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Fair tax vs. flat tax

8/21/2013

2 Comments

 

By Tim Fullerton

The latest round of scandals at the IRS has, once again, forced scrutiny upon the income tax – and those who enforce it.  The framers knew the evils associated with what they called a “direct tax” (a tax directly put upon citizens).  They specifically listed it in Article I Section 9 (the “What congress cannot do” Section):  “No Capitation, or other direct, tax shall be laid, unless in Proportion to the Census. . .”  Furthermore, one section earlier (Section 8) the congress was limited in its power to tax by stating, “...all duties, imposts and excises shall be uniform throughout the United States.” Meaning, no graduated tax rates.  Taxes had to be uniform, and could not vary from state to state, or person to person.

The sixteenth amendment, which initiated the income tax, had to include wording carving out exemptions for itself:  “The Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without the apportionment among the several States, and without regard to any census or enumeration.”

Two schemes have developed recently to create a more fair and honest method of collecting taxes, the fair tax and the flat tax.

The Flat tax is a simple elimination of all tax brackets (but one).  All income, regardless of source, would be taxed at the same rate.  And nearly all deductions (also known as loopholes) would be eliminated.  What could be fairer?

The costs of making money would be eliminated as exemptions.  Write-offs for businesses such as depreciation, maintenance, research and development would all disappear.

What would that single tax bracket be?  Ten percent?  Seventeen?  Fifty?

But the worst aspect of the flat tax is that it's still an income tax, and any income tax allows the IRS access to your pay and investment records without a warrant (in violation to the fourth amendment).  It remains a violation of Article one, Sections eight and nine.  The founders put those in there for a reason.  Income taxes treat each person as though he was NOT created equal.  Each taxpayer is rated and judged on how much money he makes, not as an individual human being.

The other option, the Fair Tax, is a complicated scheme involving a 23% sales tax on all retail purchases.  To make life easier for the less fortunate, it comes with something called a prebate (like a rebate but it comes before, not after the sale).  Monthly prebate checks are sent out based on income and number of dependents.

I see no end of creative ways of cheating on the forms designating the monthly prebate check amount.  If 24,000 illegal aliens can all have their income tax refunds sent to the same address, what is the likelihood this system can too be gamed?

If only retail sales must suffer the 23% burden, will there not be a blooming of second-hand shops?  Would you buy a new car or a newly built house if you knew the price would have a 23% premium on it?  Especially when you could buy a used car (or house) without that added expense.  Want to bet the seller of that house or car doesn't include that 23% premium when computing his asking price?  So you probably will pay the tax (in a manner of speaking) on used goods.

Under the radar another scheme has quietly started bubbling to the surface: a value added tax, VAT.   Like the Fair tax, it's a sales tax of 11%, but with no prebates.  The only exclusion would be for the sales tax paid by retailers, who collect the tax from consumers, but can deduct the sales tax they pay.   

WARNING, some of the folks in Washington would like to add a VAT on top of all the other taxes you already pay.  This is not the intention of this scheme, it is designed to eliminate the income tax, not reinforce it.

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