Tag: flat tax

Don’t Give Up on the American People…at Least not Yet

Gloominess and despair are not uncommon traits among supporters of limited government – and with good reason. Government has grown rapidly in recent years and it is expected to get much bigger in the future. To make matters worse, it seems that the deck is stacked against reforms to restrain government. One problem is that 47 percent of Americans are exempt from paying income taxes, which presumably means they no longer have any incentive to resist big government. Mark Steyn recently wrote a very depressing column for National Review Online about this phenomenon, noting that, “By 2012, America could be holding the first federal election in which a majority of the population will be able to vote themselves more government lollipops paid for by the ever shrinking minority of the population still dumb enough to be net contributors to the federal treasury.” Walter Williams, meanwhile, has a new column speculating on whether this cripples the battle for freedom:

According to the Tax Policy Center, a Washington, D.C., research organization, nearly half of U.S. households will pay no federal income taxes for 2009…because their incomes are too low or they have higher income but credits, deductions and exemptions that relieve them of tax liability. This lack of income tax liability stands in stark contrast to the top 10 percent of earners, those households earning an average of $366,400 in 2006, who paid about 73 percent of federal income taxes. …Let’s not dwell on the fairness of such an arrangement for financing the activities of the federal government. Instead, let’s ask what kind of incentives and results such an arrangement produces and ask ourselves whether these results are good for our country. …Having 121 million Americans completely outside the federal income tax system, it’s like throwing chum to political sharks. These Americans become a natural spending constituency for big-spending politicians. After all, if you have no income tax liability, how much do you care about deficits, how much Congress spends and the level of taxation?

Steyn and Williams are right to worry, but the situation is not as grim as it seems for the simple reason that a good portion of the American people know the difference between right and wrong. Consider some of the recent polling data from Rasmussen, which found that “Sixty-six percent (66%) believe that America is overtaxed. Only 25% disagree. Lower income voters are more likely than others to believe the nation is overtaxed” and “75% of voters nationwide say the average American should pay no more than 20% of their income in taxes.” These numbers contradict the hypothesis that 47 percent of Americans (those that don’t pay income tax) are automatic supporters of class-warfare policy.

So why are the supposed free-riders not signing on to the Obama-Reid-Pelosi agenda? There are probably several reasons, including the fact that many Americans believe in upward mobility, so even if their incomes currently are too low to pay income tax, they aspire to earn more in the future and don’t want higher tax rates on the rich to serve as a barrier. I’m not a polling expert, but I also suspect there’s a moral component to these numbers. There’s no way to prove this assertion, but I am quite sure that the vast majority of hard-working Americans with modest incomes would never even contemplate breaking into a rich neighbor’s house and stealing the family jewelry. So it is perfectly logical that they wouldn’t support using the IRS as a middleman to do the same thing.

A few final tax observations:

The hostility to taxation also represents opposition to big government (at least in theory). Rasumssen also recently found that, “Just 23% of U.S. voters say they prefer a more active government with more services and higher taxes over one with fewer services and lower taxes. …Two-thirds (66%) of voters prefer a government with fewer services and lower taxes.”

There is a giant divide between the political elite and ordinary Americans. Rasmussen’s polling revealed that, “Eighty-one percent (81%) of Mainstream American voters believe the nation is overtaxed, while 74% of those in the Political Class disagree.”

Voters do not want a value-added tax or any other form of national sales tax. They are not against the idea as a theoretical concept, but they wisely recognize the politicians are greedy and untrustworthy. Rasumussen found that “just 26% of all voters think that it is even somewhat likely the government would cut income taxes after implementing a sales tax. Sixty-six percent (66%) believe it’s unlikely to happen.”

Fiscal restraint is a necessary precondition for any pro-growth tax reform. If given a choice between a flat tax, national sales tax, value-added tax, or the current system, many Americans want reform, but it is very difficult to have a good tax system if the burden of government spending is rising. Likewise, it would be very easy to have a good tax system if we had a federal government that was limited to the duties outlined in Article I, Section VIII, of the Constitution.

Republicans should never acquiesce to higher taxes. All these good numbers and optimistic findings are dependent on voters facing a clear choice between higher taxes and bigger government vs lower taxes and limited government. If Republicans inside the beltway get seduced into a “budget summit” where taxes are “on the table,” that creates a very unhealthy dynamic where voters instinctively try to protect themselves by supporting taxes on somebody else – and the so-called rich are the easiest target.

Last but not least, I can’t resist pointing out that I am part of a debate for U.S. News & World Report on the flat tax vs. the current system. For those of you who have an opinion on this matter, don’t hesitate to cast a vote.

The Joy of Tax Serfdom

Like a good peasant, I have already filed an extension, so I am at least temporarily compliant with the friendly people at the IRS. But since it is tax day, perhaps a slight bit of criticism of the tax code is warranted. I have already posted my video on the flat tax and warned about the risks of adding a value-added tax on top of the income tax in another video. I also posted a very successful video narrated by a former Cato intern about the harsh compliance costs of the internal revenue code. So it is time to reach into the archives and post this classic video produced by Caleb Brown and Austin Bragg of the Cato Institute.

P.S. Not that I would ever want to put my thumb on the scale of any contest, but I am defending the flat tax in an online debate for U.S. News & World Report with someone who favors the current system. You can cast a vote if you have an opinion on the matter.

P.P.S. Caleb has independently produced a video on the meaning of free enterprise. With politicians acting as if the business community is an ATM machine to finance a bigger welfare state, Caleb’s video puts a human face on what it means to be a risk-taking entrepreneur.

New Video Exposes Nightmare of IRS Complexity

My former intern, Hiwa Alaghebandian, has just narrated a new Economics 101 video about the cost of the tax code. I won’t spoil the surprise by giving the details, but you if you’re not angry now, you will be after watching.

In the video, Ms. Alaghebandian notes that a study from 1996 (back when the tax code was not nearly as complex) estimated that a flat tax would reduce the compliance burden of the income tax by 94 percent. In my video on the flat tax, I mostly focused on how a single-rate, consumption-base system would boost growth and competitiveness, but simplicity also would be a remarkable achievement. Not only would real tax reform reduce compliance costs by hundreds of billions of dollars, it would also put a big dent in the corrupt practice of distorting economic choices with deductions, exemptions, credits, preferences, shelters, and other loopholes. That’s a profitable game for politicians and lobbyists, but the rest of us pay the price because the tax code is even more of a nightmare.

There is also an under-appreciated connection between simplicity and fairness. My colleague Will Wilkinson sagely observed that “…the more power the government has to pick winners and losers, the more power rich people will have relative to poor people.” The tax code is a good example. Many leftists want the tax system to penalize success with high tax rates. I’ve explained why this is economically misguided in a video on class-warfare tax policy, but it’s also worth pointing out that a simple and fair tax system like the flat tax makes it much more difficult for the well-connected to take advantage of complexity. Simply stated, the tax system should not punish the rich with high rates (notwithstanding the neurotic views of self-loathing trust-fund heirs), and it shouldn’t reward them with special deals.

The good news is that we know the policies that will fix the current system. The bad news is that politicians keep making the system worse. Putting the IRS in charge of enforcing key parts of Obamacare is just the latest example of why America needs a tax revolt.

The Flat Tax: Good for America, Bad for Washington

America’s biggest fiscal challenge is excessive government spending. The public sector is far too large today and it is projected to get much bigger in coming decades. But the corrupt and punitive internal revenue code is second on the list of fiscal problems. This new video, narrated by yours truly, explains how a flat tax would work and why it would promote growth and fairness. Something to keep in mind with tax day in just a couple of weeks.

There are two big hurdles that must be overcome to achieve tax reform. The first obstacle is that the class-warfare crowd wants the tax code to penalize success with high tax rates. That issue is addressed in the video in a couple of ways. I explain that fairness should be defined as treating all people equally, and I also point out that upper-income taxpayers are far more likely to benefit from all the deductions, credits, exemptions, preferences, and other loopholes in the tax code. The second obstacle, which is more of an inside-the-beltway issue, is that the current tax system is very rewarding for the iron triangle of lobbyists, politicians, and bureaucrats (or maybe iron rectangle if we include the tax preparation industry). There are tens of thousands of people who make very generous salaries precisely because the tax code is a playground for corrupt deal making. A flat tax for these folks would be like kryptonite for Superman. But more than two dozen nations around the world have implemented a flat tax, so hope springs eternal.

A 10-Point, Libertarian, SOTU Address

1. Abandon Obamacare

2. Forget Cap and Trade

3. Reject the Card Check Bill

4. Withdraw from Iraq and Afghanistan

5. Legalize Drugs

6. Scrap the tax code and replace with a flat tax

7. Expand free trade and immigration

8. Stop the bailouts

9. Cut spending

10. Cut spending

BONUS -  Cut spending


H&R Block and the IRS: An Unholy Alliance to Ransack Taxpayers

The late George Stigler, winner of the Nobel Prize in economics, is famous in part because of his work on “regulatory capture,” which occurs when interest groups use the coercive power of government to thwart competition and undeservedly line their own pockets. A perfect (and distasteful) example of this can be found in today’s Washington Post, which reports that the IRS plans to impose new regulations dictating who can prepare tax returns. Not surprisingly, the new rules have the support of big tax preparation shops such as H&R Block and Jackson Hewitt, which see this as an opportunity to squeeze smaller competitors out of the market. The IRS and the big firms claim more regulations are needed to protect consumers from shoddy work, but this is the usual rationale for licensing laws and other government-imposed barriers to entry and the Institute for Justice has repeatedly shown such rules are designed to benefit insiders rather than consumers.

Tax preparers do make many mistakes, to be sure, but that is a reflection of a nightmarish tax code, and the annual tax test conducted by Money magazine showed that even the most-skilled professionals – such as CPAs, tax lawyers, and enrolled agents – were unable to figure out how to correctly fill out a hypothetical family’s tax return. But since the IRS routinely makes major mistakes as well, perhaps the moral of the story is that we need fundamental tax reform, not IRS rules to create a cartel for the benefit of H&R Block and other big firms. Would any of this be an issue if we had a flat tax or national sales tax?

Merry Christmas from the IRS

Here are a few stories to bring holiday cheer for taxpayers. First, we have an Associated Press report that several hundred thousand federal bureaucrats have serious tax delinquencies. The Department of Housing and Urban Development always ranks high on the list of government entities that should be abolished, so it’s interesting to see that HUD bureaucrats are most likely to be dodging their taxes:

More than 276,000 federal employees and retirees owed back income taxes as of Sept. 30, 2008, according to data from the Internal Revenue Service. The $3.04 billion owed was up from $2.7 billion owed by federal employees and retirees in 2007. Among cabinet agencies, the Department of Housing and Urban Development had the highest delinquency rate, at just over 4 percent.

This rampant nonpayment is especially outrageous since federal bureaucrats “earn” twice as much compensation, on average, as those of us laboring in the productive sector of the economy. One might think they would go out of their way to comply since their bloated salaries come from tax collections. Speaking of outrage, the internal watchdogs at the Treasury have just published a report showing that it is almost impossible to verify eligibility for the special interest tax breaks in the so-called stimulus. As Investor’s Business Daily opines, this is an invitation to fraud:

A new report from the Treasury Department’s Inspector General for Tax Administration counts 56 tax provisions in the bill having a potential cost of $325 billion. Of those, 20 are tax breaks for individuals and 36 are for businesses. The problem, the Inspector General says, is the IRS can’t verify taxpayer eligibility “for the majority of Recovery Act tax benefits and credits.” For individual taxpayers, 13 of the 20 benefits and credits can’t be verified; for businesses, it’s 26 of 36. …To suggest, as Treasury does, that the biggest chunk of the $325 billion in stimulus package tax breaks can’t be adequately followed violates the pledges of openness and fairness made when the stimulus was passed last February. As the government-stimulus-oversight Web site, recovery.gov, notes, last year’s package “requires that taxpayer dollars spent under the Act be subject to unprecedented accountability.” We wouldn’t call being unable to verify upwards of two-thirds of the $325 billion handed out as “unprecedented accountability.” Sounds more like an invitation to fraud, all at the expense of the taxpayers.

To be fair, even a competent government agency might have trouble making a bad law work, and the $787 boondoggle was rushed through the legislative process with very little – if any – attention paid to anything other than funneling other people’s money to special interest groups. That being said, the IRS has trouble even with routine tasks. According to another IG report, the agency has a staggering 70 percent error rate in its processing of taxpayer identification numbers for individual taxpayers:

The Treasury Inspector General for Tax Administration (TIGTA) today publicly released its review of the IRS’s processing of applications for Individual Taxpayer Identification Numbers (ITINs). TIGTA reviewed a sample of ITIN applications and found that almost 70% contained significant errors and/or raised concerns that should have prevented the issuance of an ITIN. The IRS estimates that it has issued more than 14 million ITINs as of December 2008. ITINs are intended to provide tax identification numbers to resident and nonresident alien individuals who may have U.S. tax reporting or filing obligations but do not qualify for Social Security Numbers, which generally are only issued to U.S. citizens and individuals legally admitted to the U.S. …”The number of individual income tax returns filed using ITINs and reporting wage income has increased by 247 percent from 2001 to 2008,” commented J. Russell George, the Treasury Inspector General for Tax Administration. “If the IRS continues to issue ITINs without proper verification, the risk of fraudulently filed returns – along with fraudulently claimed refunds – will continue to rise,” added Inspector General George.

Just think how much fun it will be when the IRS is in charge of determining those of us who should get fined or jailed for noncompliance with government-run healthcare! No wonder so many taxpayers put a flat tax or national sales tax on their Christmas lists.