President Biden was quick on the draw. As quickly as the Republican bill to abolish the IRS and our current tax system was introduced, he threatened a “flat veto.” Not long after, some Republicans started having second thoughtsabout their own bill.
Then The Wall Street Journal editorialized that the Fair Tax bill was “tax masochism” for the Republican party.
That’s when I had a perverse thought.
Fundamental Tax Reform
If both of our angry, revengeful parties are against something, it can’t be all bad. Maybe it’s something that deserves serious attention.
That idea is fundamental tax reform.
Not tinkering. Not a new tax credit for this. An extra deduction for that. A nudge to buy more electric cars. And, certainly, not long debates about changes that aren’t really changes.
No. Fundamental change. Change a majority of Americans, regardless of political leaning, have wanted to see for decades.
That would be tax reform that ends the odious patchwork of taxes, tax breaks, tax loopholes, exceptions and special virtually invisible giveaways hidden in our ever-growing tax code. And, yes, the same tax code that stresses taxpayers every year and wastes the talent and lifeblood of hundreds of thousands of scheming lawyers and accountants.
So, let’s talk about the idea of a “Fair Tax.”
The IRS isn’t the enemy. It’s our elected representatives who make tax law.
The first thing to note is that eliminating the IRS isn’t a primary goal. It’s a side effect, the result of eliminating the personal income tax, the corporate income tax, the employment tax and the estate tax. If those taxes go away, we’d no longer need the IRS as we now know it.
That whole miserable, metastasizing gob of taxes would be replaced by a single, and rather large, national sales tax estimated to be 23 percent.
Kind of a whopper, right?
Well, yes and no. Consider, you’d be paying that tax from your whole paycheck, not your shrunken, after-tax-withholding paycheck. Consider also that you’d start the year with a “prebate,” a cash sum that would offset the sales taxes that would be paid to support a household of your size at the poverty (or some other) level.
While a national sales tax would raise the ante for any purchase you make, the absence of the corporate tax would put pressure on consumer prices and interest rates. Few would protest that.
An academic approval
Indeed, the idea received an economist’s approval back in 2006 when Boston University Professor Laurence J. Kotlikoff and David Rapson wrote a paper examining the tax. Curious, I called Kotlikoff last week and asked if anything had changed since then. (Full disclosure: I’ve co-authored three books with Kotlikoff.)
“The tax rate gets too high when you try to get all the revenue needed through a single tax,” he said.
But he didn’t give up on the basic idea.
“Just replace the income tax with a Fair Tax because the super-rich aren’t paying tax.” (While that may be news to many of the top 1 percenters earning $500,000 a year or more, he was really talking about mega-wealth, the people with enough assets that they could borrow against their unrealized capital gains and pay essentially no income taxes as long as they live and then have the capital gains disappear when they die.)
Taxing income AND wealth
Kotlikoff also took issue with the idea, expressed by many Democrats, that the Fair Tax isn’t fair to regular folks because they spend all, or most, of their income while the wealthy save and invest much of theirs. “It’s really a progressive tax,” he said. “It’s a tax on labor income and wealth.”
How can that be?
When wealthy people spend more than their income, the wealth they spend would also pay the national sales tax. It’s a tax that would be paid down to the last ounce of Almas caviar and Dom Perignon, not to mention all the Lamborghinis. Meanwhile, the income not spent would be invested or saved. That means it would provide needed cash for our economy.
Those who believe the wealthy would just get more wealthy have forgotten the old truism “from shirtsleeves to shirtsleeves in three generations.” One generation makes the wealth, but the following generations usually spend it.
But don’t mess with Social Security
The real Achilles’ heel of the Fair Tax idea, Kotlikoff said, was trying to replace the employment tax. “Messing with Social Security financing just isn’t going to fly politically.”
He’s probably right. Social Security is still “the third rail of American politics.”
None of that, however, means we can’t have true tax reform.
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Nine Easy Pieces About the Taxes We Pay
Here are links to a collection of nine columns written since 2005 about taxes and tax reform.
“Are Your Taxes Too High, Too Low or Just Right?, 8/27/2022 https://scottburns.com/are-your-taxes-too-high-too-low-or-just-right/
“What I’d Do to Save America,” 11/23/2019 https://scottburns.com/what-id-do-to-save-america/
“What Readers Want: More Taxpayers, Completely Different Taxes,” 2/10/2013 https://scottburns.com/a-tale-of-the-golden-boot-2/
“How Many Should Pay Income Taxes? 1/17/2013 https://scottburns.com/how-many-should-pay-income-taxes/
“If You Want To Rebuild America, Start With The Tax Code,” 9/23/2012 https://scottburns.com/if-you-want-to-rebuild-america-start-with-the-tax-code/
“The Truth About Income Taxes,” 5/4/2008 https://scottburns.com/the-truth-about-income-taxes/
“Be the World Leader in Energy Efficiency,” 3/29/2005 https://scottburns.com/be-the-world-leader-in-energy-efficiency/
“Dump the Tax Code,” 3/27/2005 https://scottburns.com/dump-the-tax-code/
“The Only Tax Reform Worth Talking About,” 2/1/2005 https://scottburns.com/the-only-tax-reform-worth-talking-about/
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We could, for instance, replace the income tax with a national sales tax, eliminate the corporate income tax, retain the employment tax and change the estate tax to an inheritance tax. An inheritance tax, Kotlikoff suggests, would reduce the concentration of wealth while encouraging broad-based philanthropy.
Congress likes taxes just as they are
Can meaningful reform happen? Don’t hold your breath.
Having endured half a century of Washington tax melodrama as a financial writer, my personal conclusion is that both parties are quite happy with the current system, thank you very much.
Why? Because taxes are their primary tool for fund raising, wheedling and extortion. Tax law is the prize for getting elected and staying elected, regardless of party.
Too bad about the rest of us.
Sources and References:
The Fair Tax website: https://fairtax.org
Laurence J. Kotlikoff and David Rapson, “Comparing Average and Marginal Tax Rates Under the Fair tax And The Current System of Federal Taxation, 10/01/2006 https://fairtax.org/library/comparing-average-and-marginal-tax-rates-under-the-fairtax-and-the-current-system-of-federal-taxation
Jeffrey Quiggle, “Biden Slams House Republican Bill to Abolish IRS:’Flat Veto.” 1/12/2023 https://www.thestreet.com/politics/biden-slams-house-republican-bill-to-abolish-irs-flat-veto
The Editorial Board (Wall Street Journal), “The GOP’s Fair Tax Masochism,” 1/20/2023 https://www.wsj.com/articles/the-gops-fair-tax-masochism-kevin-mccarthy-buddy-carter-house-republicans-sales-tax-11674248654
Tobias Burns, “Here’s what you need to know about the GOP bill to abolish the tax code,” 1/24/2023 https://thehill.com/policy/finance/3821761-heres-what-you-need-to-know-about-the-gop-bill-to-abolish-the-tax-code/
Michael Rainey, “Abolish the IRS and the Income Tax? Some Republicans are Having Second Thoughts,” 1/27/ 2023, https://finance.yahoo.com/news/abolish-irs-income-tax-republicans-230847897.html?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAALnes24NNWxrUnptmm9FmsA-L2E5rv73MyrMHfbH56-y7KyB_xzVTdCd1tO7LhsvIJNSVLNTMTiJlGrivn662ULVQc37RCsKAKEiBUbaPCaWBE66yG4__ne2m4MCxXm2BLI7BNmzxWWHccsUb7HyBH3EV79pV8xts4EPV2YY73el
Benjamin Guggenheim, “GOP national sales tax talk backfires, as Dems see political gold,” 1/29/2023 https://www.politico.com/news/2023/01/29/gop-fair-tax-sales-00079609
Related columns:
Scott Burns, “Are Your Taxes Too High, Too Low or Just Right?, 8/27/2022 https://scottburns.com/are-your-taxes-too-high-too-low-or-just-right/
Scott Burns, “What I’d Do to Save America,” 11/23/2019 https://scottburns.com/what-id-do-to-save-america/
Scott Burns, “What Readers Want: More Taxpayers, Completely Different Taxes,” 2/10/2013 https://scottburns.com/a-tale-of-the-golden-boot-2/
Scott Burns, “How Many Should Pay Income Taxes?, 1/17/2013 https://scottburns.com/how-many-should-pay-income-taxes/
Scott Burns, “If You Want To Rebuild America, Start With The Tax Code,” 9/23/2012 https://scottburns.com/if-you-want-to-rebuild-america-start-with-the-tax-code/
Scott Burns, “The Truth About Income Taxes,” 5/4/2008 https://scottburns.com/the-truth-about-income-taxes/
Scott Burns, “Be the World Leader in Energy Efficiency,” 3/29/2005 https://scottburns.com/be-the-world-leader-in-energy-efficiency/
Scott Burns, “Dump The Tax Code,” 3/27/2005 https://scottburns.com/dump-the-tax-code/
Scott Burns, “The Only Tax Reform Worth Talking About,” 2/1/2005 https://scottburns.com/the-only-tax-reform-worth-talking-about/
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(c) Scott Burns, 2023