How Capitalism Will Save Us (34 page)

Even if the flat tax only reduced compliance costs by half, that would mean, in national terms, a total reduction of $100 billion. This immense cost saving would free up human and financial resources that could then be invested in new jobs and businesses. The billions of dollars businesses spend on tax compliance or avoidance could be reallocated into new business activity and jobs. Think of what this would mean multiplied millions of times throughout the economy. The flat tax would unleash an economic boom that would produce more wealth—not only for individuals but also for government coffers.

The flat tax would also be a great time saver. The IRS reported that in
2008 Americans spent some seven and a half billion hours filling out tax forms, the equivalent of more than three million full-time jobs.

A flat tax would sharply reduce Washington’s waste of resources on tax-related activity—the 115,000 agents (and climbing) of the IRS, as well as the lobbying that is the source of so much corrosive corruption. With its endless and ever-changing latticework of loopholes, the current system has spawned an industry devoted to influencing tax policy. One in six private-sector employees in Washington is employed by the lobbying industry. Half of their efforts are directed at wrangling changes in the tax code.

Members of Congress fight like cats and dogs to gain a place on the House Ways and Means Committee, which originates our tax legislation. Those who do are set for their political lives. Courted by lobbyists, trade groups, and individuals seeking to influence the writing of new tax legislation, lucky members rake in more contributions each election cycle than do most of their peers.

The flat tax would do away with the loopholes and tax shelters that produce useless economic activity and often rip people off. According to the Government Accounting Office, some 6,400 individuals and corporations have “bought abusive tax shelters and other abusive tax planning products” in recent years.

The flat tax would also kill off the death tax. It would end the draconian unfairness of the alternative minimum tax. It would lower the tax rate on business profits, while abolishing corporate loopholes and encouraging greater transparency. The personal tax on dividends would be eliminated. Companies would thus be able to increase the dividends they pay to shareholders.

The tax would allow the United States to once again become a business-friendly environment. Nations around the world that have instituted a flat tax—from Lithuania and Romania to Mongolia and Russia—have seen their economies roar almost immediately. Russia’s depressed economy boomed after enactment of its flat tax, even before the commodities boom of 2004–2008. All flat-tax countries experienced impressive growth right up until the credit crisis. There’s no reason why the United States can’t have the same experience.

The flat tax would also return free choice to individuals who are now
forced to make financial and personal decisions they wouldn’t have made in order to lower their taxes. Yaron Brook of the Ayn Rand Institute writes,

The flat tax would end this moral distortion, enabling you to live life in a freer society.

A
nother plan proposed to address the economic distortions created by today’s monstrous federal income tax code is the National Retail Sales Tax—or what proponents call the “Fair Tax.” This sales tax is intended to replace the federal income tax and payroll taxes. It would be collected on the sale of new goods and services. But used goods and business purchases would be exempt. Business purchases would also be exempt. The Fair Tax, which has some support among conservative politicians and pundits, calls for a 30 percent tax on virtually all consumption, including new houses, as well as on services from haircuts to legal advice to open-heart surgery.

Supporters of the idea have their hearts in the right place. They understand the economic damage caused by excessive taxes on income. On its
face, a sales tax can look appealing. It does not create the social and marketplace distortions created by income taxes. But instituting the Fair Tax would bring numerous, Real World complications.

The enforcement issues are endless. For instance, what is the precise definition of the goods and services that are “new” and therefore should be taxed? What about people selling items on eBay that they claim aren’t really new and should be tax exempt? There’s also the problem of having to answer the question,
What constitutes a business?
What about individuals who incorporate simply to avoid paying the tax? The plan also assumes that government entities, such as the Pentagon for example, will pay a 30 percent sales tax when they buy an aircraft carrier or purchase supplies for our troops overseas. That’s a totally unrealistic assumption.

Exactly how would a national sales tax be collected? Will states really devote resources to collecting a 30 percent tax that goes to the federal government? What federal agency will ensure that the hundreds of thousands of retailers in America are complying? Or that a business is indeed a business?

The greatest argument against the Fair Tax is that it will drastically raise prices. The price of nonexempt goods and services purchased at retail would instantly increase 30 percent. Partisans reply that such price hikes will be offset by the fact that people would have more take-home pay because the income tax and other taxes would be abolished. And companies freed from the burden of corporate income and payroll taxes could charge less. Really? We have to admit we’re skeptical. Have you ever heard of a tax—one that’s essentially a surcharge—making a product less expensive?

Key sectors of the economy, such as housing, would be devastated. Who would want to buy a new home, for example, when it would cost 30 percent more than a preowned one?

Critics say that a sales tax, especially one this size, would be highly regressive, hitting hardest those with the least. Designers of the Fair Tax acknowledge this drawback, which is why their plan includes a scheme of monthly rebates to one and all. They call them “prebates,” which would give to everyone money equal to poverty-level income to cover necessities such as food and clothing. This “prebate” would require an entirely new
bureaucracy, even if we somehow got around the problem of enforcement. Rebates are also likely to further politicize the tax system, with interest groups of all kinds pressing for more favorable rebates based on “need,” either real or perceived.

In a recession a national sales tax is especially unfair. Income taxes decrease in hard times if your salary declines. But with a sales tax, you still have to pay a 30 percent tax on your basic living expenses—such as mortgage, food, clothing—even if you’re less able to afford it.

Finally, the fair tax requires repealing the Sixteenth Amendment to the Constitution. Otherwise, Washington continues to have the right to impose an income tax in addition to a national sales tax. Without repealing the Sixteenth Amendment, we will end up with the situation that exists in most states and in most other countries—that is, having both an income tax and a consumption tax.

Our Founding Fathers deliberately made amending the U.S. Constitution a time-consuming, cumbersome process. Getting people to accept the idea that a substantial sales tax—either the Fair Tax or a VAT—won’t raise their cost of living will require considerable time and powers of persuasion.

Another alternative to income taxes—in use in Europe—is the VAT, or value-added tax. A value-added tax is imposed not only on the retail sale of items to consumers but also on the purchase of materials by businesses to manufacture their products. It is insidious because it imposes an invisible layer of taxation that inflates the cost of living. The French were the first to enact the VAT because it’s hard to avoid: it is applied to every transaction, including services. A sales tax applies only on a final purchase, whereas a VAT is incorporated into every step of the manufacturing process—no exemptions anywhere.

A VAT increases the cost of doing business and hits all consumers. Another downside is that a VAT always ends up being an additional tax instead of a replacement tax. France, for example, imposes the VAT in addition to ferocious income taxes. As they say over there,
quel horreur!