Wednesday, November 30, 2005

Don't reform the tax code, replace it

A few weeks back, the President's Advisory Panel on Federal Tax Reform released a report. It includes some good baby steps in the right direction, such as eliminating the Alternative Minimum Tax. However, it does not go nearly far enough. It does not address the regressive employment tax, which is the largest tax payed by most workers. The tax code is the primary source of power for politicians, and well-funded lobbyists have worked for years to coerce, bribe, and otherwise manipulate corrupt Congresscritters to shape the tax code into something that benefits them and the people who hire them, but makes no sence for the nation as a whole. Tax considerations cause people to do things in a highly inefficient and unproductive way. The book The Greedy Hand by Amity Shlaes gives countless examples of unintended consequences of the convoluded tax code. Decades of tax code manipulation has resulted in a 17,000 page monster which is beyond reform. We need to throw it out and rebuilt the tax structure from the ground up.

Our current tax system punishes activities which benefit the country, benefit the economy, and benefit individuals: labor, saving, and capital. As a general principle, if you tax an activity, you decrease the activity. We want to increase the motivation for people to work and provide for themselves, to save, and to invest in our economy. Ronald Reagan summed up our current approach to taxation: "If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it." In combination with controlling and reducing government spending, we need to eliminate the tax on income and investment and replace it with a tax on consumption. Repeal the income tax, the employment tax, the capital gains tax, and the death tax, and remove these impediments to employment. Instead, tax consumption thru a national sales tax. Everyone would get an automatic pre-bate on the taxes paid to support a minimal standard of living. The poor would pay no taxes, income or employment. Money not spent on consumption would not be taxed, giving a great incentive to save and invest, driving down interest rates and providing investment capital to grow the economy. This would remove the maze of loopholes and hoops to jump through in our current system of tax deferred savings. All savings would be tax deferred. Small businesses and self-employed people would no longer be burdened with the impossible task of trying to cope with the complexities of the tax system. As interest rates fall, the economy grows, and employment rises, everyone benefits.

So why will Congress not make such a positive change? It would take away from their own power. The primary source of power for a member of Congress is the ability to take away the money that you earn and give it to someone who didn't earn it. Congress is unlikely to give up their own grasp on power, even if it is in the long-term interest of the nation.

The Fair Tax proposal is very similar to what I am proposing. For a great deal of information about how it would work and the benefits it would bring, visit

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