Changing the Tax Code


Originally the country collected its revenue through fees, tariffs, and fines, etc; a system that worked well for over a hundred years. In 1913 that changed with the ratification of the XVI Amendment which instituted the progressive income tax.
Most Americans and even most politicians will admit that our current tax code is a monstrosity and is too complicated to understand, interpret and follow. Recently, noted economist Arthur Laffer’s group announced in the Wall Street Journal that the cost of compliance and compiling the tax and collecting the tax exceeds $431 billion!
Let us be realistic, any real reform of the code is a political process so no matter how brilliant, simple, or effective a new proposed method of laying and collecting taxes faces the gauntlet of special interests, 535 men and women with their own agenda. Also, you have more than 330,000 CPAs, Public accountants, Enrolled Agents, and Attorney’s whose income would be dramatically impacted by the simplification of the IRC.
The current IRC or system, the Progressive tax, was established by Title 26 of the United States Code. It is comprised of more than 9,000 sections, thousands of regulations, hundreds of bulletins, and revenue rulings, plus settled Federal Tax Court precedents. Was this by design or has it become burdensome over the years as various sections were added and edited to accommodate a new idea from some member of Congress. There hundreds of sections that provide tax credits or tax payer subsidies if a tax payer behaves in certain ways or purchases certain goods. There is little doubt that understanding the code and being able to comply with it can be a daunting task requiring top professionals to prepare an individual’s tax return. Most experts agree that this current system must be reformed; the debate centers on an adequate alternative that is politically acceptable to our leaders and the people.
The Fair Tax was first conceived in the 1990’s and has recently gained support amongst some members of the Tea Party Movement. The basic idea is to eliminate the 16th Amendment (a HUGE obstacle, and very costly process that could take YEARS) and replace it with a tax on all consumption: including day-to-day purchase of food, sundries, and large items like homes and cars. The proponents believe that the taxes accrued in manufacturing products will magically disappear and thereby reduce the overall cost of goods sold. That is simply a major flaw in their idea. There are few if any taxes accrued during manufacturing until the end unit.
Fair tax is flawed for a number of reasons:
1. In manufacturing a company or entity large or small does not manufacture the entire product at one site, in one process, or without outside parts and supplies. Taking manufacturing a computer: There are manufactured parts on site that are fabricated from other parts, then parts are assembled, plus there are purchase parts outside of the corporation such as microchips, memory chips, wire harnesses, etc. These purchased items from outside suppliers will have the Fair tax applied. At Raytheon the average product line is comprised of 70% purchase parts. So the theory, which is the entire foundation of the Fair tax, is violated. (Not to mention dealing with other nations including Indian Reservations).
2. It is anti-Consumption. Modern economies are very complex but rest on capital formation, allocation various resources and consumption of goods and services from inside the country and from imported items. A tax on consumption will discourage consumption at some level which will retard the growth of GDP and perhaps stagnate growth altogether. The best way to reduce a deficit is to grow GDP.
3. It is NOT fair to the lower income earner as they consume a substantial portion of their income (some estimates are 95% to 100%) on just basic items as food, clothing, etc. Not only is this unfair in that regard it is political suicide to propose that some citizen that is merely on subsistence income level pay 23% of their gross income in taxation. (Rebate to the poor)?
4. Larger purchase items like cars and trucks: In Arizona our combined city, county, and state income tax is 9% to 10.5%. Add that number plus the 23% fair tax to a purchase of a $30,000 car and it now costs the taxpayer more than $40,000. Sales taxes of that magnitude necessarily will reduce the number of cars sold.
5. Currently it is estimated that 47% of workers pay no federal income tax. (The number is hard to verify especially since millions pay no tax, not even payroll taxes. If you receive a W-2 you pay at least 15.3% in taxes – FICA). If a majority of that 47% pays FICA they pay taxes. However, if you now add a fair tax plus 10% state sales tax most families in this category will have their taxes doubled or tripled. That is another part that is political suicide. By requiring the lower income to pay an obvious tax of 15% will help to make this sector of society more aware and involved in government.
6. Another major factor that must be kept in mind. We are discussing/analyzing a political process that is inherently subject to being politicized and corrupted. Many outside factions/special interests/lobbyists will do their best to gain special recognition and special legislation to be applied to their situation, sector of the economy, or industry. There have been thousands of executive orders signed by President Obama exempting individuals, groups such as unions, and corporation with DIRECT access to the President, exempting them from the new health care bill.
7. The Black Market: Using as an example citizens that live near Mexico, Canada, or a Native American reservation purchases tobacco products at substantially reduced prices due to the absence of federal taxes. This behavior would increase whereby citizens would be purchasing other high ticket items such as cars, appliances, manufactured homes. Perhaps the Navajo’s could build factories to make cars or accept DIRECT imports from foreign nations where there is NO taxation of the Native Reservations. Also the black market of organized crime, private sales would be considered black market.
8. Housing: 33% tax on purchase of a $400,000 home?????? NO way.
The fair tax has been touted by many coming into the 2012 campaign, we don’t think that the candidates have considered it in depth; it looks good on the surface but will not apply equally to all and it will disproportionately harm the poor which is unfair and political suicide.
VAT or the Value Added Tax was first introduced in France in 1954. The idea is to tax the manufacturing or other production as the product flows through the system and value is added at each stage through the efforts of labor added value or other purchase parts, etc are added to the eventual end product. France not only has the VAT tax but also and income tax. The results have been disastrous to France’s ability to compete globally. Without the massive influx of very cheap labor from its former colonies in North Africa their competitiveness would be further weakened. The unfortunate aspect of massive increase of cheap labor from North Africa, Muslim nations all, is a dramatically growing Muslim minority that has learned to demand more from the central government. Muslim population is now about 5% of France but under the age of 30 they represent more than 30% of that segment. Their birth rate in this class is 5.6 per eligible female in contrast to barely 1.1 for native French.
In short we conclude and endorse the Flat Tax as the only fair tax because it affects all citizens, regardless of income, equally and without discrimination which is in line with the original intent of equal protection and representation. Keeping it in the proper prospective you should note that a flat tax of ten percent is an effective equal rate for all, but the actual tax paid is not the same; make a million dollars, pay one hundred thousand in taxes; make ten thousand pay one thousand (not counting the standard, and only, deduction that will be built in). Also, the flat tax does not require an amendment to the Constitution as it fits the parameters of the XVI Amendment. To those who believe that a flat tax benefits the rich with a low tax rate we submit that with no deductions or loopholes the rich will pay more than with any other system. The poorer will also pay the same rate but without the confusion of the present system they will know exactly how much income they can count on every week Most would be payroll deduction and not missed.
Because the flat tax is based on income, and has no deductions, there is less opportunity for corruption. Less tax cheating and no black market based on tax cheating means more money collected. The cost of collecting is greatly reduced. And the tax payer will know exactly how much money they will have for their own personal use; which will reduce one’s financial uncertainty.
Flat Tax: The Flat Tax idea is not a new one. Dr. Arthur B. Laffer (supply side originator and Laffer curve developer) has been analyzing and discussing this concept for many years. It has been adopted in Russia with strong success and other more moderate successes in former Soviet-Bloc states. The basis is simple: A Flat tax on all income at a much lower level than the current top tax bracket in our progressive system in place now. It is proposed to have no deductions or exemptions. Arthur Laffer has performed a recent study on the Flat Tax and he believes that 11.5% plus sin tax on alcohol and tobacco will auto balance the budget in ten years and substantially increase revenues to the treasury as it will capture taxation on incomes that have been protected by special provisions in the code.
Our concern with that is the alcohol/tobacco provisions which are holdovers from the current system. We propose a slight modification to Professor Laffer’s. Married Filing Joint (MFJ) with two children earning (keep in mind changing the current system will take ENORMOUS political courage) $50,000 spends nearly all of that income just on the basics of food, clothing, housing, health care. We propose to exempt the first $10,000 per taxpayer. Our proposal also differs in that we want a surcharge of 3% on top of the 12% to 14% estimate to pay down the national deficit and debt. In this example:
MFJ 2 Dependents $ 50,000.00
2 Tax Payer Exclusions $ 20,000.00
Taxable Income $ 30,000.00
Tax Rate of (14% plus 3%) $ 5,100.00
Families Net Income: $ 44,900.00

By adopting a Flat Tax and eliminating 100% of all deductions and special provisions of subsidies, tax credits etc. will mean tackling a huge and diverse number of opponents, namely:
• Housing, banking, mortgage firms that have utilized the deduction of mortgage rates to help a larger segment of society to buy homes and those than can buy homes to buy larger homes with larger mortgages yielding these institutions with growing revenue.
• Charities: that depend largely upon contributions from all segments of society will have their benefactors lose the deductibility of these charitable contributions.
• Insurance companies that provide clever mechanisms such as Charitable Remainder Trusts that were created to mitigate or even eliminate the estate or death tax.
• CPA’s, Enrolled Agents, and Attorney’s stand to lose millions of clients through the massive simplification of the tax code.
• Internal Revenue Service will lose thousands of federal jobs that were created based upon the need of compliance, enforcement, and collection of thousands of types of taxes from a diverse universe of tax payers. They will be left with audit compliance of those tax payers that are not paid via a W-2 or regular payroll.
With the adoption of a flat tax it will automatically reduce the corrupting influence in the legislative process. They corrupting special interest will have no ability to demand special provisions of the IRC and the representative or senator will have nothing to offer in return.

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