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Posts Tagged ‘Flat Tax’

With tax day fast approaching, it’s time to write about our good friends at the Internal Revenue Service.

One of the new traditions at the IRS is an annual release of tax scams. It’s know as the “dirty dozen” list, and while it may exist mostly as a publicity stunt, it does contain some useful advice.

And that’s true of this year’s version. But I worry that the IRS is looking at a few trees and missing the forest.

The Washington Examiner was kind enough to let me write a cover story on the “dirty dozen” list. Here’s my effort to add some context to the discussion.

…our friends at the Internal Revenue Service have a relatively new tradition of providing an annual list of 12 “tax scams” that taxpayers should avoid. It’s an odd collection, comprised of both recommendations that taxpayers protect themselves from fraud, as well as admonitions that taxpayers should be fully obedient to all IRS demands. Unsurprisingly, the list contains no warnings about the needless complexity and punitive nature of the tax code. Nor does the IRS say anything about how taxpayers lose the presumption of innocence if there’s any sort of conflict with the tax agency. Perhaps most important, there’s no acknowledgement from the IRS that many of the dirty dozen scams only exist because of bad tax policy.

In the article, I list each scam and make a few observations.

But I think my most useful comments came at the end of my piece.

…maybe the tax system wouldn’t engender so much hostility and disrespect if it was simple, transparent, fair, and conducive to growth. And that may be the big-picture lesson to learn as we conclude our analysis. When the income tax was first imposed back in 1913, the top tax rate was only 7 percent, the tax form was only two pages, and the tax code was easily understandable. But now that 100 years have gone by, the tax system has become a mess, like a ship encrusted with so many barnacles that it can no longer function. …the bottom line is that the biggest scam is the entire internal revenue code. The winners are the lobbyists, politicians, bureaucrats and insiders. The losers are America’s workers, investors, and consumers.

In other words, if we actually want a humane and sensible system, we should throw the current tax code in the garbage and replace it with a simple and fair flat tax.

And that’s exactly the message I shared in this interview with C-Span.

Here are a few of the points from the discussion that are worth emphasizing.

The current tax code benefits Washington insiders, not the American people.

But I’m not optimistic about fixing the tax code, in part because the crowd in DC would lose some power.

We’ll never get good tax reform unless there’s genuine entitlement reform to restrain the growing burden of government spending.

The flat tax and national sales tax are basically different sides of the same coin.

If you want class-warfare tax rates on the rich, keep in mind that high rates don’t necessarily translate into more revenue.

The no-tax-hike pledge is a vital and necessary component of a strategy to restrain government.

Itemized deductions benefit the rich, not the poor.

If you care about poor people, focus on growth rather than inequality.

We should mimic Hong Kong and Singapore, not France and Greece.

P.S. I wrote last week that the Senate GOP put together a budget that is surprisingly good, both in content and presentation. A reader since reminded me that the Chairman of the Senate Budget Committee was a sponsor of the “Penny Plan,” which would lower non-interest outlays by 1 percent per year.

Since Mitchell’s Golden Rule simply requires that spending grow by less than the private sector, Senator Enzi’s Penny Plan obviously passes with flying colors.

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In my 2012 primer on fundamental tax reform, I explained that the three biggest warts in the current system.

1. High tax rates that penalize productive behavior.

2. Pervasive double taxation that discourages saving and investment.

3. Corrupt loopholes and cronyism that bribe people to make less productive choices.

These problems all need to be addressed, but I also acknowledged additional concerns with the internal revenue code, such as worldwide taxation and erosion of constitutional freedoms an civil liberties.

In a perfect world, we would shrink government to such a small size that there was no need for any sort of broad-based tax (remember, the United States prospered greatly for most of our history when there was no income tax).

In a good world, we could at least replace the corrupt internal revenue code with a simple and fair flat tax.

In today’s Washington, the best we can hope for is incremental reform.

But some incremental reforms can be very positive, and that’s the best way of describing the “Economic Growth and Family Fairness Tax Reform Plan” unveiled today by Senator Marco Rubio of Florida and Senator Mike Lee of Utah.

The two GOP senators have a column in today’s Wall Street Journal, and you can read a more detailed description of their plan by clicking here.

But here are the relevant details.

What’s wrong with Rubio-Lee

In the interest of fairness, I’ll start with the most disappointing feature of the plan. The top tax rate will be 35 percent, only a few percentage points lower than the 39.6 percent top rate that Obama imposed as a result of the fiscal cliff.

Even more troubling, that 35 percent top tax rate will be imposed on any taxable income above $75,000 for single taxpayers and $150,000 for married taxpayers.

Since the 35 percent and 39.6 percent tax rates currently apply only when income climbs above $400,000, that means a significant number of taxpayers will face higher marginal tax rates.

That’s a very disappointing feature in any tax plan, but it’s especially unfortunate in a proposal put forth my lawmakers who wrote in their WSJ column that they want to “lower rates for families and individuals.”

What’s right with Rubio-Lee

This will be a much longer section because there are several very attractive features of the Rubio-Lee plan.

Some households, for instance, will enjoy lower marginal tax rates under the new bracket structure, particularly if those households have lots of children (there’s a very big child tax credit).

But the really attractive features of the Rubio-Lee plan are those that deal with business taxation, double taxation, and international competitiveness.

Here’s a list of the most pro-growth elements of the plan.

A 25 percent tax rate on all business income – This means that the corporate tax rate is being reduced from 35 percent (the highest in the world), but also that there will be a 25 percent maximum rate on all small businesses that file using Schedule C as part of a 1040 tax return.

Sweeping reductions in double taxation – The Rubio-Lee plans eliminates the capital gains tax, the double tax on dividends, and the second layer of tax on interest.

Full expensing of business investment – The proposal gets rid of punitive “depreciation” rules that force businesses to overstate their income in ways that discourage new business investment.

Territorial taxation – Businesses no longer will have to pay a second layer of tax on income that is earned – and already subject to tax – in other nations.

No death tax – Income should not be subject to yet another layer of tax simply because someone dies. The Rubio-Lee plan eliminates this morally offensive form of double taxation.

In addition, it’s worth noting that the Rubio-Lee plan eliminate the state and local tax deduction, which is a perverse part of the tax code that enables higher taxes in states like New York and California.

Many years ago, while working at the Heritage Foundation, I created a matrix to grade competing tax reform plans. I updated that matrix last year to assess the proposal put forth by Congressman Dave Camp, the former Chairman of the House Ways & Means Committee.

Here’s another version of that matrix, this time including the Rubio-Lee plan.

As you can see, the Rubio-Lee plan gets top scores for “saving and investment” and “international competitiveness.”

And since these components have big implications for growth, the proposal would – if enacted – generate big benefits. The economy would grow faster, more jobs would be created, workers would enjoy higher wages, and American companies would be far more competitive.

By the way, if there was (and there probably should be) a “tax burden” grade in my matrix, the Rubio-Lee plan almost surely would get an “A+” score because the overall proposal is a substantial tax cut based on static scoring.

And even with dynamic scoring, this plan will reduce the amount of money going to Washington in the near future.

Of course, faster future growth will lead to more taxable income, so there will be revenue feedback. So the size of the tax cut will shrink over time, but even a curmudgeon like me doesn’t get that upset if politicians get more revenue because more Americans are working and earning higher wages.

That simply means another opportunity to push for more tax relief!

What’s missing in Rubio-Lee

There are a few features of the tax code that aren’t addressed in the plan.

The health care exclusion is left untouched, largely because the two lawmakers understand that phasing out that preference is best handled as part of a combined tax reform/health reform proposal.

Some itemized deductions are left untouched, or simply tweaked.

And I’m not aware of any changes that would strengthen the legal rights of taxpayers when dealing with the IRS.

Let’s close with a reminder of what very good tax policy looks like.

To their credit, Rubio and Lee would move the tax code in the direction of a flat tax, though sometimes in a haphazard fashion.

P.S. There is a big debate on the degree to which the tax code should provide large child credits. As I wrote in the Wall Street Journal last year, I much prefer lower tax rates since faster growth is the most effective long-run way to bolster the economic status of families.

But even the flat tax has a generous family-based allowance, so it’s largely a political judgement on how much tax relief should be dedicated to kids and how much should be used to lower tax rates.

That being said, I think the so-called reform conservatives undermine their case when they argue child-oriented tax relief is good because it might subsidize the creation of future taxpayers to prop up entitlement programs. We need to reform those programs, not give them more money.

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On the issue of so-called progressive taxation, our left-wing friends have conflicting goals. Some of them want to maximize tax revenue in order to finance ever-bigger government.

But others are much more motivated by a desire to punish success. They want high tax rates on the “rich” even if the government collects less revenue.

Some of them simply pretend there isn’t a conflict, as you might imagine. They childishly assert that the Laffer Curve doesn’t exist and that upper-income taxpayers are fiscal pinatas, capable of generating never-ending amounts of tax revenue.

But more rational leftists admit that the Laffer Curve is real. They may argue that the revenue-maximizing rate is up around 70 percent, which is grossly inconsistent with the evidence from the 1980s, but at least they understand that successful taxpayers can and do respond when tax rates increase.

So the question for grown-up leftists is simple: What’s the answer if they have to choose between collecting more revenue and punishing the rich with class-warfare taxation?

And here’s some new research looking at this tradeoff. Authored by economists from the University of Oslo in Norway, École polytechnique de Lausanne in France, and the University of Pennsylvania, they look at “Tax progressivity and the government’s ability to collect additional tax revenue.”

The recent massive expansion of public debt around the world during the Great Recession raises the question how much debt a government can maximally service by raising the level of taxes. Or, to phrase this classic public finance question differently, how much additional tax revenue can the government generate by increasing income taxes?

And since they’re part of the real world (unlike, say, the Joint Committee on Taxation or the Obama Administration), they recognize that higher tax rates impose costs on the economy that lead to feedback effects on tax revenue.

Our research (Holter et al. 2014) investigates how tax progressivity and household heterogeneity impacts the Laffer curve. We argue that a more progressive labour income tax schedule significantly reduces the maximal amount of tax revenues a government can raise…under progressive taxes heterogeneous workers will face different average and marginal tax rates. …the answer to our question is closely connected to the individual (and then properly aggregated) response of labour supply to taxes. The microeconometric literature, as surveyed e.g. by Keane (2011), has found that both the intensive and extensive margins of labour supply (the latter especially for women), life-cycle considerations, and human capital accumulation are important determinants of these individual responses. …households make a consumption–savings choice and decide on whether or not to participate in the labour market (the extensive margin), how many hours to work conditional on participation (the intensive margin), and thus how much labour market experience to accumulate (which in turn partially determines future earnings capacities).

The above passage has a bit of economic jargon, but it’s simply saying that taxpayers respond to incentives.

They also provide estimates of tax progressivity for various developed nations. They’re only looking at the personal income tax, so these numbers don’t include, for instance, the heavy burden of the value-added tax on low-income people in Europe.

The good news (at least relatively speaking) is that the American income tax is not as punitive as it is in many other nations.

But the key thing to consider, at least in the context of this new research, is the degree to which so-called progressivity comes with a high price.

Here is some additional analysis from their research.

Why does the degree of tax progressivity matter for the government’s ability to generate labour income tax revenues…? changes in tax progressivity typically affects hours worked…increasing tax progressivity induces differential income and substitution effects on the workers in different parts of the earnings distribution. …a more progressive tax system may disproportionately reduce labour supply for high earners and lead to a reduction in tax revenue. …more progressive taxes will reduce the incentives for young agents to accumulate labour market experience and become high (and thus more highly taxed) earners.

Now let’s look at some of the results.

Remarkably, they find that the best way of maximizing revenue is to minimize the economic damage of the tax system. And that means…drum roll, please…a flat tax.

For its current choice of progressivity (the green line), the US can sustain a debt burden of about 330% of its benchmark GDP, by increasing the average tax rate to about 42%. Thus, according to our findings the US is currently still nowhere close to its maximally sustainable debt levels…we also observe that larger public debt can be sustained with a less progressive tax system. Converting to a flat tax system (the black line) increases the maximum sustainable debt to more than 350% of benchmark GDP, whereas adopting Danish tax progressivity lowers it to less than 250% of benchmark GDP.

Here are a couple of charts from their study, both of which underscore that punitive tax rates are very counterproductive, assuming the goal is to either maximize revenue or to sustain a larger public sector.

Notice that if you want to punish “the rich” and impose Danish-type levels of progressivity (the dashed line), you’ll get less revenue and won’t be able to sustain as much debt.

Now let’s shift from discussing intellectual quandaries for the left and talk about challenges for believers in limited government.

We like a flat tax because it treats people equally and it raises revenue in a relatively non-destructive manner.

But because it is an “efficient” form of taxation, it’s also an “efficient” way to generate revenues to finance bigger government.

Indeed, this was one of the findings in a 1998 study by Professors Gary Becker and Casey Mulligan.

So does this mean that instead of supporting a flat tax, we should a loophole-riddled system based on high tax rates solely because that system will be so inefficient that it won’t generate revenue?

Of course not. At the risk of stating the obvious, this is why my work on fundamental tax reform is intertwined with my work on constitutional and legal mechanisms to limit the size and scope of government.

And it’s also why Obama’s class-warfare approach is so perversely destructive. If you think I’m exaggerating, watch this video – especially beginning about the 4:30 mark.

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I’m a long-time proponent of the flat tax for three simple reasons.

1. It replaces the discriminatory “progressive” tax with a single tax rate at the lowest possible level, thus reducing the tax penalty on productive behavior.

2. It gets rid of all forms of double taxation, such as the death tax and capital gains tax, meaning economic activity is never taxed more than one time.

3. Other than a family-based allowance, it gets rid of all loopholes, deductions, credits, exemptions, exclusions, and preferences, meaning economic activity is taxed equally.

Some people say that these are also three reasons to favor a national sales tax.

My response is that they’re correct. In simple terms, a national sales tax (such as the Fair Tax) is like a flat tax but with a different collection point.

If you want more details, I often explain the two plans are different sides of the same coin. The only difference is that the flat tax takes of slice of your income as you earn it and the sales tax takes a slice of your income as you spend it. But neither plan has any double taxation of income that is saved and invested. And neither plan has loopholes to lure people into making economically irrational decisions.

Instead of class warfare and/or social engineering, both plans are designed to raise money is the least-damaging fashion possible.

So even though I’m mostly known for being an advocate of the flat tax, I have no objection to speaking in favor of a national sales tax, testifying in favor of a national sales tax, or debating in favor of a national sales tax.

With this bit of background, you can understand why it caught my attention that an economics professor at the University of Georgia (Go Dawgs!) wrote a column for Forbes with the provocative title of “I Will Support The Fair Tax When Its Backers Tell The Truth”.

Professor Dorfman writes that “such a consumption tax has much to recommend it from an economic point of view” but then warns that he “cannot support the Fair Tax as long as its backers continue to make implausible claims for their proposed reform.”

So what are the implausible claims? Let’s check them out and see if his friendly criticism is warranted.

He first expresses skepticism about the claim that take-home pay will rise to the level of gross pay under a Fair Tax, particularly given the assertion that prices won’t rise.

…the odds are that your gross pay will shrink over time under the Fair Tax. …employers can offer workers lower pay because of the lower cost of living (same prices, but higher take home pay). Because workers evaluate pay offers based on the purchasing power of that pay, the same competitive forces that will lower prices after the removal of business taxes, will lead to lower pay for employees in the long run as the labor market adjusts.

I suspect Professor Dorfman’s critique is correct, but I don’t think it matters. Workers understandably care first and foremost about the purchasing power of their paycheck, and that won’t be negatively impacted.

The Professor than looks at whether the Fair Tax gets taxes the underground economy.

…let’s tackle the claim that the Fair tax will do a better job of collecting taxes on criminals, the underground economy, and those who underreport their income. The idea is that people may hide some of their income or that drug dealers and others in the underground economy do not report their income, but that everyone spends money so the Fair Tax will tax everyone. Unfortunately, this claim is not true… Retailers are just as capable of underreporting revenue and not sending in the corresponding Fair Tax as people are of underreporting their income. …The incentive to avoid such consumption taxes will only increase when the rate is four or five times what it is now. If you don’t believe consumption taxes suffer from collection problems, go ask Greece.

And he looks specifically at taxing criminal activity.

Another reason that the Fair Tax will not capture extra revenue from illegal activities is that it only switches which side of the transaction is missed by the tax system. Currently, while drug dealers may not report their income, the people who buy drugs are paying with after-tax income. Under the Fair Tax, the drug dealers will pay tax when they spend their drug profits. However, unless the drug dealer sends in the Fair Tax on their sales, the drug buyers will now avoid tax on their purchases. Under either tax system, one side of the underground transactions will be paying taxes and one will not.

I think Professor Dorfman is correct, particularly in his explanation that drug dealers and other criminals will not collect sales tax when they peddle their illicit goods.

And he’s also correct when he says that the Fair Tax won’t collect all taxes on legal products.

But that doesn’t mean the Fair Tax is somehow flawed. Indeed, it’s quite likely that the underground economy will shrink under a national sales tax since the incentive to evade tax (on legal products) is a function of the tax rate. So if we replace the punitive high-rate internal revenue code with a low-rate Fair Tax, there will be a higher level of compliance.

But not zero evasion, so Fair Tax supporters exaggerate if they make that claim.

The next point of contention is whether the IRS can be repealed under a Fair Tax.

…some agency needs to collect all the sales taxes, ensure retailers are sending in the full amount, and handle all the mechanics of the prebate. The prebate requires this federal agency to know everyone’s family size and have a bank account or other method of sending out the prebate each month. So while individuals will have less interaction with the federal tax agency, there will still be some. For retail businesses, their interactions with federal tax officials will be at least as much as now, if not more.

The Professor is right, though this may be a matter of semantics. Fair Tax people acknowledge there will be a tax collector (the legislation creates an incentive for states to be in charge of collecting the tax), but they say that the tax authority under their system will be completely different than the abusive IRS we have today.

Last but not least is the controversy over whether everyone benefits under a Fair Tax.

…while Fair Tax proponents often act like nobody loses under the Fair Tax that is simply not possible. If the Fair Tax is implemented in a revenue neutral manner (collecting the same amount of total revenue as all the taxes it replaces), and some people win then other people must lose. Poor people pay roughly no tax either way, so the Fair tax would be neutral for them. The very rich will assumedly pay less since they spend a lower percentage of their income and spend more overseas. Thus, the suspicion is that the middle class will be paying more. One other group pretty sure to pay more is the elderly. The elderly have paid income tax while earning income, and under the Fair Tax would suddenly pay high consumption taxes right when their income drops and their spending increases. In the long run, this is not a problem, but early in a Fair Tax regime, the elderly definitely are losers.

Once again, Professor Dorfman is making a good point (and others have made the same point about the flat tax).

My response, for what it’s worth, is that supporters of both the flat tax and national sales tax should not be bound by revenue neutrality. Especially if the revenue-estimating system is rigged to produce bad numbers. Instead, they should set the rate sufficiently low that the overwhelming majority of taxpayers are net winners.

And in the long run, everyone can be a net winner if the economy grows faster.

And that, as Professor Dorfman agrees, is the main reason for tax reform.

The Fair Tax really has much to recommend it. It is simpler than the current system. It causes fewer distortions in the daily economic decisions that people make. The main distortion it does introduce is positive: to encourage saving and discourage consumption which would make the country wealthier in the long run.

Though I would quibble with the wording of this last excerpt. I don’t think the Fair Tax creates a pro-savings distortion. Instead, it removes an anti-savings bias. Just like the flat tax.

Now let me add a friendly criticism that Professor Dorfman didn’t address.

Advocates of the Fair Tax correctly say that their proposal shouldn’t be implemented until and unless the income tax is fully repealed. But as I explain in this video, that may be an impossible undertaking.

To be blunt, I don’t trust politicians. I fear that they would gladly adopt some form of consumption tax while secretly scheming to keep the income tax.

P.S. Actually, what I really want is a very small federal government, which presumably could be financed without any broad-based tax. Our nation enjoyed strong growth before that dark day in 1913 when the income tax was imposed, so why concede that politicians today should have either a flat tax or Fair Tax? But that’s an issue for another day.

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Some statements are so lame that they now serve only as punch lines.

Nobody, after all, would ever claim to a teacher that “the dog ate my homework.”

Moreover, surely few if any people ever actually assert to bill collectors that “the check is in the mail.”

And I have to imagine that no guy would be dumb enough to think a girl would fall for the line that “I’ll still love you in the morning.”

But we now have a new champion in the contest for the most laughable and pathetic assertion ever made.

But first some background. Congressional investigators have been trying to figure out the level of criminality and malfeasance in the IRS’s campaign to interfere with the 2012 election by targeting Tea Party groups. Much of the attention has focused on the activities of Lois Lerner, a left-wing ideologue at the center of the scandal.

And it is because of this investigation that we have a winner in the most-preposterous excuse contest. The political hacks at the IRS are now claiming, with straight faces, that they can’t turn over thousands of emails sent and received by Lois Lerner because of a “computer mishap.”

Here’s some of what’s been reported by the Washington Times.

The IRS has told Congress that it has lost some of former employee Lois G. Lerner’s emails from 2009 through 2011, including those she sent to other federal agencies… Rep. Dave Camp, chairman of the Ways and Means Committee, said he was stunned… “The fact that I am just learning about this, over a year into the investigation, is completely unacceptable and now calls into question the credibility of the IRS’s response to congressional inquiries,” Mr. Camp said. “There needs to be an immediate investigation and forensic audit by Department of Justice as well as the Inspector General.” …the emails lost were “critical years” from the beginning of the targeting of conservative groups.

At this point, I suppose I should acknowledge that there’s an infinitesimally tiny chance that the IRS is being honest. Maybe, just maybe, the IRS’s immense computer infrastructure and multiple levels of redundant back up happened to fail. And, by an amazing coincidence, they can recover everything except the emails from Lois Lerner that were sent at precisely the time she was instrumental in the IRS’s harassment campaign.

Yeah, right, there’s a chance the IRS is being honest. Just like the Nixon White House could have accidentally erased 18-1/2 minutes of tape.

That being said, there’s a chance I’ll be playing center field next month for the New York Yankees. And an even bigger chance that the models from Victoria’s Secret will invite me for a weekend orgy (and just in case the Princess of the Levant is reading this, I naturally would say no).

Let me now detour into the world of public policy.

The IRS’s venal and corrupt behavior is only possible because the tax code is a Byzantine nightmare of about 75,000 pages. And that doesn’t even include all the tax court decisions and IRS letter rulings that also govern the internal revenue code.

It is this thicket of special-interest sleaze that enables hacks like Lois Lerner to wield unjustified power.

So if we want to actually reduce the chances of similar malfeasance in the future, then action is needed.

But I’m not just talking about prison for the crooks who tried to misuse the power of government.

We also need to rip up the internal revenue code and replace it with a simple and fair flat tax.

As you can see in this video, I’m mostly a fan of tax reform because it will help the American economy. But I’m also delighted the flat tax will reduce the discretionary power of politicians and bureaucrats.

In the long run, of course, it would be even better if we shrank the federal government so much that we didn’t need any broad-based tax of any kind.

 

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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.

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I realize this may be a thought crime by DC standards, but it sure would be nice to eliminate the high tax rates that undermine economic growth and reduce American competitiveness.

At the risk of sharing too much information, I fantasize about a world without the internal revenue code. In addition to getting rid of high tax rates, I also want to abolish the pervasive double taxation of income that is saved and invested.

Tax Code PagesJust as important, I want to wipe out the distorting loopholes that tilt the playing field in favor of politically connected interest groups. And I daydream about how much easier tax day would be if ordinary people didn’t have to figure out how to comply with an ever-changing tax code.

But perhaps you’re a normal person and you don’t dwell on these topics. Your fantasies probably have nothing to do with fiscal policy and instead involve that hottie in your neighborhood.

That’s fine. I’m actually envious of well-adjusted people who don’t fixate on the cesspool of Washington.

But – at the very least – I want you to agree that America needs fundamental tax reform. And to help persuade you,  here are some fresh stories to remind you that the tax code and the IRS are a blight on society.

For instance, how do you feel about the IRS engaging in partisan politics, as reported by the Washington Times.

Even as the IRS faces growing heat over Lois G. Lerner and the tea party targeting scandal, a government watchdog said Wednesday it’s pursuing cases against three other tax agency employees and offices suspected of illegal political activity in support of President Obama and fellow Democrats. …the Office of Special Counsel…said it was “commonplace” in a Dallas IRS office for employees to have pro-Obama screensavers on their computers, and to have campaign-style buttons and stickers at their office. In another case, a worker at the tax agency’s customer help line urged taxpayers “to re-elect President Obama in 2012 by repeatedly reciting a chant based on the spelling of his last name,” the Office of Special Counsel said in a statement. …Another IRS employee in Kentucky has agreed to serve a 14-day suspension for blasting Republicans in a conversation with a taxpayer.

For more information about this nauseating scandal, read the wise words of Tim Carney and Doug Bandow.

Or what about the time, expense, and anxiety that the tax code causes for small businesses? Heck, even the Washington Post has noticed this is a big issue.

More than half of small employers say the administrative burdens and paperwork associated with tax season pose the greatest harm to their businesses, according to a new survey by the National Small Business Association. Forty-seven percent say the actual tax bill hits their companies the hardest. On average, small-business owners spend more than 40 hours — the equivalent of a full workweek — filing their federal taxes every year. One in four spends at least three full weeks on the annual chore. There is also the expense of doing that work. Only 12 percent of employers filed their taxes on their own this year, down from 15 percent last year — and hiring help can be pricey. Half spent more than $5,000 on accountants and administrative costs last year. One in four spent more than $10,000.

I was tempted to say compliance costs add insult to injury, except that understates the problem. Watch this video if you want to understand why the tax code needs to be junked.

And let’s not forget that high tax rates are pointlessly destructive and bad for America. Dozens of companies have redomiciled in other jurisdictions to get out from under America’s punitive corporate tax system. And more are looking at that option. Here are some excerpts from a report in the U.K.-based Financial Times.

Walgreens has come under pressure from an influential group of its shareholders, who want the US pharmacy chain to consider relocating to Europe, in what would be one of the largest tax inversions ever attempted. …The move, known as an inversion, would dramatically reduce Walgreens’ taxable income in the US, which has among the highest corporate tax rates in the world. …In a note last month, analysts at UBS said Walgreens’ tax rate was expected to be 37.5 per cent compared with 20 per cent for Boots, and that an inversion could increase earnings per share by 75 per cent. They added, however, that “Walgreens’ management seems more hesitant to pull the trigger near-term due to perceived political risks.”

By the way, “perceived political risks” is a polite way of saying that the team at Walgreens is worried that the company might be targeted by the crowd in Washington. In other words, it will be attacked if it does the right thing for workers, consumers, and shareholders.

But that’s blaming the victim. All you really need to know is that America’s corporate tax system is so harsh that companies don’t just escape to Ireland, Switzerland, the Cayman Islands, and Bermuda. They even find better fiscal policy in Canada and the United Kingdom!

Last but not least, do you trust the IRS with your confidential financial data? If you answer yes, seek help right away from a mental health professional and check out these stories.

According to the Washington Times:

A new cost-saving computer technology being implemented by the IRS has left the agency vulnerable to hacking, putting taxpayers’ info at risk, an investigative report has found. …although the IRS has developed cybersecurity guidelines, many of the servers aren’t following them, said a report by the agency’s internal watchdog, the Inspector General for Tax Administration. In fact, the servers failed 43 percent of the tests investigators put them through, though they aren’t releasing what those tests and settings are due to security concerns.

According to a Bloomberg report:

A U.S. Internal Revenue Service employee took home a computer thumb drive containing unencrypted data on 20,000 fellow workers, the agency said in a statement today. …The IRS said it’s working with its inspector general to investigate the incident. The IRS statement didn’t say why the incident was discovered now, didn’t include the name of the employee who used the thumb drive and didn’t say whether the employee still works at the IRS.

And National Review has reported:

The Internal Revenue Service stole and improperly accessed 60 million medical records after raiding a California company, according to a legal complaint filed in March with the California superior court for San Diego. …“No search warrant authorized the seizure of these records; no subpoena authorized the seizure of these records; none of the 10,000,000 Americans were under any kind of known criminal or civil investigation and their medical records had no relevance whatsoever to the IRS search.”

So what’s the bottom line? I suppose there are different interpretations, but my view is that the system is irretrievably broken. It needs to be shredded and replaced.

What are the options?

My real fantasy is to have a very small federal government. Then we wouldn’t need a broad-based tax of any kind.

But I also have incremental fantasies. Until we can shrink the federal government to its proper size, let’s at least figure out ways of collecting revenue that are much less destructive and much less unfair.

The flat tax is one possible answer.

I’m also a fan of the national sales tax, though only if we first amend the Constitution to ensure that politicians don’t pull a bait-and-switch and burden us with both an income tax and sales tax!

To be more specific, I’m a fan of the Fair Tax, but only if we make sure that politicians never again have the ability to impose an income tax.

P.S. Since we’re on the subject of taxes, folks in Northern New Jersey, Southern New York, and New York City may be interested in a tax symposium this Thursday at Ramapo College in Mahway, New Jersey. Along with several other speakers, I’ll be pontificating on the following question: “The Income Tax:
Necessary Evil, Or the Root of All Evil?”

The college is convenient to I-287 near the New York/New Jersey border. Say hello if you attend.

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