The goal of a tax system is to bring in revenue for the powers that be; federal, state, county, or city. Since the income tax was first instituted in 1913 (allowed by the 16th Amendment) it was to be used for funding the country during war time. As the federal government expanded and needed more revenue for its programs, so did the tax system. This began with Woodrow Wilson who created the Federal Reserve System, the Federal Trade Commission, tariff reduction, and a graduated income tax. Since then the tax code has grown to enormity, a document between 60 and 75,000 pages long. Considering it started modestly in 1913 small enough to fit in a 400-page textbook, it is easy to see how disputes have grown and loopholes are evermore apparent.
Today, there are seven different tax brackets spanning between 10% and 39.6% based on income and marital status. The bracket most called into question is the highest, where if you make $413,201 in a year you pay the same percentage as someone who makes $4,132,010. Liberals believe this is unfair and point to former Forbes wealthiest man, Warren Buffett, who claims to pay a lower tax rate than his secretary. The “fair share” belief was the rallying point of the Occupy Wall Street movement and is echoed by liberals on the campaign trail as recently as the 2016 presidential election.
It’s not just liberals who take issue with the tax system either. Conservatives disagree with it as well, especially upon the news 45% of Americans do not pay federal income taxes. Conservatives believe in a simplified and more balanced system. One thing both sides can agree on is with its confusing language and colossal size, the current tax code cannot remain in control of the lives of millions of Americans.
One approach to tax reform with a history of support is the fair tax. The goal of the fair tax is to replace all federal income and payroll based taxes with an integrated approach including a progressive national retail sales tax, a prebate, dollar-for-dollar federal revenue neutrality, and, through companion legislation, the repeal of the 16th Amendment. The tax rate as set by the fair tax is a loophole free, 23% consumption, or, sales tax. Establishing a sales tax would ensure everyone contributes to the federal fund equally to how much you spend; so if you’re buying expensive goods and luxury items, you’ll be paying more than the low income family buying necessities. In fact, the system is designed so if you’re living only on necessities, you won’t pay anything at all compliments of the prebate. The prebate is like it sounds, money you are given from the government before you give any up; the opposite of a rebate. The objective is to cover the costs of basic essentials everyone must have to survive. Because the government would be giving money away rather than taking it, there would be no need for the IRS which would mean more federal savings which subsequently leads to a more balanced budget.
This plan has had many supporters, most recently Libertarian presidential candidate Gary Johnson, but was made famous by the 2012 Republican Presidential nominee hopeful and former Godfather’s Pizza CEO, Herman Cain and his 9-9-9 plan; a plan calling for a 9% income tax, 9% sales tax, and 9% corporate tax. With the fair tax or the 9-9-9 variation, the system is simplified so everyone knows what they’re paying and, as Herman Cain put it, “it’ll save all of us, collectively, $430 billion a year that we spend to fill out the stupid tax code.” The fair tax also has the added benefit of taxing those who otherwise do not pay federal taxes such as illegal immigrants, drug dealers, and others who come across their money without it being reported.
The fear with a federal sales tax is when the government needs more money it will raise the rates. So conceivably, a simple 9-9-9 plan could become a 15-15-15 plan, this coming from Mike Franc, former Vice President of Government Studies for the conservative Heritage Foundation. Another problem with enacting a consumption tax is any income made prior to its passage would be taxed again when used to make a purchase. Not a desirable outcome for those living on a fixed income, i.e. retirees.
The second tax reform option is the flat tax. The best perspective to view this simplified system is through the eyes of Dick Armey; a PhD in economics, who served in the United States Congress from 1985 to 2003, and was House Majority Leader from 1995-2002. In a brief editorial to USA Today in 2011, he describes how the simplification of the tax system would save Americans time, money, and stimulate the economy. He compares the 60,000-page tax code of today with a flat tax return form that would fit on a post card. Today, the average American spends 26.5 hours a year on their income taxes; compare that to five minutes in postcard form. His flat tax works as follows: an individual reports their gross income minus personal allowances to give taxable income. In the bill he pushed in 1996 as House Majority Leader during the Clinton Administration, the rate was established at 20% falling to 17% two years after the bill’s enactment.
The loss of certain deductions such as the ability to deduct interest payments on mortgages could cause some dissent as it could dramatically decrease home values. With the housing market’s recent history, there are already thousands with upside-down mortgages who are unable to refinance to match the decrease; muddying the housing market waters could for a short period leave homeowners in turmoil. However, after the market adjusts to the new tax, estimated at three years post-passage, the time and money saved with the new tax plan would balance out the expense of lost deductions, as well as boost GDP. As the Armey plan calls for phasing in the rate, conceivably deductions could be phased out to ease the transition as well.
To get to any agreement the tax code must address the term used by many liberals, “fair share.” The apparent choice for fairness would be the aptly named fair tax. However, as economist Will McBride claims, the wealthy do not spend an equal percentage of their income as the poor. This makes a consumption tax inherently regressive, not something anyone desires.
If the question of fairness comes down to a percentage, the flat tax is the clear winner. It is difficult to argue with a system where, if someone makes ten times as much as you, they pay ten times as much. Such a system would make it impossible for Warren Buffett to say he pays a lower rate than his secretary because there would not be any loopholes for him to utilize to reduce his taxable income. Furthermore, Dick Armey’s Freedom and Fairness Restoration Act pushed by the Republican Congress in the 90’s allowed a standard deduction. For example, at the initial rate of 20% a family of four making $50,000 a year would take a $36,800 deductible and end up paying only $2,640 in taxes, or 5% of their total income. A family of four making $150,000 per year would pay $22,640 after the deductible, or 15% of their income. Under the Armey plan, a family making more money actually pays a higher percentage of their income, and Americans earning less than the deductible pay no taxes. No matter how you slice it, the greater your income, the larger percentage of your income you pay when compared to a family of the same size.
As it was during the Clinton Administration, the flat tax with a standard deduction is the most viable option for meaningful reform of the American tax code. Not only is this a balanced approach but it will end any criticism of the wealthy not paying their “fair share”.