TCS Daily


How to Create a Fairer Tax Environment

By Steven Selengut - October 19, 2009 12:00 AM

Can lawmakers who don't have the courage or intelligence to outlaw texting while driving really be expected to create a saner tax structure? Hmmm.

Developing a fairer tax environment is much less an economics problem than it is a political dilemma and, as many of you observed, it is unlikely that anything "tax" will be improved upon until there is some serious facial (and cultural) change in Washington.

Politicians focus on one issue at a time, and pretend to have problems dealing with inter-related programs. Tenured politicians have a vested interest in resisting any change that involves their spheres of influence. Both parties are embarrassingly mired in twentieth century class warfare that stifles all forms of productive debate.

Tax cuts don't just benefit the rich. In fact, they provide the opportunity for everyone to attain greater wealth. Demand directs resources far better than punitive taxation. Money in consumer hands will fuel social and environmentally friendly change.

"You cannot eliminate revenue from one program without replacing it from another, equally complicated, one", career politicians will say philosophically. They have little to gain from simplifying the tax collection system --- yet it is obvious that a whole new approach would solve most of the economic woes plaguing us today, domestic and international.

So what would become of all the CPAs, tax attorneys, and offshore laundries--- new jobs as consultants, auditors, and regulators perhaps?

Survey responses outlined constructive and manageable solutions to our multiple tax problems. If they could only be dealt with as a whole "New Deal" (catchy phrase), a fairer tax structure would be in reach.

Several basic concepts need to be accepted: (a) don't tax the job creators, (b) tax consumption instead of income, and (c) regulate shareholder abuse in the form of obscene executive pay. Then, enforce compliance with the intent of a simplified tax code.

A smarter tax system would allow more people to become wealthy honestly; smarter regulation of thieves in high places would improve the image of big business (and big government) significantly.

There are 44,000 pages in the Internal Revenue Code (IRC) alone, 5.5 million words, incomprehensible at best. Obviously, there is a lot more to be said about each of the ideas that follow. Here are the top survey ideas; the first two were discussed in previous results articles as consumer spending enhancers and job creators, respectively.

One: Social Security. Replace it with a plain vanilla, individually, and flexibly funded fixed pension program. Every person has his or her own personal pension plan for both mandatory and limited voluntary contributions --- limited to a maximum percent of income.

Two: Corporate Taxes. Eliminate income and Social Security taxes and all other nuisance fees and charges that increase corporate expenses and lead to higher prices--- a "Free Trade Zone" only policy. Monitor employers to assure that their savings are translated into new job opportunities and/or lower prices.

Cap total compensation (all "perks" included) at mid seven figures. Allow one year-end bonus split among all employees and shareholders. Invade every boardroom with well-paid and expert compensation auditors.

Three: The Fair Tax. Adopt the plan that has been negligently ignored by congress for decades. It replaces the entire IRC with a Federal Sales Tax, and without Social Security, a number between 10% and 12% would probably work.

It's easy to understand, eliminates the lobbyist gifts and bonuses that current IRC loopholes produce, taxes the underground economy, and gives back (with necessity only debit cards) to lowest tier wage earners. All businesses would be audited to assure collection compliance, and a cap would be set on the total take for all levels of government.

There would be no sales tax on food, healthcare, and educational expenses.

Four: The Flat Tax. Institute a 10% Federal income tax, with no exclusions, exceptions, deductions, credits etc. All income, regardless of source, is taxed at the same level, and the total from all levels of government capped at 15%.

A combined Flat Tax and Fair Tax environment would increase jobs and spending, while reducing tax fraud and credit abuse. Any number of approaches could be used to assist the lowest wage earners, and Social Security benefit payments would be tax-free forever.

Compensation creativity such as stock options, country club dues, and first class airfare, need to be dealt with to protect shareholders and employees from their leaders--- new jobs for those displaced professionals.

Total annual employment compensation above $5,000,000 would be subject to a flat tax of 55%. This would apply only to employees of publicly traded companies and elected public officials. Entrepreneurs, celebrities, lottery winners, etc, must not be penalized for their creativity and good fortune.

It is likely that both new taxes will produce returnable surpluses quickly.

Five: Death & Gift Taxes. Give them death; they deserve it.

Six: Property Taxes. Reduce them each year for all persons receiving Social Security benefits. Retirees would pay no property taxes after ten years.

Seven: Tolls, Licenses, & Fees. Eliminate all collections and charges for government provided public transportation (roads, bridges, tunnels) and recreational facilities (parks, museums).

Eight: Value Added Tax (VAT). Several of the suggestions above should reduce the prices of American exports. But if our trading partners assess a VAT on those exports, lets negotiate elimination or return the favor.

Healthcare reform is next, with tons of ideas not being considered by Congress.


Steve Selengut is the President of Sanco Services and the author of The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read and A Millionaire's Secret Investment Strategy.
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18 Comments

Ugh.
"Can lawmakers who don't have the courage or intelligence to outlaw texting while driving really be expected to create a saner tax structure? Hmmm."
.
.
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Driving laws are generally handled by the States (or at least that is what the Constitution would lead us to believe). Congress' job should be to stay out of the way...not add yet another provision that all of the States must pass or lose their federal highway money.

Double Ugh.
This guy doesn't seem to understand separation of powers or the different forms of taxation.
Property taxes? Those taxes are levied by States, cities, counties and school districts. The federal government doesn't collect or control property taxes.
His errors on these basics make me ignore the rest of what he has had to say.

Why have both?
Just institute the Fair Tax and get rid of the income tax, the payroll tax, the Medicare/Medicaid tax, inventory taxes, corporate taxes, estate taxes and other transfer taxes. An embedded rate of 22% would take care of it all, even with a prebate for those in the poverty zone.

Taxing consumption is the only fair way to tax. It gives the tax payer a choice, rather than treating him or her like a child - which the income tax does.

Imaging being able to save tax free, to pay a mortgage with tax free dollars, to purchase used goods tax free. The GDP would rise by 10% in the first year and companies would relocate back to the US, insteading of fleeing from it.

ABD

The FairTax will NEVER happen. Period.
It's like wishing for Libertarians to get more than 10% of the vote.

Congress will NEVER relinquish the power to reward friends and punish enemies via the tax code like that. NEVER. EVER.

Welcome to Planet Reality. Sucks, eh?

Amen Zyndral
I agree with Zyndryl
Instead of a small efficient federal government, we are going to see a super interventionist state that feels its job is to manipulate and control our behaviors and our economic achievement.. with themselves it's central purpose and feature. With health care in the governments hands it (the state) will open up a new front for intervention in our lives and freedoms.

It took over two hundred years for the beaurocracies and statists to reach this stage but they have. Next, we either retrieve our liberties or suffer these insufferable controllers ministrations trickling down on our heads interminably.

US will never elect a black president.

Fair Tax - No Exemptions
The Fair tax is "easy to understand" and "eliminates the lobbyist gifts," but only if you stick with the program. As designed, there are NO exemptions; none. That's why it's easy to understand and why it will be so hard for Congress to pass the FIRST "lobbyist gift." You'll ruin that, if you say "there would be no sales tax on food, healthcare, and educational
expenses." The Fair Tax already exempts the basic necessities by means of the prebate. Don't spoil the soup by peeing in it!

I agree that 10% or 12% is plenty, if Congress could restrict spending to essential government services. But they won't.

Don't cap pay; asses a compensation tax
The author wrote:

"Cap total compensation (all "perks" included) at mid seven figures. Allow one year-end bonus split among all employees and shareholders. Invade every boardroom with well-paid and expert compensation auditors."

Today the feds cap the fat cats' pay, and tomorrow they cap mine. No thanks.

Instead, the feds should asses a compensation tax of 100% of every individual employee's total compensation above e.g. $2.5 million. So if an employee earns $5 million, his employer has to shell out $2.5 to the tax man for a total compensation cost of $7.5 million. This will put severe downward pressure on all compensation above the limit. (Note: One interesting variable might be to require all deferred compensation items to be FMV priced on Dec. 31 or the last trading day before and the values added to total compensation.)

As for the fair tax, forget it. Congress can't be trusted to keep the rates low enough and the base wide enough for it work as designed. (Just imagine every industry group and manufacturer in creation lobbying up on Congress to get their goods and services exempted from the fair tax; this would be no different from the way things work now.)

We'll roll back Civil Rights, re-instate Jim Crow..even Slavery BEFORE...q
..Congress replaces the income tax with the Fair Tax.

BUT they WILL be most happy to implement the Fair Tax in addition to the income tax, that's for sure.

And you'll never get a fairer tax environment as long as...
...the government subsidizes incredibly stupid decisions, like this one:

http://www.businessinsider.com/20-year-old-buys-home-with-183000-fha-loan-and-just-35-down-2009-10

The 20 year old may be very stupid, but at least she has three jobs. Its the government that I blame.

Equal does not mean fair.
Try and convince me that a non-progressive tax is fair. Fair means Justice not Equal.

I'll try, but...
>"Try and convince me that a non-progressive tax is fair. Fair means Justice not Equal."

I'll try. But I don't expect much success, given that this is apparently a rhetorical statement. Here goes...

God Himself established a non-progressive tax. The tithe was established at 10% for everybody, rich, poor, and in between.

Income comes from productivity, which comes from labor. If taxes are 10% for everybody, everybody donates 6 minutes of work out of every hour of work. If you look at it in normalized units of time, instead of artificial units of dollars, this arrangement is both just AND equal.

And...
A similar thought:

When we convict a man of a crime, we give him a sentence of time in jail, regardless of income, health, or status. We do not say "this man's time is more valuable than that man's time, so he should serve less time". Nor do we say "this man is sickly, so he should serve less time, because a year is much more valuable to him than to the healthy man".

When we establish a draft, all men are required to serve the same amount of time.

In other words, our sense of justice already teaches us to us time as the unit of measure in such matters.
Time is a great treasure, and a great equalizer. God gives us all a small amount (some more than others, as He sees fit) and holds us all accountable for how we spend it. A non-progressive flat rate tax follows this principle of justice. And, it is equal.

robert bennet: why would a company lobby when they pay no tax.
Under the Fair Tax no companies pay a tax. Of any kind. What are they lobbying for? To have the consumption tax removed from a product that only they produce would be blocked by competitors. Could the makers of Tide ask for the removal of consumption tax on Tide without the makers of Cheer alerting the public? The consumer pays the tax at point of purchase, Tide and Cheer still compete on quality and price. No company or industry gets an exemption to start, and all are watching, consumers included, for any attempt to create one.

The rate. If your Congressman wants to raise the rate, he will have to introduce a bill, you and other voters in your district can see that, and since it directly affects the price of everything you pay, I think you will be telling him no.

The base. Everyone. If you are worried about low income or regressive, read the book. It does a much better job than I can here. If you are worried about times of slow consumption, sales tax is less effected than income tax. While I might be unemployed (I am) I still consume, where as I pay no income tax. Neither does an employer pay a payroll tax on me. Double the impact on revenues when unemployment rises. Not so if we tax consumption only.

Compensation: Let it be. Forcing artificial ceilings limits the free flow of capital, and causes new and creative ways to hide compensation. It is also very Bastille Day like. I have no doubt that the $20 million compensation generates more in consumption taxes than 20 economist combined. I also believe that executive will be more generous than he is now with donations.

Seems the possibilies are of a great difference from the way things are now.

Pelosi has already broached adding a VAT
Zyndrl, It seems you understand the Fair Tax very well. I hope you do not tire of educating people of the difference in VAT, Fair and Flat tax. And that the Fair Tax is to replace income and payroll tax, not be added on top of. I know it is hard for some to see past the gooblygook, but keep trying. Never say Never.

I appreciate it.

Correction on Corp tax, they will pay national sales tax on goods and services.
Corporations will pay sales tax and property tax by state. States already compete on lowering property tax to attract business, they might drop it to zero to keep business.
No Income Tax,
No Payroll Tax,
No Capital Gains Tax.

They will also not have to pay for tax compliance, which is estimated to be over $300 billion per year. That is $1000 per capita.

www.fairtax.org

Fair non-progressive
An easy-to-understand principle of justice is "you get what you pay for." The proper function of government is to protect life and property. A human life is a human life, so a fixed tax for every person takes care of that. Property taxes at a fixed percentage of property value covers protecting property. Note that if this is all the government does, the expense of federal government is about one-sixth of what it is today, so that's hardly burdensome. It's even lower if we don't have military bases in more than half the countries in the world.

What are you saying? Write off the future?
That future generations hold off enemies wanting our property at the U.S. Border?

The FairTax is not about addressing any other government function other that the way taxes are collected.

A by product of the FairTax will be a transparent government as far as how any government program is funded, including maintaining treaty obligations with dozens of trading partners on this planet. The Congress and President will have to make a case for any increase in any government spending, just as they will for a decrease. That we will save money in the short run by pulling out of these treaties and coming home is not in doubt.

It is the future of global society aspiring to even dream of having a government funded by such a Fairtax that allows people to easily monitor politicians and their spending habits that will be in doubt.

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