The Tax Blend

Reader comment on: Flat Tax or Fair Tax

Submitted by Eugene Patrick Devany (United States), Apr 9, 2014 09:35

The high 23% Fair Tax is a mixture of good and bad. The Fair Tax includes a prebate - a handout to low income families intended to offset the regressive nature of the tax. Unfortunately, there is nothing to stop people from keeping the prebate and avoiding the high tax rate by purchasing used items from clothing to furniture and everything in between. This legal tax avoidance will reduce the demand for new goods, slow the economy and require an increase in the initial 23% tax rate. At least the wealthy will be able to sell their used items rather than discarding or donating them.

The claimed concern for, "a European-style value-added tax that exists not as a substitute for the existing income tax system, but as an ever-increasing addition to it" does not explain why every developed country in the world considers a VAT to be the fairest business tax ever invented. A VAT is a business income tax on gross sales that permits a credit for VAT taxes paid by other businesses in the chain of production and distribution but does not allow other income deductions, deferrals, exemptions or special rates (which is why it is fair). In practice, a VAT is a very good substitute for some but not all income tax revenue because it must be paid by business owners rather than low income families.

The optional 19% Flat Tax is very good for high earners who will be able to lower their taxes but does nothing for low income families who have suffered the most since the 1970s. Workers have been overtaxed with the 15.3% payroll taxes on top of the income tax. Even Bill Gates agrees (March 13 at AEI) that we need to eliminate the payroll taxes to create full employment and raise wages for all. The tax code has caused the poorer half of the U.S. population to lose 70% of their net wealth between 1995 and 2010 and the trend continues. Low wealth individuals cannot support families and are pressured to take lower paying jobs with stagnating wages.

Only a blend of taxes can produce very low tax rates. The 2-4-8 Tax Blend maintains only the best tax reform features with the same flat rates for rich and poor. Consider a flat 8% income tax rate combined with an option to pay either a 2% of net wealth tax (excluding $15,000 cash and $500,000 in retirement savings) or paying an additional 18% on income. (Note that the 15.3% combined payroll taxes would be eliminated). If it takes more than a few moments to approximate your taxes and select an option you are either slow at math or in the top 10% of wealth holders.

A low 4% VAT and 8% C corporation rate would complete the essential business tax reform and even the tax liability for pass through businesses and large publicly traded companies.

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