Thursday, May 19, 2011

An argument agains both the Flat and Fair Tax proposals

Under the original foundation of the Constitution, taxes were primarily received through tarrif and excise taxes on goods coming and going from the American shores.  Control over these tax receipts was how the Port of New York became such a powerful entity, that its administrator, Chester Arthur, was elected President of the United States.

This all changed in 1913 with the advent of the Federal Reserve, and the passage of the 16th Amendment (Income Tax).

Since that time, the government has used taxation to increase tax revenues and receipts on the American people to now many citizens pay over 50% of their income in property, sales, excise, to the state and federal governments.

Over the past decade, grassroot organizations that sought to eliminate the 1913 system and incorporate a new tax structure that they consider fairer, and more in tune with original Constitutional taxation.  Two of these tax proposals are the Fair Tax and the Flat Tax.

A new look at both of these taxes by Lew Rockwell shows that each proposal has major flaws, and still do not address the nation going back to the original freedoms and liberties built into the Constitution.

Two specific tax reform plans that many conservatives and some libertarians have fallen for are the Flat Tax and the FairTax. Both plans promise to invigorate the economy, increase employment, and raise everyone’s standard of living. But neither one is true to its name, and neither one is an incremental step toward lower overall taxes. Both are fraught with problems and contradictions, and both are revenue-neutral plans that would fund the federal government at the same obscene level that it is now.

The Flat Tax is an income tax. It is the tax-reform idea that has been around the longest. First proposed by economist Milton Friedman in 1962, the Flat Tax entered the mainstream through a
1981 Wall Street
Journal article by Hoover Institution economists Robert Hall and Alvin Rabushka called "A Proposal to Simplify Our Tax System."

Under a flat tax, everyone’s income is taxed at the same rate (Hall and Rabushka say 19 percent; Forbes says 17 percent). But not only are there no tax brackets, there are generally no tax deductions either, other than those for personal and dependent allowances. Social Security and Medicare taxes would remain as they are now. The appeal of the Flat Tax is simplicity. You can do your taxes on a postcard-sized form says Forbes. Goodbye anxiety and compliance costs.

The main problem with the Flat Tax is a simple one: the Flat Tax is not flat. And furthermore, no one actually pays 19 or 17 percent. In fact, taxpayers don’t even pay the same percentage. The Flat Tax is actually a highly progressive tax. It is more progressive than our current system, and effectively has more tax brackets. Who said progressivity requires graduated tax rates?

The FairTax is a consumption tax. It is the most radical tax reform plan, bar none. It also has the most vocal and intolerant proponents. The FairTax is the brainchild of three businessmen concerned about the crippling effects on the economy of the federal tax code.

The FairTax is a national retail sales tax of 30 percent on the final sale of all new goods and services. All new goods are included – from cars and houses to prescription drugs and food. And with the exception of college tuition, all services are included – from heart operations and funerals to rent and haircuts. Purchases for business purposes would be exempt. Because it would replace the personal income tax, there would also no longer be withholding tax, capital gains tax, the alternative minimum tax, or taxes on interest and dividends. Even your gambling winnings would no longer be taxed.

So why is the FairTax not fair? Well, first of all, what’s fair about a consumption tax? Why is it that people who rightly criticize the income tax are so quick to accept a national sales tax on consumption? The FairTax perpetuates the fallacy that the government has a right to confiscate a percentage of the value of each new good sold and every service rendered. This is no different than claiming that the government has a right to the portion of each American’s income. As the late economist Murray Rothbard explained:

The consumption tax, on the other hand, can only be regarded as a payment for permission-to-live. It implies that a man will not be allowed to advance or even sustain his own life, unless he pays, off the top, a fee to the State for permission to do so. The consumption tax does not strike me, in its philosophical implications, as one whit more noble, or less presumptuous, than the income tax. – Lew Rockwell
In the end, neither tax proposal seeks to take America back to the original foundation of taxation, and the freedom and liberties of people to choose their income levels, and income lifestyles.  Nations that seek the majority of their revenues from their own people, instead of stimulating success and taxing imports from other nations is in part what has led to our divided society, where the rich despise the welfare class, and the poor accuse the rich of being the creators of their problems.


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