BY JOHN D. VAN BRINK

Preface – Benjamin Franklin mused, “In this world nothing can be said to be certain, except death and taxes.” Due to a revolution in medical technology, including mapping the human genome, nano machines, and advanced pharmaceuticals, some predict that mankind is on the verge of conquering death.

As for taxes, well, not so fast. If we start with the premise that government is necessary, and that it needs to collect taxes to pay for constitutionally mandated expenses, such as national defense, infrastructure and roads, and coining a currency, then, the next logical question is, “What is the best way to collect taxes?”
This article reviews two books on reforming the United States Income Tax system – The Fair Tax, by Neal Boortz and John Linder, and Flat Tax Revolution, by Steve Forbes. Both books put forth tax collection proposals that…

• Claim to be far superior to both the current Income Tax system and to all other tax proposals in terms of efficiency, fairness, and simplicity.
• Purport to be revenue neutral, meaning that they would collect the same amount of revenue as the current system.
• Provide historical evidence to backup their assertion that lowering tax rates actually increases tax revenues.

Efficiency – The Tax Foundation, a Washington think tank, produced a report in December 2005 calculating that individuals, businesses, and nonprofits spent 6 billion hours and $265 billion to comply with the federal income tax in 2005. In addition, about 100,000 people work for the IRS with an annual budget that exceeds $10 billion.

Finally, the Congressional Budget Office estimates that making decisions based on reducing taxes, rather than increasing income, is an opportunity cost of about 18 percent of the $2 trillion U.S. Gross Domestic Product (GDP). Taken together, these compliance costs total somewhere in the neighborhood of $500 billion annually for a federal operating budget of about $1.5 trillion.

Fairness – Since the Income Tax became law with the ratification of the 16th Amendment, the percentage of people paying the tax has increased from one-half of 1 percent in 1913 to 52 percent in 2003.

Also, the goods and services we buy include embedded taxes the retailer pays to acquire the components that make up those goods and services. This embedded tax averages about 22 percent, with a range of about 15 percent for leather goods to about 26 percent for services.

Also, the corporate tax rate, currently 35 percent, is really a cost of doing business that is passed on to the consumer, embedded in the price of our goods and services. The corporate tax is really an embedded sales tax that is regressive because it disproportionately impacts the poor who spend a larger percentage of their income on necessities.

Finally, the Alternative Minimum Tax (AMT), originally intended to punish 150,000 high-income people in 1969, was never indexed to inflation, and is expected to impact about 35 million people in 2010.

Simplicity – From 1954 to 2000, the number of words in the tax code has increased almost 500 percent, and the number of words in the IRS regulations that describe how to calculate, report, and pay the taxes has increased by 939 percent. In 2000, the tax code numbered over 1.6 million words.

The Fair Tax – (HarperCollins, soft cover, 196 pages, ISBN: 0060875410) treats the subject of tax reform in a way that is both informative and entertaining. After all, with Atlanta’s own syndicated radio talk show host, Neal Boortz, as a co-author, what else would you expect? This book makes a compelling case for tax reform that includes the history of both the current US income tax and tax withholding systems, a sobering description of compliance costs, a clear presentation of the Fair Tax proposal and its benefits, and a guide to give the reader advise on how to answer the proposal’s critics and turn the proposal into law. However, there is no comparison to alternate tax reform proposals. In fact, the flat tax and the VAT (Value Added Tax) are mentioned in only one sentence in the entire book.

Concepts – The Fair Tax legislation (H.R. 25 and S. 25 in the 109th Congress) is a form of a National Retail Sales Tax (NRST), a consumption tax that would take the place of all existing taxes on income, including individual, self-employment, corporate, dividend, interest, capital gains, estate, gift, Social Security, and Medicare.
All new goods and services, except education, would be taxed at the retail level. Used goods would not be taxed. The Internet, which currently is not taxed, would be taxed.

Every eligible household would receive a monthly tax rebate, called a prebate, to cover the cost of basic necessities. For a family of four this would amount to $506 per month. The amount would be based on the government’s published poverty figures, and would be indexed to inflation.

Individuals would no longer file forms, other than prebate and change of address, and there would be virtually no audits.

Illegal aliens who currently pay no income, Social Security, or Medicare tax would find it much harder to thwart the Fair Tax.

It is expected for productivity, employment, exports, and foreign investment to increase, and interest rates, inflation, and consumer costs to decline. Also, money that is held offshore to avoid taxes would return to the domestic economy.

However, no country has ever enacted a NRST to replace all other forms of taxation, so there is no history of success available to give skeptics comfort, and to provide advocates with ammunition for answering critics.

Also, the Fair Tax, once enacted, would be mandatory, not voluntary. The Fair Tax is immediate. Therefore, any negative impacts would occur immediately. Thousands, if not millions, of people currently making a living from the current system would need to find other work.
Furthermore, the prebate is a fixed amount that does not take into account the differences in cost of living around the country.

Oddly, education is considered to be an investment while a new home is not.

Finally, Social Security and Medicare would be separated from individual income, making it more difficult to enact personal, self-funded accounts.

John Linder – At the August meeting of the Cobb County Republican Women’s Club, the guest speaker was none other than John Linder. I asked him to address some of these concerns. He said that the American economy creates about 150,000 new jobs each month, but he was not sure how many people would become unemployed or how long it would take to absorb them. Also, he said that Texas and Florida—the tenth and fifteenth largest economies in the world—do pretty much what he is proposing. There was not enough time for him to answer all my questions, but perhaps they will be explained in a second book that he said would be released soon.

Flat Tax Revolution – (Regnery, hard cover, 158 pages, ISBN: 0895260409), while lacking literary flair and style, Flat Tax Revolution is a nuts and bolts treatise on tax reform.

Whereas, The Fair Tax gives a detailed history of the current income tax system, Flat Tax Revolution provides a broader description of tax systems used throughout our nation’s history.

The book is not as thorough at relating the details of compliance costs, but more than makes up for it by providing accounts of how various flat tax proposals around the world have been passed into law with astounding success.

In addition, the chapter entitled “How You Can Help Bring About Reform” lists dozens of Think Tanks, Policy Institutes, Foundations, and Radio Talk Shows, complete with phone numbers and/or web sites. There are also web sites (www.house.gov/writerep and www.senate.gov) for contacting your member(s) of Congress.

Finally, an entire chapter is devoted to pointing out the shortcomings of a NRST, including The Fair Tax.

It should be noted that Forbes says that the proponents of the Fair Tax should be commended for their efforts at tax reform, and that the Fair Tax would be far better than the current system.

Concepts – The Steve Forbes’ Flat Tax, while not an actual piece of legislation, is a proposal to levy a 17 percent income tax on both individuals and corporations. Dividends, capital gains, Social Security benefits, and estates would no longer be taxed, and the AMT would cease to exist. Annual exemptions would be $13200 for adults and $4000 for children and dependents, with a $1000 refundable tax credit per child age 16 or younger. Essentially, this means that a family of four would not have to pay tax on their first $46,165 of income.

Corporations would be able to write off the entire amount of capital expenditures in the year in which they take place (no more depreciation and amortization).

The greatest advantage of the Flat Tax is that it has been used in several countries with tremendous success, including Russia, Hong Kong, Romania, Lithuania, and Slovakia. Also, it is voluntary. Those who want to stick with the current system can do so. Annual tax filing could be accomplished on a single page form. As with the Fair Tax, it is expected for productivity, employment, exports, and foreign investment to increase, and interest rates, inflation, and consumer costs to decline.

But much of the benefits of tax reform, as pointed out in The Fair Tax, come from eliminating the corporate tax. Steve Forbes’ proposal, while greatly simplifying the corporate tax, leaves it in place. Also, while Forbes criticizes the Fair Tax prebate, his proposal contains a similar flaw in that personal exemptions would be at a fixed amount nationally, disregarding cost of living differences.

Finally, Steve Forbes’ specific Flat Tax proposal does not transition into a flat rate over time, so any negative impacts would be felt immediately.
Conclusions – The good news is that tax reform is a popular topic of discussion among political candidates, such as Rudy Giuliani, Mitt Romney, and Mike Huckabee (the only presidential candidate to endorse the Fair Tax).

However, while both tax proposals are far superior to the current tax system, neither proposal satisfies tax reform purists.

When the Constitution guarantees equal protection under the law, why is it that we cannot discriminate against people based on their gender, race, creed, religion, national origin, or sexual preference, but if you have money you are fair game? This is usually nothing more than blatant class warfare, political correctness, and vote buying.

But we should not allow the perfect to be the enemy of the good. Perhaps we should gradually simplify the income tax until there is one flat rate with no exemptions or deductions, and no corporate tax. After this is accomplished, then we could weigh the benefits of switching to a National Retail Sales Tax (NRST).

Who am I? – John David (JD) earned his MBA from Tennessee Technological University (TTU). He has worked at Olin Corporation, EDS, General Motors, IBM, Barclay’s American Bank, Duke Power, and The Institute for Nuclear Power Operations (INPO). JD now works as a software developer at one of the largest credit card processing companies in the world, Total System Services (TSYS), in Kennesaw, GA. He enjoys reading books on a variety of topics including history, philosophy, and politics. He is active with the Cobb County GOP (www.cobbgop2007.com) and the Cobb County Republican Women’s Club (www.CCRWC.org).