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March 2019
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Filed under: General
Posted by: Jim Gray @ 5:46 pm

                        “ALTERNATIVES TO THE INCOME TAX”  (46)

Last week we basically “shot fish in a barrel” by discussing the failings of our present income tax system.  Not only does this system cost us taxpayers a whopping $200 billion just to keep records for the preparation of our taxes each year, it also costs an additional $194 billion each year to pay the administrative expenses of the Internal Revenue Service.  Two viable alternatives to this complicated and unwieldy system are the Flat Tax (and a variation of it called the “Fair Tax”), and the National Sales Tax. 

The Flat Tax is a greatly simplified income tax reporting and paying system that would reduce the size of our yearly tax reporting form to the size of a post card.  This would be accomplished by taking away all credits, deductions, loopholes, and exemptions, except for one generous family deduction that everyone would receive. 

The amount most often discussed for a deduction for a family of four is $30,000.  That means that a household of four people that earned $30,000 or less would not pay any income taxes at all on their income.  That would address the problems of the poor.  But thereafter, all people would pay the same percentage of their income to the government as taxes, regardless of what the amount of that income might be.  So a family that earned a million dollars per year would pay about ten times the amount of taxes that would be paid by a family that earned a hundred thousand dollars.  To most people, that would be a fair and reasonable result.

What would the tax rate be under this new tax system?  Of course the rate would be subject to change, just like under our present system.  But we can get some hints from the countries of the former Soviet Union that have already implemented the flat tax.  Estonia was the first, and it implemented a flat tax in 1994 of 26 percent.  Then Latvia chose a 25 percent tax rate, and Lithuania picked a 33 percent rate. 

But the tax approach in those countries spurred their economies so successfully that after a few years they became known as the “Baltic Tigers.”  So soon Russia instituted a revolutionary 13 percent flat rate tax of its own, and with that Russia’s economy began to prosper.  Why?  Its businesses flourished from the reduced tax rate, and the government itself realized more revenue both because income tax compliance became easier, and because tax evasion and avoidance became far less profitable. 

And then the flat tax revolution spread.  Serbia adopted a 14 percent rate, Slovakia chose 19 percent, Ukraine 13 percent, Romania 16 percent, and Georgia chose a rate of 12 percent, which currently is the lowest in the world. 

Computing taxes under the flat tax system would be simple.  Each household would report its wage, salary and pension income, subtract the family allowance and then determine the family’s taxable income, which would be taxed at a fixed rate.  That’s pretty much all.  So the tax return could be filled out by a normal ten year-old child in about fifteen minutes.  All businesses would file a similar form, no matter if they were Exxon-Mobil or a mom and pop diner.  The businesses would report their gross revenue, subtract their labor costs, costs of goods sold and investment costs, and from that compute their total net revenue as taxable income.  From that amount would be computed their total tax. 

No more complicated deductions, depreciation calculations, or favorable treatment for politically powerful entities.  And this would result in economic decisions being made for business reasons, instead of tax reasons.

The Fair Tax would be similar to the flat tax, except that it would add a provision for tax rebates every month to lower income people.  This would keep those people from having to wait until the end of the year for their tax refunds.

The second alternative would be a National Sales Tax.  Whenever people purchase any goods or services they would pay a sales tax to the federal government, just like the sales taxes that are levied today by most cities.  As a result, there would be no reporting of income to the government at all, which would result in an enormous savings to virtually everyone before one even considers what their taxes would be.

Concerns about this system falling too heavily upon the shoulders of the poor would be addressed by allowing everyone to have a tax-free allowance of rental or mortgage payments up to a certain amount, as well as an exemption for some of the staples of life, such as the purchase of non-processed foods.  This latter provision would also have the side benefit of encouraging people to consume healthier foods, since such things as milk, fresh fruits and vegetables, eggs, and non-processed meats, fish, poultry, beans, and rice would have no sales tax at all.  But sodas, canned goods, sugar snacks, and other processed foods, which are far less healthy or nutritious, would be taxed.

All money that people earn as income would stay in their own pockets.  This also means that we could actually eliminate the Internal Revenue Service!  But to satisfy people’s concerns that Congress would first adopt a national sales tax, and then subsequently bring back an income tax on top of that, we would probably have to repeal the 16th Amendment to the U.S. Constitution, which gives the federal government the power to implement a federal income tax.   

Otherwise, the main fears for the national sales tax would come from the potential loss of deductions for charitable donations for religious organizations and other charities.  But to the degree that these are considered to be overriding concerns, they could always be addressed by providing additional deductions or rebates for these payments.

So please take a reflexive moment and contemplate what life would be like under either of these alternative tax systems.  We would probably end up paying about the same amount of taxes, but along the way the monstrous “hidden taxes” of complying with our present income tax system would be eliminated, as would the unfairness of many politically and economically powerful groups receiving favorable tax treatment that is not available to the rest of us.  In addition, people would be encouraged to invest and otherwise save their money because savings and investments would not be taxed at all.  This would appreciably stimulate our economy.   In addition, our merchants would also be able to compete more fairly both domestically and abroad with the products of other countries because they would not be paying taxes to our government that foreign merchants are not required to pay. 

Finally, when we pay taxes we will at least be able to see what those taxes are.  Today our tax system is so complex that increases in taxes can mostly be hidden from us.  But under both of these systems, if taxes were to be raised or lowered it will be plain for all to see.  That refreshing development might be enough to warrant a change all by itself.

James P. Gray is a judge of the Orange County Superior Court, the author of Wearing the Robe - the Art and Responsibilities of Judging in Today’s Courts (Square One Press, 2008), and can be contacted at JimPGray@sbcglobal.net or at his blog at JudgeJimGray.JudgeJimGray.com.


  1. Ed Sarlls Says:
    You raise some good points about the problems of the current system and the advantages of some alternatives. Unfortunately, you are confused about the FairTax. The FairTax is a form of National Sales Tax. It is not an income tax. You can get details at http://www.FairTax.org/ and I will outline some here. 1. The National Sales Tax you describe exempts certain items. The FairTax does not exempt anything as this opens Pandora’s Box to lobbyists who want their items exempted. Instead, the FairTax provides a rebate on the tax on necessities at the beginning of each month. Then you can spend it on what is important for your family. This could be text books, diapers and formula, clothing, prescriptions and medical care, or whatever else is important for your stage of life. The FairTax also untaxes businesses. This simplifies business accounting and reduces overhead due to both taxes paid and compliance costs. These reductions will produce lower consumer (and export) prices, higher wages, and higher retained earnings (invested in business growth and stock prices). Untaxing exports will make U.S. goods more competitive and generate more U.S. manufacturing jobs. There is a lot more, including detailed research reports, on the FairTax.org web site. Thank you for highlighting the need for fundamental tax reform. You may contact me and I will be pleased to answer your questions.

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