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Archive for the ‘National Sales Tax’ Category

I’m at Hillsdale College in Michigan for a conference on taxation. The event is called “The Federal Income Tax: A Centenary Consideration,” though I would have called it something like “100 Years of Misery from the IRS.”

I’m glad to be here, both because Hillsdale proudly refuses to take government money (which would mean being ensnared by government rules) and also because I’ve heard superb speeches by scholars such as Amity Shlaes (author of The Forgotten Man, as well as a new book on Calvin Coolidge that is now on my must-read list) and George Gilder (author of Wealth and Poverty, as well as the forthcoming Knowledge and Power).

My modest contribution was to present “The Case for the Flat Tax,” and I was matched up – at least indirectly, since there were several hours between our presentations – against former Congressman John Linder, who gave “The Case for the Fair Tax.”

I was very ecumenical in my remarks.  I pointed out the flat tax and sales tax (and even, at least in theory, the value-added tax) all share very attractive features.

  • A single (and presumably low) tax rate, thus treating taxpayers equally and minimizing the penalty on productive behavior.
  • No double taxation of saving and investment since every economic theory agrees that capital formation is key to long-run growth.
  • Elimination of all loopholes (other than mechanisms to protect the poor from tax) to promote efficiency and reduce corruption.
  • Dramatically downsize and neuter the IRS by replacing 72,000 pages of complexity with simple post-card sized tax forms.

For all intents and purposes the flat tax and sales tax are different sides of the same coin. The only real difference is the collection point. The flat tax takes a bite of your income as it is earned and the sales tax takes a bite of your income as it is spent.

That being said, I do have a couple of qualms about the Fair Tax and other national sales tax plans.

First, I don’t trust politicians. I can envision the crowd in Washington adopting a national sales tax (or VAT) while promising to phase out the income tax over a couple of years. But I’m afraid they’ll discover some “temporary” emergency reason to keep the income tax, followed by another “short-term” excuse. And when the dust settles, we’ll be stuck with both an income tax and a sales tax.

As we know from the European VAT evidence, this is a recipe for even bigger government. That’s a big downside risk.

I explore my concerns in this video.

To be sure, there are downside risks to the flat tax. It’s quite possible, after all, that we could get a flat tax and then degenerate back to something resembling the current system (though that’s still better than being France!).

My second qualm is political. The Fair Tax seems to attract very passionate supporters, which is admirable, but candidates in competitive states and districts are very vulnerable to attacks when they embrace the national sales tax.

On dozens of occasions over the past 15-plus years, I’ve had to explain to reporters that why anti-sales tax demagoguery is wrong.

So I hope it’s clear that I’m not opposed to the concept. Heck, I’ve testified before Congress about the benefits of a national sales tax and I’ve debated on C-Span about how the national sales tax is far better than the current system.

I would be delighted to have a national sales tax, but what I really want is a low-rate, non-discriminatory system that isn’t biased against saving and investment.

Actually, what I want is a very small federal government, which presumably could be financed without any broad-based tax, but that’s an issue for another day.

Returning to the issue of tax reform, there’s no significant economic difference between the flat tax and the sales tax. What we’re really debating is how to replace the squalid internal revenue code with something worthy of a great nation.

And if there are two paths to the same destination and one involves crossing an alligator-infested swamp and the other requires a stroll through a meadow filled with kittens and butterflies, I know which one I’m going to choose. Okay, a slight exaggeration, but I think you get my point.

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Never let it be said I back down from a fight, even when it’s the other team’s game, played by the other team’s rules, and for the benefit of the wrong person.

And that definitely went through my mind when U.S. News & World Report asked me to contribute to their “Debate Club” on the topic of “Should Mitt Romney pay higher taxes?”

I’m not a Romney fan, and it irks me to defend good tax policy on behalf of someone who is incapable and/or unwilling to make the same principled arguments.

But my job is to do the right thing and bring truth to the economic heathens, so I agreed to participate. And I’m glad I did, because it gave me a chance to try out a new argument that I hope will educate more people about the perverse impact of double taxation.

Let me know what you think of this approach, which asks people whether they would think it would be fair if they couldn’t take credit for withheld taxes when filling out their 1040 tax return.

Capital gains taxes and dividend taxes are both forms of double taxation. That income already is hit by the 35 percent corporate income tax. So the real tax rate for people like Mitt Romney is closer to 45 percent. And if you add the death tax to the equation, the effective tax rate begins to approach 60 percent.  Here’s a simply analogy. Imagine you make $50,000 per year and your employer withholds $5,000 for personal income tax. How would you feel if the IRS then told you that your income was $45,000 and you had to pay full tax on that amount, and that you weren’t allowed to count the $5,000 withholding when you filled out your 1040 form? You would be outraged, correctly yelling and screaming that you should be allowed to count those withheld tax payments.  Welcome to the world of double taxation.

By the way, if you like my argument, feel free to vote for my entry, which you can do on this page.

I won my previous debate for U.S. News, so I’m hoping the keep a good thing going. As they say in Chicago, vote early and vote often.

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Actually, the title of this post should probably read, “The Good, Good, Good, Bad, and the Ugly.”

That’s because Herman Cain’s 9-9-9 tax plan has low tax rates, it eliminates double taxation, and it wipes out loopholes, and those are three very big and very good things.

The bad part, as I explain here, is that Cain would let politicians impose a national sales tax at the same time as an income tax.

And the ugly part is that he also would let them impose a value-added tax as well, as I discuss here.

I pontificate on all these issues in the latest Coffee and Markets podcast, which you can listen to by clicking here.

In closing, I will admit that it’s been very frustrating to deal with Cain’s plan. Supporters of Cain accuse me of being too critical and opponents of Cain accuse me of being too nice.

Normally, I don’t like being in the middle of the road, but that seems to be the only logical place to be since 9-9-9 has some really good features and some really bad features.

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I’m very enthusiastic – but also a little worried – about Herman Cain’s tax plan.

So when I got the opportunity to write a short column for the New York Times, I explained that his proposal was very good tax policy, in large part because it is based on the same principles as the flat tax.

The flat tax is desirable for a wide range of reasons, including simplicity, fairness and transparency. It also would end the widespread and corrupt process of inserting loopholes and preferences in the code in exchange for campaign cash and political support. But public finance economists generally like the flat tax for different reasons, most notably the pro-growth impact… For the same reasons, people should like Herman Cain’s 9-9-9 tax plan. …It is based on the idea that the tax rate should not penalize people for being productive, and even an ardent supply-side sympathizer like me can’t complain too much about a 9 percent rate. Another key principle is the repeal of most forms of double taxation… Cain also takes a chainsaw to the underbrush of credits, deductions, shelters, loopholes, exemptions, and other distortions in the tax code.

But I then expressed my concern that the 9-9-9 plan might morph into something we don’t want.

This doesn’t mean Cain’s tax plan is perfect. The biggest concern, at least from many on the right, is that he would allow the crowd in Washington to simultaneously impose a flat tax, a national sales tax and (apparently) a form of value-added tax. This might not be a problem if there was some way of guaranteeing that none of the rates could ever climb above 9 percent. Unfortunately, the European experience (especially with VATs) does not leave much room for optimism. Sooner or later, politicians who want bigger government can’t resist pushing tax rates higher. And when the dust settles, you become Greece. Which is why Cain should not have reinvented the wheel. If he wants a low rate, no double taxation and no loopholes, the flat tax has all the upsides and none of the downsides of the 9-9-9 plan.

My basic message is that 9-9-9 should be turned into a postcard because the flat tax is a safer way of achieving the same goals.

The worst thing that can happen with a flat tax, after all, is that politicians begin to re-install loopholes and re-impose discriminatory rates and we wind up with something that looks like the current system.

But that’s a lot better than being Greece.

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I like the overall approach of Herman Cain’s 9-9-9 tax plan. As I recently wrote, it focuses on lower tax rates, elimination of double taxation, and repeal of corrupt and inefficient loopholes.

But I included a very important caveat. The intermediate stage of his three-step plan would enable politicians to impose both an income tax and a national sales tax. I wrote in my earlier post that I had faith in Herman Cain’s motives, but I was extremely uncomfortable with the idea of letting the crowd in Washington have an extra source of revenue.

After all, Europe’s welfare states began their march to fiscal collapse and economic stagnation after they added a version of a national sales tax on top of their pre-existing income taxes.

But it seems that I was too nice in my analysis of Mr. Cain’s plan. Josh Barro and Bruce Bartlett are both claiming that the business portion of Cain’s 9-9-9 is a value-added tax (VAT) rather than a corporate income tax.

In other words, instead of being a 9 percent flat tax-9 percent sales tax-9 percent corporate tax, Cain’s plan is a 9 percent flat tax-9 percent sales tax-9 percent VAT.

Let’s elaborate. The business portion of Cain’s plan apparently does not allow employers to deduct wages and salaries, which means – for all intents and purposes – that they would levy a 9 percent withholding tax on employee compensation. And that would be in addition to the 9 percent they presumably would withhold for the flat tax portion of Cain’s plan.

Employers use withholding in the current system, of course, but at least taxpayers are given credit for all that withheld tax when filling out their 1040 tax forms. Under Cain’s 9-9-9 plan, however, employees would only get credit for monies withheld for the flat tax.

In other words, there are two income taxes in Cain’s plan – the 9 percent flat tax and the hidden 9 percent income tax that is part of the VAT (this hidden income tax on wages and salaries, by the way, is a defining feature of a VAT).

This doesn’t make Cain’s plan bad from a theoretical perspective. The underlying principles are still sound – low tax rates, no double taxation, and no loopholes.

But if I was uneasy when I thought that the 9-9-9 plan added a sales tax on top of the income tax, then I am super-duper-double-secret-probation uneasy about adding a sales tax and a VAT on top of the income tax.

Here’s my video on the VAT, which will help you realize why this pernicious tax would be a big mistake.

Again, this doesn’t make Cain wrong if we’re grading based on economics or philosophy. My anxiety is a matter of real-world political analysis. I don’t trust politicians with new sources of revenue. Whether we give them big new sources of revenue or small new sources of revenue, they will always figure out ways of pushing up the tax rates so they can waste more money trying to buy votes.

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Since it is tax-filing season and we all want to honor our wonderful tax system, let’s go into the archives and show this video from last year about the onerous compliance costs of the internal revenue code.

The mini-documentary explains how needless complexity creates an added burden – sort of like a hidden tax that we pay for the supposed privilege of paying taxes.

Two things from the video are worth highlighting.

First, we should make sure to put most of the blame on Congress. The IRS is in the unenviable position of trying to enforce Byzantine tax laws. Yes, there are examples of grotesque IRS abuse, but even the most angelic group of bureaucrats would have a hard time overseeing 70,000-plus pages of laws and regulations (by contrast, the Hong Kong flat tax, which has been in place for more than 60 years, requires less than 200 pages).

Second, we should remember that compliance costs are just the tip of the iceberg. The video also briefly mentions three other costs.

1. The money we send to Washington, which is a direct cost to our pocketbooks and also an indirect cost since the money often is used to finance counterproductive programs that further damage the economy.

2. The budgetary burden of the IRS, which is a staggering $12.5 billion. This is the money we spend to employ an army of tax bureaucrats that is larger than the CIA and FBI combined.

3. The economic burden of the tax system, which measures the lost economic output from a tax system that penalizes productive behavior.

The way to fix this mess, needless to say, is to junk the entire tax code and start all over.

I’ve been a big proponent of the flat tax, which would mean one low tax rate, no double taxation of savings, and no corrupt loopholes. But I’m also a big fan of national sales tax proposals such as the Fair Tax, assuming we can amend the Constitution so that greedy politicians don’t pull a bait and switch and impose both an income tax and a sales tax.

But the most important thing we need to understand is that bloated government is our main problem. If we had a limited federal government, as our Founding Fathers envisioned, it would be almost impossible to have a bad tax system. But if we continue to move in the direction of becoming a European-style welfare state, it will be impossible to have a good tax system.

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If you go to the IRS website, there are about one thousand forms (and accompanying material such as instruction documents) that you can download.

Fortunately, most of us only have to worry about a small fraction of what’s on that list, but it’s still a nightmare – and one that gets worse every year because politicians have an endless appetite for manipulating our lives and auctioning off new loopholes for campaign cash.

So let’s take a few minutes to review the features of a tax system that is simple and fair (and pro-growth). I’m talking about the flat tax, which now is successfully working in about 30 nations.

Just a quick caveat for my friends who prefer the national sales tax. Yes, that system also would be a vast improvement. But since the Fair Tax or something like that would require a constitutional amendment to ensure that politicians couldn’t impose both a sales tax and income tax, that’s more of a long-term project.

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While watching my interview with Dambisa Moyo, I noticed C-Span has an easy-to-use archive system that shows all previous appearances.

This was an opportunity for some narcissistic reminiscing, beginning with my first appearance in 1990 (which I shared with a friend, who laughed at my “Justin Bieber haircut”).

But I was especially pleased to find my debate with Bruce Bartlett about the national sales tax or Fair Tax.

Some readers occasionally give me a hard time about devoting a lot of time and effort to promoting the flat tax, while not paying enough attention to the national sales tax. I’ve explained that this is because I think the flat tax is more politically feasible, but the C-Span debate should demonstrate that I am more than happy to vigorously defend the Fair Tax when given the opportunity.

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I spoke at the Tea Party Patriots convention earlier today. Great people, great crowd.

My job was to debate on the side of the flat tax over the fair tax. Several people asked for more information, and I promised to put this video on the blog. Long-time readers probably will have seen it before, but it’s always good to be reminded why we need tax reform – and also reminded why we can’t trust politicians with a new source of revenue.

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In the past 15 years, I’ve debated in favor of a national sales tax, testified before Congress on the merits of a national sales tax, gone on TV to advocate for the national sales tax, and spoken with dozens of reporters to explain why the national sales tax is a good idea. Even though I prefer the flat tax, I’ve been an ardent defender of sales tax proposals such as the FAIR tax because it would be a great idea to replace the current system with any low-rate system that gets rid of the tax bias against saving and investment. I even narrated this video explaining that a national sales tax and flat tax are different sides of the same coin – and therefore either tax reform proposal would significantly improve prosperity and competitiveness.

I will continue to defend the FAIR tax and other national sales tax proposals that replace the income tax, but I wonder whether this is a losing battle. Every election cycle, candidates that endorse (or even say nice things about) the FAIR tax wind up getting attacked and put on the defensive. Their opponents are being dishonest, and their TV ads are grossly misleading, but they are using this approach because the anti-FAIR tax message is politically effective. Many pro-tax reform candidates have lost elections in favorable states and districts, largely because their opponents were able to successfully demagogue against a national sales tax.

The Wall Street Journal reaches the same conclusion, opining this morning about the false – but effective – campaign against candidates who support a national sales tax.

In 16 House and three Senate races so far, Democrats have blasted GOP candidates for at one point or another voicing an interest in the FAIR tax. …FAIR tax proponents are right to say these Democratic attacks are unfair and don’t mention the tax-cutting side of the proposal, but the attacks do seem to work. Mr. Paul’s lead in Kentucky fell after the assault, and the issue has hurt GOP candidate Ken Buck in a close Colorado Senate race. In a special House election earlier this year in Pennsylvania, Democrat Mark Critz used the FAIR tax cudgel on Republican opponent Tim Burns. In a district that John McCain carried in 2008, Mr. Critz beat the Republican by eight points and is using the issue again in their rematch. This is a political reality that FAIR taxers need to face. …in theory a consumption tax like the FAIR tax is preferable to an income tax because it doesn’t punish the savings and investment that drive economic growth. If we were designing a tax code from scratch, the FAIR tax would be one consumption tax option worth debating. But…voters rightly suspect that any new sales tax scheme will merely be piled on the current code.

We won’t know until next Tuesday what is going to happen in Kentucky and Colorado, and we won’t know until then what will happen in the other campaigns where the FAIR tax is an issue. But if there are two tax reform plans that achieve the same objective, why pick the approach that faces greater political obstacles?

FAIR tax proponents presumably could defuse some of the attacks by refocusing their efforts so that repealing the income tax is the top priority. This would not require any heavy lifting since all honest proponents of a national sales tax want to get rid of the 16th Amendment and replace it with something that unambiguously prohibits any direct tax on income. So why not lead with that initiative, and have the national sales tax as a secondary proposal? This is what I propose in the video, and I think it would be much harder for demagogues to imply that a FAIR tax would mean a new tax on top of the corrupt system that already exists.

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After my recent post on “bashing the IRS,” I got several emails and comments asking whether a national sales tax might be a better idea than the flat tax. I’m a big fan of proposals such as the Fair Tax. I’ve debated in favor of the national sales tax, done media interviews in favor of the national sales tax, written in favor of the national sales tax, and even defended the national sales tax in congressional testimony. As far as I’m concerned, we should junk the IRS for some type of single-rate, consumption-base (meaning no double taxation), loophole-free system. The flat tax is the most well-know approach for achieving these goals, but the national sales tax also would work. Indeed, the two plans are different sides of the same coin. A sales tax takes a piece of your income (but only one time and at one low rate) when it is spent, and a flat tax grabs a slice of your income (but only one time and at one low rate) when it is earned.

So why, then, do I devote most of my energies to a sales flat tax? The answer is that I don’t trust politicians. I fear that they will pull a bait-and-switch, and implement something like a Fair Tax but never complete the deal by getting rid of the income tax. The European experience certainly serves as a warning. Nations across Europe began implementing their version of a national sales tax (the value-added tax) in the late 1960s. Voters often were told that other taxes would be eliminated or reduced. But all the evidence shows that VATs simply led to a much higher tax burden and a much bigger burden of government.

I don’t want that to happen in America, as I explained 13 years ago for Reason and two years ago for the Media Research Center. But this video is probably the best summary of my argument.

By the way, some fans of the Fair Tax say the solution to this problem is an amendment to the Constitution. I fully agree, but then I point out that there are not even enough votes to approve a watered-down balanced budget amendment, so that seems an unlikely path to success. That being said, if we ever reach this point, and are able to repeal the 16th Amendment and replace it with something that unambiguously would stop the politicians from ever burdening America with an income tax, I will gladly offer my support and push a national sales tax

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I have a question for my friends who support a national sales tax. First, some background. Beginning with the defeat of Woody Jenkins in his Louisiana Senate race back in the 1990s, various versions of the national sales tax have caused political headaches for GOP candidates. Even candidates from conservative states, such as Sen. DeMint in South Carolina, have been put on the defensive because they said good things about the FairTax. The latest example comes from the Pennsylvania special election for Rep. Murtha’s seat. As this Wall Street Journal column points out, the winning Democratic candidate hammered the Republican because of his support for the FairTax. So even though I have said very nice things about a national sales tax, testified about the virtues of the national sales tax, and debated in favor of a national sales tax over the current system, I am increasingly convinced that the flat tax is the only plan that is sufficiently immune to demagoguery. Can anyone give me a persuasive argument about the political viability of the FairTax?

Democrats turned the table and ran against Mr. Burns on taxes. The GOP businessman had flirted in the past with supporting the FAIR tax, a version of a national sales tax that supporters want to replace the income tax. Mr. Critz’s ads blasted Mr. Burns for supporting a 23% sales tax increase without mentioning the income tax elimination, and the GOP seems to have been caught flat-footed. Republicans can rightly complain that this is unfair and that Mr. Critz will vote to raise taxes when Mrs. Pelosi gives the order. But they need a real-time campaign answer to the tax-hike charge. Whatever the merits of the FAIR tax in theory, we’ve long thought it is a political loser because voters figure they’ll get the sales tax without losing the income tax. At a minimum, FAIR tax supporters shouldn’t have left Mr. Burns defenseless on the subject. By the way, this is also a political warning to Republicans inclined to fall for the Democratic trap of agreeing to a new value-added tax in return for lower income-tax rates.

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I only vaguely remember this debate that took place at Furman University, and I never saw this recording until it arrived in my inbox today. I invite fans of both the flat tax and FairTax to watch this debate and let me know your thoughts.

Many of my arguments, by the way, also apply to the debate on the value-added tax. Simply stated, I don’t trust politicians when they claim a VAT won’t be used to increase the overall burden of government.

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Gloominess and despair are not uncommon traits among supporters of limited government – and with good reason. Government has grown rapidly in recent years and it is expected to get much bigger in the future. To make matters worse, it seems that the deck is stacked against reforms to restrain government. One problem is that 47 percent of Americans are exempt from paying income taxes, which presumably means they no longer have any incentive to resist big government. Mark Steyn recently wrote a very depressing column for National Review Online about this phenomenon, noting that, “By 2012, America could be holding the first federal election in which a majority of the population will be able to vote themselves more government lollipops paid for by the ever shrinking minority of the population still dumb enough to be net contributors to the federal treasury.” Walter Williams, meanwhile, has a new column speculating on whether this cripples the battle for freedom:

According to the Tax Policy Center, a Washington, D.C., research organization, nearly half of U.S. households will pay no federal income taxes for 2009…because their incomes are too low or they have higher income but credits, deductions and exemptions that relieve them of tax liability. This lack of income tax liability stands in stark contrast to the top 10 percent of earners, those households earning an average of $366,400 in 2006, who paid about 73 percent of federal income taxes. …Let’s not dwell on the fairness of such an arrangement for financing the activities of the federal government. Instead, let’s ask what kind of incentives and results such an arrangement produces and ask ourselves whether these results are good for our country. …Having 121 million Americans completely outside the federal income tax system, it’s like throwing chum to political sharks. These Americans become a natural spending constituency for big-spending politicians. After all, if you have no income tax liability, how much do you care about deficits, how much Congress spends and the level of taxation?

Steyn and Williams are right to worry, but the situation is not as grim as it seems for the simple reason that a good portion of the American people know the difference between right and wrong. Consider some of the recent polling data from Rasmussen, which found that “Sixty-six percent (66%) believe that America is overtaxed. Only 25% disagree. Lower income voters are more likely than others to believe the nation is overtaxed” and “75% of voters nationwide say the average American should pay no more than 20% of their income in taxes.” These numbers contradict the hypothesis that 47 percent of Americans (those that don’t pay income tax) are automatic supporters of class-warfare policy.

So why are the supposed free-riders not signing on to the Obama-Reid-Pelosi agenda? There are probably several reasons, including the fact that many Americans believe in upward mobility, so even if their incomes currently are too low to pay income tax, they aspire to earn more in the future and don’t want higher tax rates on the rich to serve as a barrier. I’m not a polling expert, but I also suspect there’s a moral component to these numbers. There’s no way to prove this assertion, but I am quite sure that the vast majority of hard-working Americans with modest incomes would never even contemplate breaking into a rich neighbor’s house and stealing the family jewelry. So it is perfectly logical that they wouldn’t support using the IRS as a middleman to do the same thing.

A few final tax observations:

The hostility to taxation also represents opposition to big government (at least in theory). Rasumssen also recently found that, “Just 23% of U.S. voters say they prefer a more active government with more services and higher taxes over one with fewer services and lower taxes. …Two-thirds (66%) of voters prefer a government with fewer services and lower taxes.” 

There is a giant divide between the political elite and ordinary Americans. Rasmussen’s polling revealed that, “Eighty-one percent (81%) of Mainstream American voters believe the nation is overtaxed, while 74% of those in the Political Class disagree.”

Voters do not want a value-added tax or any other form of national sales tax. They are not against the idea as a theoretical concept, but they wisely recognize the politicians are greedy and untrustworthy. Rasumussen found that “just 26% of all voters think that it is even somewhat likely the government would cut income taxes after implementing a sales tax. Sixty-six percent (66%) believe it’s unlikely to happen.” 

Fiscal restraint is a necessary precondition for any pro-growth tax reform. If given a choice between a flat tax, national sales tax, value-added tax, or the current system, many Americans want reform, but it is very difficult to have a good tax system if the burden of government spending is rising. Likewise, it would be very easy to have a good tax system if we had a federal government that was limited to the duties outlined in Article I, Section VIII, of the Constitution.

Republicans should never acquiesce to higher taxes. All these good numbers and optimistic findings are dependent on voters facing a clear choice between higher taxes and bigger government vs lower taxes and limited government. If Republicans inside the beltway get seduced into a “budget summit” where taxes are “on the table,” that creates a very unhealthy dynamic where voters instinctively try to protect themselves by supporting taxes on somebody else – and the so-called rich are the easiest target.

Last but not least, I can’t resist pointing out that I am part of a debate for U.S. News & World Report on the flat tax vs. the current system. For those of you who have an opinion on this matter, don’t hesitate to cast a vote.

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Here are four very short videos produced from an in-office interview I did at the Heartland Institute last week. Which tax system do you prefer?

I talk about the current internal revenue code…

…and the flat tax…

…and the national sales tax (Fair Tax)…

…and the value-added tax.

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America’s biggest fiscal challenge is excessive government spending. The public sector is far too large today and it is projected to get much bigger in coming decades. But the corrupt and punitive internal revenue code is second on the list of fiscal problems. This new video, narrated by yours truly and produced by the Center for Freedom and Prosperity, explains how a flat tax would work and why it would promote growth and fairness.

There are two big hurdles that must be overcome to achieve tax reform. The first obstacle is that the class-warfare crowd wants the tax code to penalize success with high tax rates. That issue is addressed in the video in a couple of ways. I explain that fairness should be defined as treating all people equally, and I also point out that upper-income taxpayers are far more likely to benefit from all the deductions, credits, exemptions, preferences, and other loopholes in the tax code. The second obstacle, which is more of an inside-the-beltway issue, is that the current tax system is very rewarding for the iron triangle of lobbyists, politicians, and bureaucrats (or maybe iron rectangle if we include the tax preparation industry). There are tens of thousands of people who make very generous salaries precisely because the tax code is a playground for corrupt deal making. A flat tax for these folks would be like kryptonite for Superman. But more than two dozen nations around the world have implemented a flat tax, so hope springs eternal.

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Here are a few stories to bring holiday cheer for taxpayers. First, we have an Associated Press report that several hundred thousand federal bureaucrats have serious tax delinquencies. The Department of Housing and Urban Development always ranks high on the list of government entities that should be abolished, so it’s interesting to see that HUD bureaucrats are most likely to be dodging their taxes:

More than 276,000 federal employees and retirees owed back income taxes as of Sept. 30, 2008, according to data from the Internal Revenue Service. The $3.04 billion owed was up from $2.7 billion owed by federal employees and retirees in 2007. Among cabinet agencies, the Department of Housing and Urban Development had the highest delinquency rate, at just over 4 percent.

This rampant nonpayment is especially outrageous since federal bureaucrats “earn” twice as much compensation, on average, as those of us laboring in the productive sector of the economy. One might think they would go out of their way to comply since their bloated salaries come from tax collections. Speaking of outrage, the internal watchdogs at the Treasury have just published a report showing that it is almost impossible to verify eligibility for the special interest tax breaks in the so-called stimulus. As Investor’s Business Daily opines, this is an invitation to fraud:

A new report from the Treasury Department’s Inspector General for Tax Administration counts 56 tax provisions in the bill having a potential cost of $325 billion. Of those, 20 are tax breaks for individuals and 36 are for businesses. The problem, the Inspector General says, is the IRS can’t verify taxpayer eligibility “for the majority of Recovery Act tax benefits and credits.” For individual taxpayers, 13 of the 20 benefits and credits can’t be verified; for businesses, it’s 26 of 36. …To suggest, as Treasury does, that the biggest chunk of the $325 billion in stimulus package tax breaks can’t be adequately followed violates the pledges of openness and fairness made when the stimulus was passed last February. As the government-stimulus-oversight Web site, recovery.gov, notes, last year’s package “requires that taxpayer dollars spent under the Act be subject to unprecedented accountability.” We wouldn’t call being unable to verify upwards of two-thirds of the $325 billion handed out as “unprecedented accountability.” Sounds more like an invitation to fraud, all at the expense of the taxpayers.

To be fair, even a competent government agency might have trouble making a bad law work, and the $787 boondoggle was rushed through the legislative process with very little – if any – attention paid to anything other than funneling other people’s money to special interest groups. That being said, the IRS has trouble even with routine tasks. According to another IG report, the agency has a staggering 70 percent error rate in its processing of taxpayer identification numbers for individual taxpayers:

The Treasury Inspector General for Tax Administration (TIGTA) today publicly released its review of the IRS’s processing of applications for Individual Taxpayer Identification Numbers (ITINs). TIGTA reviewed a sample of ITIN applications and found that almost 70% contained significant errors and/or raised concerns that should have prevented the issuance of an ITIN. The IRS estimates that it has issued more than 14 million ITINs as of December 2008. ITINs are intended to provide tax identification numbers to resident and nonresident alien individuals who may have U.S. tax reporting or filing obligations but do not qualify for Social Security Numbers, which generally are only issued to U.S. citizens and individuals legally admitted to the U.S. …”The number of individual income tax returns filed using ITINs and reporting wage income has increased by 247 percent from 2001 to 2008,” commented J. Russell George, the Treasury Inspector General for Tax Administration. “If the IRS continues to issue ITINs without proper verification, the risk of fraudulently filed returns – along with fraudulently claimed refunds – will continue to rise,” added Inspector General George.

Just think how much fun it will be when the IRS is in charge of determining those of us who should get fined or jailed for noncompliance with government-run healthcare! No wonder so many taxpayers put a flat tax or national sales tax on their Christmas lists.

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