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    Flat Tax vs. Fair Tax

    07/06/2011

    The current U.S. tax system is huge convoluted mess. The Internal Revenue Service (IRS) has six federal income tax brackets ranging from 10 to 35 percent. Our so-called progressive tax system punishes the most productive members of society with a higher tax rate. The current tax system is riddled with loopholes and biases that hurt individuals who save money for the future. Not only does our tax code treat citizens differently but it is hopelessly complicated. According to the IRS, the average taxpayer spends 26.5 hours preparing and sending in their taxes. The ever-growing Internal Revenue Code is now over 3 million words. It’s far too complex, intrusive and long.

    We can all agree that we clearly need to fix the tax code. The two most common tax reform proposals are the flat tax and the fair tax. Which one is best? First, both the flat tax and the fair tax (if implemented correctly) would likely be better than the current tax system. As Cato Institute scholar Dan Mitchell says, “from an economic perspective, the flat tax and the national sales tax (or fair tax) are virtually identical. Both would junk the current system. Both would restore fairness by taxing at one low rate. Both would eliminate all forms of double taxation.”

    FreedomWorks has long concentrated our efforts on implementing a flat tax. The flat tax is simple and would generate more economic growth than the status quo. Instead of our current multi-rate tax system, a flat tax would tax all individuals at the same rate. Under a 10 percent flat tax, someone making $100,000 annually would pay a $10,000 federal income tax. It’s a simple equation. It would not punish productive members of society with a higher tax rate.

    I personally advocate the flat tax being as low as possible. Of course, any tax reform should be accompanied by significant spending cuts. The flat tax would remove special interest loopholes from the tax code and allow individuals to file their taxes within five minutes on a form the size of a postcard. It can be implemented through the normal legislative process and it has been successful in dozens of other countries. So far, the flat tax has been adopted in roughly 24 countries. There’s a flat tax revolution going on around the globe and the United States needs to jump on the bandwagon.

    I can understand why the fair tax is very appealing to many limited government activists. It has various benefits similar to the flat tax, such as overhauling the current tax code and eliminating all forms of double taxation. The fair tax, however, could be dangerous. If we don’t repeal the 16th Amendment first, we could end up with both an income tax and a national sales tax. The politicians in Washington would love to have both sources of money. Several European governments have added a national sales tax on top of their federal income tax. The same trick could happen in America if we aren’t careful.

    Fair tax advocates claim that it would get rid of the IRS but it would likely be replaced with another agency by a different name. The proposal promises that most individuals will get a monthly prebate paid in advance. The amount of the prebate is determined by the Department of Health & Human Services' poverty level guidelines. Who would administer this?  Unlike the flat tax, the fair tax as a replacement for the income tax has never been implemented in any country. We have no real world examples of what a fair tax would look like in action. Perhaps the fair tax isn’t as politically feasible as the flat tax. It’s important to remember that repealing a constitutional amendment requires the approval of 290 House members, 67 Senators and a majority of the legislatures in three-fourths of the states.

    An immediate goal should be to enact a low, single-rate flat tax to greatly improve the tax system. Unfortunately, we have to take it one step at a time. Cato Institute scholar Dan Mitchell has mentioned a proposal that says "in the short run, we rally behind a flat tax. Once that simple and fair system is implemented, we then seek a constitutional amendment that would prohibit an income tax." We all may have different immediate and ultimate objectives. But we shouldn’t let the perfect be the enemy of the better.

    As the quote commonly attributed to Winston Churchill goes, “there is no such thing as a good tax.” All taxes hamper economic growth, distort production and punish individuals to varying degrees. With that said, there are tax systems that are worse than others. It’s clear that the current tax code needs to be overhauled. The flat tax is the most political feasible way of improving our tax system for now.

    9 comments
    Tom Ryan
    01/09/2014

    With The Neutral Tax, you don't need to make a choice between a FairTax, flat tax, or any other tax policy at the federal level. All those decisions are made by the states and then the federal government gets a fixed, flat share of the resulting revenue. This puts the states in the drivers seat in setting tax policy.

    In this post you state that you want the flat tax to be "as low as possible". Well how can you ensure it is is as low as possible? Enable the states to compete, just as the founders envisioned, that's how. This also applies to the FairTax as well. What is the best rate for the FairTax? Why not let each state decide? That will ensure that rates stay low. The Neutral Tax enables us to stop bickering about tax policy at the federal level and start competing on tax policy at the state level.

    You can read more about The Neutral Tax at neutraltax (dot) com.

    Orville Shelton
    10/09/2011

    The "Fair Tax" is better than the "Flat Tax". The "Flat Tax" rate as set in the original proposal back in the 90's by Mr. Armey was 17% and can be no lower than 17%. That rate is way to high. I was a fan of the Flat Tax until I heard the rate then and started trying to come up with a rate that was 10% or less. That wasn't going to happen. The numbers just wouldn't add up. With the "Flat Tax" congress can increase it at any time as well as give exceptions to paying it.

    The "Fair Tax" is a tax on consumption. It's set at 5% never to be increased, collected by the states for a fee to be determined then sent to the U. S. Treasury. The citizenry pays no tax on an amount equal to the cost of living for a family of 4. Each year you will get money back from the treasury. This is how I understand the "Fair Tax" to be. With a "Fair Tax" you don't have to fill a tax return ever again.

    Before this can come into effect after passage by congress and signed into law by the president we have to repeal the Federal Reserve Act of 1913, repeal 16th amendment and abolish the IRS. Repealing the 16th amendment and abolishing the IRS isn't going to happen. Congress, the President and those who control the Federal Reserve aren't going to let this happen. They want all of our money no matter how they to get it.

    Greg Walburn
    09/18/2011

    Here is a few simple reasons to go to the National Sales Tax.

    The Federal Gov't has NO business in knowing what we make and how we make it.

    It reduces the number of "tax payers" from 130 million to 25 million(a guess) (businesses who collect the sales tax)

    It becomes a volunteer tax since if you do not buy retail you will not be taxed.

    It will make USA business very competitive - lowering the cost of doing business

    It will take the power of taxation away from the idiots we call congressmen/women.

    My National Sales tax is different from the Neal Boortz group. When I ran for congress in 2004 I had my own national sales tax proposal. See my bio on my outline of issues.

    Alfred Martin
    08/29/2011

    The income tax is not on income as such. It is an
    Excise Tax with respect to Certain Activities and Privileges
    which is measured by reference to the income which they
    produce. The income is not the subject of the tax; it is the
    basis for determining the amount of tax.
    House Congressional Records, page 2580, March 27, 1943.

    Read the above over and over again. Income is not the subject of the Income Tax. The Income tax has nothing to do with income. It is an Excise tax on certain activities and Privileges. The income tax is not a tax on the amount of money one receives in a given year. Income, as defined in the law, can only be generated from all sources of taxable activity, nothing else. Taxable activity is any act which the federal government has an exclusive, legislated authority to engage in for the purpose of raising revenue to support of its own functions.

    The Income tax is an excise tax (income tax upon the income produced from Certain Activities and Privileges, not upon the earnings of private citizens engaged in common law occupations. The supreme Court said:
    "An income tax is neither a property tax nor a tax on occupations
    of common right, but an Excise Tax....."
    Sims v. Arrens, 271 S.W. 729.

    You have the right to have all the income you want. Your earnings, income, belongs to you and you don't owe a tax on it unless you are engaged in a taxable (income generating) activity.
    Write your CONgressMAN and ask him for a list of the activities that produces taxable income. I'll tell you this, you have a right to work and earn a living and it's not subject to an Excise Tax. When you filled out a Federal Income Tax form and sent it to the IRS, why didn't the IRS send you back a letter and tell you that you made a mistake and you are not subject to the Federal Income Tax because you weren't in a taxable revenue activity, and send you back a full refund? See the fraud! There is no such thing as working under the table. When you work in the private sector, you should never have to fill out a Federal form. Federal Forms apply to Federal employees. Being a Federal Employee is one of the certain activities where the income is subject to the Excise tax. Title 26, the Internal Revenue Code, does not apply to the private sector workers. Congress never taxed our earnings.

    Fred Walker
    08/15/2011

    The first thing people need to understand is, our current tax system grew out of a "flat tax"! A flat tax will not work if based on income. If a so called "new" flat tax is instituted it will be perverted just as the current tax system has been perverted. It is impossible to abolish the 16th Amendment with out a, preplanned "contract" with the Citizens and the States. It would become impossible to collect Income based “Flat” Tax if the 16th Amendment is repealed. HR:25 allows for this. It was designed to (orderly) replace the current Income Tax System. We must have an orderly transfer from our current system to any new system. With out a orderly, planed and seamless plan to transfer to a new tax system Congress will have grounds to reject any new system. That is one of the reasons HR: 25 was designed as it is. HR:25 removes any excuse for Congress to reject it on the grounds it would cause any disruption or reduction in (collected) revenue. HR: 25 is designed to be revenue neutral. HR:25 The Fair Tax will work!
    Those who fear ending up with two taxes; our current system and the Fair Tax must think the Citizens are stupid. If you read HR:25 you will find it will not continue if the 16th Amendment and the current income tax system are not repealed by a set date after HR:25 is passed. We will never see Government spending under control as long as Government is allowed to steal money from the Citizens before they have control of that money. As far as eliminating the IRS, HR:25 will not "eliminate" the entire IRS. Some branch of Government must collect revenue. The idea is to eliminate IRS "income based taxes" and the related complexity & expense. HR:25 will do that. As far as the pre-bate program is concerned, the Federal Government currently has the ability to distribute checks to every Citizen Head of Household. Many current Federal Agencies have the ability to send funds in several forms to individual Citizens. Sending a pre-bate to every Head of Household will not be an issue.

    You must remember, it will be much easer for Congress to manipulate any “flat tax” and compound it with something like a VAT tax. This is not possible if HR:25 is implemented.

    “ overhauling the current tax code” Has nothing to do with HR:25 or its development! It was understood in the beginning that the current tax code, income tax, and the related law was so complex and corrupt that replacement or repair was not an option. The current Income Tax must be eliminated in its entirety. HR:25 does just that. It allows for a seamless transfer from our current system to a new uncorrupted system to collect Federal Revenue with out any income based taxation. It is fair while requiring every Citizen to contribute to the system. It does this without penalizing any segment of society.

    Expecting Congress to pass a so called “Flat Tax” and then come back and send a Repeal request on the 16th Amendment to the States is not going to happen. If this was a possibility there would have already been successful request to repeal the 16th Amendment. The only way a repeal request will be submitted to the States is through legal “contract” language as in HR:25.

    I believe that when implemented HR:25 will be so successful it will allow for a major reduction in the Tax Rate. It is impossible to put an exact number on the size of the underground economy. It is therefor impossible to predict any increase in (collected) revenue. The one thing that is clear is every Citizen will see just how much tax we currently pay, no hiding, no special deductions, or exemptions for select groups or businesses. All Federal tax related penalties on doing business or creating jobs in the United Sates are eliminated by HR:25. All Federal penalties of saving or investing in the United States are eliminated. All Federal income based double taxation is eliminated. Hopefully demands for future cuts in the tax rate will follow, as will request for a Federal Balance Budget Amendment. This depends on each Citizen as does passage of HR:25.

    Larry Walters
    07/25/2011

    The fallacy of Dan Mitchel's video and of Julie's above comments is that the Flat Tax legislation (HR-1040) does not replace or "overhall" in Julie's words the income tax. It just adds the Flat Tax option to the existing 75,000 plus pages.

    So those constitution loving and respectful congress sheeple will continue to game the system with their special interest groups. Why? Because Campaign contributions from tax lobbyists like Dick Armey and their clients virtually assure reelection. Oh, Dick Armey isn't a lobbyist (any more)? Hm. Maybe not in official terms but you can bet he is influencing congress sheeple in spite of his official title or registration.
    I witnessed Sen. Marco Rubio turn from a FairTax supporter to a Dick Armey supporter when Armey endorsed Rubio's candidacy for U.S. Senate. Suddenly Rubio supports the Flat Tax even though he sees the FairTax as a better tax reform solution. Another spineless politician he gives in to the money.

    Furthermore, since the Flat Tax is a tax on income, repeal of the 16th without the Sales Tax legislation being passed means the Flat Tax is over and there is no revenue for the government to operate. That could be a good thing for a while but is totally unrealistic.

    I realize the Mitchel video is old (2008) so here is an update on the FairTax legislation.
    Since it is fiscally irresponsible to repeal the 16th before implementing the FairTax and unreasonable to pass the Flat Tax first as Mitchel suggests, the FairTax legislation (HR-25) contains a sunset clause. Now remember, even Mitchel agrees the sales tax is the best revenue producing solution in the long run. HR-25 allows seven years after passage of the FairTax to become ratified. If it is not ratified in that time all income tax code that was abolished by HR-25 is restored.
    Do you think that after a couple of years under the sales tax system, without the need to file a federal tax return, we will allow congress to reimpose a sales tax? If so, we deserve being punished and in economic hell.

    Julie also comments about the IRS being replaced by another name. Obviously not into the detail of HR-25, there is a new department created. A Sales Tax Administration but it will only have contact with the revenue agents of each state. The federal agency does not deal with individuals or business when it come to sales tax matters as the states administer the sales tax collections and enforcement.

    Again showing some ignorance of the FairTax, Julie asks is disussing the prebate "Who would administer this?". Well if you would learn more about the FairTax you would know it is administered by an agency with tons of experience distributing monthly payments to millions of people. The Social Secutity Administration. Add a little more computing power, a few displaced IRS worker and away we go. Doe you realize the one argument that used to be used against the FairTax, that it is regressive to low income earners is very true about the Flat Tax? The payroll deductions takes 7.65% out of every pay check even if there are no withholding tax deductions. That goes away under the FairTax. Everyone gets to Keep Your WHOLE Pay check.

    Everyone agrees lowering tax on business will stimulate growth. Wow! If that is true, and it is, imagine what NO TAX ON BUSINESS might do. Under the FairTax only businesses who sell to the end consumer collect and remit to their state the sales tax. Pretty simple Huh?

    My assessment of those who oppose the FairTax is they benefit greatly because of the complexity of the income taxor just don't understand it well enough. And those who promote the Flat Tax while preserving the income Tax are among the benefiters of complexity or the illustrators of insufficient knowledge.

    No. There is no right way to do the wrong thing and any form of income tax is wrong. We must stand united and abolish it completely and now. It is up to us as freedom loving Americans to ride our representatives until they cry 'uncle' and either quit, give in to passing HR-25 or lose to a candidate who will advocate and pass HR-25. We have the vote and it is our power if used appropriately.

    In passing the FairTax we close the Tax Gap, reported by the IRS at about $350B /year. That means the average $2600 each tax filer now pay to make up for the Tax Gap loss goes away and those who create the Tax Gap pay when they buy stuff.

    It also means the $400B in compliance costs goes away. Collection costs under HR-25 is estimated at 10% of what it is now. Add the $11B IRS budget which will rapidly grow to almost double under Obamacare and we have reduced the federal government by 100,000 workers while making $350B + $360B + $10B back into our productive economy. By productive I mean producing something of value that adds to our GDP. It means the federal government no longer get us to provide our private financial and personal information.

    If the Flat Tax got rid of the income tax as we know it and was the tax law of the land without exception, it still would not be a better solution and we would still have a multi tiered set of tax brackets is a couple of years. History does repeat itself. Look at what happened to the 400 pages of the income tax from 1913. Without repeal of the 16th we will just have more of the same. And Political feasiblity is pure poppycock. Just a way of soothing those who may question the idea of the Flat Tax but not be curious enough to look at the devil in the details.
    Need to know more. Need to verify my claims. www.fairtax.org has ti all. Click About the FairTax on the menue bar.

    yisroel shapiro
    06/16/2013

    Sharon and Bruce, You both simply don't understand how the fairtax would work. Under our current system there is an EMBEDDED tax of roughly 22% on all goods and services. think about when you buy a loaf of bread for a dollar. It takes many people/businesses to make that bread: Farmer, seed provider, fertilizer provider, truckers/transport, packager, baker, designer, marketer, etc.

    Imagine what would happen under the Fairtax when we completely eliminate the following: Income tax, social security tax, medicare tax, corporate income tax, death tax, self-employment tax, alternative minimum tax, gift tax, capital gains tax, (audits and the IRS). When companies and businesses don't have to worry about complying with the tax code and all the expenses that entails, prices on all products would drop! By about 22 percent! the FairTax raises that back up to regular sales price, meaning the price doesn't change!!!
    as an example:

    bread costs $1.00.
    after eliminating all forms of taxes,
    bread costs $.78
    after establishing the fair tax,
    bread costs $1.00.

    prices of everything remain by and large the same, AND people take home all their money from their paycheck. its a win-win-win

    Bruce Carr
    06/15/2013

    I will, because I have that extra $ (and more) since I get to keep everything I earn under the fair tax; not giving 35% unconstitutional theft tax to the IRS for the fed to spend my $ on waste I don't agree with. Flat tax is just asking the thieves not to increase the % every few yrs when they overspend and fail to restrain with a realistic budget.

    Sharon Sniffin
    06/09/2013

    One drawback, who is going to be willing to pay an extra 100,000. sales tax on a 400,000. dollar new house? or an extra 6000. on a 25,000 new car? Not me!!!!!