Taxes

Return to Common Sense

March 9, 2013

Section: Domestic – Taxes

“The tax code is socialistic redistribution of wealth and discourages growth, while foreign country experiments with low and flat rates have resulted in growth in population and revenue.”

“To compel a man to subsidize with his taxes the propagation of ideas which he disbelieves and abhors is sinful and tyrannical.” Thomas Jefferson.

Philosophy (Background, Issues, Objectives):

Constitution Article I identifies “direct taxes shall be apportioned among the several states...”

Congress “shall have the power to lay and collect taxes, duties, imposts and excises to pay the debts…”

Amendment XVI specifies that the Congress can “…collect taxes on incomes…”

After the Civil War, nearly all the wartime taxes—including the nation's first income tax—were repealed and the federal government relied mostly on the tariff for revenues.
In 1894, with Democrat Grover Cleveland in the White House and Democratic majorities in both houses of Congress, a federal income tax became law.

· In 1895, a test case called Pollack v. Farmers' Loan & Trust question the definition of a "direct tax" apportioned equally among the states according to population, and it was voted down 5-4.

In 1913, the 16^th Amendment was ratified to legalize a personal income tax, while also imposing a tax on corporate profits.

Almost 40% of the public is out of compliance with the present tax system, according to the IRS.

The IRS has an almost limitless number of forms, publications, schedules, instructions and rules — all totaling roughly 70,000 pages or 3.7 million words.
Cost of compliance has increased from $112 billion in 1995 to $265 billion in 2005.

o Compliance consumes 7.6 billion hours or the equivalent of 3.8 million full-time workers.

Non compliance is most due to the enormous complexity of the current system.

o About 60% of taxpayers pay professionals, who have to refer to 25 volumes of administrative and legal guidance books that take up nearly nine feet of shelf space, to file for them.

o 22% of taxpayers buy software that helps steer them through the process.

Tax evasion is a major, continuing, and growing problem (IRS estimates 2% in 1992)

o IRS assessed over 33 million civil penalties in 1997.

Current income tax is unfair and inequitable.

Revised minimums, exemptions, and deduction are exempting more and more from paying any taxes.

o In 2010 47% of Americans pay zero or negative federal income taxes.

o Between 1950 and 1990, the number zero federal tax returns averaged 21%, dipping to 18% in 1986, in the 1990s, the zero tax percentage hovered around 25% of taxpayers.

Progressive rates penalize increased income (top 1% pay 36.9% of all income taxes).

o Karl Marx demanded a “heavy progressive or graduated income tax” to redistribute wealth.

o “Living wage” concept is discredited Marxian dogma justifying redistribution of wealth.

Thanks to inflation, Alternative Minimum Tax (AMT) now applies to more people.
Rasmussen poll found majority (61%) did not believe they got their money’s worth from taxes.
Corporate income tax of 35% is higher than tax rate is every European nation.

Lower tax rates have been proven to grow the economy and improve standards of living.

Laffer curve demonstrates how lowered tax rates increase revenue.
Kennedy, Reagan, and Bush tax cuts all proved positive impact of rate cuts.

· Tax cuts aimed at capital and business produced the biggest economic benefits.

o For every tax-cut dollar on capital gains, $10.61 of new GDP is created.

o For every dollar of accelerated business-investment tax write-offs, $9 of new GDP is created.

o Fr every dollar of corporate tax cuts, $2.76 of new GDP is created.

o The IMF found for every dollar of government spending, only $0.70 of new GDP is created.

Tax Foundation reviewed academic research on taxes and growth and couldn’t find a single study supporting the notion that higher tax rates are good for prosperity.

Nonprofits have a unique and profound influence on the American people and culture.

Nonprofits serve many roles in society and our families' daily lives: churches, educational institutions, unions, health and medical care charities, youth outlets such as Boys and Girls Clubs, pet rescue and placement groups, etc.
Nonprofits help shape nearly every aspect of American society.
Government money has bought charitable allegiance and complicity with the liberal agenda.
Rather than instruments of private association and independence as part of the fabric of American freedom, taxpayer-financed charities have become extensions of big, corrupt government.
Nonprofits historically have been one of the two institutional watchdogs and critics of bad government and corrupt politicians.
Politicians have taken full advantage of this situation, and use taxpayer funding of charity as a means of political patronage and even personal benefit.
There seems to be correlation between corruption and public (versus private) financing of charity.
Liberal nonprofits indoctrinate our youth and are helping move society towards socialism.

States have different income tax rates, which has had a predictable influence on growth.

Connecticut has found that higher taxes lead to lower growth and lower household income.
States with high tax rates (Michigan, North Dakota, New Jersey, New York, and Illinois) are losing people.
The only Pacific Coast state to lose migrant population in 2007 was California, which has the highest state income tax in the nation.
States with low income taxes (North Carolina, Alabama, Oregon, and South Carolina) are gaining people.
States with no income tax (Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming) are also growing.
Wyoming and Nevada, with zero corporate and individual tax rates, is attracting business from high tax states.
In Colorado a single income tax rate generated surplus revenue, causing a rate decrease.
In Indiana the economy boomed after a single tax rate went into effect in 2003.

Bush tax cuts have once again proven value of Supply Side economics.

Tax revenues are above the historical average, even after the tax cuts.
Nearly all of the 2006 budget deficit resulted from additional spending above the baseline.
Supply side economics assumes replenishment of some but not necessarily all lost revenues.
Capital gains tax revenues doubled following the 2003 tax cuts.
Projections show that entitlement costs dwarf the projected large revenue increases.
Tax revenues correlate with economic growth, not tax rates.
The low income tax cuts reduced revenues the most.
Pro-growth tax cuts support incentives for productive behavior.
The economy responded strongly to the 2003 tax cuts.
The rich are now shouldering even more of the income tax burden.
Contrary to common belief, lowering corporate tax rates results in increased tax revenues.

Two major alternatives are designed to replace the existing progressive income tax.

FairTax proposes a progressive national retail sales (consumption) tax.

o Requires repeal of 16^th Amendment which authorized tax on income.

o Theoretically fair tax would include underground economy, paying at time of purchase.

o Value-Added Tax is a national sales tax paid by individuals and businesses at the cash register.

§ The credit-invoice VAT gets its name from the fact that businesses remit the VAT collected from consumers purchasing finished products, after subtracting the tax they previously paid.

o Another form of the VAT is the "subtraction method," under which businesses would pay taxes on their annual receipts after subtracting the money they spent to make their product.

o VAT rarely replaced income taxes in Europe, or ever resulted in lower income tax rates.

· There are at least forty governments with flat tax type systems, most of which made the switch in just the last decade. These include:

o Estonia (1994, 21%)

o Lithuania (1994,15%)

o Latvia (1995, 23%)

o Russia (2001, 13%)

o Serbia (2003, 12%)

o Bosnia and Herzegovina (2004, 10%)

o Slovakia (2004, 19%)

o Ukraine (2004, 15%)

o Georgia (2005, 20%)

o Romania (2005, 16%)

o Turkmenistan (2005, 10%)

o Kyrgyztan (2006, 10%)

o Albania (2007, 10%)

o Mongolia (2007, 10%)

o Kazakhstan (2007, 10%)

o Mauritius (2007, 15%)

o Tajikistan (2007, 13%)

o Bulgaria (2008, 10%)

o Czech Republic (2008, 15%)

o Belarus (2009, 12%)

o Seychelles (2010, 15%)

o Hungary (2011, 16%).

o Lowered income tax rates result in higher tax income, proving the Laffer Curve.

Principles:

Primary purpose is to raise revenue to run the government.

Taxes must be simple, fair, and equitable.
Taxes should not be used for social change.

The ten golden rules of effective taxation:

· When you tax something more you get less of it.

· Individuals work and produce goods and services to earn money for present or future consumption.

· Taxes create a wedge between the cost of working and the rewards from working.

· An increase in tax rates will not lead to a dollar-for-dollar increase in tax revenues, and a reduction in tax rates that encourages production will lead to less than a dollar-for-dollar reduction in tax revenues.

· If tax rates become too high, they may lead to a reduction in tax receipts. The relationship between tax rates and tax receipts has been described by the Laffer Curve.

· The more mobile the factors being taxed, the larger the response to a change in tax rates. The less mobile the factor, the smaller the change in the tax base for a given change in tax rates.

· Raising tax rates on one source of revenue may reduce the tax revenue from other sources, while reducing the tax rate on one activity may raise the taxes raised from other activities.

· An economically efficient tax system has a sensible broad base and a low rate.

· Income transfer (welfare) payments also create a de facto tax on work and, thus, have a high impact on the vitality of a state’s economy.

· If A and B are two locations and if taxes are raised in B and lowered in A, producers and manufacturers will have a greater incentive to move from B to A.

Recommendations:

Short term, simplify the existing income tax:

First, begin tax reform by offering an optional flat income tax alternative (10%).
Next, implement incremental improvements to the existing tax code on individuals:

o Abolish capital gains taxes.

o Abolish Alternative Minimum Tax (AMT).

o Abolish “death tax” on estate inheritance.

o Abolish “worldwide” taxation, to eliminate double taxation with foreign taxes.

o Ban internet taxes permanently.

o Liberate seniors (and employers) from payroll (social security) taxes

Next, implement incremental improvements to the existing tax code on businesses:

o Reduce corporate taxes to best globally competitive rate (10%).

o Allow immediate expensing for 100% of new equipment purchases for business.

Institute dynamic scoring of tax proposals to establish true impact of any tax change.
Stop defining political groups as non-profit organizations.

Long term, replace the federal Income Tax approach with National Sales (consumption) Tax:

First, Repeal the 16^th Amendment that authorized income taxes.
Next, implement a flat retail sales tax system with no exemptions, deductions, or minimums/maximums.

o Apply same rate to individuals, partnerships, and corporations.

o Repeal all federal excise taxes, except those dedicated to specific trust funds.

o Redeploy IRS to focus on enforcement.

References:

American for Fair Taxation on www.fairtaxvolunteer.org.

Citizens for Tax Justice on www.ctj.org.

“The Fair Tax Book – Saying Goodbye to the Income Tax and the IRS” by Neal Boortz and John Linder, published by HarperCollins Publishing, 2005.

“Who’s the Fairest of Them All?” by Stephen Moore published by Encounter Books, 2012.

“Examining a Change to a National Retail Sales Tax Regime: Impact to Households” dated November 1996 published by Stanford Decisions and Ethics Center.

“Emancipating America From the Income Tax – How a National Sales Tax Would Work” by David R. Burton and Dan R. Mastromarco dated April 15, 1997 published by The Cato Institute on http://www.cato.org/pubs/pas/pa-272es.html .

“Description of Various ‘Flat Tax’ Proposals” dated November 1, 1998 published by Center for Tax Justice on http://www.ctj.org/html/flatsum.htm .

“The FairTax, Tax Evasion, and the Underground Economy” dated 2000 published by Americans for Fair Taxation on http://www.fairtax.org/pdfs/tax_evasion.pdf .

“Few think taxes are spent wisely” by Jon Dougherty dated April 16, 2002 published by World Net Daily at http://www.worldnetdaily.com/news/article.asp?ARTICLE_ID=27239 .

“A Tale of Two Tax Codes” by Diane Alden dated April 20, 2002 published by News Max at http://www.newsmax.com/commentmax/get.pl?a=2002/4/20/010726 .

“Mayday, Mayday” by Deroy Murdock dated May 1, 2002 published by National Review Online at http://www.nationalreview.com/murdock/murdock050102.asp .

“The Historical Lessons of Lower Tax Rates” by Daniel J. Mitchell dated August 13, 2003 published by The Heritage Foundation on http://www.heritage.org/Research/Taxes/wm327.cfm .

“Adam Smith’s Principles of a Proper Tax System” by Jack P. McHugh dated April 21, 2004 published by Mackinac Center for Public Policy on http://www.mackinac.org/article.aspx?ID=6495 .

“Framework for tax reform” by Jack Kemp dated February 14, 2005 published by Town Hall at http://www.townhall.com/columnists/JackKemp/2005/02/14/framework_for_tax_reform .

“Options for Tax Reform” by Chris Edwards dated February 14, 2005 published by The Cato Institute at http://www.cato.org/pub_display.php?pub_id=3681 .

“PAYGO: A Recipe for Steep Tax Increases and Runaway Spending” by Brian Riedl dated March 14, 2005 published by The Heritage Foundation on http://www.heritage.org/Research/Budget/wm685.cfm .

“Income Distribution: Stagnant or Mobile?” by Bruce Bartlett dated July 13, 2005 published by the Laffer Associates at http://www.ncpa.org/pub/st/20050801-laffer.pdf .

“Eastern Europeans Are More Free Than Americans” by Dave Gibson dated October 14, 2005 published by American Daily at http://americandaily.com/article/9714 .

“’Living Wage’ is Socialistic Income Redistribution” by Tom Brewton dated January 16, 2006 published by American Daily at http://americandaily.com/article/11249 .

“Income Relativism” by Tim Kane dated January 30, 2006 published by National Review Online at http://www.nationalreview.com/comment/kane200601300839.asp .

“Stop Lying About Tax Cuts” by Herman Cain dated March 29, 2006 published by Town Hall at http://www.townhall.com/columnists/HermanCain/2006/03/29/stop_lying_about_tax_cuts .

“The Simple (Tax) Life” by Chris Edwards dated April 17, 2006 published by The Cato Institute on http://www.cato.org/pub_display.php?pub_id=6345 .

“An Accidental Tax Boon” by Robert H. Nelson dated June 1, 2006 published by the Washington Post at http://www.washingtonpost.com/wp-dyn/content/article/2006/05/31/AR2006053102043.html .

“It’s Tax-Cut Time, Once Again” by Thomas E. Nugent dated July 14, 2006 published by National Review Online at http://article.nationalreview.com/?q=NTlhN2ZiOGQwYWJjMTBiNzUyM2IyNWQyMTcwNTQ0MGU= .

“Income Tax Destroyed Connecticut Jobs” by Tom Brewton dated August 26, 2006 published by American Daily at http://americandaily.com/article/15256 .

“The Benefits of Good Tax Policy” by Daniel J. Mitchell dated December 15, 2006 published by Fox News at http://www.foxnews.com/story/0,2933,236810,00.html .

“Federal Tax Burdens and Expenditure by State” dated March 2006 published by Tax Foundation at http://www.taxfoundation.org/files/sr139.pdf .

“Why Should the Middle Class Fight Tax Hikes on the Rich?” by Michael Medved dated January 10, 2007 published by Town Hall at http://townhall.com/columnists/MichaelMedved/2007/01/10/why_should_the_middle_class_fight_tax_hikes_on_the_rich .

“Ten Myths About the Bush Tax Cuts” by Brian M. Riedl dated January 29, 2007 published by The Heritage Foundation at http://www.heritage.org/Research/Taxes/bg2001.cfm .

“Cowboy-Up Economics” by Greg Kaza dated March 7, 2007 published by National Review Online at http://article.nationalreview.com/?q=NmRmOWE2NDE5NDE4ZTRkMGY1NTEwYmYyNzgxODVkYTI= .

“Emerald Miracle” by Chris Edwards dated March 16, 2007 published by National Review Online at http://article.nationalreview.com/?q=NzUzMzA0N2UxM2E0MTg4Mzk5YmI1Zjk3YzU4ZGVlZmE= .

“Conservatives Push Taypayer Bill of Rights” by Dick Armey dated March 26, 2007 published by Human Events Online at http://www.humanevents.com/article.php?id=19961 .

“Which Taxes Weigh Most Heavily on Americans with Different Incomes?” by Andrew Chamberlain and Gerald Prante dated March 26, 2007 published by Tax Foundation at http://www.taxfoundation.org/publications/show/22287.html .

“Who’s paying the taxes?” by Frank Pastore dated April 1, 2007 published by Town Hall at http://www.townhall.com/columnists/FrankPastore/2007/04/01/whos_paying_the_taxes .

“Who Pays America’s Tax Burden, and Who Gets the Most Government Spending?” by Andrew Chamberlain, Gerald Prante, and Scott A. Hodge dated March 2007 published by Tax Foundation at http://www.taxfoundation.org/files/sr151.pdf .

“State and Local Tax Burdens Hit 25-Year High” by Curtis S. Dubay dated April 2007 published by Tax Foundation at http://www.taxfoundation.org/files/sr153.pdf .

“Tax Facts” by Bruce Bartlett dated April 10, 2007 published by Real Clear Politics at http://www.realclearpolitics.com/articles/2007/04/tax_facts.html .

“Closing the Tax Gap Means Taxpayers Beware!” by Alison Acosta Fraser and William Packer dated April 13, 2007 published by The Heritage Foundation at http://www.heritage.org/Research/Taxes/wm1424.cfm .

“Taxing Myths” by Brian Riedl dated April 17, 2007 published by National Review Online at http://article.nationalreview.com/?q=YThmMjBhOTc2MDFiNjQwYWJkNzk2ZDNkNTYzODcyY2Y= .

“Flat World, Flat Taxes” by Daniel J. Mitchell dated April 27, 2007 published by American Magazine at http://www.american.com/archive/2007/april-0407/flat-world-flat-taxes .

“You go, Europe!” dated April 28, 2007 published by San Diego Union-Tribune at http://signonsandiego.printthis.clickability.com/pt/cpt?action=cpt&title=You+go%2C+Europe%21+%7C+The+San+Diego+Union-Tribune&expire=&urlID=22129317&fb=Y&url=http%3A%2F%2Fwww.signonsandiego.com%2Funiontrib%2F20070428%2Fnews_lz1ed28bottom.html&partnerID=616 .

“Revenue-Maximizing Corporate Income Taxes: The Laffer Curve in OECD Countries” by Alex Brill and Kevin A. Hassett dated July 31, 2007 published by American Enterprise Institute at http://www.aei.org/publications/filter.all,pubID.26577/pub_detail.asp .

“Why the Fair Tax Won’t Work” by Warner Todd Huston dated September 12, 2007 published by American Daily at http://www.americandaily.com/article/20250 .

“The World is Flattening” dated September 24, 2007 published by Investors Business Daily at http://www.ibdeditorials.com/IBDArticles.aspx?id=275524561948107 .

“Internet Tax Ban: The Next Chapter” by John Gizzi dated September 27, 2007 published by Human Events Online at http://www.humanevents.com/article.php?id=22598 .

“State and Local Tax Hikes Add to Federal Tax Relief Pressures” by JD Foster dated September 28, 2007 published by The Heritage Foundation at http://www.heritage.org/Research/Taxes/wm1647.cfm “Keep the Internet Tax-Free” by Grover Norquist dated October 4, 2007 published by Real Clear Politics at http://www.realclearpolitics.com/articles/2007/10/keep_the_internet_taxfree.html .

“The Fair Tax – The Truth” by Neal Boortz dated November 27, 2007 published by Town Hall at http://www.townhall.com/columnists/NealBoortz/2007/11/27/the_fairtax_--_the_truth .

“Is the U.S. Corporate Tax in the Laffer Zone?” by Chris Edwards dated December 10, 2007 published by CATO Institute at http://www.cato.org/pub_display.php?pub_id=8840 .

“Inflation and the Tax Man” by Richard W. Rahn dated January 17, 2008 published by CATO Institute at http://cato.org/pub_display.php?pub_id=9104 .

“States of Opportunity” dated February 12, 2008 published by The Heritage Foundation at http://online.wsj.com/public/article_print/SB120277561232960623.html .

“The History of U.S. Taxation” by JB Williams dated March 12, 2008 published by American Daily at http://www.americandaily.com/article/21761 .

“Saving Time & Money” by Michael Burgess and Newt Gingrich dated April 15, 2008 published by National Review Online at http://article.nationalreview.com/?q=MjU5NjgzZjMyNGQ1OWQ1Mjc4OTk1MGM3NWYxZDE2MGM= .

“2009 State Business Tax Climate Index” by Curtis Dubay and Chris Atkins dated October 2008 published by Tax Foundation at http://www.taxfoundation.org/publications/show/22658.html .

“Corporate Tax Rates: Receipts and Distortions” by Alex Brill dated December 22, 2008 published by American Enterprise Institute at http://www.aei.org/docLib/20090102_TaxNotesBrill.pdf .

“Change We Need” dated January 13, 2009 published by Investor’s Business Daily at http://www.ibdeditorials.com/IBDArticles.aspx?id=316743763302078 .

“Cornerstone of the Obama Agenda” by Mark J. Fitzgibbons dated April 2, 2009 published by American Thinker at http://www.americanthinker.com/2009/04/cornerstone_to_the_obama_agend.html .

“Kennedy-Reagan vs. Bush-Obama” by Peter Ferrara dated April 8, 2009 published by The American Spectator at http://spectator.org/archives/2009/04/08/kennedy-reagan-v-bush-obama .

“We Still Need a Simpler Tax Code” by Nina E. Olson dated April 10, 2009 published by The Wall Street Journal at http://online.wsj.com/article/SB123933106888707793.html .

“The Income Tax System is Broken” by Declan McCullagh dated April 15, 2009 published by CBS News at http://www.cbsnews.com/stories/2009/04/15/politics/otherpeoplesmoney/main4945874.shtml .

“The Flat Tax vs. the Fair Tax” by John Tamny dated May 19, 2009 published by Real Clear Markets at http://www.realclearmarkets.com/articles/2009/05/the_flat_tax_vs_the_fair_tax.html .

“Value-Added Tax: No Solution for Health Care or Fiscal Woes” by Curtis S. Dubay dated July 9, 2009 published by The Heritage Foundation at http://www.heritage.org/Research/Taxes/wm2532.cfm .

“Repeal the Sixteenth Amendment” by Paul Moreno dated January 14, 2010 published by Human Events at http://www.humanevents.com/article.php?id=35185 .

“Europe’s VAT Lessons” dated April 15, 2010 published by The Wall Street Journal at http://online.wsj.com/article/SB10001424052702304198004575172190620528592.html .

“Business-Power Neglect” by Larry Kudlow dated July 3, 2010 published by Town Hall at http://townhall.com/columnists/LarryKudlow/2010/07/02/business-power_neglect# .

“Tax Reform” dated August 17, 2010 published by The Heritage Foundation at http://www.heritage.org/Research/Reports/2010/08/Tax-Reform .

“Fourteen Ways to Reduce Government Spending” by Grover Norquist dated August 18, 2010 published by Americans for Tax Reform at http://www.atr.org/files/files/081810pr_14_Specific_Spending_Reduction_Ideas%281%29.pdf .

“The Value-Added Tax Is Wrong for the United States” by Curtis S. Dubay dated December 21, 2010 published by The Heritage Foundation at http://www.heritage.org/Research/Reports/2010/12/Value-Added-Tax-Why-the-VAT-Is-Not-Pro-Saving .

“Saving the American Dream” by Stuart M. Butler, Alison Acosta Fraser, and William W. Beach dated May 10, 2011 published by The Heritage Foundation at http://www.heritage.org/Research/Reports/2011/05/Saving-the-American-Dream-The-Heritage-Plan-to-Fix-the-Debt-Cut-Spending-and-Restore-Prosperity .

“A Short History of the Income Tax” by John Steele Gordon dated September 27, 2011 published by The Wall Street Journal at http://online.wsj.com/article/SB10001424052970204422404576594471646927038.html .

“The Rise of the Flat Tax Gives Us Moring in Albania” by Nathan Lewis dated September 30, 2011 published by Forbes Magazine at http://www.forbes.com/sites/nathanlewis/2011/09/29/the-rise-of-the-flat-tax-gives-us-morning-in-albania/ .

“Don’t Confuse Me With The Facts” by Ralph Benko dated April 26, 2012 published by Town Hall at http://finance.townhall.com/columnists/ralphbenko/2012/04/26/washington_to_the_citizens_dont_confuse_me_with_the_facts .

“Obama Goes Oh-23-3” by Daniel J. Mitchell dated January 18, 2013 published by Town Hall at http://finance.townhall.com/columnists/danieljmitchell/2013/01/18/obama-goes-oh233-n1491788 .