In my discussion with Andrew on important considerations for a tax system I argue that simplicity is something to seek whereas Andrew believes that simplicity is not so important. Andrew has his Simplicity write-up for your viewing pleasure.

All things being equal (i.e. does it treat taxpayers in a fair and balanced way), I do believe that simplicity in a tax system is something to strive for.   When I consider simplicity I am essentially considering the following:

1. 1.       Can the taxpayers (and tax collectors) understand what is expected of them without having a degree in taxation?
2. 2.       Does the taxpayer have to jump through complex hoops to comply?
3. 3.       Is the taxpayer restricted unnecessarily?

Since our current system is what we are used to, I provide examples from my own experience of what is required for our current tax filings. I have a small business and a family of four. My CPA does taxes for both entities because he has expertise that I would never be able to apply in order to pay my required share. 

On the business side I am required to withhold income and payroll taxes from payroll checks. I am required to withhold at different rates for different earning brackets and to stop withholding certain taxes when certain thresholds are reached. I am required to file 941 payroll tax deposits with each pay cycle. I am required to file quarterly reconciliation reports. I am required to report new hires. I am required to keep track of all revenues and expenses. Some capital expenditures I must expense years into the future. Some provisions allow me accelerated depreciation when the government wants to prime the economy. I file W2s, 1099’s etc. as well an annual tax return which, as a subchapter S corporation, flows income for my personal income filing through a for K1.

As an individual I may have to file quarterly estimated taxes. I fund my Individual Retirement Accounts, Health Savings Account, College Savings Account, Variable Life Insurance (all to reduce taxes and make my financial planners money).  I gather up all my W2s, 1099s, 5498-SAs for investment income, salary/wage earnings, interest income, dividend income so I can file my annual tax returns… I can write off mortgage interest. I get child credits. I can also write-off some losses (but I may have to take losses over time so that the government is sure to get their money). I may get some tax credits for certain activities. I may be subject to the alternative minimum tax. I may or may not get a tax refund.

Oh, and if I have a significant event in my life… I better talk to a tax specialist. If my health deteriorates and I am forced to cash in an investment, I must prepare to pay Uncle Sam before I take care of my specific needs.

Perhaps complexity is by design… If our politicians in their infinite wisdom make things complex, perhaps folks just won’t itemize & the government gets to keep taxes in excess of what is actually due… If so, who does this affect the most? Not the wealthy who can afford tax planners.

Does the current income tax pass my litmus test? No.

1. 1.       No, not everyone can understand it. It is 66,000 pages… not exactly a weekend read.
2. 2.      Yes, taxpayers have to jump through hoops to comply.  Businesses pass these compliance costs onto consumers as a cost of doing business.
3. 3.      Yes, taxpayers are unnecessarily restricted. To avoid paying more than due, we must separate funds into IRAs, HSAs, Variable Life Policies, etc.  We have tax consequences when we need to cash in on investments and even when we leave money to our heirs. 

There are too many entities and too many moving parts. Every business AND individual has significant filing requirements. The average person cannot understand this complexity.

As an option, we have the FairTax bill which has the following requirements:

1.       Registered Sellers file regular Sales Tax returns and remit payment of 23% based on the sale of new goods and services. These sales tax filings will likely be made part of a combined Federal and State sales tax filings vs. a separate federal and state sales tax filings.

2.       Consumers consume and see the 23% tax appear on their sales receipts.

3.       Qualified Families can register annually in order to receive monthly prebate checks.

Is it really that easy? For most of us, yes. Can it be more complex? Sure. Families using unregistered domestic help are required to remit the sales tax. There will be other possible complexities as well but this is far simpler than our current system. Does the FairTax pass the my litmus test?

1. 1.      Yes, everyone can understand it.
2. 2.      No, the taxpayer does not have to jump through hoops to comply.
3. 3.      No, the taxpayer is not unnecessarily restricted. Consume services and new goods? Pay the tax. Consume used goods, pay no tax.

Now, in fairness, a Flat Tax that is void of massive complexity would be simpler than what we have now but… where the FairTax puts only a small filing burden on registered sellers (sellers of new goods and services) the Flat Tax puts a more significant burden on every family and business to track revenues & expenses. Both are an improvement over what we have currently but, in my estimate, the FairTax is simpler and better.

I have been having interesting discussions with AndrewS recently about his view that the FairTax is quite flawed an about my view that the FairTax would be the best thing since sliced bread. AndrewS posts on many interesting topics and he has very interesting and well-thought-out and extremely well written communication about his positions – many of which I agree with. His last communication “Why Argue” seems to make the case that by pointing out perceived theoretical flaws in the FairTax without offering up solutions is somehow a good thing. I see things differently.

In this world, I know two things with certainty… (1) those entities who succeed (individuals, businesses, governments) are those that come up with solutions to problems – not just problems with solutions and (2) you cannot please everyone all of time. It is easy to poke holes in any theory… 1770’s – Will democracy (a theory at that time) be a good thing? 1985ish - What happens if we (Microsoft) release Windows 3.0 with known imprefections? 2008 - What are the risks of the prebate becoming some uncontrollable welfare mechanism? What happens if the video rental service games the system by selling once-used DVDs as used in order to avoid taxation? Sometimes, though, implementing an imperfect solution is far better than doing nothing. 

Why did I mention Windows 3.1? Because I am in the technology industry. Also because many of us know that IBM’s OS2 and Apple’s Macintosh OS were far better at the time. But had Microsoft not released Windows 3.1 as an answer to the graphical world that was taking the computer operating systems by storm, it would have missed the boat entirely.   Were the risks weighed? I have to think YES. Did the rewards outweigh the risks? Absolutely YES. What would have happened had Microsoft taken a few more years to get the product much more stable before marketing? OS2 or Macintosh OS would have taken over market share and Microsoft would be a shadow of its current self.

Now, in our fast-moving globally competitive world of today… can we afford for the United States of America to miss the boat? What boat?   

Folks, while there are many things to get excited about with the FairTax, one of the most exciting things is making the United States more competitive both for our own consumers and for consumers away from our lands who buy products and services offered by U.S. companies. The prosperity argument is huge… I just don’t see it addressed in our current tax structure (other than rhetoric about penalizing companies for sending jobs overseas by some presidential candidates). I also don’t see it addressed with the FlatTax as I understand it. 

Again, the prosperity argument is that, under the FairTax, taxation is stripped away completely from the productivity side and replaced on the consumption side (national sales tax – with prebate). When this happens, it levels the playing field with imported items (untaxed coming into our lands) such that American-made items can complete for shelf-space at in our retail stores and markets. Stripping away these taxes from the productivity side also makes US-made goods/services more competitive globally.

By persuading others about “perceived flaws” with the FairTax without offering up solutions, I argue that we remain stuck in neutral (or worse yet… reverse) in a fast-changing globally competitive market. 

The mountain to climb in order to take back our country from politicians who create winners and losers with our 66,000 pages of tax code is extremely high. Washington is not going to want to give up this power without a fight. It is very clear to me that We The People need to rally around one viable (perhaps not perfect) alternative to the current system otherwise guess what? We get to keep our existing oppressive and abusive current system that manipulates the free markets and that puts us at a competitive disadvantage. 

We have an opportunity to be honest about things and recognize that our tax code (including Social Security and Medicare) is a huge problem that, if left unsolved, will cripple us.   We also have an opportunity to do something. Actively supporting the FairTax is doing something that is fair and that has extreme benefit in many areas that touch our lives.

Peace,

YK

I do think the nitpickiness caused impatience on my end. Apologies.

I have a blog started now but hope a civil reply here is welcome.

Here are the main advantages in my view that the FairTax has over the Flat Tax:

1.       Pricing of U.S.-made products. Under any income tax, tax costs must ultimately be priced into the product before going to the register. This means that many imports have an unfair advantage since many have taxes stripped away (credited back) when the leave the country for export.

2.       Flat Tax still has a major tax avoidance issue – more-so than what I believe is possible by the FairTax. I personally really like that illegal aliens and other tax evaders/tax avoiders would pay into the system (and relieve some of the excess tax for those of us who tow the line). How does the Flat Tax invite those who don’t file into the system?

3.       I personally like that we don’t pay into the system until we consume basic necessities with the tax prebate. I also like that those who don’t reside here legally do not participate in the prebate.

4.       Not sure what the Flat Tax does with corp taxes, capital gains, and estate taxes but I can’t imagine that payroll taxes (SocSec, Medicare) go away on the production side. I really like that the FairTax strips all of this away and invites jobs, capital, and opportunity back to our lands to help our economy and national competitiveness.

5.       I like the transparency of the FairTax. I also like that we have control over when we contribute and how much base on choosing to consume or not.  We can go into savings/investment mode early in our careers and then contribute more to the gov’t more when we are more financially secure.

6.       I like the idea of not having to file an income tax return.

There are really a lot of really great reasons. Yes, there will need administration… but 30 million businesses vs. 300 million taxable individuals? It just seems that administration is much easier than under a Flat Tax and infinitely easier than under the current tax system.

Are there issues? Yes. Corrupt people will still evade the system but my sense tells me that it will be more difficult to fully evade. Besides, greater prosperity and freedom will lift our country out of much of this evasion mindset.

Would it be difficult for states to administrate? No

Would it be difficult for SSA to handle prebates? No

Are there issues to work out? Yes. But nothing major.

For all that I have studied (and yes, I read both books) I haven’t seen anything as positive as the FairTax. I hope folks continue to have the conversation. 

Peace,

YK

It is fair because it taxes everyone an equal percentage of their income. In theory, we all receive the benefits of the government, so we all should pay. And, to be honest, even a flat tax is unfair in some ways. The poor receive an inordinate share of government benefits, so should really pay more. And, I know some leftists say the rich have more for the police to protect, so benefit more, but I would argue the poor live in more dangerous neighborhoods, and so actually have more to fear from crime, so they benefit more there.

1. The tax must be paid by everyone who earns even 1 cent in the course of a year. If we exempt people who earn under $10,000 or under $20,000 or some other number, or a floating scale depending on family size, or exempt anyone at all we create problems.

2. There must be NO withholding. Our current system is based on a lie, or, to be a bit less harsh, a deceptive system.

One last caveat:  If we institute this flat tax, I would also eliminate corporate taxes, along with any other form of taxation which is not assessed against individual income. (Excepting, perhaps, a uniform import duty. Though I would only allow the tariff in hopes of eventually transitioning from an income tax to a tariff-only federal tax system.)