We Need Fundamental Tax Reform!


Most Americans would agree that our tax code is a mess and needs major reform.  The last reform was in 1986 when the top rate was reduced from 50% to 28% and many deductions were eliminated.  However this reform effort turned out to be short lived in the sense that many of these deductions have now been added back in.  The Romney plan of 2012, cutting all tax rates by 20% in a revenue neutral way, would have been an improvement over our current system.  But, it’s gains would likely also have been only short-lived.
CaptureConsumption taxes are now being used in many parts of the world and, in recent years, the idea of a national sales tax has gained popularity in the U.S.  The so-called Fair Tax would impose a single 30% tax on all sales at the retail level.  The proponents claim that this would raise enough income to replace all federal taxes: the individual income tax, the corporate income tax, the payroll tax and the estate tax.
The tax attorney, Michael Graetz, has evidence that a 34% tax rate would be necessary to replace just the individual and corporate income taxes alone.  This is a large discrepancy.  Regardless, a major argument against the Fair Tax is that such a high single tax of 30% or higher would create a compliance problem because of the incentive for people to try to avoid paying it.
Mr. Graetz has proposed a hybrid consumption and income tax, which he calls the Competitive Tax Plan, as a more reasonable but still fundamental change to our current tax system.  Although I have discussed this proposal previously, I will summarize it again here:

  • A broad-based Value Added Tax of about 14% is enacted on goods and services.
  • Families earning less than $100,000 per year are exempted from the income tax. The tax rate would be 15% for incomes between $100,000 and $250,000, and 25% above this level.
  • The corporate income tax rate is lowered to 15%.
  • The Earned Income Tax Credit is retained and used to provide relief from the Payroll Tax for low-income families.
  • The plan is designed to be revenue neutral as verified by the Tax Policy Center.

There are many advantages of the Graetz Plan over our current system.  100 million returns, for all those with incomes under $100,000, would be eliminated.  This would, in turn, make it less politically expedient for Congress to constantly add new exemptions and preferences into the code.  Lower income tax rates for both individuals and corporations would give the economy a big boost.
The Competitive Tax Plan is an example of the type of bold, fundamental reform that we need to make to our federal tax system.

11 thoughts on “We Need Fundamental Tax Reform!

  1. The Fair Tax is the only fair way of funding the functions of the U.S. government. There would be no taxes deducted from people’s pay checks, which gives them virtual raises, regardless of their income. Ill informed critics dismiss the plan because they cite propaganda, not factual information, to validate their nonsensical arguments. People who are critical of the Fair Tax omit the fact that it would effectively untax the poor, due to the Prebate and the elimination of the payroll tax. Waging class warfare is the only thing liberals are good at, not enacting policies conducive to economic growth. Critics are incapable of making any logical counterarguments because they either distort the facts or dismiss them in entirety. Liberals claim it would hurt the poor, which is false.

    • I like the idea of a consumption tax, such as the FAIR tax. The only problem, which is a big one, is to make sure it brings in enough money to fund our government at its present level of about $4 trillion per year. It has been estimated (see above) that this would require a sales tax of 34% on most purchases we make. This is so high as to be impractical.

    • Example: say an item costs $1.00 with a 20 cent tax added. The Fair Tax people call this a 16.7% tax since 20 cents is 1/6 of $1.20. However 20 cents is 1/5 of $1.00. So this is really a 20% tax. This is the difference you have to be careful about.

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