Flat Tax - Value Added Tax - Consumption Tax 

There is a lot of talk about tax reform and rightly so.  The U.S. Internal Revenue Code is over 70,000 pages long.  This is ridiculous.   It provides a multitude of loopholes for the rich and major corporations. 

The rate is irrelevant if they are paying no tax anyway.  It makes me mad when I hear politicians recommending all kinds of tax concessions and credits to stimulate the economy.  They are just making the situation worse.

We need to eliminate all the credits, deductions, exemptions, and loopholes.  I hear you say you don’t want to give up something like the deduction for interest on your home mortgage.  Don’t kid yourself.  If we allow any deductions, the rich will make out much better than you do.  If you have any hope of everyone paying their fair share, we must totally eliminate the credits, deductions, exemptions, and loopholes.

Some proposed options are;

1.      “Flat” income tax with no deductions

2.       “Value Added” tax 

3.      “Consumption” or “sales” tax

Each option means throwing out the current tax code and starting over.  This is a bold move. 

The “Flat” tax is pretty simple.  It is still an income tax.  The difference is there is only one rate.  After a large standard deduction for a single individual or family unit, everyone will pay the same rate. 

The “Flat” tax rate suggested would be in the 15% to 17% range.  The most important change must be the elimination of all other credits, deductions, exemptions, and loopholes.  This part is essential.

The budget presented by Paul Ryan and the U.S. House Budget committee suggests two rates of 10% and 25% and cutting loopholes.  Maybe it is a good first step, but does not go far enough in my opinion.

The “Value Added Tax” (VAT) is basically a tax on a product or service every time it changes hands.  A “Value Added Tax” rate would be lower than a “Consumption” tax rate, but many products would be taxed several times. 

I do not like this option.  The “Value Added Tax” will change the end price of many products to the consumer depending on the distribution system.  It would favor and promote companies with vertical expansion and distribution.  It would hurt, or put some wholesalers in the distribution system out of business. 

I really get scared when I hear politicians suggest this as an additional tax.  We can’t continue to add new taxes.

The “Consumption Tax” or “Sales Tax” option is normally referred to as the “Fair Tax”.  I know the name game in politics is often misleading, but the “Fair Tax” probably really is the most fair tax option. 

I remember an economics professor when I was in school in the 1960s saying a national sales tax was the only really fair tax because it was a consumption tax.  Everyone paid their fair share based on what they consumed.  This makes sense to me.  He said the only problem was that it was political suicide for any politician to suggest it at that time.  I hope we have matured. 

The “Fair Tax” is a consumption tax and should stimulate savings and business investment.  This will stimulate the economy without government intervention. The government should not be picking winners and losers. 

The “Fair Tax” sales tax rate would be about 30%.  This sounds high, but a part of the “Fair Tax” bill is the elimination of all other federal taxes. 

There would be a “Prebate” sent to every taxpayer for a large standard deduction for an individual or family unit.  Individuals with a minimal income would end up paying no tax.  When this standard deduction is considered, the net tax collected would be closer to 23%.

In 1999, three Democrats and three Republicans introduced the “Fair Tax” bill to congress.  The bill now has over sixty co-sponsors. 

The bill is simple.  It is only 150 pages long.  Not 70,000 like our current tax code.

The “Fair Tax” is not a new idea.  As I mentioned, my economics professor recommended it in the 1960s. 

I think it is interesting that Alexander Hamilton talks about a “consumption” tax and how effective it was in The Federalist Papers.  That was over 200 years ago.  I am always amazed at how smart our founding fathers were.

I like the “Fair Tax” option, but it must be adopted in total.  An essential part of the bill is the elimination of other Federal taxes. 

I know politicians never want to give up any tax money.  I think it was U.S. Senator Charles Grassley of Iowa that said, “Taxes are a politicians narcotic”.  They always want more.

It scares me when I hear a politician suggest a “small” Federal sales tax without eliminating other taxes.  This is not an acceptable option.