I like simplicity.
The reason I like simplicity is because it's really hard to scam somebody or lie when things are kept simple. It is complexity wherein politicians and criminals work their ways to get your money out of your hands legally.
The most obvious example of this is our complex tax system. 16,000 pages plus for the tax code and now that I'm working on bankruptcies and asset recovery I am reminded as to just how complex politicians have made taxes ON PURPOSE. They also make it so you don' t know you're being bled. Much like leeches will soothe your skin with an anesthetic before they start to suck out your blood, politicians have made it so you don't even realize how much you're paying in taxes with the PAYGO system.
But the single worst aspect of this complex tax system is not the loopholes that benefit a few connected people, nor is it the fact we have to waste the equivalent of 2 weeks per year complying with this horrendously complex tax code, nor is it the loss of production that labor could have been spent doing otherwise.
No, the single LARGEST COST to the complex tax system is simply the lack of....
pricing.
"Pricing?" you say.
"Yes, pricing," I answer.
Understand that government has a price. It has a cost. And that cost is the price we pay in taxes.
The problem is that since we have so many taxes and so many fees at so many different levels, that nobody really knows what the final price tag of the government is. This is HORRIBLE in that without knowing the price of something, you can't tell for sure whether it's worth what you're getting in return.
A Big Mac is very simple. I know it costs about $4. And therefore, before I spend my $4 I can COMPARE the PRICE against the EXPECTED BENEFIT. MW3 is very simple. I know it costs $60 and can COMPARE THE PRICE AGAINST THE EXPECTED BENEFIT.
But with government you can't do that. Because nobody, bar some really anal-retentive accountants, can tell you what price you are personally paying for government.
Now, super-awesome economists such as myself kindly and regularly calculate "government spending as a percent of GDP." This is to show the people "hey, this is what we're paying for the government we got."
THere's just one small problem.
98% of the American adult population doesn't know what "GDP" stands for, let alone the merit of dividing government spending by it. They wouldn't be able to understand what that number signifies. Besides, it's getting in the way of their love affair with Kim Kardashian's wedivorce.
But it is here that the true argument for a flat sales tax lays.
A flat sales tax does four things.
1. It consolidates ALL the various government taxes into ONE SINGLE TAX. More specifically, ONE SINGLE NUMBER everybody can understand, and in doing so puts a VERY SPECIFIC PRICE ON GOVERNMENT. Because all government revenue would be derived from ONE single tax, any cries or demands from the people to "pay for the chilllllllldreeeeeen" or "bailing out Banksters" or "free food" or "social security" or "wars here and there" would immediately and quite accurately drive up that ONE SINGLE NUMBER, so you could see how much "paying for free college education" would cost.
"The starting tax rate is 20%. Oh, you want free health care? The new tax rate is 24.7% Oh, you also want to subsidize loser solar companies? The new new tax rate is now 25.1%. Oh, you want to bail out the banking industry? The new new NEW tax rate is 32%"
People would know PRECISELY how much government would cost and would therefore allow them to determine whether they were getting their bang for their buck.
2. It forces people to have skin in the game so they cannot rob Peter to pay themselves. If they want free food for their 4 illegitimate children, then they get to pay an extra 1% in sales tax on everything they buy. They want to have free education? They get to share some of that burden. And in doing so...
3. It unifies the people. Instead of pitting them against one another, the poor vs. the rich, the old vs. the young, the children vs the childrenless, doesn't matter. You're all in the same boat, you all pay the same price. You can no longer vote to tax one group of people or grant others a "credit" or a "loophole." Get in that damn sandbox and start playing nice with one another.
4. Makes people put down that damn People Magazine and quit worrying about Kim Kardashian and pay the ef attention to some economics.
There are of course other HUGE economic benefits to having a tax code that would be whittled down from 16,000 pages to a SOLE, SINGLE SIMPLE number, but the above is I think the most overlooked, perhaps never-considered benefit of a flat sales tax.
Now, out of the Republican contenders for the nomination, are there any advocating this?
No, even my man, Herman Cain, still has to complicate it unnecessarily by deriving taxes by three different sources. But it is a start.
I fear, however, even the average American voter isn't bright enough to multiply 9 by 3, and will thusly still be just as confused as with a 16,000 page tax code.
So why not just make it an even 27% and stop confusing the average American?
19 comments:
As much as I would like to see this, I wonder how this would deal with real-world complexity. What kinds of sales get taxed?
And (assuming you even care about this) how is this supposed to be fair to rich, poor, and in between when even a small amount of money means a lot more to a poor person than someone with a lot. Or rather, (correct me if I'm wrong), the marginal dollar means a lot more to a poor person than someone with a lot more wealth. I would also argue that the cost of protecting a person with lots of wealth is greater than the cost of protecting a person with not so much, so how does this flat tax account for this?
I think your approach looks nice but is too idealized. Nevertheless, like a good liberal I am open-minded and receptive to instruction if you think I'm misapprehending this whole issue.
Bro Herman has been a Sales tax (Fair Tax) guy for quite a while. This 999 thing is a stopping point on the road to eliminating all other federal taxes. I have been following Herman's carrer since the late 90s. The Demonrats wouldn't be doing this to him if he wasn't a real danger to Da One.
Reason #3 is enough to keep the government from ever switching to a flat tax. A unified population is much harder to control than a population that is obsessed with choosing a side and throwing rocks at the "bad guys".
Socrates,
A marginal dollar does mean more to a poor person, but a sales tax is still a percentage. Also, the poor use far more government than they pay for. The rich pay the most and get back far less than they use.
The problem with our current tax system and any of the current proposals is they do not tie the taxes paid to the services used and thus are simply wealth transfer / legal plunder.
what do you think of a sales tax, instead of an income tax. That would truly be the fairest not. The rich who want to spend on useless things would be taxed appropriately for it. No need for a proportional tax rate, no need for useless tax free retirement accounts. It would definitely increase the savings of households. The only downfall i can think of is keeping everything from going into the black market.
And i agree on the costing of govt. When numbers come in billions and trillions it is impossible for people to comprehend. We should get a bill with our taxes every year with a costing breakdown/person. That new bailout package to GM, it will cost your family $200, etc... This should also be done for every level of govt. That new school your council wants to built so they can have a legacy built in their name, it will cost you $600/year/person for the next twenty years. The city wants to build a bridge to nowhere, break it down to the cost/car traveling the highway.
We need to know how much our govt costs and they do everything in their power to keep us from knowing.
I agree with the flat tax. However, be warned on the dangers of a national sales tax. Every proposed new tax is either "temporary", or "revenue neutral". They will pitch the VAT tax as a way of eliminating income taxes. And surprise surprise, you will wake up one day to find out they never got rid of the other taxes.
All the countries that have a value added tax, are countries that have tapped out their income tax levels. And none of them have eliminated any income or payroll taxes. These high tax countries, also tend to fuel an abundant off book black market, in cash only transactions.
This is a warning to Americans, do not allow a national sales tax to happen. You will end up stuck with already high income taxes and an ever increasing sales tax.
If i recall correctly, Uruguay once had only a value-added-tax and no income taxes. Arabic countries also do not have income taxes.
Economists usually prefer consumption taxes over income taxes because they don't want savings to be taxed.
However, realistically there is no way ANY government, not even the US of A, would relinquish such a large share of expenditures that they could make do with only one type of tax. That being said, Cain's 9/9/9 seems a pretty good deal to me in these dark times.
As much as I would love to see tax simplification, I doubt it will ever happen. One of the biggest powers that Congress has is to grant favors via the tax code. They won't give up that power without a major housecleaning.
Step 1: Simple tax rate. Pick one, a sales tax, a flat income tax, hell I'd even accept 2 or 3 tax brackets.
But make the tax return a simple 3 line form: Enter income in to box A, pull rate from table 1 enter into box B, multiply A by B and enter into C, write cheque for value in C and sign the bottom.
No deductions, no credits, no loops which may or may not have holes in them.
Step 2: Balance budget within the new revenue stream outline in step 1.
You need to starve the beast by reducing it's funding. There are two ways of doing this, the hard way and the real hard way. The hard way is cutting spending now, doing without things we cannot afford and getting thing in order. The REAL HARD WAY, is the Italy way, where the people who lend you money decide to up the interest rate and you can no longer afford to do anything.
Pat Sullivan explained the dangers with adding a new tax. It doesn't matter how it was sold, a new tax is a new tax, period. Unless there is a constitutional amendment repealing the income tax at the same time and capping the national sales tax, the tax monster risk isn't worth the simplicity reward.
Beyond this, my concern with all of this desire to radically rework our tax structure is it is overshadowing the more urgent issue. We need to turn our economy around. The graduated income tax structure isn't the primary problem. Our primary problems are:
1) We are dedicated to turning a blind eye while our trading partners rig their currencies. This is intricately tied into both our loss of a manufacturing economy and our national debt. Anything less than militant denial of this fact is considered protectionism.
2) Open boarders and a refusal to distinguish between citizens and legal residents on the one hand and illegals on the other.
I am a flat tax man too. EVERYONE should pay too - even if they have to borrow to do it. The poor be damned - they have a stake in this country too - and our welfare class lives in relative luxury compared to the poor of some other countries.
I propose some number crunching for you Captain - assume total elimination of welfare spending. Assume the monies spent on welfare are redirected at our national debt. How long before we are debt free? I think most people would be shocked at how much the liberal poverty industry is costing us.
I am all for simplicity.
But I do have a question about it for an economist (of which I am not).
Is putting all the eggs in one basket a good idea?? Today the gov gets taxes from a variety of areas. Some are more affected than others by say a recession. A sales tax is based on sales which disappear when times are tough. Would leaning on a single tax (whatever it is) cause problems in some situations???
And second (ok 2 questions), does doing a single tax.... with no deductions disappear one of the tools the government can use to affect behavior (to the positive or negative). Like a sin tax to reduce smoking/drinking. Or credits to make charitable donations cheaper??
I like a flat tax idea, but are these (and others) unintended consequences of it? And how will they affect us??
Socrates, the great thing about arguing for the poor..... is that everything disproportionally hurts them so you always have an argument about how people are being mean to them.
A flat sales tax is a good example. Imposing one is bad for the poor because the marginal dollar as you state affects them more.
On the other hand, Here in Canada, we went from a 7% National sales tax down to 5%. And you should have heard the wails from people how it disproportionally helped the rich since they spent more.
The same argument from both sides whether you increase or reduce such a tax. It hurts the poor.
Neat little package huh??
I much more prefer the flat tax, Today I am forced to move income around, buy things like RRSP's etc to try to maximize my income without paying more income tax by moving up a tax bracket. My time would be much better spent just working maximizing income, not worrying about trying to tax shelter it. And on top of that, I would have access to it to spend it or invest it rather than it being stuck in a tax shelter. Either of which would increase both the number of jobs and the wages of the "poor".
......
I also dispute the definition of "poor" that is used today. Am artificial poverty line where one can own a big screen tv and a fancy car and home is quite possibly one of the stupidest things people have come up with.
Poor is what my grandpa went through being bore into a household of 5.. and 2 hired men. Who lived in a house the size of my bedroom. Poor is when he at the age of 13 took the janitorial job at school because the family needed money. Poor was when my Great grandmother allowed herself only 4 cents a month for tea. (when was the last time that you saw someone use a teabag even twice??) Poor was when some of their neighbors trapped gophers for food.
Today poor can mean that you only have a couple 30 inch tv's instead of a couple 60 inch ones. When I went to university I was considered homeless because I lived with 4 others rather than as my own family. We had full everything. The works. But I had friends that paid 3 times what we did for living, and got less for it.
Today, My wife and I make good money. We aren't in the low income tax brackets. Most of our incomes goes back into the farm business, And what we live on puts us squarely in the "poor" category.
We need to delete the welfare system. Start over. Define poor as "People who are in genuine need" and not "He has granite counter tops and I don't"
I have no problem paying to help people survive. I worked hard to provide for the things I want in life. I think others could do the same. I don't mind paying to help people who genuinely need it.... But I have no intention of giving money to people who want to keep up with the jetsons, but only do the work of a grasshopper.
Interesting - Rasmussen just did a poll where 60% of those polled favored across-the-board spending cuts to balance the budget.
I'd go for the flat tax, but only if the income tax were made unconstitutional. The worst of all worlds would be the give the government another avenue to tax e.g. sales tax or VAT without taking the worst tax away.
You'll never get Washington to reform the income tax system or drop it for a sales tax. They want to have the power to pick winners and losers.
Hey Barcs,
That is a good question, but you can always finance shortfalls with decifit spending.
I'd prefer to avoid that. I would make a balanced budget amendment which would force cuts on government spending and not increases in revenue.
Additionally, a nation LIKE ITS PEOPLE should be saving for a rainy day.
Of course, that's expecting too much for the debt-addicted democrats and their worthless constituents.
Here's a better idea: Repeal the 16th, 17th, 19th, 24th, and 26th Amendments. Go back to the old tax system, where each state paid in proportion to its population and the peacetime Federal budget was 3% of GDP.
I doubt that 3/4 of the states would ratify this, but some states could secede (with or without the consent of Congress) and join together under a new constitution, as happened in 1776, 1789, and 1861.
You missed another big point. There is no "pricing" for government because it has a monopoly.
You can compare one computer game to another, and decide to buy one or the other, or both, or neither.
With government, you have no choice. You are forced at gunpoint to pay, whether you want to or not.
If someone said "Pay me $1000 for this hamburger!", you'd probably refuse.
If someone said "Pay me $1000 for this hamburger, and I'll kill you or kidnap you if you refuse to pay!", then you might grudgingly pay.
Of course, government bureaucrats rarely explicitly say "Pay me or I'll kill you!" It's hidden under a vast bureaucracy and tax code.
All taxation is theft.
Barcs,
As an economist I can tell you that sales taxes deliver more consistent revenues than income taxes. People don't reduce consumption by much during a downturn, but jobs are usually lost and the unemployed don't pay income taxes. That is one of the main reasons why economists (and the OECD) recommend less income taxes and more consumption taxes.
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