Saturday, January 26, 2008

Why Are Taxes So Complicated? And a Simple Proposal to Fix Them.

The U.S. Tax System is broken. Any system that requires professional help, the use of a computer to file, and costs a bunch to file is broken in my opinion. The Federal Government estimates is takes 3 billion hours per year to comply with the tax code. The mean hourly wage in the United States is $18.84/hour. That means on average it costs at least $56 billion per year for Americans to file their taxes. We should absolutely scrap the entire U.S. Tax Code as it exists today.

What should we replace it with? I'd say a national sales tax is one simple solution. 45 of 50 states already collect a sales tax, so the incremental cost of implementing the system shouldn't be too much and we have already proven that collectin sales taxes CAN work. While I can't say I am an expert on it yet, the Fair Tax proposal seems to be a fairly evolved attempt at a flat national sales tax. It is supposedly bipartisan, though it appears to only have the support of two democrats in Congress which is not exactly a ringing endorsement. It gives rebates up to the poverty level, sheltering the poor from taxes altogether. It will dramatically reduce the cost of compliance since we already have a redundant sales tax system in place. Evasion will probably be no worse than under the current income tax system (some likely to happen under both systems).


Ian said...

Gov. Huckabee's advocacy of the FairTax is the single most important policy position in this election. Research findings explain why:

The FairTax rate of 23 percent on a total taxable consumption base of $11.244 trillion will generate $2.586 trillion dollars – $358 billion more than the taxes it replaces [BHKPT].

The FairTax has the broadest base and the lowest rate of any single-rate tax reform plan [THBP].

Real wages are 10.3 percent, 9.5 percent, and 9.2 percent higher in years 1, 10, and 25, respectively than would otherwise be the case [THBNP].

The economy as measured by GDP is 2.4 percent higher in the first year and 11.3 percent higher by the 10th year than it would otherwise be [ALM].

Consumption benefits [ALM]:

• Disposable personal income is higher than if the current tax system remains in place: 1.7 percent in year 1, 8.7 percent in year 5, and 11.8 percent in year 10.

• Consumption increases by 2.4 percent more in the first year, which grows to 11.7 percent more by the tenth year than it would be if the current system were to remain in place.

• The increase in consumption is fueled by the 1.7 percent increase in disposable (after-tax) personal income that accompanies the rise in incomes from capital and labor once the FairTax is enacted.

• By the 10th year, consumption increases by 11.7 percent over what it would be if the current tax system remained in place, and disposable income is up by 11.8 percent.

Over time, the FairTax benefits all income groups. Of 42 household types (classified by income, marital status, age), all have lower average remaining lifetime tax rates under the FairTax than they would experience under the current tax system [KR].

Implementing the FairTax at a 23 percent rate gives the poorest members of the generation born in 1990 a 13.5 percent improvement in economic well-being; their middle class and rich contemporaries experience a 5 percent and 2 percent improvement, respectively [JK].

Based on standard measures of tax burden, the FairTax is more progressive than the individual income tax, payroll tax, and the corporate income tax [THBPN].

Charitable giving increases by $2.1 billion (about 1 percent) in the first year over what it would be if the current system remained in place, by 2.4 percent in year 10, and by 5 percent in year 20 [THPDB].

On average, states could cut their sales tax rates by more than half, or 3.2 percentage points from 5.4 to 2.2 percent, if they conformed their state sales tax bases to the FairTax base [TBJ].

The FairTax provides the equivalent of a supercharged mortgage interest deduction, reducing the true cost of buying a home by 19 percent [WM].

ALERT: Kotlikoff refutes Bruce Bartlett's shabby critiques of the FairTax.

Anonymous said...

Has Congress EVER left their grubby paws off ANY tax bill? OK, what do they do with it? I'll tell you: they "adjust" it for "fairness". BY the time all the "adjustments" are done, we'll have just as complicated a system as we do now, and there will be a Great Cry for an Income Tax, to capture all that money that The Rich are concealing from the people.

Which is all immaterial; it will never get passed. Tell the average guy that he's going to pay an additional 23% on every damned thing he buys, and he's going to say "No way!" and shut off his brain. All the fancy explanations about how "fair" it is and rebates and such will produce what every teacher in the world has experienced - a simple refusal to work at understanding. The schoolteacher has sticks and carrots to encourage that effort. FairTax proponents don't. If the size of the federal gov't could be reduced enough to require a rate of 10% or less, it might pass, but that will happen right around the time of those flying pigs.

Which is yet a third reason, and the probable reason that only 2 Democrats have signed up for it, despite its "bipartisan" label. The politicians would have to admit that the federal government is now consuming TWENTY_THREE percent of all the resources in the country, and this is something that is now hidden behind the smokescreen of "witholding".