I’m a supporter of a single-rate tax regime, especially if there’s no double taxation of income that is saved and invested.
That’s why I like the flat tax.
But I’ve expressed concern about the national sales tax, even though it’s basically the same as a flat tax (the only real difference is that the flat tax takes a bite out of your income when it is earned, while the sales tax takes a bite of your income as it is spent).
The reason for my skepticism is that I don’t trust politicians. I fear that they will adopt a sales tax, but never replace the income. As a result, we’ll wind up like Europe, with much bigger government.
And also much more red ink – even though politicians claim tax hikes and new taxes will lead to balanced budgets.
I’m not just being paranoid. Not only is this what occurred in Europe, the same thing is now happening in Japan.
Here’s some of what the Wall Street Journal has to say about “reforms” to the value-added tax in the land of the rising sun.
Japan on Tuesday increased its consumption tax to 8% from 5%. An increase to 10% is written into the law for next year, and don’t imagine for a minute that this will be the last. Welcome to the value-added-tax ratchet, which only goes in one direction—up. Tokyo first imposed a 3% consumption tax in 1989, after politicians had tried for a decade to enact one. …The new tax was billed as part of a tax reform, but the reform never materialized.
And as I warned in a prior column, the VAT has become a recipe for bigger government in Japan.
The new tax didn’t solve Japan’s deficit woes, as the debt to GDP ratio climbed to 50%, so in 1997 politicians increased the rate to 5%. Again politicians promised the increase would be offset by income-tax reforms. Again the reform proved illusory. …The additional revenue still didn’t satisfy Tokyo’s spending ambitions, and debt has since climbed well above 200% of GDP despite the VAT increase. …So now the rate is going up again in the name of, you guessed it, shoring up government finances as the population ages.
The OECD likes this development, which is hardly a surprise, but it’s bad news for those of us who favor growth and opportunity.
Japan’s experience points up the broader political problem with a value-added tax wherever it has been imposed. Economists tout the VAT for generating revenue without creating disincentives to work and invest. But in practice the consumption levy merely becomes one more tax in addition to current taxes and thus one more claim by the political class on the private economy. …The lesson for tax reformers elsewhere, not least in America, is to beware the VAT because once it is imposed it is only going up.
And it’s worth noting that the Europeans also have been increasing the VAT in recent years.
Simply stated, this is a levy to finance bigger government.
I elaborate in my video on the VAT.
P.S. You can see some amusing – but also painfully accurate – cartoons about the VAT by clicking here, here, and here.
P.P.S. I also very much recommend what George Will wrote about the value-added tax.
P.P.P.S. I’m also quite amused that the IMF accidentally provided key evidence against the VAT.
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Jimmy V, the idea of reducing corporate income taxes down to 3-4% is a fantastic idea. As we all know, when the price of something goes up the demand goes down, and when we tax something we raise its price. Therefore taxing businesses means we will have fewer businesses and therefore fewer jobs. You notions here are all good. I would only improve on it by eliminating income taxes on business altogether. Corporate income taxes account for only about 10% of federal revenue, anyway. And there are side benefits to such a move: all of those larger companies with the huge tax compliance departments can set those people free to do productive things, which is another net reduction in the cost of doing business. The same can be said for smaller business who outsource their tax compliance to outside companies. The net macro benefit to our economy would be significant.
Other than that, though, you have some major missteps. The most revealing item was your comment on inheritance taxes in which you said, that some inheritance tax is needed “because so much of it wasn’t properly taxed in the past.” Properly taxed? “Properly taxed” is an oxymoron. You have revealed an innate agreement with the government’s desire to tax anything that moves. This is just a restatement of the statist position that “what’s mine is mine and what’s yours is mine”. Here is another way to look at inheritance taxes. When somone who built a successful business passes away, an inheritance tax of, say, 25% has the effect of you and I (i.e., we the people) saying to this person’s heirs: we now own a 25% share of his business. Where did we get the right to make that claim?
Your next policy misstep was treating investment income the same as ordinary income so that we could tax everything at the same rate. The net of such a policy would inevitably raise taxes on investments, the mother’s milk of growth, thereby raising the total price of investing. Consequently, investment would go down, and productivity and growth would stagnate if not wither. The benefit we would see from your reduction in business taxes would be slaughtered by the increase in investment taxes. You even regurgitate leftist talking points about “corporate opulence” and income inequality (though you used the term “wealth disparity”). There is no net economic value in reducing corporate opulence or wealth disparity. None. That is nothing but “feel good” blather from the left.
But, back to the positives. Several of your other points, such as repatriation of foreign revenues and reduced lobbying are spot on. You are on the right track in general, I think. You just need to clean up some of this.
I’m against a VAT sales tax and a flat income tax. I’m for a progressive income tax like we have, but with the top margin set at 34%; not the new 39.6%. Now, I’ve never bought into Dan’s double-taxation flow charts. To me they’re specious ruse. The only remote argument of double-tax is on corp dividend distributions. Herein the shareholder is getting pref treatment or tax-discounting anyhow. Not only that, the tax a corporation pays on its dividends isn’t paid mainly by the shareholders either. Corp tax is mainly paid by the little common customer, in higher prices.
Here’s a solution to growing our economy, creating jobs, restoring the middle class, and de-skewing the egregious income disparity…. Almost all our problems lie within our perverse and corrupt income tax code. We don’t practice true, fair, level playing field, free market capitalism.
First set all corporate tax down to 3% or 4%; or essentially quit taxing corporations. Investors like Dan wouldn’t be able to cry about double-taxation or two bites anymore.
Then, treat all individual invest income, ie, long term cap gains, dividends, and carried interest; as plain “ordinary income”! The only exception would be muni bond interest.
In theory, inheritance and gift income should be tax exempt; but because so much of it wasn’t properly taxed in the past, there’d have to be something like maybe a 20% cap or something!?
The only deductions would be for dependents and all charitable donations.
A huge item would also be removing our “artificial appreciation” from our housing markets!!! Of course existing mortgage holders would be grandfathered their mortg int deduction (MID), property tax deduc, sales tax deduct, and ccard interest deducts, BUT all capital gains on sale of a home immediately becomes ‘ordinary taxable income’! New mortgages wouldn’t get anymore tax deductions or incentives. This would return our housing markets to a true capitalism. Our inner city blight would start to improve, affordability would improve, wealth disparity would lessen, etc etc.
With no tax on corporations, GDP, prices, and jobs would all be stimulated greatly. Corporate opulence, eg lavish dining, vacation junkets, and sports box suites etc; would greatly subside. Massive lobbying and corp political contributions would also greatly diminish. Repatriation of the $Trillions in foreign countries would come back too!
With the massive increase in jobs and GDP, gov’t tax revenues would grow dramatically, even with a 34% individual top bracket!
In summary, just getting the corruption and perversion out of our existing tax code; and going with a true, fair, moral, level playing field, free market capitalism, is all we need to do to get America back! It’s getting Congress, and all these alleged economists on board; that’s the hard part.
Mr. Mitchell is not paranoid at all.
These things, as with Obamacare making millions dependent on an ever shrinking pool of real productivity, are one way streets of no return. Stepping stones to the ultimate destiny of decline. Decline that tends to come suddenly, when you cross the threshold and lose your status as most motivated citizens in the world (motivation = you get to keep what you earn and there are few safety nets if you are non-productive your entire lifetime). When the crisis finally hits, or the slope to decline becomes too steep, what are voters going to do? Repeal Obamacare and de-insure millions during an economic decline? And repeal the VAT at the same time when the debt has reached 150% of GDP? Once in the death spiral there is no hope.
There is an inflection point, a point of no return after which the dynamics of western democracy seem to induce voter-lemmings into suicide. That point of no return has been crossed by most western democracies. That point was finally crossed by US voter-lemmings too, six years ago, when in response to problems created by emerging coercive collectivism in America, the electorate opted for even more statism. You are now in the throes of this death spiral and VAT talk starts appearing on the horizon of HopNChange.
VAT will come to milk the very voter-lemmings that voted for HopNChange. Once the rich are eaten, socialism runs out of food — when diluted over the entire US population there is not nearly as much money amongst top 1% to redistribute amongst the population and make any significant difference, other than permanently suppressing the incentives and exceptional effort required to become and stay rich — and so socialism like a modern day Saturn, must inevitably turn to eating his own children: The voter-lemmings that hoped in an easier path to prosperity. VAT talk in Washington is a sign that socialism, having Arthur-Laffered income taxes, having reduced growth down to the classic one to two percent welfare state trendline, is now turning hungry again. HopNChangers prepare yourselves to be eaten by the monopoly socialist bully you created. Yes, you thought you were creating a friend indeed.
But my guess is that VAT will come suddenly. When world confidence in the US’s ability to repay all its debt starts wavering, the ensuing vicious cycle will create a crisis that will precipitate the desperate imposition of VAT overnight. HopNChangers will have completed their magical journey to an easier prosperity. Current timid talk about VAT is preparing us for that day, that inevitable step in America’s decline.
Marty:
My book “Fixing Everything” has an extensive discussion of the different flat rate taxes and taxes in general.
However, it was written 3 years ago and is not complete.
All flat taxes are “consumption” taxes in that the consumer ultimately pays the tax as part of the final price. The only difference is supposed to be when and how the taxes are collected.
A Value Added Tax (VAT) is paid at each stage of production. Documentation on taxes paid follows through to the final sale. Total taxes paid must equal total cost plus profits plus the VAT percentage. The VAT is called a “hidden tax”, but frankly it’s no more hidden than a tax on income. As Dan pointed out many European countries have both, so in those cases the effective tax percentage is hidden.
When people discuss a “Flat Tax”, it is normally a single rate tax on all earned income. Earned income includes salaries and profits. While it is assumed that there will be no deductions from salaries for benefits, it gets a little murky when we discuss profits. While deductions for purchased products or services used in production make perfect sense, since with the exception of imported components a flat tax would have been already applied, deductions for entertainment, expensive travel, etc. sound an awful lot like executive perks.
A National Sales Tax (NST) comes in two forms. Either the tax is tacked on at the end, like State sales taxes; or, like the FairTax, incorporated into the cost of the product. The only real difference is the stated tax percentage. This tax would include imported costs and executive perks. In theory this is the easiest to understand and seems to simplify collection. In practice, not so much.
Politicians would adjust the rate for medicine, education, food, etc. Service industries would be impossible to police. Can you imagine a barber not being tempted to pocket the extra 30% that would go to tax authorities? And, frequently such a tax is added on top of other taxes in a cascade. Black markets would be everywhere.
The best option would be a hybrid flat income/sales tax that would be income based, adjusted for taxes on imported components and executive perks that would bring it in line with a tax on sales.
Because a true flat tax is neutral, low income groups would pay the same as high income groups, so politically there is no chance this would pass. The Ryan Plan proposed two tax rates. — Awful, this destroys the simplification to the collection process. A better alternative would be a cash payment like the FairTax’s prebate, which make the effective tax paid progressive, without complicating the collection process.
Dan:
WRONG! A national sales tax is NOT “basically the same” as a flat tax on income, because we are not starting from scratch. Existing income taxes are embedded in gross incomes, and the only way they would be the same is if gross incomes were reduced to net income levels.
For a simplified example, take a law firm: Assume gross salaries are $800,000 and partner’s profits are $200,000. Converting to a flat income tax changes nothing, cost to clients would still be $1,000,000. A flat national sales tax, however, would go on top or initially $1,333,333 to clients. While competitive pressure would force down partner profits first, gross salaries can be very sticky downward.
In “FairTax the Truth” this problem is mentioned on page 143 in the notes. The note states that prices will go up by 24.7%. However, this is glossed over by saying that since salaries go up it’s not a problem. Except if you’re on a fixed income!
Note that the 24.7% figure has to be wrong, unless the Fed provides the liquidity to allow all prices to inflate by that amount. Even then it’s still wrong.
Dan, I am a bit confused. Apparently, there are several different tax schemes that are referred to as a “flat tax”. Could you please give me a more specific name for the particular flat tax that you support? Or perhaps recommend a good book on the subject? Thanks, Marty Ryerson “If workers struggle for higher wages, this is hailed as ‘social gains’; if businessmen struggle for higher profits, this is damned as ‘selfish greed’.” – Ayn Rand.