I’m ecumenical on tax reform. I’ll support any plan that rips up the internal revenue code and instead lowers tax rates, reduces double taxation, and cuts out distorting loopholes.
And as I explain in this interview, both the flat tax and national sales tax have a low tax rate. They also get rid of double taxation and they both wipe out the rat’s nest of deductions, credits, exclusions, preferences, and exemptions.
You’ll notice, however, that I wasn’t very optimistic in the interview about the possibility of replacing the IRS with a simple and fair tax system.
But perhaps I’m being needlessly gloomy. New polling data from Reason-Rupe show that there’s very strong support for reform. At least if you favor a flat tax.
This doesn’t mean we can expect genuine tax reform tomorrow or the next day.
President Obama is viscerally committed to class-warfare tax policy, for instance, and special interest groups would vigorously resist if there was a real possibility (they would say threat) of scrapping the current tax code.
But it does suggest that tax reform – at least in the form of a flat tax – could happen if there was real leadership in Washington.
So maybe my fantasies will become reality!
And one of the best arguments for reform is that the internal revenue code is an unfair mess.
Consider how rich people are treated by the tax code. The system is so complicated that we can’t tell whether they’re paying too much (because of high rates and pervasive double taxation) or paying too little (because of special preferences and tax shelters).
Regardless, we do know that they can afford lots of lobbyists, lawyers, and accountants. So even though they are far more likely to be audited, they have ample ability to defend themselves.
But the real lesson, as I explain in this CNBC interview, is that the right kind of tax reform would lead to a simple system that treats everyone fairly.
I’m also glad I used the opportunity to grouse about the IRS getting politicized and corrupted.
But I wish there had been more time in the interview so I could have pointed out that IRS data reveal that you get a lot more revenue from the rich when tax rates are more reasonable.
And I also wish I had seen the Reason-Rupe poll so I could have bragged that there was strong support for a flat tax.
Unfortunately, I wouldn’t have been able to make the same claim about the national sales tax. I haven’t seen any recent public opinion data on the Fair Tax or other similar plans, but a poll from last year failed to find majority support for such a proposal.
And a Reason-Rupe poll from 2011 showed only 33 percent support for a national sales tax.
That won’t stop me from defending the national sales tax. After all, it is based on the same principles as a flat tax.
But the polls do suggest (as do anecdotes from the campaign trail) that a flat tax is a more politically viable option for reformers.
The moral of the story is that it makes more sense to push for the flat tax. After all, if I have an easy route and a hard route to get to the same destination, why make life more difficult?
Though the ultimate libertarian fantasy is shrinking government back to what the Founding Fathers had in mind. Then we wouldn’t need any broad-based tax of any kind.
P.S. Here’s my choice for the strangest-loophole award.
P.P.S. Since I shared a poll today with good news, I may as well link to a tax poll that left me somewhat depressed.
P.P.P.S. Let’s end with some IRS humor.
[…] I said in the video, it would be nice to toss the current tax code in the trash and replace it with something that collects revenue is a less-damaging and less-corrupt […]
[…] I said in the video, it would be nice to toss the current tax code in the trash and replace it with something that collects revenue is a less-damaging and less-corrupt […]
[…] The good news is that Americans don’t like the tax system. […]
[…] The good news is that Americans don’t like the tax system. […]
I would prefer either to our current tax code. However, flat tax critics talk about the rich paying their fair share. What they miss is that under a flat tax, after a certain point, everyone pays the same rate. Personally, I am of the mindset that a flat tax would ensure that everyone pays their fair share. Liberals talk about the rich paying their fair share. All the more reason for a flat tax or a national sales tax, the latter I personally prefer.
[…] This violates the important principle that the law should treat everyone alike. Yet another reason to have a simple and fair flat tax. […]
Chip:
You say that compliance costs will still be there with a flat tax.
That cannot be true. A flat tax applied to all income would allow most people to avoid filing taxes at all. For example, a 25% flat tax on earned income would be accurately withheld by the employer. Only those with “business” income would have to file for themselves and the withholding from their employees.
Businesses would have a more complicated filing than individuals, but it would be radically less burdensome than the current code.
While I believe the savings would be less than Dan, 80% would probably be saved.
There will be temporary displacement of many tax accountants, tax lawyers, lobbyists, and IRS personnel; but these are some of our brightest people and the economy will get a tremendous boost by shifting them from zero-sum paper jobs to more productive endeavors.
[…] Some Good News on Tax Reform (if You Prefer the Flat Tax over the … […]
[…] Some Good News on Tax Reform (if You Prefer the Flat Tax over the … […]
A main problem with our current tax system or a flat tax is that both have the compliance cost which is about $450 billion per year. That is a sizeable portion of the GNP. That cost will be gone and prices will drop 15 to 20 %. This is paid by business which is passed on to the consumer, the ultimate taxpayer!
Reblogged this on Karl Dickey's Blog.
Dan:
Regarding your “what’s in it for them?” comment in the interview:
Honest politicians (I know — oxymoron!) who put through a flat tax to replace the current code could count on re-election from very happy constituents.
Normal politicians who’ve gotten elected for the power and the revolving door perks could no longer manipulate the tax code, but they certainly have plenty of government money to accomplish the same goals.
If we’re swinging for the fences on revenue collection, wouldn’t it make sense to limit legislative discretion on spending too?
Only in the abstract might voters be open to a flat tax on income.
The top 5% currently make 32% of the income but pay 59% of the taxes. There is no way the bottom 95% will vote to pay 27% more of total revenues.
Somehow the flat tax must be made progressive, while leaving in place the top marginal rate. The FairTax proposes a “prebate” for citizens. This is a great idea, because it retains all the savings on tax collection, such as no need for annual tax filings for employees and those with no business income.
The problem here is the amount of the prebate. Whatever the amount ends up being, it should be deducted from welfare payments and from Social Security.
The FairTax has set relatively low levels for the prebate. An argument could be made that the prebate should be set higher, at the poverty line. A family with no income would have poverty line support. At a flat rate of 25%, they would keep 75% of every dollar earned. Unlike the situation as means-tested support is lost, their effective tax rate would never go above the effective tax rate for the wealthy.
The federal government would treat every citizen the same (since the wealthy would also receive the prebate). Welfare could become the sole responsibility of the States.
The fatal flaw for a National Sales Tax is the cascade effect on previously taxed gross salaries.
For example, if someone currently pays $24,000 out of a gross salary of $100,000; a 25% flat tax would be close at $25,000 out of $100,000; with no change in the cost of the product or service produced.
However, under a 25% NST, that individual would receive $100,000 net salary and the tax added on top would be $33,333. The price of the product or service must go up. [Note that the market would push the inflated cost down below a 33% increase.]
This problem is mentioned in “FairTax the Truth” in a footnote on page 143. They claimed that this is not a problem since salaries also go up. BUT, what about those on fixed incomes and our competitiveness generally?
The only way to make an NST work would be to lower gross salaries to the current net salary. — Impossible.
If there’s going to be a tax on prostitutes, make sure it includes our current legislators!