Tax Code Burning Day is a new idea, and possibly a bit extreme, but the idea of chucking our income tax system has been around for quite a while. When I suggested, ten years ago, that we were all suffering from TDB--- Tax Debate Burnout--- five thousand readers agreed. They sent in letters and postcards in support of then Congressman Dick Armey (R, TX) and his proposal for a simple flat tax.
Had we adopted the flat tax we would have avoided a decade in which tax debate has become absolutely poisonous. We could have acted with unity in response to 9/11 and the recession. We might not have the acrimonious, divisive, and future taxpayer punishing tax cuts won by the Bush administration because we'd already have a broad lower tax rate. We'd be a healthier country, pulling together.
But that's all spilt milk.
Congressman Armey's idea was to chuck the Federal Income Tax. He wanted to replace it with a simple flat tax. This tax would exempt the first $13,100 of income (single return) or $26,200 of income (joint return). Each child would exempt another $5,300 of income. All income over these broad exemptions would be taxed at a straight 17 percent. No itemized deductions need apply.
It was, and remains, a great idea. You would pay no taxes until you had enough income to survive. After that, everyone paid at the same rate. It's a graduated tax that would eliminate taxes for millions of households.
If reader mail is any indication, everyone liked it except our elected friends in Washington. They, regardless of party, hated it. Those who make their living sucking up to them, really hated it. They want to retain the right to create special tax breaks for left handed residents of Idaho born under the sign of Aries. They also want to retain the ability to create special business tax breaks to make our air completely polluted, provided it is done with coal by electric utilities.
The only problem with the Armey flat tax proposal was that it didn't go far enough. We need to chuck the entire tax system--- we need to eliminate the income tax, the employment tax, the corporate tax, and the inheritance tax. We need to start over.
The reason for this is that our tax system is so complicated, so ridden with exemptions, special tax breaks, and other results of years of highly successful lobbying that we can't have a reasonable conversation about what the real tax burden is and who pays it. Regardless of which party is in power, we're always playing three-card Monte with Washington.
So consider the Fair-Tax proposal, known in Congress as H.R. 25. The Houston based tax reform organization, Americans for Fair Taxation, has proposed that we eliminate the existing tax system--- every bit of it--- and replace it with a national sales tax. We would no longer have a special tax on labor, the employment tax. We would no longer tax capital. Instead, we would tax consumption.
Live modestly. Spend little. Your tax bill will be tiny.
Live extravagantly. Spend lots. Your tax bill will be substantial.
Save and invest your money and you'll pay no taxes. The money will be providing employment and helping the economy grow. Taxes are only paid when you withdraw the money from productive use and spend it on consumption.
Concerned about the regressive nature of sales taxes? Not to worry. Every household would get a prebate--- a monthly check from the government--- of all the sales taxes they would pay on any expenditures they would make up to the poverty level. As a consequence, millions of families would pay little or nothing in taxes. The rest of us would pay taxes in direct proportion to what we consume. We would pay it at a single rate of 23 percent when we buy new goods. Used goods would not be taxed.
What would that do for you and me?
Lots. It would end the fastest rising and most regressive tax in America, the payroll tax. It would mean that Social Security and Medicare would be supported by a broad consumption tax on money from work, interest, dividends, capital gains, and old capital--- not just labor income up to $90,000. It would allow us to focus on a single broad tax as the "price of a civilized society." It would end the ruthless game of divide and conquer that both political parties have been playing for decades.
It would allow us to focus on and debate the biggest unanswered question we face: How large a Social Contract do we want in America?
Tuesday: The Road Not Taken, part 2: A Productive Energy Policy
On the web:
About the Fair Tax
Americans for Fair Taxation
The Fair Tax Act of 2003 (H.R. 25)
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