Monday, August 02, 2004

More on the Flat Tax

Tonight on television I listened to Steve Forbes talking about his flat tax idea and learned a fact: Income tax in America is a 200 billion dollar a year business! That 200 billion does not produce anything of value. It's merely money wasted hiring tax accountants and tax lawyers and filling out forms to send in to the IRS.

To put 200 billion dollars in perspective, that is twice the budget for the state of California! The annual budget for California is only 105 billion dollars.

Some argue that moving to a flat tax would eliminate a lot of jobs because the flat tax would be so much simpler that we wouldn't need so many tax accountants and tax lawyers not to mention the hugely expensive IRS bureaucracy. Arguing against moving to a flat tax because of lost jobs is like arguing against curing polio because the wheel chair industry would have to layoff workers.

Imagine a primitive little isolated village with 100 inhabitants and 1 king. The king could order that 100 people farm the land and grow food to feed themselves and him. Or, the king could order that 80 people farm the land and 20 people stand around singing songs to the king and filling out paper work. In the latter case, 80 people have to work hard to produce food for themselves as well as for the 20 that aren't doing anything useful simply because the king said so. That's what we have with our current income tax system. The people that do productive work have to work harder to make up for the people that simply feed off the government mandated income tax bureaucracy. Is it a good investment for America to dedicate 200 billion dollars per year to an infrastructure that exists only because the government says it must exist and which produces absolutely nothing of value?

There are two problems with our income tax system:

  1. It is not equally fair to everyone.
  2. It is extremely complicated and expensive and a drag on the economy.

I've suggested my flat tax idea in this blog which will fix both of these problems. It's different from what Steve Forbes promotes in that my idea is a new concept, namely taxing gross income rather than net income and taxing only individuals, not businesses.

Steve Forbes wants a flat tax that still has deductions (a tax on net income) and still taxes businesses. Steve Forbes flat tax is mainly just tax simplification but is not a new conceptual approach to the problem. Make no mistake, it is deductions and exemptions and special calculations that make our income tax system both unfair and complicated, not the progressive rates. Graduated or progressive rates by themselves are not excessively unfair and don't add much complexity. It is the deductions and excemptions and special little calculations that congress implements that are the heart of the problem with our income tax system.

Our income taxes have lots of deductions and special calculations because congress thinks it is their job to influence how people handle their money. For example, congress wants to encourage people to buy houses since home construction is good for the economy, therefore, home mortgage interest is deductible. Besides adding complexity to the tax code, it also adds unfairness. If home owners get a big tax break while apartment dwellers do not, is it fair? Absolutely not! Apartment dwellers are subsidizing home owners. Apartment dwellers are paying MORE than their fair share while home owners are paying LESS than their fair share! Likewise, people with children get a huge tax break while people without children do not. Why should childless couples subsidize those with children? Sure, children are expensive but so are exotic cars yet we don't give a tax break to anyone because they choose to buy an expensive car. Having children is a choice and those that choose to have children should pay their own way. A good flat tax system is all about being fair to everyone, not just fair to those behaving the way the government wants them to behave.

And why should we tax only individuals and not businesses? Because a business is just a concept. Take away the people and there is no business. People are the fundamental element. Tax people when they get income and tax all people the same way and then everything will be fair and simple. Tax only people, not businesses and the economy will thrive because businesses will invest more energy actually producing something of value instead of wasting a lot of energy managing their taxes. What about people who own their own business? Sooner or later, the business owner has to get some money or value (such as a loaner car) from the business and that's when it should be taxed.

As long as congress thinks they have the right to influence what you and I do with our money they will continue to add one unfair and complicated wrinkle after another to the tax code. It is not the job of our government to tell us what to do with our money. It is the job of our government to protect our rights and they should try to do it in the most fiscally responsible way possible and wasting 200 billion dollars every year on paperwork is NOT fiscally responsible.

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At 8/04/2004 04:21:00 AM, Blogger Nik said...

Right, with your tax model, I'd do everything through my company and take out virtually no money from the company as personal income. People already do this, buy all their "related" equipment through their small companies. A photographer buys his kid a new scanner on the companies bill, a musician buys an MP3-player. This would just amplify all of this and make very little earnings taxable. Thus those who would not misuse the system would be punished as taxes would have to be increased. Wee!

At 8/04/2004 04:07:00 PM, Blogger David said...

Like you said, people are already cheating this way. How would it be any worse with a fair flat tax?

In fact, not taxing businesses will eliminate a lot of the cheating you're talking about. Why do businesses give loaner cars? Because they get to write it off. If they're not taxed, there's no write off and no reason to give the loaner car.

When someone gets a value, like an MP3 player or a loaner car, that's when it should be taxed.

Right now, when a business buys an MP3 player, they have to declare that as an expense and write it off. Otherwise, what is the point in buying it through the business? Right now, the system is broken and people are cheating like mad.

What I've suggested does not enable the IRS to catch this kind of cheating. But it doesn't hurt either. It does help the overall situation, though, for a number of reasons:

1) When things are fair, people have less incentive to cheat.

2) Without deductions, there is much less incentive for people to set up phony home businesses (like Amway) just to try and get some deductions.


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