The Preposterous Income Tax
With only two weeks to go until "tax day," have you finished
preparing your 2005 return? Maybe you filed your return weeks
ago and you're one of the "lucky" ones that got a refund of the
interest-free loan you made to the government.
On the other hand maybe you've determined that you're going to
have to write a check to the IRS this year. Isn't it comforting to
know that after spending hours digging through indecipherable
forms and instructions, gathering receipts and making all the
calculations that you now get to pay more?
In the 1960's television show "Green Acres," the main characters,
Oliver and Lisa Douglas, had to climb a pole to answer their
telephone. To anyone watching, it was preposterous that they
would live that way, but it was normal to them.
It is preposterous that we live with the present federal tax code.
Members of Congress talk about tax reform year after year, but
little gets done. Tax credits are added, deductions taken away
and rates are adjusted from time to time, but every April 15, it is
more of the same - wasted time, head scratching and profanity -
for the American taxpayer.
Why do we put up with this? Because we're sheep. Because
most taxpayers just muddle along not caring that the tax code is
fundamentally unfair, not knowing how much power they've
ceded to the government and not understanding how damaging
the tax code is to America.
There have been various ideas floated in recent years for
reforming the tax code. Congress, left to its own devices, will
never do more than tweak around the edges of the thousands of
pages of tax code rules and regulations. Why? Because
tweaking around the edges leaves the power with Congress, not
the people. Keeping the tax code complex keeps everyone under
the thumb of government.
To remove the power that Congress wields over "we the people"
via the tax code, we must slay the dragon.
There are two major schools of thought regarding tax reform: a
flat tax on income or a national sales tax, specifically the Fair
Tax.
While a flat tax would be preferable to the current mess, it has
fundamental flaws. First, it leaves the burden of tax compliance
on the shoulders of both businesses and individuals.
Second, given the propensity of Congress to manipulate the tax
code, a flat tax wouldn't remain flat for long. The tax reform of
1986 reduced the number of tax brackets to three, but now there
are six.
Third, while a flat tax may be simple for people whose entire
income is from wages, all of the complexity of the current tax
code would remain for the self-employed and for businesses that
would continue to deal with the onerous task of determining just
how much income they had.
The Fair Tax would solve all of these problems.
There would no longer be any requirement for individuals to
self-report their tax liability (which is preposterous to begin
with). Second, the only manipulation that Congress could do
would be to adjust the rate up or down. Third, businesses would
simply collect the tax in the same way as they collect sales taxes
today.
Almost all of the arguments against the Fair Tax have little merit
and those that do are really only of concern during the transition
period. An example is that a person that has saved after-tax
dollars would be taxed again when those dollars are spent. This
is true, but when the taxes that are currently embedded (and
hidden) in everything we buy today are removed with passage of
the Fair Tax, the final price of most goods and services to the
consumer will not change much if at all even with the Fair Tax
added. Thus the buying power of after-tax savings would be
nearly the same.
Some criticize the Fair Tax saying that the 23% rate commonly
quoted is really 30%. That all depends on how you view tax
rates. Let's say you bought something for $1.00. The tax added
under the Fair Tax would be $0.30 for a total cost of $1.30. If
you view the Fair Tax as the percentage of the total price paid,
($0.30 / $1.30) it is 23%. This is the "tax inclusive" rate and is
way income tax rates are quoted today. If you're in the 25% tax
bracket, you keep 75 cents while the government takes 25 cents
of each extra dollar that you earn. The amount of tax as a
percentage of the "spendable" money is really 33% ($0.25 /
$0.75). The 23% Fair Tax rate simply allows an apples-to-
apples comparison to income tax rates.
Some argue that the "wealthy" won't pay their "fair share" under
the Fair Tax. The short answer is that yes they will, but more
than that, do you really think that everyone pays their "fair
share" today? The $345 billion in uncollected taxes for 2001 [1]
says to me that a lot of people aren't. Can it really get worse
than that under the Fair Tax? It is doubtful.
Some politicians put a negative spin on the Fair Tax for no other
reason than they know that they would lose power if the current
tax code were eliminated. Politicians curry favor with special
interests and contributors via the tax code. No tax code to
manipulate means nothing to give to those special interests.
The economic benefits of the Fair Tax are substantial and too
numerous to mention here. Suffice it to say that the Fair Tax
would bring about unprecedented economic prosperity to the
United States. The Americans for Fair Taxation website [2] has
more information.
Momentum for the Fair Tax is growing via a grassroots effort all
across the country and it has been introduced in both the House
(H. R. 25) and Senate (S.25). You too can become part of this
effort. Think about that on April 15.