Tax Reform

By | April 28, 2004

Monday night I went to a tax reform debate. Though I believe more were invited, there were three people on the panel of experts. Two were pro “tax reform” and one was not. Tax reform in this context means a proposed federal sales tax replacing income and corporate taxes. I was aware of this idea from the past, however not very familiar with it.

If you look at the economy as being circular, then the same amount of money is removed from the economy by taxing no matter where you take it from. The difference at that point is the efficiency of the means of collecting tax. While it seems that a sales tax might be more efficient to manage, I had not been convinced that the benefit out weighed the challenge of changing the way things are done at such a scale. Some of my questions were answered that evening. For one, an estimated 28 billion dollars a year is spent in complying to the tax code (IRS, tax agents, etc.). Despite that, the IRS still admits to as much as 25% non compliance! And the actual number could be even higher.

One point that I had not thought of is the fact that though you may take the same amount of money out of the economy no matter what sector you take it from, there is a certain amount of determination as to who is most affected. Most notably, there can be a significant difference (at least perceived) in how certain taxes affect different classes. In fact, they had words for this. A regressive tax structure is one that would be more of a burden to the lower class than others. For example, a flat tax (everyone taxed a the same percentage) would be considered regressive, because even though the upper class pays more, they are seen to have more disposable income, so that it is less of a burden to them, whereas the lower class may need all of their income just for necessities. A progressive tax on the other hand, takes a higher percentage from the rich than the poor.

The current system is seen as being progressive, because the higher one’s income, the higher the amount of tax one is supposed to pay. However, the many conditions and loopholes have allowed for a system that most see as being unfair and uneven. The fact is that often times those (be they individuals or companies) with the most money know how to shelter themselves from taxes. This leads to a recognized difference in stated tax rate vs. effective tax rate (in reality the tax system is more flat than progressive). One of the panelist suggested that in order to get more from the wealthy, you would want to actually lower the stated tax rate, because then there is less incentive for them to spend money to try and avoid taxes, and they end up paying more!

The one panelist who was arguing against tax reform, argued that a sales tax is regressive. This is because the poor have to spend most if not all of their money to get by. However, there are a number of things built into this proposed reform that would off set that, not to mention the lack of such things as income tax would benefit them at least as much. I won’t go into the details here, but the advocates of tax reform argue that, with a simple rebate in place in the proposal, that the system is actually progressive.

The dissenter’s main point was that she believed that taxes should be used to control wealth and income inequality, that greater differences in wealth destabilize society. She argued that those with more have a greater responsibility to society. While one person in attendance was questioning who had a “fair claim” to the money one makes, she made the good point that most everyone who is making any money is doing so inside the context of society, enjoying and benefiting from certain public works.

I admit though, I don’t think I really agree with either side completely. As usual, I’m in favor of a certain amount of balance. The one side almost seems to believe that there shouldn’t be any wealthy, and you get the feeling that anything they make over a certain amount should become public property so to speak. On the other side, the people seem to believe that making money is unquestionably good (so long as it’s not illegal) so those who earn more should be rewarded by getting to keep more. If economics is the only thing you’re looking at, then someone who earns more (because they are providing an in demand good or service) is beneficial to the economy and therefore good. However, I believe there is more to look at and take into consideration when talking about the overall good to society. Yes, the economy is a significant part of society, but not the only part.

Anyhow, while I still have some questions and doubts, I am in favor of the tax reform. I believe that it is at least better than the current system. The website,, is the home of the non profit organization, Americans for Fair Taxation. It began as a research organization, which resulted in their current tax reform proposal. Their website has more information, and will probably answer many of your questions. It also has a place where you can sign a petition in support of the proposed changes. The primary questions that I still have, have more to do with the feasibility of changing over to a federal sales tax, rather than if it would actually be a better system in the long run once there.

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