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for all occasions in the Galleria!April 2, 2006 The Preposterous Income Tax By Jan A. Larson With only two weeks to go until "tax day," have you finished preparing your 2005 return? Maybe you filed your return weeks ago and you're one of the "lucky" ones that got a refund of the interest-free loan you made to the government. On the other hand maybe you've determined that you're going to have to write a check to the IRS this year. Isn't it comforting to know that after spending hours digging through indecipherable forms and instructions, gathering receipts and making all the calculations that you now get to pay more? In the 1960's television show Green Acres, the main characters, Oliver and Lisa Douglas, had to climb a pole to answer their telephone. To anyone watching, it was preposterous that they would live that way, but it was normal to them. It is preposterous that we live with the present federal tax code. Members of Congress talk about tax reform year after year, but little gets done. Tax credits are added, deductions taken away and rates are adjusted from time to time, but every April 15, it is more of the same - wasted time, head scratching and profanity - for the American taxpayer. Why do we put up with this? Because we're sheep. Because most taxpayers just muddle along not caring that the tax code is fundamentally unfair, not knowing how much power they've ceded to the government and not understanding how damaging the tax code is to America. There have been various ideas floated in recent years for reforming the tax code. Congress, left to its own devices, will never do more than tweak around the edges of the thousands of pages of tax code rules and regulations. Why? Because tweaking around the edges leaves the power with Congress, not the people. Keeping the tax code complex keeps everyone under the thumb of government. To remove the power that Congress wields over "we the people" via the tax code, we must slay the dragon. There are two major schools of thought regarding tax reform: a flat tax on income or a national sales tax, specifically the Fair Tax. While a flat tax would be preferable to the current mess, it has fundamental flaws. First, it leaves the burden of tax compliance on the shoulders of both businesses and individuals. Second, given the propensity of Congress to manipulate the tax code, a flat tax wouldn't remain flat for long. The tax reform of 1986 reduced the number of tax brackets to three, but now there are six. Third, while a flat tax may be simple for people whose entire income is from wages, all of the complexity of the current tax code would remain for the self-employed and for businesses that would continue to deal with the onerous task of determining just how much income they had. The Fair Tax would solve all of these problems. There would no longer be any requirement for individuals to self-report their tax liability (which is preposterous to begin with). Second, the only manipulation that Congress could do would be to adjust the rate up or down. Third, businesses would simply collect the tax in the same way as they collect sales taxes today. Almost all of the arguments against the Fair Tax have little merit and those that do are really only of concern during the transition period. An example is that a person that has saved after-tax dollars would be taxed again when those dollars are spent. This is true, but when the taxes that are currently embedded (and hidden) in everything we buy today are removed with passage of the Fair Tax, the final price of most goods and services to the consumer will not change much if at all even with the Fair Tax added. Thus the buying power of after-tax savings would be nearly the same. Some criticize the Fair Tax saying that the 23% rate commonly quoted is really 30%. That all depends on how you view tax rates. Let's say you bought something for $1.00. The tax added under the Fair Tax would be $0.30 for a total cost of $1.30. If you view the Fair Tax as the percentage of the total price paid, ($0.30 / $1.30) it is 23%. This is the "tax inclusive" rate and is way income tax rates are quoted today. If you're in the 25% tax bracket, you keep 75 cents while the government takes 25 cents of each extra dollar that you earn. The amount of tax as a percentage of the "spendable" money is really 33% ($0.25 / $0.75). The 23% Fair Tax rate simply allows an apples-to-apples comparison to income tax rates. Some argue that the "wealthy" won't pay their "fair share" under the Fair Tax. The short answer is that yes they will, but more than that, do you really think that everyone pays their "fair share" today? The $345 billion in uncollected taxes for 2001 says to me that a lot of people aren't. Can it really get worse than that under the Fair Tax? It is doubtful. Some politicians put a negative spin on the Fair Tax for no other reason than they know that they would lose power if the current tax code were eliminated. Politicians curry favor with special interests and contributors via the tax code. No tax code to manipulate means nothing to give to those special interests. The economic benefits of the Fair Tax are substantial and too numerous to mention here. Suffice it to say that the Fair Tax would bring about unprecedented economic prosperity to the United States. The Americans for Fair Taxation website has more information. Momentum for the Fair Tax is growing via a grassroots effort all across the country and it has been introduced in both the House (H. R. 25) and Senate (S.25). You too can become part of this effort. Think about that on April 15. -- Send feedback to the author. The "What is the Deal?" column will appears weekly on the Pie of Knowledge website. Guest submissions are welcome and encouraged. 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