividends. Social Security and Medicare taxes are not charged against dividend income. And we wonder why Social Security and Medicare are going broke! The many wealthy people who have utilized the tax loopholes know that the first step to lowering taxes is to shift your income from earned to unearned sources so you can avoid payroll taxes.

Posted by: Andrew at October 21, 2005 9:39 PM
Comment #87197

The FairTax idea is really an interesting one and I find myself drawn to its arguments. The benefits are:

1) The Prebate eliminates the regressive nature of the sales tax on the poor
2) It taxes both goods and services thus coming to terms with the reality of America’s growing service economy
3) It makes it very difficult to cheat the system with loopholes.
4) It collects revenue from “off-the-books” income indirectly, thus taxing the American economy not the American income.

Disadvantages:

1) The tax is charged only on retail sales and thus places a heavy burden on newly manufactured products. Can you imagine what that will do to America’s already floundering manufaturing sector?
2) With a sales tax as high as 23% it may encourage the same type of tax evasion as the income tax.
3) The trading of services or goods (barter) is technically not a retail sale and so is a technique to avoid a sales tax.
4) It relies too heavily on one system. If people barter their way through every retail transaction the goverment can go broke. We should not put all or eggs in one basket.

If the sales tax was initiated we should not make it the only stream of income. Furthermore, the FairTax idea of a “prebate” could be adopted and may encourage states with sales taxes to do the same.

But if history has taught us anything, it is that no system is perfect. The US goverment has revamped the tax system multiple times because of the inevitable loopholes that develop from court cases and lobbying. The FairTax people seem to forget this fact and assume this as a final solution to tax policy in America. Be realistic.

Posted by: Andrew at October 21, 2005 9:53 PM
Comment #87198

Andrew

I wasn’t talking about the rate, but the percentage of the total. Higher income people pay taxes at a higher rate, in any case and they also pay much more in actual dollars. The top 20% pays most of the total taxes and the top 40% pays almost all of them.

Just think about the costs of government versus what a person who makes median wage pays. I don’t know about you, but I don’t pay enough in taxes to support my share of FEMA, aircraft carriers, EPA, National Parks etc. I think Bill Gates is picking up part of my share.

BTW - Social Security is theoretically a pension insurance plan. President Bush proposed that the poor get to keep more of their money to invest themselves. He was shot down. You pay SS up until $90,000 and the medicare part on all your income. SS is set up so the lower wage earners get a larger payout relative to their contributions. President Bush wanted to make this even a better deal for the poor, but the SS lobby shot that down too.

Posted by: Jack at October 21, 2005 10:08 PM
Comment #87269
But if history has taught us anything, it is that no system is perfect. The US goverment has revamped the tax system multiple times because of the inevitable loopholes that develop from court cases and lobbying. The FairTax people seem to forget this fact and assume this as a final solution to tax policy in America. Be realistic.

Andrew. Good analysis.

Posted by: d.a.n at October 22, 2005 2:29 AM
Comment #87292

Is there any agreement/disagreement that either the FairTax or Flat Income Tax despite any shortcomings of both, would be better than the system that we currently have.

Posted by: steve smith at October 22, 2005 10:51 AM
Comment #87308

“Is there any agreement/disagreement that either the FairTax or Flat Income Tax despite any shortcomings of both, would be better than the system that we currently have.

Posted by: steve smith at October 22, 2005 10:51 AM “….Althiugh I prefer the Fairtax, I’ll agree that either would beat what we now have.

Posted by: tomd at October 22, 2005 1:08 PM
Comment #87318

I like both plans, and support both, but slightly prefer the 17% Flat-Rate-Income-Tax plan with a low-level-income-exemption that is N times (e.g. 1.5) times the poverty level (established by the government, and based on increased exemptions for each dependents), and with all tax deductions, loop-holes, subsidies, and tax shelters eliminated.

I slightly prefer the Flat-Rate-Income-Tax plan, because it involves very little change. The biggest change is elimination of over-complication. It requires less explaining. It retains the current accounting for Social Security and Medicare (which we, unfortunately, have to drag along with us into any new tax system). Both plans protect the poor, since the poor would pay zero income tax or zero sales tax, except after poverty levels are exceeded. Both plans greatly reduce the accounting. Tax returns will be very simple, and greatly reduce the need of massive IRS staffing. And, since the big question with any tax system is whether it is fair in the sense that the final result is that everyone (except the poor) pay about the same percentage of income to taxes, why not keep it more closely associated with income, than with spending.

However, like I said, either would be better than what we have now. But, a 23% sales tax seems awfully high, and worries me a bit. It might be more palatable if it were 18%, and government was forced to cut spending to live within that limit? The hard part about trying to determine if sales tax will create sufficient revenue is that it is hard to measure much people spend, save, invest, etc. What people earn (legally, not under the table) is already in IRS/Social Security computers. And, once a flat sales tax system goes into place, many will, interestingly, be trying to verify that the end result achieved is a system that is fair in the sense that the percentage of income paid to taxes is fair and balanced across all income levels. IMO, that should be linear (e.g. everyone pays about the same 17% rate on all income above the poverty level).

Posted by: d.a.n at October 22, 2005 3:57 PM
Comment #87328

So the govertnment sends out these prebate checks.
They’ll all of a sudden decide that they’re giving to much money to the surfs. One of two things happens.
1. They raise the sales tax.
2. They end the prebates.
3. Both.
The thing to remember is the government DOES NOT GIVE MONEY TO ANY ONE WITHOUT TELLING THEM HOW AND WHAT TO DO WITH IT!

Posted by: Ron Brown at October 22, 2005 7:19 PM
Comment #87334

To the Flat Taxer in the discussion, there is one thing that I don’t hear about in any of the flat tax argments: how will Social Security and Medicare be taxed?

As you know (or may not know), Social Security and Medicare are taxed on earned income only (i.e. by working). Passive income from dividends are not taxed for social security or medicare. Bear in mind, some states also have disability insurance payroll taxes (like in California) in addition to the SS and Medicare taxes. These taxes only effect people who work for their income.

Read any book at your local bookstore about tax saving schemes that the rich use and you will find that most of these schemes involve shifting your income generating wealth to passive “unearned” investment income where Social Security and Medicare taxed can’t be levied.

As you can see, in our current system, a smart rich person can arrange his or her finances to avoid payroll taxes, which in effect means that the working American pays about 18% in payroll taxes IN ADDITION to their income tax rate, while the rich just pay the income tax on their dividend income. In essence payroll taxes produce a regressive income tax system.

The flat tax does not solve this tax inequity.
A man who works for his money will pay about 18% in SS and medicare in addition to the 17% flat tax, totalling 35% tax on income, but a rich person who doesn’t work for his or her money (through passive income from investments) pays just the 17% flat tax. Does that seem fair to you?

Does the flat tax proposal include making a change to how social security and medicare taxes are levied? Will SS amd Medicare be levied on unearned income as such as dividend income? After all if we want to make the income tax fair (charged on all forms of income) why can we do the same with social security taxes?

Posted by: Andrew at October 22, 2005 9:22 PM
Comment #87338

Ron Brown, you seem to be disparaging the Gov’t with your all caps rant. Since the House and the Semate and the Presidency is right now Republican, are you saying, like the majority of the people in the US are saying now, that the Republicans suck?

Posted by: ray at October 22, 2005 10:52 PM
Comment #87351

Andrew

The poor get a much bigger share of thier SS than the rich. It is set up so that those who contribute less get back more than their contribution, while at the higher levels you begin to lose.

The benefit table this year is

(a) 90 percent of the first $656 of his/her average indexed monthly earnings, plus
(b) 32 percent of his/her average indexed monthly earnings over $656 and through $3,955, plus
(c) 15 percent of his/her average indexed monthly earnings over $3,955.

You can see what is happening here. And if someone avoids paying SS, he/she gets nothing back from it.

SS has its share of problems and it should be fixed. But it is not unfair to the poor. In fact it is specifically designed to redistribute income from higher earners to lower earners.

IF you don’t think it is fair, you could always advocate that we just make it voluntary for everyone.

Posted by: Jack at October 23, 2005 1:34 AM
Comment #87354

Andrew,
The 17% Flat Income Tax Rate plan includes are taxes. Social Security and Medicare are part of the overall 17% . The 17% tax applies to all income, regardless of where it came from. Everyone pays 17% (except the poor) on all income above the low-income-level-exemption (e.g. N=1.5 times poverty level), and all deductions, loop holes, subsidies, and tax shelters are eliminated.

Some people say this might not raise enough revenues. Maybe, but the theory is that there will be enough, once all the deductions, loop holes, subsidies, and tax shelters are eliminated.

Posted by: d.a.n at October 23, 2005 2:13 AM
Comment #87451

d.a.n,

In the Flat Tax proposal can other payroll deductions (such as 401K, health insurance, etc.) be deducted by the employer Pre-Flat Tax which can presently be done and offers some positive benefit.

Posted by: steve smith at October 23, 2005 10:47 AM
Comment #87488

ray
Ron Brown, you seem to be disparaging the Gov’t with your all caps rant. Since the House and the Semate and the Presidency is right now Republican, are you saying, like the majority of the people in the US are saying now, that the Republicans suck?

I’m saying the whole danm bunch of them in DC suck. Republican and Democrat.

Posted by: Ron Brown at October 23, 2005 3:10 PM
Comment #87512

Paul,
I agree with you on most issues, except for taxing investment. There is a compromise here. The nation needs to encourage savings. I think that taxes should be done away with on the first 3K you make in capital gains tax. this would completely encourage savings, and would not be a cut for the rich who make a couple million a year on their investments. The idea that the Bush administration is pushing is that we need to encourage saving, which I agree with, but I think that they are just using this argument to give another advantage to the “ruling class” here in the U.S.
Ivan

Posted by: Ivan Mitchell at October 23, 2005 6:05 PM
Comment #87521

Thanks d.a.n for the clarification on the SS and medicare tax question I had earlier.

Thanks jack for you response too. While I understand your point (you get out what you put in, plus proportionally more for the poor) the short-term effect of paying a higher rate than an upper class American is regressive and therefore immoral in my mind. However, since d.a.n. clarfied that the flat tax includes SS and Medicare my point it moot.

To add another note, to this young Democrat, there is nothing wrong with income redistribution and therefore I think that everyone in America should participate fully in SS except for the most destitute. I think that it is immoral to have so many people living below the poverty line in one of the richest nations on earth. Many of those are our mothers and fathers in retirement.

Let us honor our fathers and mothers and secure the SS system, not abandon it. And any new tax scheme coming out of Congress should keep these programs in mind and well funded, IMHO.

Posted by: Andrew at October 23, 2005 7:08 PM
Comment #87655
d.a.n, In the Flat Tax proposal can other payroll deductions (such as 401K, health insurance, etc.) be deducted by the employer Pre-Flat Tax which can presently be done and offers some positive benefit.
Currently 401K’s are tax deferred. But, they still get taxed later. Some people believe it will be taxed at a lower tax rate than when it went into the 401K. The way things are going, it’s not hard to see how taxes might be higher later. They may wish they’d paid the tax when it was earned. I’m not a big fan of 401K’s really, unless a company provides big matching…then it’s a good deal. Otherwise, there are other instruments and methods to save and invest. Also, I think the popularity of 401K’s has led to abuses that have eroded much of the initial principal for many people that have paid into them.

Therefore, I’d prefer to eliminate the deferred tax deduction for 401K’s. But, if that’s not possible, then it’s OK to keep it as it is, because it will still get taxed later (hopefully at a lower rate, as some are expecting).

Andrew,
Yes, we have to drag S.S. and Medicare with us into any new tax system. However, I believe it may inevitably be necessary to halt cost-of-living increases, and cut back Medicare benefits, because it’s simply untenable. S.S. and Medicare currently require huge revenues, and growing, and an $8 trillion National Debt, $1.6 trillion shortfall in pensions, $50 trillion in nation-wide personal debt is exacerbating the problem. And, now, energy shortages and inflation are making it worse. In fact, 4 or 5 of these many serious problems are a bit unnerving. One or two alone seem harmless, but the culmination of these many issues, ignored by incumbents for far too long, and exacerbated by energy shortages, and another natural disaster, or other disaster, could be the last straw.

Posted by: d.a.n at October 24, 2005 1:20 PM
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