Fred Thompson's Tax Proposal

[samclem]

Yesterday Fred Thompson outlined the way he'd like to change the tax system. Major points (according to the AP):
- Keep the present tax cuts which are due to expire in 2010
- Eliminate the estate tax
- Eventually eliminate the AMT
- Give taxpayers the option to file under the present system or a flat tax. The "flat tax" would have a high standard deduction ($12.5K for singles, $25K for couples), and a personal exemption of $3k per person (so a family of 4 would pay no tax on their first $39K of income). Cap gains and dividends would be taxed at 15%. All other income up to $50K (singles) $100k (couples) would be taxed at 10%. All income above this level would be taxed at 25%. There would be no other tax credits or deductions for those who choose to use the simplified flat-rate computation.

Opinions form the crowd? Okay, okay, I'll start:
CON:
- Another whole set of tax computations? The only way an individual will know which system is most beneficial is to crunch their numbers for both systems. In addition to the folly of a "simplification" that really causes more pain for everyone, it will also not enhance the citizenry's faith in the tax code, since everyone will know that the tax loopholes are there for those with the legal staff and CPAs needed to ferret them out.
- The "flat tax" still requires that all taxpayers figure out their income. For most people, figuring out that number is the hardest part of doing their taxes. So, there's really not much reduction in taxpayer paperwork.
- The government is still taxing (i.e. disincentivizing) productivity. Is productivity what we want to discourage as a matter of national policy?
- It leaves the income taxation system intact, and the new "flat tax" will likely soon become the same morass of complex exemptions and rules that we have now. Each year special interests will fight to include more "tweaks" to the flat tax.

PRO:
- A voluntary, incremental change like this is more likely to be enacted than a more radical overhaul (like a National Retail Sales Tax).
- A parallel simple flat tax might be a mechanism for developing popular support for scrapping the other "conventional" tax code. It is possible the public will come to see the present code as the tool used by the wealthy and the "insiders" to get away with paying less than their fair share, and it is possible that this could lead to pressure to do away with the conventional system.

Also, note that, at least as AP has outlined it, cap gains and dividends would be taxed at a higher rate (15%) than earned income (10%) for the first $50K/$100K. Interesting. At least the`dividend/cap gains rate isn't higher than it is right now.

 

[clifp]

I'd be shocked if this proposal was actually revenue neutral. I also think it is silly to talk about a voluntary flat tax. Pretty obviously you are going to figure out which system AMT, conventional, or "flat tax" results in the lowest tax and use that system.
I guess it is voluntary in the fact that if the flat tax is higher you don't have to pay it.

I don't have a problem with earned income being taxed lower than cap gains/dividends up to some points. As I reasonably baseline I think earned income+payroll tax should be approximately equal to cap gains/dividends. Once the SS cap goes away so should the lower earned income rate.

 

[ERD50]

Why " - Eventually eliminate the AMT " ?

Seems like practically everyone is agreeing (is that possible?) that the lack of an inflation adjustment has messed up the AMT. It is hitting lower incomes than originally intended (what the heck did they expect with no inflation adjustment?!).

If.... If we were to go to an NST, it would make sense to gradually bring it in. It is a big change. 1/2% every six months, while cutting other taxes at the same rate.

Jan 1 and July 1, withholding could decrease by that 1/2% on income below $X. The lower classes would see no change - their paychecks would increase by 1/2% and costs in the stores would go up by 1/2%.

Keep cutting the most complex parts of the taxes and deductions until there is no income tax, only NST.

Big if's though. I know, just dreams.

-ERD50

 

[retire@40]

...Give taxpayers the option to file under the present system or a flat tax...

Let's say under the present system you pay $16 in tax.
Under a flat tax you would also pay $16 in tax, except the government would collect twice as much.

How is that possible?

16 = 16 (Starting point)
4 + 12 = 16 (Rewrite left side)
4 - 12 = 16 - 24 (Subtract 24 from both sides)
4 - 12 + 9 = 16 - 24 + 9 (Add 9 to both sides)
(2 - 3)2 = (4 - 3)2 (Rewrite as squares)
2 - 3 = 4 - 3 (Square root of each side)
2 = 4 (Add 3 to both sides)
1 = 2 (Divide both sides by 2)

 

[ih2005]

Flat Tax Rebuked

(Paraphrased) Reply by Dan R Mastromarco (LL.M., Taxation, Georgetown, principal in the Argus Group, adjunct professor at the University of Maryland, International Management Program, and research consultant to Americans for Fair Taxation - FairTax.org) to:

"A National Sales Tax Doesn’t Add Up" by Bruce Bartlett, December 29, 1999

Many engaged in true tax reform find Bartlett-type attacks exasperating, if not embarrassing. I'd like to convey perspective of both flat taxers and sales taxers who believe that such attacks are counterproductive, but first provide some political history by which to frame said perspectives.

For years Conservatives have posited that a VAT is bad policy (when liberals were discussing it), fearing it would become additional to an income tax (it was called a "money machine"). Circa 1980, conservative intellectuals touted Hall-Rabushka "subtraction method" [H-R] VAT which taxed business value added at the business side and labor value added at the labor side. Unlike European VATs (identical in scope), H-R became favorite of Dick Armey and Steve Forbes. It eliminated steeply progressive tax rates and tax on savings. Because of the prior VAT criticisms, H-R was packaged as the "flat tax" and is sold as an income tax to this day, rather than the VAT that "its DNA characterizes it as."

Some conservative commentators have called for the repeal of the 16th Amendment and for the adoption of the flat tax, (despite the fact that it is styled as a direct tax and could not be adopted with such repeal). Mr. Bartlett has called the national sales tax [ie, the FairTax] a VAT (which it isn't), castigated VATs as evil, and has said that sales taxes have become VATs in Europe (which they didn't). In the next breath, he "throws his arms around" the flat tax (which is a VAT). He quotes Bill Gale that the [FairTax] would have to be imposed at 60 percent, but glaringly fails to recognize that if the two bases are the same, he would have to impose that rate for the flat tax to be revenue neutral. In truth, all economists know that the two plans differ NOT in economic effect or base, but in administration.

An income tax taxes savings and investment multiple times. Both flat tax and FairTax are neutral as to savings and investment, tax income only once, and are both consumption taxes. Both are single rate taxes, have nearly the same base, and would improve the U.S. standard of living. Neither redistributes wealth.

While some have even suggested that hey are the same plans under different names, the flat tax taxes value added at each stage in the production process, but the FairTax prefers to tax it when it is added up at the end and eliminate the need to make everyone a taxpayer and collector.

Substantive commonalities between the flat tax and FairTax doesn't mean that there are NO key political and policy distinctions that could be exploited in pitting one against the other. If FairTax supporters wanted to retaliate in response to the Bartlett-type critique, they would have MUCH material with which to HONESTLY do so:

• The flat tax will make small firms and farmers pay the tax even if they have no profit
• The flat tax is opposed by many small business groups
• The flat taxers implicitly support big government by disguising even more of the overall tax burden as the current law
• The flat tax has been kicking around for nearly 20 years
• The flat tax makes everyone a taxpayer and collector, while the FairTax exempts 115 million filers [2000 figure] from ever having to deal with the IRS
• The flat tax is regressive, but the FairTax would enable everyone to keep his full paycheck.
• The flat tax has not only stalled, it has lost public and Congressional support.
• The FairTax is instantly understood, while even some proponents of the flat tax don’t understand it
• There are no transition rules developed for the flat tax and they would be very difficult to craft
• The flat tax taxes exports and relieves imports from tax
• The flat tax confuses tax reform with temporary tax reduction and makes both twice as hard
• The flat tax retains the entire income tax apparatus which erodes as quickly as you can say, “tax bill”

FairTaxers could advance these truthful points without resorting to bigotry associated with a cultic religious organization. However, for the most part, FairTax supporters have chosen not to attack the flat tax, but rather accentuate the commonalities between the plans - despite the above-noted differences. The reason is that, in the battle for tax reform, the real enemy is our current system.

Income tax advocates look down upon the articles of Bruce Bartlett with smug chortling, as Bruce is doing their work for them. The IRS and the liberals who want an income tax to ensure (1) taxes can be raised without the American people knowing it, and (2) wealth can be redistributed from the middle class to the poor, do not even need to fight us - we're killing ourselves!

Perhaps Mr. Bartlett believes that the flat tax will help elect Republicans, effect tax reform, and provide tax cuts; however, the real effect of his criticism is to divide conservatives, to delay serious national consideration of tax reform, and to fertilize the roots of the income tax.

(Paraphrased from The link between the Fair Tax and Scientology? | Political Insider | ajc.com )

 

[OAG]

Some more "pie in the sky" during an election; that will never see the light of day. Forgive me it is early and I am a bit cynical.

 

[donheff]

Why " - Eventually eliminate the AMT " ?

Seems like practically everyone is agreeing (is that possible?) that the lack of an inflation adjustment has messed up the AMT. It is hitting lower incomes than originally intended (what the heck did they expect with no inflation adjustment?!).

It is because the Bush Administration calculated the AMT into their justification that their tax cuts benefiting people like me wouldn't take too huge a chunk out of the revenue stream.

 

[samclem]

It is because the Bush Administration calculated the AMT into their justification that their tax cuts benefiting people like me wouldn't take too huge a chunk out of the revenue stream.

Isn't it because, under the "pay-go" rules only recently passed by Congress (not backed by Bush and passed after his tax cuts), every loss of revenue must be offset? While many in Congress want to eliminate the AMT, now they have to figure out where the new money/budget cuts will come from? I think that is what is exacerbating the problem.

And, the Bush tax cuts have led to an increase in government revenues (as tax rate cuts frequently do). As a result, despite all the spending on military operations and the increased domestic spending, last month the deficit fell to its lowest level in 5 years.

 

[ih2005]

FAIRTAX SPEC'S - No college degree required

While many who are invested in the current income tax system seek to demagog the well-researched FairTax plan, FairTax's theoretical underpinnings have been professionally reviewed, and its acceptance in the professional / academic community continues to grow.

Renown economist Laurence Kotlikoff believes that failure to enact the FairTax - choosing instead to try to "flatten" what he deems to be a non-flattenable income tax system - will eventuate into an irrevocable economic meltdown, because of the hidden aspects of the current system that make political accountability impossible. Tom Frey, of the DiVinci Institute, foresees the coming collapse of the income tax system.

Here is why the FairTax MUST replace the income tax. It's:

• SIMPLE, easy to understand
• EFFICIENT, inexpensive to comply with and doesn't cause less-than-optimal business decisions for tax minimization purposes
• FAIR, loophole free and everyone pays their share
• LOW TAX RATE, achieved by broad base with no exclusions
• PREDICTABLE, doesn't change, so financial planning is possible
• UNINTRUSIVE, doesn't intrude into our personal affairs or limit our liberty
• VISIBLE, not hidden from the public in tax-inflated prices or otherwise
• PRODUCTIVE, rewards, rather than penalizes, work and productivity

Its benefits are as follows:

For INDIVIDUALS:
• No more tax on income - make as much as you wish
• You receive your full paycheck - no more deductions
• You pay the tax when you buy "at retail" - not "used"
• No more double taxation (e.g. like on current Capital Gains)
• Reduction of "pre-FairTaxed" retail prices by 20%-30%
• Adding back 29.9% FairTax maintains current price levels
• FairTax would constitute 23% portion of new prices
• Every household receives a monthly check, or "pre-bate"
• "Prebate" is "advance payback" for taxes payable on monthly consumption to poverty level
• FairTax's "prebate" ensures progressivity, poverty protection
• Finally, citizens are knowledgeable of what their tax IS
• Elimination of "parasitic" Income Tax industry
• NO MORE IRS. NO MORE FILING OF TAX RETURNS by individuals
• Those possessing illicit forms of income will ALSO pay the FairTax
• Households have more disposable income to purchase goods
• Savings is bolstered with reduction of interest rates

For BUSINESSES:
• Corporate income and payroll taxes revoked under FairTax
• Business compensated for collecting tax at "cash register"
• No more tax-related lawyers, lobbyists on company payrolls
• No more embedded (hidden) income/payroll taxes in prices
• Reduced costs. Competition - not tax policy - drives prices
• Off-shore "tax haven" headquarters can now return to U.S
• No more "favors" from politicians at expense of taxpayers
• Resources go to R&D and study of competition - not taxes
• Global "free (and equitable) trade" becomes possible for currently-disadvanted U.S. exports
• US exports increase their share of foreign markets

For the COUNTRY:
• 7% - 13% economic growth projected in the first year of the FairTax
• Jobs return to the U.S.
• Foreign corporations "set up shop" in the U.S.
• Tax system trends are corrected to "enlarge the pie"
• Larger economic "pie," means thinner tax rate "slices"
• Initial 23% portion of price is pressured downward as "pie" increases
• No more "closed door" tax deals by politicians and business
• FairTax sets new global standard. Other countries will follow

The income tax system must ultimately fail, if for no other reason than that Washington politicians cannot seem to wean themselves from being "sucked down the spending hole" while seeking ways to hide the magnitude of taxation from those who ultimately pay for all of it - every working American. It's well past time to scrap the tax code and pay for government the way that America's working men and women are paid - when something is sold.

(Permission is granted to reproduce in whole or part. - Ian)

 

[samclem]

ian/ih2005,
- I support the "Fair Tax" (more accurately called a "National Retail Sales Tax"), too. But, your obviously cut-pasted entries with no relevance to the ongoing thread are a pox.
- You've got 4 posts and all are commercials for the Fair Tax. It's not productive.

 

[growing_older]

So, for Fred Thompson's proposal, any idea if the optional Flat Tax portion would still respect the tax-exempt or tax-deferred treatment of IRAs and 401k accounts - or would you be taxed at Flat Tax rates on the income generated within such accounts?

 

[ih2005]

Dear "Irritated by words"

ian/ih2005,
- I support the "Fair Tax" (more accurately called a "National Retail Sales Tax"), too. But, your obviously cut-pasted entries with no relevance to the ongoing thread are a pox.
- You've got 4 posts and all are commercials for the Fair Tax. It's not productive.

Well, questions about FairTax recur; answers need not be re-crafted with each recurrence. Now one could assume that my posts were not germane to the topic - which, of course, means that I had no motivation to post the things I did - which, of course, is ridiculous.

When I read stuff, I look to see if I can learn one thing new; otherwise, I simply move on to the next post. Seldom do I trouble myself over the initiatives of others, especially when they're engaged in something using their mind. (Yes, I research and write anything I may happen to "cut and paste.")

 

[retire@40]

Well, questions about FairTax recur

Could you answer just one question for me with either a yes or no?

Could the "FairTax" ever be unfair?

 

[Rustic23]

Not paying tax on used items seems to me a loop hole that will be exploited. Many industries, i.e. jewelry, furniture, drugs, etc. have large markups. What is to stop a store from paying sales tax on the wholesale figure and then sell the item as 'used' cheaper than the 'new' with new sales tax. I see an increase in the auction/garage sale business.

Actually I don't. Like others have said, the Income Tax Code has become a political god send for our leaders. I don't see them giving it up. Income Tax Loopholes = campaign contributions = remain in power. The fair tax would be harder to manipulate, and therefore it will not pass, and neither will Fred's.

 

[cute fuzzy bunny]

Eh, its a plausible plan, but I miss him on Law and Order. The other guy aint curmudgeonly enough.

 

[Texas Proud]

How many people have lived in a location with VAT? I have...

First, they will not eliminate the income tax as it is just to juicy... so they would 'reduce' it for the VAT.. then after awhile, the VAT is part of the price you pay for everything... (the price on the product includes the VAT, so you do not see it)...

Then, they need more income, so let's raise the income tax just a bit... and over time.. you have both.

I still have a huge foreign tax credit that I can not use which was only my income that was taxed.. so the rate was higher than here... and I got no deduction for all that VAT that I payed while overseas...

 

[ih2005]

FairTax, Fairly Fair

Could you answer just one question for me with either a yes or no?

Could the "FairTax" ever be unfair?

Not enough information. Unfair to whom?

 

[retire@40]

Not enough information. Unfair to whom?

Unfair to anyone it affects.

 

[ih2005]

Oh, just hang me!

Like others have said, the Income Tax Code has become a political god send for our leaders. I don't see them giving it up. Income Tax Loopholes = campaign contributions = remain in power. The fair tax would be harder to manipulate, and therefore it will not pass, and neither will Fred's.

It is up to us to demand that our legislators vote for the FairTax. Then, we must back up our convictions with our dollars and/or actions (if only to forward info here and there).

In order to change America's tax system, we must provide funding to the organization that got this ball rolling, FairTax.org - I give $25 per mo., but much more, if my time is considered. (Just today, it was revealed that FairTax.org has had to regroup from its intense, but effective, spending in the pre-Primaries.)

Supporters among the R candidates:
Huckabee,
Tancredo (co-sponsor, HR 25),
Hunter (co-sponsor, HR 25),
Cox (first out on the campaign trail w/it),
McCain (said, he'd sign it),
Thompson (? waffled ),

Supporters among the D candidates: Mike Gravel

But, imagine! Look at the momentum! (keep in mind that it's taken 9 LONG YEARS to come into public view!)

-or-

We simply do nothing, complain, post at our fav forums, and continue to be strangled by the Tax Code, both in our families, and globally.

 

[ih2005]

Unfair to anyone it affects.

Oh, c'mon. You're wasting my time. Give me a legitimate, and useful question.

 

[cute fuzzy bunny]

Well now, it wouldnt be a particularly fair tax if it was unfair to someone, would it?

Seems like a legitimate question to me.

Or you could just do a search on 'fairtax' to see one of the other prior discussions where everyone pasted each other in the face over the topic.

 

[ih2005]

Well now, it wouldnt be a particularly fair tax if it was unfair to someone, would it?

Seems like a legitimate question to me.

Or you could just do a search on 'fairtax' to see one of the other prior discussions where everyone pasted each other in the face over the topic.

You decide on the basis of my postings, whether you see it as unworthy to advocate. Give me your reasons, and I'll be happy to respond.

 

[retire@40]

Oh, c'mon. You're wasting my time. Give me a legitimate, and useful question.

I'm asking if you think the "fairtax" is fair to everyone. It should be a simple yes or no.

You are pushing the "fairtax" in every post you make like a snake oil salesman promoting a product that will cure everything and anything, but when someone asks you a simple question about what magic ingredients are in your snake oil, you don't want to tell them.

Why would you not want to answer a simple question about a self-described tax? Is the description accurate or not?

 

[ih2005]

You are pushing the "fairtax" in every post you make like a snake oil salesman promoting a product that will cure everything and anything...

Tell me what you think it won't cure, and I'll be happy to respond. I've already given you reasons why to advocate for FairTax (I wouldn't term my comments as "snake oil" - that would presuppose that I'm talking to some simple folk here. I never make such an assumption - although, I might consider revising that opinion of you based on your little Q./A. strategy.)

 

[cute fuzzy bunny]

You decide on the basis of my postings, whether you see it as unworthy to advocate. Give me your reasons, and I'll be happy to respond.

So far all of your postings have to do with fairtax and fairtax only. Perhaps if you had something else to say I'd have a pretty good idea of what sort of 'advocate' you are...

I think we beat the fair tax thing pretty well already, but it seems to me that the summary was that its merits are irrelevant since it'd never get passed.