Out of the Tax Day Tea Party movement emerged renewed calls for tax reform, a very honorable goal that I am strongly in support of. But most of these calls seem to be in support of the fair tax – a proposal that would replace all income tax with a national sales tax of about 23%. But while I favor tax reform, I’ve always been hesitant to jump on board the fair tax bandwagon, instead favor a [perhaps more cautious] flat tax proposal, which would simplify the current income tax system – charging all individuals of all incomes and equal charge about 14%. Both proposals have the same goal, and both have drawn support from pro-growth groups such as the Heritage Foundation.
So why am I so concerned about the fair tax? One word: consumption. Our economy, like most others, is consumption-based. It is consumption that stimulates demand, that leads to production, that creates jobs, that helps to grow our economy. If we shift the entire tax burden to the consumption of goods, as the fair tax would, we create both the potential for sticker shock – generated by a sudden increase in the price of all goods (including food), as well as an overall disincentive to spend the money people make. Combined, those things could create at least a temporary drop in consumer expenditures, which in turn could push the country back into a recession.
I searched the Fair Tax website (www.fairtax.org) for a response, and this is what I found:
Under a flat tax, individuals would still file an income tax return each year similar to today’s 1040 EZ. While this is a simple postcard, the record keeping required to fill in the blanks is still long and burdensome. Under the FairTax, individuals never file a tax return again, ever! Under the flat tax, the payroll tax would be retained and income tax withholding would still be with us. Under the FairTax, the payroll tax, which is a larger and more regressive tax burden for most Americans than is the income tax, is repealed. Under the FairTax, what you earn is what you keep. No more withholding taxes; no more income tax.
Notwithstanding flat tax proponents’ honorable intentions, income tax reform has been less than a success in the past. Congress has tried to reform the income tax again and again, with the result being greater complexity and, generally, higher rates. The problem is the income tax, and it is time to stop tinkering with it.
While its true that the Flat Tax is slightly more complicated (it would still require a very basic income tax form), I’m not convinced that animosity toward the IRS is a good reason to push through what amounts to a radical – and potentially risky – tax overhaul. Rather than introducing a new system which punishes consumption, I would much rather revert to a simple, equal income tax which charged all individuals the same rate, that way, no matter how much you make, you always have more money after taxes than you do at a lower income, and what you do with your money has no effect on how much is taken by the government – once you’ve paid your 14%, you can spend, save, invest, or burn your money at no additional cost.