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Tax Reform has now become the major topic of debate for this election cycle. Of course, this happens every few years. They will probably make a few small changes that are suppose to make the tax code simpler but it always has the opposite effect.
I’m not exactly sure why Republicans are pounding this drum so loudly. Especially when focusing on government spending worked so well in 2010. I thought the problem was spending? Now, all of a sudden, “tax reform” is suppose to save us all and turn this economy around. The so called “reform” consists of either a flat tax or a consumption tax or both.
Now, a flat tax in and of itself isn’t a bad idea, nor is a consumption tax necessarily a bad idea but, here are the problems with both, as they are being proposed:
A flat tax taxes all revenue at the same rate, but, not all businesses have the same profit margin percentages. Some businesses, like high volume retail stores, have very small margins, like 2 or 3%, while other businesses, like a consulting firm might have margins of more than 50%. Some large construction companies that build skyscrapers might have a small margin of 5% but a small local contractor might have a margin of 75% or more. Oh, so just tax them on the profit? But, that is what we do now. A flat tax simply doesn’t work on business.
But, what about a flat tax on personal income. If you saw my post regarding Cain’s 9-9-9 you will see that even with personal income the actual tax rate that people pay varies widely based on marital status, number of dependents, itemized deductions, etc. If you make less than $100,000 your actual tax rate on all of your income is probably less than 10%. In many cases less than 5%. So, yes, we could just throw all of the deductions and exemptions out the window, I guess. But, that would certainly mean a very, very large tax increase for the lower to middle class. I don’t see how that is suppose to stimulate the economy. If the lower to middle class suddenly have less money to spend because they now have to pay a huge amount of tax that they previously didn’t have to, I tend to think that would harm the economy, not help it!
What about the consumption tax and a flat tax, like 9-9-9? Well, not a bad idea by itself, but to add a consumption tax in addition to the income tax seems like a very bad idea to me. I don’t trust the government. Never have. Never will. Why would we trust congress with a new tax? Many people on the left have wanted a Value Added Tax for years. Are Republicans really going to give it to them?
What about just scrapping the income tax altogether and going with the fair tax? That is also a decent idea, but, in order for the Fair Tax to be revenue neutral the “embedded” tax will be 23%. Embedded means that portion of the final price that is tax. For example, if something costs 77 cents and the tax is 23 cents, the final price is $1.00. Or, if something costs $1.00 and the final price is $1.30, the embedded tax is 23%. Well, I don’t know about you, but that actually looks like 30% to me. ”Embedded” is just a fancy way to make the tax seem smaller than what it really is. Yes, the Fair Tax has a “pre-bate” up to the poverty level so that people don’t pay the “23%” on the basic necessities of life. But, for a family of 4, that is about $20,000. So, if someone makes $100,000, $80,000 will be taxed at “23%”, or 30%, when they spend it. That is $24,000 in taxes! Sure, they are already paying Social Security and Medicare at 7.65% (5.65% currently) and that would go away under the Fair Tax. But, if you add the 7.65% plus the actual income tax that they currently pay, which is probably between 5 and 10%, their tax rate will more than double under the Fair Tax. Again, maybe this is “fair” because everyone needs to have some “skin in the game”, but, I’m not sure that the lower to middle class will be too thrilled when they find out how much they will end up paying.
And, what about the “10 million words” in the tax code? Well, I don’t have time to read the entire tax code, that is why I use resources like U.S. Master Tax Guide or CCH’s Tax Guide. They’ve already done the research for us and broken it down to terms that even a CPA can understand. I’ve been preparing taxes professionally now for 15 years and I’ve always been able to find the answer to a tax question. Believe it or not, there really aren’t that many “gray” areas. Most of the things that people have tried have been fully vetted.
Not only that, but, the majority of tax returns aren’t overly complicated. The average family has maybe 2 or 3 W-2′s, a mortgage statement that shows interest and real estate taxes, state income taxes that they paid, taxes on personal property, charitable giving, maybe some interest from a savings account, maybe a student loan interest deduction, ira deduction and maybe a couple of other small things. You certainly don’t need to trash the tax code because returns are just “too complicated”. A small percentage are complicated.
They could let people choose which method they want to use. If they want to continue filing the way they do now, let ‘em. If they want to just pay a flat tax, let ‘em do that. I’m okay with that, but, the majority of people are going to be better off filing as they do now. Under Perry’s plan, their rate, after deductions, would be 20%. Most taxpayers would need to calculate their taxes both ways in order to see how they would benefit the most. This means more tax preparation work, not less.
Filed under: Personal Taxes, Politics Tagged: 9-9-9, fair tax, FairTax, Flat tax, irs, medicare, national sales tax, Perry, Republicans, stimulate economy, Tax, Tax law, tax reform
