Josh put up an excellent post about the “everything old is new again” tax proposal (FairTax instead of “flat tax” – swapping one 4-letter f-word for another seems funny).
Here’s the response I was going to put as a comment on that post, but it started running a tad long.
I’ve loved this idea for over a decade (it got me to vote for Forbes back in 96), but to play devil’s advocate, and just for the fun of it:
1) How is the Boortz plan different from the Forbes one? Or is Neal just piggybacking on Steve’s idea to sell copies of a book? Steve’s was 17% instead of 23 :) You can see similar kinds of pushes @ http://www.pbs.org/newshour/bb/congress/forbes_flat_tax.html and http://members.forbes.com/forbes/2005/1017/042.html
2) What’s the employment motivation? You’re talking about putting a large number of people into unemployment from not being needed. Even if the IRS isn’t counted, there’s a huge industry around filing taxes today. Putting that many people out of a job instantly would be felt. This isn’t a “horse and carriage”/Industrial revolution type of situation where there were years of phasing out the “old way”. For better or worse, a lot of people make their living based on knowledge of the existing tax system. They realize economic value based on that knowledge. This change throws them back to zero. The compromise is usually to phase in the new system instead, admittedly.
3) People are bad at math and we know that. Whether they’d admit to it or not, most people get huge refunds (because they don’t get the “interest-free loan” idea) around April 15th and consider it some kind of gift from the govt. Trying to explain that those $3k is actually their money just doesn’t stick. There are always signficant spikes in the sales of “big ticket”/”luxury items” (big screen tv’s, for instance) around April/May due to this refund effect – another net economic negative to consider.
4) What’s the political motivation? If I’m a member of Congress, I know I can manipulate taxes in the current system thanks to the complicated nature of it and the fact that most people only parse any tax effect once a year. As many articles say, a national sales tax suddenly handcuffs members of Congress, who are stuck with only affecting very-visible tax changes. The power of Congress derives from being able to operate (and “play”) under the radar of the vast majority of Americans. What’s their motivation to throw away the good deal they have today? Notice that they *do* have a motivation to *look* like they want to throw it away (so they can chant along with us how the IRS is evil), but not actually make it happen (the idea’s been around awhile – what’s stopped us in the past that’s going to change in the future?).
5) This doesn’t help me with my NC income taxes. States aren’t going to roll over and adopt this just because the fed said so, so I’m still stuck with the current system in one way (filing taxes once a year). Arguably worse, filling out my NC taxes was relatively simple since most of the data could transfer from federal information, but I lose that optimization when the federal taxes are gone :) Yeah, that’s a stretch I admit. As smaller argument could be that once sales taxes are that high (reminding me of VAT’s in .eu and elsewhere), the states are then given almost carte blanche in terms of their own sales taxes. 3% would never fly when the federal tax rate was 5%, but even 6% is almost lost in the noise when the fed’s hitting you up for 23% or more.
6) What happens to companies? Since they’re stuck paying the same sales tax, to be fair they should be getting out of the income tax burden as well. Of course, then multi-national companies become that much more motivated to buy their resources/supplies/etc from non-US sources. Companies become much more motivated to try and avoid charging the sales tax, but that’s pretty clear.
7) What’s the economic motivation? Similar to #6, once the tax burden is solely on consumption, you’re motivating people to a) stop consuming more than they need to (chilling effect on economy and cash flow) and b) when they do consume, do so outside of the normal sales method which incurs this high sales tax. Black markets (that already exist) will expand as the potential savings grows. More sales will shift to Mexico/Canada/etc as their prices will be more competitive with the US ones (although you could argue that the net effect on US prices should be at or close to zero, but that’s not clear at all).
And, of course, the usual “they’re beating a dead horse!” kind of response:
(One wonders – if this is the way I treat ideas I like, then how do I react to ones I hate? :)