28 Jan Taxes, Taxes, Taxes

“America’s income tax system is broken …, and America’s government could care less.” – The Lonely Realist

On January 8^th, Congressman Earl (Buddy) Carter (R-GA) introduced the Fair Tax Act of 2023 (FTA), which would repeal the Internal Revenue Code (IRC) and abolish the IRS, replacing America’s income, self-employment, estate, gift and payroll taxes with a national sales/consumption tax of 29.87% (which commentators have rounded to 30%). The FTA provides for a fanciful and unworkable Federal/State-by-State partnership to collect the resulting taxes. Representative Carter asserts that the FTA “promotes freedom, fairness, and economic opportunity”; however, the FTA’s straightforward sales tax is the very definition of regressive since it would impact negatively on lower-income Americans and, by repealing income, gift and estate taxes, lower taxes for the wealthy. Whatever its merits and demerits, the FTA has no chance of becoming law …, but, then, that’s not its purpose. It’s a partisan political piñata masquerading as tax reform. Evidence of that political reality is glaring, from its backdated start-date of January 1, 2023 to its enforcement provisions that sunset in 2027. Should this be what allegedly mature elected officials spend their time doing? Retroactive law-making coupled with the invitation to evade the tax after 4 short years? Really?

Unfortunately, the Biden Administration’s response has been ham-fistedly partisan as well, the President labeling a national sales tax a non-starter that “would raise taxes on the middle class by taxing thousands of everyday items from groceries to gas, while cutting taxes for the wealthiest Americans.” While true – the FTA indeed is seriously flawed –, the President was presented with a once-in-a-generation opportunity that he quickly squandered. What he could have said is that the FTA presents a useful beginning that could lead America to enact necessary tax reform …, an estimable goal. After all, the last time America enacted tax reform was in 1986 under Ronald Reagan! To make progress on reform, the President could have acknowledged that the proposed FTA provides Congress with a unique opportunity to fix a fundamentally broken tax system and that making a bipartisan effort to do so would further Americans’ faith in government, democracy and capitalism. The President could have complimented the Republican Party for labeling the Infernal Revenue Code an unworkable vestige of 20^th Century policy-making, agreed that the Republican proposal of a national sales tax presents a new and innovative direction for producing true tax balance, and added that although the Republican Party unfortunately had gotten the formula wrong, the FTA could easily be fixed by a true bipartisan effort [and yes, Virginia, “bipartisan” is a real word]. In doing so, President Biden would have been embracing achievable tax reform as well as engaging in an honest effort to balance America’s budget, precisely the goals that would provide Americans with the “fairness and opportunity” promised by the FTA. He could have added that adopting a national sales tax would provide Americans with incentives to consume less and save more, an especially-important goal in today’s inflationary environment.

But that is not the direction that the President or either political party chose to take.

The politics of tax reform are cynical …, ooops, cyclical. The last time fundamental tax reform was seriously considered by America’s government was in 1995-96 when Congress debated replacing the IRC with a simplified flat tax that would have reduced tax preferences and taxed consumption. What actually happened was the opposite. The Taxpayer Relief Act of 1997 added new deductions and tax credits, made taxes more complicated, and raised tax rates. That’s been the game now for decades. America’s tax system is such a complicated morass that members of Congress refuse to seriously address reform knowing that doing so would bite the wallets of the special interests that feed them. The problem is not that Federal income tax rates favor the top 1%. It’s that those rates have been warped by the panoply of complex loopholes provisions that distort incentives. As a consequence, America’s rickety, archaic tax system is expensive, unpopular, inefficient, unenforceable (which would continue even were Congress to adequately fund enforcement), and often doesn’t work at all. What this argues for is real tax change that can be achieved only through a healthy legislative-and-executive process. That hasn’t been happening because America’s tax laws today are a vote-buying and campaign fund-raising machine – political corruption by another name. (One partial solution advocated by TLR is Congressional term limits.)

Tax efficiently needs to be at the heart of America’s tax system. That efficiency cannot be achieved without simplification that relieves Americans of the burdens of tax planning and tax return preparation – an unproductive industry that today costs Americans more than $14 billion/year. Efficiency also cannot be achieved without persuading the public that America’s tax system is fair. Moreover, if America is going to pay its debts – currently exceeding $31 trillion –, it will have to be more successful at collecting the taxes it is owed. Americans have loudly complained that the audit and tax collection methods used by the IRS are unacceptable. The tax code and its system of tax collection accordingly require revision.

A tax system that would meet America’s 21^st Century needs would rely on the same type of consumption tax tabled by the Republican Party which, happily, is the form of taxation most popular with tax reform experts. The model for doing so is the Competitive Tax Plan (CTP), which would shift the focus of America’s current tax system to a sales/consumption tax collected at the source on non-essential purchases, reduce taxes on savings and investments, and eliminate the income tax for more than 80% of Americans. The CTP would be a major simplification that would benefit both Americans and American businesses, eliminating the costs of universal tax return preparation and the enormous number of special interest tax provisions that currently riddle the IRC, reducing both the need for and the costs of over-reaching income tax enforcement. The CTP would ensure that change would come to America in more significant ways than President Obama attempted in his eight years as President, would make America great again in more tangible ways than President Trump achieved in his four years, and would build back better than President Biden has engineered in his two years in office. That’s Change, Greatness and a Better America …, precisely the stern Churchillian stuff that a socially and economically successful democracy requires.

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Finally (from a good friend)