by J. Marsolo
September 6, 2017
American Thinker has published two articles in the past week on having a flat income tax, and a similar proposal to use FICA, which is a flat rate, to replace the current rates. The articles generated interesting debates. I believe that a better reform is to abolish the income tax and replace it with a national sales tax.
In designing a tax system, the goal of conservatives and libertarians should be to reduce the power of the federal government, which means reducing (even to zero) the power of the IRS, the most powerful and intrusive federal agency. The goal should also be to raise taxes by the fairest and least intrusive manner. The only method that accomplishes this is a national sales tax at the point of final purchase by the consumer.
First, in any system based on taxing income, regardless of the rate, businesses and the self-employed will have to deduct business-related expenses to arrive at taxable income from gross income. Thus, the IRS is still in place to audit expenses. You cannot have a flat rate on businesses and the self-employed because you would be taxing gross receipts. This will drive up the taxes on business and the self-employed dramatically. The IRS will love this. This is obvious to anyone who examines the problem, or who owns or runs a business.
Second, a flat rate on W-2 employees may work, but most will object because they lose the deductions for children, home mortgage and real estate taxes, charitable contributions, college education, and so on. Taxpayers will lose all their deductions in return for the promise of a simpler tax return. But now that you have lost your deductions, the government will surely raise the rate when needed.
Most W-2 employees file the simple form with no deductions. For $50, you can buy Turbotax to do your taxes. The argument that it simplifies your tax return is weak.
The best solution is replace the income tax with a national sales tax. Most states already have a sales tax and experience in collecting and enforcing it. It is collected by the merchant at the point of sale to the consumer. The merchant usually remits to the state on a monthly or quarterly basis. If it does not, the state will suspend the sales tax license of the merchant and shut down the store. With a national sales tax, the states would collect the tax, then remit to the federal treasury. Collection and enforcement are at the state level. There is no need for the large, intrusive IRS. This would return some power to the states.
The tax should exclude food, clothing, medical services, and legal services, as many states now do. Food at restaurants would be taxed. This is not a value-added tax, but a tax at the point of sale on goods and some services.
Businesses and individuals now spend lots of money and expend much time to do their income tax returns. For tax year 2015, the IRS received about 137 million personal returns, with about 71 million e-filed by paid preparers. These taxpayers would save money.
A sales tax would reach the cash underground economy and the tax avoidance economy because the merchant has to collect the tax. It will result in all paying taxes. And it will get rid of the use of the tax system to subsidize private living expenses disguised as business expenses.
Most politicians will oppose this because it takes away their power. Lobbyists in D.C. make a great living lobbying for tax breaks for their clients. Many lobbyists are former congressmen and government employees who know whom to call and lobby. More importantly, politicians, especially Democrats, like the current system because it gives them power to regulate the economy.
Most taxpayers would support repeal of the income tax because they will not have to spend time and money keeping track of records and paying people to do their returns.
The goal of tax reform should be to have everyone pay his fair share of the tax burden in the least intrusive manner. This requires the reduction of the power of the IRS, and at best the elimination of the IRS. Only a sales tax will accomplish this.