RTCS

Taxes

Return to Common Sense

November 8, 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...”

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

·         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.

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

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

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.

o   IRS assessed over 33 million civil penalties in 1997.

Current income tax is unfair and inequitable.

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.

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.

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

·         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.

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

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

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

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

o   Requires repeal of 16th 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:

Country

Start Date

Flat Tax Rate

Prior Rates

Notes

Jersey

1940

20%

 

Corp. rate 20%

Hong Kong

1947

16%

 

Corp. rate 17.5%

Guernsey

1960

20%

 

Corp. rate 0%

Jamaica

1986

25%

 

Corp. rate 33.3%

Tuvalu

1992

30%

 

Corp. rate 30%

Estonia

1994

21%

16-33%

Corp. rate 0%

Lithuania

1994

15%

18-33%

Corp. rate 15%

Grenada

1994

30%

 

Corp. rate 30%

Latvia

1995

23%

25% top

Corp. rate 15%

Russia

2001

13%

30% top

Corp. rate 20%, VAT rate 18%

Serbia

2003

12%

10-20%

Corp. rate 10%

Iraq

2004

15%

 

Corp. rate 15%

Bosnia & Herzegovina

2004

10%

5-30%

Corp. rate 10%

Slovakia

2004

19%

10-38%

Corp. rate 19%

Ukraine

2004

15%

10-40%

Corp. rate 25%

Georgia

2005

20%

12-20%

Corp. rate 20%, VAT rate 18%

Romania

2005

16%

18-40%

Corp. rate 16%

Turkmenistan

2005

10%

 

Corp. rate 20%

Egypt

2005

20%

32% top

Corp. rate 20%

Trinidad & Tobago

2006

25%

25-30%

Corp. rate 25%

Kyrgystan

2006

10%

10-20%

Corp. rate 10%

Albania

2007

10%

30% top

Corp. rate 10%

Macedonia

2007

10%

15-24%

Corp. rate 10%

Mongolia

2007

10%

10-40%

Corp. rate 25%, VAT rate 10%

Montenegro

2007

9%

16-24%

Corp. rate 9%

Kazakhstan

2007

10%

10-40%

Corp. rate 15%

Pridnestrovie

2007

10%

Moldova

aka Transnistria

Mauritius

2007

15%

15-25%

Corp. rate 15%

Tajikistan

2007

13%

 

 

Bulgaria

2008

10%

20-24%

Corp. rate 10%

Czech Republic

2008

15%

12-32%

Corp. rate 19%, VAT rate 19%

Timor Leste

2008

10%

Indonesia

Corp. rate 10%

Belarus

2009

12%

9-30%

Corp. rate 24%

Belize

2009

25%

25-45%

Corp. rate 25%

Nagono Karabakh

 

5%

Azerbaijan

Corp. rate 5%

Seyhelles

2010

15%

 

Corp. rate 33%

Paraquay

2010

10%

 

Corp. rate 10%

Hungary

2011

16%

17-32%

 

Abkhazia

 

10%

Georgia

Corp. rate 18%

 

Principles:

Primary purpose is to raise revenue to run the government.

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:

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

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

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

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

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:

 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.

The Liberty Amendments” by Mark R. Levin published by Threshold Editions, 2013.

American for Fair Taxation on www.fairtaxvolunteer.org.

Citizens for Tax Justice on www.ctj.org.

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.cfmKeep 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 .

Bad Sin Tax” by David Coughlin dated December 29, 2009 published by Town Hall at http://dscough.blogtownhall.com/2009/12/29/bad_sin_tax.thtml

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/ .

Redistributing wealth from top to bottom by David Coughlin dated February 9, 2012 published by American Clarion at http://www.americanclarion.com/2502/2012/02/09/redistributing-wealth-top-bottom/

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 .

How to Repeal the 16th and 17th Amendments” by Theodore Koehl dated July 7, 2013 published by American Thinker at http://www.americanthinker.com/2013/07/how_to_repeal_the_16th_and_17th_amendments.html .

First We Must Adopt a Flat Tax, Then Need to Return to the Gold Standard” by Nathan Lewis dated November 7, 2013 published by Forbes at http://www.forbes.com/sites/nathanlewis/2013/11/07/first-we-must-adopt-a-flat-tax-then-need-to-return-to-the-gold-standard/2/ .

 

RTCS