Potential Economic Benefits
One of the biggest potential impacts that this system could have on American businesses is to make them more competitive in the global market. Removing payroll taxes alone would lower the overall cost of U.S. labor without shrinking workers' wages. And labor costs are routinely mentioned as one of the top reasons for manufacturing moving overseas. However, a system such as FairTax would remove not only payroll taxes, but all other corporate taxes as well. This means that a firm that manufactures widgets in the U.S. would be charged no direct taxes. Domestically, the widgets themselves would only be exposed to taxes at the time of retail sale. If the widgets were exported, there would be no U.S. taxes involved at all (barring some import/export tax) and the economic advantages of moving production overseas begin to look much less attractive. More domestic production would lead to an improved (or ideally eliminated) trade deficit, increased employment opportunities, etc.
It is also worth noting that removal of corporate taxes would most likely cut down on the games played by companies such as the "Double Irish Arrangement" and "Dutch Sandwich". Such structures allow many international firms to avoid much of the U.S.'s 35% corporate income tax. For example, Google manages to only pay 2.4%. Such maneuvers are by no means rare and ensure that firms who only operate domestically or do not have the resources to put into tax avoidance are the only ones paying the full rate. Removal of loopholes associated with complex tax policies would certainly improve financial transparency.
Next up: "Fairness" Benefits
Monday, November 22, 2010
Tuesday, November 16, 2010
The Case for a National Sales Tax: Part 2
The Benefits of a Simplified System
As a commenter pointed out on the last post, it doesn't matter how short a piece of legislation is, the average American (and probably more than a few members of congress) will never read it. That is just fine, we operate in a society filled with laws without ever reading much in the way of detailed legislation. However, according to a survey by the National Retail Foundation, almost 75% of US taxpayers intended to file last year's taxes using an accountant, tax preparation service or software. This would seem to indicate that the process of filing a tax return is either so complicated or cumbersome that a huge number of Americans are willing to pay someone else to make it easier. Don't get me wrong, I understand that many American's are lazy and some would probably pay someone else to go to the bathroom for them if they could. But, the fact that the current tax code is so complicated that a taxpayer preparing his own taxes might easily be missing out on deserved credits and deductions is absurd.
A national sales tax would remove the need to hunt for deductions or credits that change from year to year. In fact, individual taxpayers wouldn't even need to file a return each year. All you would have to do is let the government know that you exist so that you can be mailed your monthly "prebate". Removing the burden of tax returns from citizens also has another benefit: it is hard to dodge taxes. Even an illegal alien working "off the books" would need to purchase things and would so contribute taxes. Obviously there will always be tax cheats no matter what the system and many states deal with businesses circumventing sales taxes, but many simple mistakes that lead to incorrect returns each year can be avoided entirely.
Perhaps the greatest benefit of simplicity is something that seems to be a hot topic at the moment, smaller government. The IRS could be vastly shrunk as the number of tax filings would decrease dramatically. Furthermore, if the federal government paid the existing state agencies that collect local taxes to handle the federal sales tax, even further efficiencies could be achieved. A streamlined system would help to remove at least a thin layer of bureaucracy from an already bloated government. Spending less money on overhead means that less of the tax money collected goes into collecting taxes.
Next up: potential economic benefits
As a commenter pointed out on the last post, it doesn't matter how short a piece of legislation is, the average American (and probably more than a few members of congress) will never read it. That is just fine, we operate in a society filled with laws without ever reading much in the way of detailed legislation. However, according to a survey by the National Retail Foundation, almost 75% of US taxpayers intended to file last year's taxes using an accountant, tax preparation service or software. This would seem to indicate that the process of filing a tax return is either so complicated or cumbersome that a huge number of Americans are willing to pay someone else to make it easier. Don't get me wrong, I understand that many American's are lazy and some would probably pay someone else to go to the bathroom for them if they could. But, the fact that the current tax code is so complicated that a taxpayer preparing his own taxes might easily be missing out on deserved credits and deductions is absurd.
A national sales tax would remove the need to hunt for deductions or credits that change from year to year. In fact, individual taxpayers wouldn't even need to file a return each year. All you would have to do is let the government know that you exist so that you can be mailed your monthly "prebate". Removing the burden of tax returns from citizens also has another benefit: it is hard to dodge taxes. Even an illegal alien working "off the books" would need to purchase things and would so contribute taxes. Obviously there will always be tax cheats no matter what the system and many states deal with businesses circumventing sales taxes, but many simple mistakes that lead to incorrect returns each year can be avoided entirely.
Perhaps the greatest benefit of simplicity is something that seems to be a hot topic at the moment, smaller government. The IRS could be vastly shrunk as the number of tax filings would decrease dramatically. Furthermore, if the federal government paid the existing state agencies that collect local taxes to handle the federal sales tax, even further efficiencies could be achieved. A streamlined system would help to remove at least a thin layer of bureaucracy from an already bloated government. Spending less money on overhead means that less of the tax money collected goes into collecting taxes.
Next up: potential economic benefits
Monday, November 15, 2010
The Case for a National Sales Tax: Part 1
Given the current economic situation, a lot of attention is being paid to tax policy. One of the biggest debates at the moment is over tax breaks and who should get them. I would like to make the case for a complete overhaul of the U.S. tax system with the implementation of a national sales tax. I certainly did not originate this idea and am not certain about some of the finer details. Overall, however, I think that the ideas behind a sales tax are sound. In order to discuss the general principles of such a tax system, I will use one of the more prominent proposals, FairTax, as the base example. Before I get into the specifics, I want to begin by saying that I have issues with the way that FairTax is promoted. The name itself is loaded. While I intend to argue that a national sales tax is indeed more "fair" than the current system, the name "FairTax" has a slimy feel to it. It is also often spoken of in terms of a tax-inclusive rate in order to make it seem lower than the traditional tax-exclusive rate that many are used to with current state sales tax rates.* In any case, it is worth setting aside the political haze that clouds every idea Congress tosses around in order to actually evaluate proposal.
FairTax is a proposal to eliminate all federal taxes such as individual income, corporate income, capital gains, alternative minimum, payroll (social security, unemployment, medicare, etc.), estate and gift taxes. They would all be replaced with a nationwide tax on the retail sale of all new goods and services. There would be no tax on purchase amounts up to the government defined poverty line. That is to say that someone earning at or less than the poverty line would not be subject to the sales tax at all. This would be implemented by every household (even those making more than the set poverty level) receiving a monthly "prebate" check. Rather than filing a tax return at the end of the year, each household would be reimbursed for the total tax that would be collected on a year's worth of purchases at the poverty level. This amount would be divided by 12 and disbursed each month. So in effect, each household would only be taxed on what they spent above the poverty threshold.
That's basically it. The proposal has some details on what constitutes a new good, etc. But for the most part it is very simple and straightforward. In fact, to the right is a picture of outgoing Representative John Linder R-GA holding the 133 page FairTax Act alongside the current tax law. In my next posts I will discuss the benefits of the a national sales tax over the current tax system.
* Tax-inclusive means that the rate is calculated based upon total spent, so if you spent $0.77 on an item and paid $0.23 in tax, you would calculate the tax rate by: 0.23 / (0.77 + 0.23) for a rate of 23%. Nobody calculates rates like that in the real world. If you see an item in the store, you calculate the sales tax based upon the price of the item only, not including the tax. In the above example, if you paid $0.23 in tax on an item that cost $0.77 almost everyone would calculate the tax rate as 0.23/0.77 for a rate of about 30%. Playing games like this is not going to win any friends.
FairTax is a proposal to eliminate all federal taxes such as individual income, corporate income, capital gains, alternative minimum, payroll (social security, unemployment, medicare, etc.), estate and gift taxes. They would all be replaced with a nationwide tax on the retail sale of all new goods and services. There would be no tax on purchase amounts up to the government defined poverty line. That is to say that someone earning at or less than the poverty line would not be subject to the sales tax at all. This would be implemented by every household (even those making more than the set poverty level) receiving a monthly "prebate" check. Rather than filing a tax return at the end of the year, each household would be reimbursed for the total tax that would be collected on a year's worth of purchases at the poverty level. This amount would be divided by 12 and disbursed each month. So in effect, each household would only be taxed on what they spent above the poverty threshold.
That's basically it. The proposal has some details on what constitutes a new good, etc. But for the most part it is very simple and straightforward. In fact, to the right is a picture of outgoing Representative John Linder R-GA holding the 133 page FairTax Act alongside the current tax law. In my next posts I will discuss the benefits of the a national sales tax over the current tax system.
* Tax-inclusive means that the rate is calculated based upon total spent, so if you spent $0.77 on an item and paid $0.23 in tax, you would calculate the tax rate by: 0.23 / (0.77 + 0.23) for a rate of 23%. Nobody calculates rates like that in the real world. If you see an item in the store, you calculate the sales tax based upon the price of the item only, not including the tax. In the above example, if you paid $0.23 in tax on an item that cost $0.77 almost everyone would calculate the tax rate as 0.23/0.77 for a rate of about 30%. Playing games like this is not going to win any friends.
Wednesday, November 3, 2010
Election Reaction: Calls for Compromise
After any election that changes the balance of power there is the inevitable call from both sides to compromise and work together to "get things done". There are a number of problems with this mentality that this election should have highlighted to the powers that be:
1. "Getting things done" means different things to different groups. To liberals, it means using government to fix perceived problems. To conservatives (especially in this election cycle) it means reigning in government which they perceive as the problem. There is something to be said for not getting things done if what is being done is unpalatable. The idea that these two philosophies can be easily reconciled is laughable.
2. Compromise doesn't just mean meeting in the middle. If someone were to say to you, "I would like to punch you in the gut ten times," you would tell them to get lost (or something more colorful). If the person came back and said, " OK, how about I only punch you in the gut five times," your answer wouldn't change. You find getting punched unacceptable. It doesn't matter how many times, or where you would get hit, you won't budge. This is how many people (especially in the current polarized situation) feel about politics. A conservative doesn't want the government involved in health care at all, so a liberal offering to remove the "public option" to sweeten the deal is not compromise.
3. Compromise is about fine tuning details to appeal to multiple groups, not adjusting ideology. At the end of the day, liberals and conservatives are going to agree on very little in terms of broad sweeping policies. The Democrats unilaterally enacted the health care overhaul despite polling showing that the people didn't want it. The people have spoken and removed the Democrats from power as a fairly clear signal that they did not approve of what had been done. If the Democrats had unilaterally pushed something through that Americans accepted in principle, but had some quirks to be worked out, there would not have been 60 House seats changing hands. Voters don't mind a little haggling over details, but they don't want to compromise on their principles.
4. Compromise is just another way of saying "maintain the establishment". Much like children, politicians don't like change. As power switches between parties, very little changes. The two "compromise" with each other and merge toward the middle. During the next election, voters decide that they don't like what is happening, so they vote to put the other party in power. Yet again the parties merely meet in the middle and nothing really changes. They fail to understand that voters don't like the middle. If they did, power wouldn't change hands so frequently. You can't please everyone and when you try you end up with an approval rating of less than 25%. The Tea Party is a prime example of the dissatisfaction with the status quo. Why have a vote if you're just going to do something that nobody likes? What's the point of having a majority if the majority doesn't rule?
5. What constitutes compromise is decided by the party in power. Congress still has not passed a budget. This is perhaps one of the few things where meaningful compromise is achievable. For example, both parties agree that the DOT needs money to operate. How much money is certainly up for debate as there is disagreement as to just what that money is needed for, but the at the end of the day the government has to be funded and a consensus reached (or pushed through unilaterally). Instead, Congress has wasted time on stimulus spending, health care reform and other projects favored by the liberals. The liberals were in power, they got to set the bar for what would be compromised on. There is nothing inherently wrong with this, it is just important to realize that "compromise" is not some warm fuzzy activity where everyone is on the same page and coming from the same place.
6. True compromise is nearly impossible in a two party system. The two parties represent (in theory) polar opposites. There is rarely going to be an issue on which polar opposites can agree. If there were different degrees of conservative and liberal there could be compromises reached that might appeal to segments of each group. However, the desire to maintain "party unity" in order to maintain power generally keeps members of Congress on their respective sides of the aisle except when they come together on something that benefits the establishment without regard for what their party supposedly stands for.
1. "Getting things done" means different things to different groups. To liberals, it means using government to fix perceived problems. To conservatives (especially in this election cycle) it means reigning in government which they perceive as the problem. There is something to be said for not getting things done if what is being done is unpalatable. The idea that these two philosophies can be easily reconciled is laughable.
2. Compromise doesn't just mean meeting in the middle. If someone were to say to you, "I would like to punch you in the gut ten times," you would tell them to get lost (or something more colorful). If the person came back and said, " OK, how about I only punch you in the gut five times," your answer wouldn't change. You find getting punched unacceptable. It doesn't matter how many times, or where you would get hit, you won't budge. This is how many people (especially in the current polarized situation) feel about politics. A conservative doesn't want the government involved in health care at all, so a liberal offering to remove the "public option" to sweeten the deal is not compromise.
3. Compromise is about fine tuning details to appeal to multiple groups, not adjusting ideology. At the end of the day, liberals and conservatives are going to agree on very little in terms of broad sweeping policies. The Democrats unilaterally enacted the health care overhaul despite polling showing that the people didn't want it. The people have spoken and removed the Democrats from power as a fairly clear signal that they did not approve of what had been done. If the Democrats had unilaterally pushed something through that Americans accepted in principle, but had some quirks to be worked out, there would not have been 60 House seats changing hands. Voters don't mind a little haggling over details, but they don't want to compromise on their principles.
4. Compromise is just another way of saying "maintain the establishment". Much like children, politicians don't like change. As power switches between parties, very little changes. The two "compromise" with each other and merge toward the middle. During the next election, voters decide that they don't like what is happening, so they vote to put the other party in power. Yet again the parties merely meet in the middle and nothing really changes. They fail to understand that voters don't like the middle. If they did, power wouldn't change hands so frequently. You can't please everyone and when you try you end up with an approval rating of less than 25%. The Tea Party is a prime example of the dissatisfaction with the status quo. Why have a vote if you're just going to do something that nobody likes? What's the point of having a majority if the majority doesn't rule?
5. What constitutes compromise is decided by the party in power. Congress still has not passed a budget. This is perhaps one of the few things where meaningful compromise is achievable. For example, both parties agree that the DOT needs money to operate. How much money is certainly up for debate as there is disagreement as to just what that money is needed for, but the at the end of the day the government has to be funded and a consensus reached (or pushed through unilaterally). Instead, Congress has wasted time on stimulus spending, health care reform and other projects favored by the liberals. The liberals were in power, they got to set the bar for what would be compromised on. There is nothing inherently wrong with this, it is just important to realize that "compromise" is not some warm fuzzy activity where everyone is on the same page and coming from the same place.
6. True compromise is nearly impossible in a two party system. The two parties represent (in theory) polar opposites. There is rarely going to be an issue on which polar opposites can agree. If there were different degrees of conservative and liberal there could be compromises reached that might appeal to segments of each group. However, the desire to maintain "party unity" in order to maintain power generally keeps members of Congress on their respective sides of the aisle except when they come together on something that benefits the establishment without regard for what their party supposedly stands for.
Election Reaction: Polarization of Congress
Among the many impacts of the 2010 Midterms appears to be a further polarization of Congress. Many of the Democratic losses last night came from moderate Democrats. In addition, due to the influence of the Tea Party, many Republican victories went to Tea Party backed candidates or establishment candidates who moved further to the right in order to appeal to their more conservative base. This leaves fewer moderates between the conservative and liberal sides, raising questions as to how this will affect the coming term and even the lame duck session.
One of the biggest issues is how the Tea Party will interact with the establishment, particularly the GOP. There has been a lot of talk about shaking things up and changing Washington coming from newly elected conservatives. However, Tea Party candidates are still a small minority in Congress and will need to rely on conservative establishment members if they hope to have a real impact in the immediate future. It will be a fine line between upholding the conservative principles that got them elected, and working within the existing system to implement the policies that they promote. The key will be how the Republican party reacts to the new members. Many believe that the party's best hope is to realign themselves more to the right, embrace the movement and get back to their conservative roots. Others feel that the only way to pass legislation is with the help of the establishment and that compromise and moderation will be forced upon the new class. It would seem that the latter option is very dangerous. If voters feel that the change the conservative candidates peddled was merely rhetoric and that they are corrupted by the system, 2012 could spell trouble for the GOP. Either another round of more conservative Tea Party candidates will beat out established candidates in primaries, or conservatives will become disillusioned and just stay home. In any case, the Republicans have a choice to make.
One of the biggest issues is how the Tea Party will interact with the establishment, particularly the GOP. There has been a lot of talk about shaking things up and changing Washington coming from newly elected conservatives. However, Tea Party candidates are still a small minority in Congress and will need to rely on conservative establishment members if they hope to have a real impact in the immediate future. It will be a fine line between upholding the conservative principles that got them elected, and working within the existing system to implement the policies that they promote. The key will be how the Republican party reacts to the new members. Many believe that the party's best hope is to realign themselves more to the right, embrace the movement and get back to their conservative roots. Others feel that the only way to pass legislation is with the help of the establishment and that compromise and moderation will be forced upon the new class. It would seem that the latter option is very dangerous. If voters feel that the change the conservative candidates peddled was merely rhetoric and that they are corrupted by the system, 2012 could spell trouble for the GOP. Either another round of more conservative Tea Party candidates will beat out established candidates in primaries, or conservatives will become disillusioned and just stay home. In any case, the Republicans have a choice to make.
Election Reaction: Tea Party Costs Republicans?
In the wake of last night's election, there is big debate over whether Tea Party wins in primaries cost Republicans victories in the general election. There seems to have been mixed results as Rubio and Paul won out while Angle and O'Donnell failed to defeat their Democratic opponents. Many argue that had Mike Castle beaten O'Donnell in the Delaware primary, the Republicans would now control that Senate seat. The same is argued for a primary victory by Sue Lowden in Nevada. Either of these situations could very well have happened, but there is no way to know for sure. In any case, the problematic part of this debate is that it ignores the very reason that these Tea Party candidates won the primaries in the first place: the Republicans were no longer seen as conservatives by their party base.
To a conservative voter the question of whether or not the Tea Party candidates cost the Republican party is irrelevant. This election was about voting for a conservative, not a Republican. This fixation on the party is exactly why the Tea Party came about in the first place. Too many Republicans forgot what the party used to stand for: lower taxes and smaller government. The bailout bill was too much for some to take and they realized that their Republican representatives no longer shared their views. So they mobilized and put forth truly conservative candidates in the primaries and managed to oust establishment candidates.
From the beginning there were grumblings from the GOP that such conservatives were unable to win in the general election or that they were too far to the right for the average voter. But that wasn't the point. Conservative voters were sick of sending moderates to Washington who abandoned their principles in the name of "party unity" or "bipartisan compromise". In particular, Mike Castle was very unpalatable to conservatives and was considered one of, if not the most liberal Republican in the House. In the mind of voters, it was better to take a chance on someone who actually shared their views rather than be guaranteed to have someone who only pretended to.
In the end, Angle and O'Donnell failed to win and Democrats retained a majority in the Senate. However, the important message has been sent, particularly in Nevada where the election was rather close. Conservative voters want a conservative, not a Republican. If the Republican is a conservative, great. But if it comes down to principles or the party, principles might finally start to win out.
To a conservative voter the question of whether or not the Tea Party candidates cost the Republican party is irrelevant. This election was about voting for a conservative, not a Republican. This fixation on the party is exactly why the Tea Party came about in the first place. Too many Republicans forgot what the party used to stand for: lower taxes and smaller government. The bailout bill was too much for some to take and they realized that their Republican representatives no longer shared their views. So they mobilized and put forth truly conservative candidates in the primaries and managed to oust establishment candidates.
From the beginning there were grumblings from the GOP that such conservatives were unable to win in the general election or that they were too far to the right for the average voter. But that wasn't the point. Conservative voters were sick of sending moderates to Washington who abandoned their principles in the name of "party unity" or "bipartisan compromise". In particular, Mike Castle was very unpalatable to conservatives and was considered one of, if not the most liberal Republican in the House. In the mind of voters, it was better to take a chance on someone who actually shared their views rather than be guaranteed to have someone who only pretended to.
In the end, Angle and O'Donnell failed to win and Democrats retained a majority in the Senate. However, the important message has been sent, particularly in Nevada where the election was rather close. Conservative voters want a conservative, not a Republican. If the Republican is a conservative, great. But if it comes down to principles or the party, principles might finally start to win out.
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