What the U.S. Needs: A New Tax System?

By now we're familiar with the usual suspects behind this financial crisis: rates were held too low for too long; banks loaned to anyone who had a pulse; JPMorgan Chase (NYSE: JPM  ) , Citigroup (NYSE: C  ) , Bank of America (NYSE: BAC  ) , and the like created "derivatives of mass destruction;" regulation was non-existent, and so forth.

But Robert Frank, economist, author of The Economic Naturalist: Why Economics Explains Almost Everything, and Cornell University professor, offered an unconventional theory behind the crisis during a recent visit to Motley Fool headquarters.

Frank used the quest for status and rank to explain what has happened in the economy, implying that the lust for societal status and rank was furthered by the easy availability of credit -- which caused this crisis. Frank maintains that the quest for status can actually hurt others.

His theory goes like this: As the affluent become wealthier and spend more, the "frame of reference" shifts, causing a cascading effect down the income ladder. The wealthy start building bigger houses, and then the group below them builds bigger, too -- not necessarily because they can afford to, but because the standard has increased.

If you don't match others' spending on housing, Frank said, then it's your kids who go to the inferior school, because the quality of school districts tracks neighborhood prices very closely. "If everyone is spending more on housing, so must you -- unless you want to endure sending your kids to an inferior school," he said. According to Frank, the average U.S. house is now 50% larger than its counterpart in the 1970s.

The aftermath
Certainly, "wealth" grew at a breakneck pace over the past five years as people chased status, made possible by an overdose of credit that was unsustainable. Homebuilders like Lennar (NYSE: LEN  ) , Pulte Homes (NYSE: PHM  ) , and Toll Brothers (NYSE: TOL  ) did well for themselves building larger homes. Now, they're suffering the consequences.

Now the economy's rip cord has broken. To pull it back up, the federal government has committed to spending billions of dollars to jump-start the economy.

Of course, the magnitude of the stimulus brings with it inevitable deficits. But Frank says we shouldn't be overly concerned about deficits in the short run. "Deficits in short term aren't a problem, as spending levels are low right now," he said.

However, Frank said that in the long run, deficits can be very costly. You can minimize the long-term impact of deficits by spending on useful investments; Frank points to this simple example:

There are a couple bottlenecks on the northeast rail corridor -- you can't get double-decker rail containers under the overpasses and through the Baltimore tunnel. If you cleared those bottlenecks out it would cost you about $6 billion; but the immediate benefits would be $12 billion. So if you do that project with borrowed money you're ahead $6 billion.

How to minimize the impact of deficits
Frank has come up with a solution to the "status problem" that would alleviate debt burdens for future generations: redesign the tax system.

He has proposed that the U.S. scrap the income tax and in its place adopt a steeper progressive consumption tax -- or in its catchier name, "the unlimited savings allowance tax." The theory starts with the basic assumption that consumption plus savings equals your income.

Individuals would report their income to the Internal Revenue Service the same as they do now, but would also report savings the way they would for a 401(k) plan. Then you'd take income minus savings to get how much you consumed for the year. From there, you'd take off a large standard deduction ($30,000, for example) to get the tax base.

The tax rates start out low, but the tax rate increases the more people spend. There's no logical limit to the top marginal tax rates on consumption, according to Frank; it could even be 200%.

Rationale for the consumption tax
Frank said we've been reluctant to raise the tax rate too high because we fear that people will start saving and investing less. However, he argues that under the progressive consumption tax, you actually encourage greater savings with higher marginal tax rates, while providing incentives for people to pursue slightly less glamorous materialistic things, and keep their accounts growing where they are sheltered from tax. "I think that's the easiest way we have to change our incentives -- and it wouldn't be a painful adjustment for the rich," said Frank.

Implementing this
The key to implementing Frank's plan is taxing consumption after we emerge from the downturn. "Tell people today that there's a consumption tax coming so they all go out and spend," he said. "I better buy the car now and not wait. You get immediate stimulus."

As for the long run, Frank said that if you phase the tax in gradually, you would shift money from consumption to investing, which means faster growth in the long run. "It's a proposal that says we'll have faster growth, and we won't consume as high a percentage of our national income as we do now," he said. "The challenge is to make a transition from our unsustainable 'borrowing-consuming economy' to a 'save-and-invest economy.' We can do that."

What do you think, Fools? Chime in below with a comment, or click these links for related Foolishness:

Fool contributor Jennifer Schonberger owns shares of Bank of America but does not own shares of any of the other companies mentioned in this article. The Motley Fool has a disclosure policy.


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  • Report this Comment On July 08, 2009, at 1:52 PM, catoismymotor wrote:

    WWW.FAIRTAX.ORG

  • Report this Comment On July 08, 2009, at 3:20 PM, jsl4980 wrote:

    I'm not sure I understand how exactly the tax will be applied from the description, so I can't comment on that. But if you want to encourage savings then we should exempt interest earned on savings accounts from the income tax today. If you want to cut deficits raising taxes is not the right side of the equation to fix, we need to cut government spending instead.

  • Report this Comment On July 08, 2009, at 5:11 PM, bills442 wrote:

    sounds like a gimmick to me. I didn't buy "expensive" items and "saved" and invested plenty without any motivation. Of course I havn't been rewarded at all for that ... in fact my biggest regret over the last 20 years of my life is that I didn't spend like the rest of the fools.

    Nope, there's plenty of punishment capability already built into the system for people who spend carelessly, if we would just allow consequences to actually "happen" instead of bailing out everyone.

    I don't see the need.

  • Report this Comment On July 08, 2009, at 5:25 PM, eldetorre wrote:

    Flat income tax on all income above poverty level.

    Flat asset/property tax.

    Flat sales tax on everything. Refunds available for those via very simple formula.

    Close all loopholes.

    Tax all short term investment income at same rate.

    Do not tax dividend income below a certain level.

    Less federal gov't spending. Local problems local taxes.

    Eliminate pork.

  • Report this Comment On July 08, 2009, at 5:26 PM, brucedieter wrote:

    www.fairtax.org or

    FairTax: The Truth: Answering the Critics by Neal Boortz and John Linder

    and

    The FairTax Book: Saying Goodbye to the Income Tax and the IRS by Neal Boortz and John Linder

  • Report this Comment On July 08, 2009, at 5:39 PM, usanzac wrote:

    Robert Frank must live in a vacuum. The National Retail Sales Tax (NRST, aka "FairTax") is a far better idea and does the following, just to name a few:

    1. Completely replaces all forms of taxation today, many of which are costs of doing business

    2. Saves hundreds of billions of dollars a year in terms of tax compliance; income is not reported

    3. It is progressive because every household receives a payment, in advance every month, representing the cost of the NRST applied to the cost of living

    4. Encourages saving and investment because taxes are only paid at the final point-of-sale of new products and services

    Opponents recognize that it takes power away from government since elected officials will no longer be able to tweak an income tax code; as designed, the rate for the NRST can be changed but not selectively.

  • Report this Comment On July 08, 2009, at 6:39 PM, taxguydoug wrote:

    Good luck with your Fair Tax. If half of the country isn't going to pay income taxes now, why would they sign up to start paying a national sales tax? The only fair tax is the one that taxes someone else.

    Your proposal is a give-away to the rich. They will pay less of the overall burden than they do now.

    As for the author's suggestion, how would he define "income". That definition takes up a very large section of our current tax code, so you really haven't changed that much.

  • Report this Comment On July 08, 2009, at 6:49 PM, mythshakr wrote:

    Someone needs to explain how consumption taxes to discourage consumption and encourage saving will grow any sector of the economy?

    If everyone is saving and not spending just which parts of the economy are going to grow?

    For example, would not increasing taxes on a basic necessity like food be an incentive for people to go on diets and thus spend less on food?

    Is the goal here to have only the cheapest things in the marketplace survive?

  • Report this Comment On July 08, 2009, at 6:50 PM, jssiegel wrote:

    So now that I'm retired you're going to tax me for spending the money I saved after it was taxed as income? And you thought Social Security was the third rail of politics - wait until AARP hears this screwball idea!

  • Report this Comment On July 08, 2009, at 6:52 PM, DDHv wrote:

    We could use something! For myself, I've noted that backyard gardens are not taxed, and the ROI on investment is fantastic (as long as you are using it yourself) provided the needed work is filed under "necessary exercise"

  • Report this Comment On July 08, 2009, at 6:56 PM, GOLDOIL wrote:

    25 years ago I calculated the FLAT TAX percent to equal the Tax Revenue generated by the current IRS system. The answer in 1978 was seven percent (that's only 7%!) of all income above the minimum poverty standard.

    Revisiting these calculations today, a 10% Flat Tax would exceed current Tax Revenues AND cover most of the major social changes like Universal Care and paying SSI.

    Do the math everyone...12% would payoff the deficit within 10 years while maintaining a BALANCED BUDGET! Is that too much to pay? It is a lot LESS than 98% of Americans pay, BUT it is MORE than the top 2% of wealthy Americans pay.

    Now, are we Capitalism or are we under complete financial domination and dictatorship of the FEW? We need to look at incomes in 1955 to see how the problem has grown til today. At the peak of this Financial Debacle, 41 % of all workers were in Financial sector.

    Those 41% earned MORE than four times the aggregate income of the other 59% of workers. That is the BIG picture and why laissez-faire capitalism does not work!

    Free enterprise does work,BUT there can be NO Free Enterprise when business is dominated by the few powerful individuals and corporate management,

    Love America, but the Founding Fathers Hated GREED.

    Prof. Dan remy, Economics

  • Report this Comment On July 08, 2009, at 7:23 PM, BlueBoomerHD wrote:

    Flat income tax, above predetermined poverty level, no exemptions.

    IRS paper work on a postcard.

    Simple and effective; important numbers in third paragraph of GOLDOIL's post:

    "Do the math everyone...12% would payoff the deficit within 10 years while maintaining a BALANCED BUDGET! Is that too much to pay? It is a lot LESS than 98% of Americans pay, BUT it is MORE than the top 2% of wealthy Americans pay."

    The "Fair Tax" exemplifies the notion that if it has to be in the name, it probably isn't.

  • Report this Comment On July 08, 2009, at 7:33 PM, xetn wrote:

    Perhaps all of you economists on this site should read some alternative ideas, like this:

    http://blog.mises.org/blog/

    or

    http://blog.mises.org/blog/

    or

    http://blog.mises.org/archives/010236.asp

    When you boil down the study of economics, it is actually a study of human action; the actions of billions of individual transactions taking place between buyers and sellers. This is macroeconomics. Macroeconomics which most main-line economists (like Keynesian economists) are only looking at the results and think they can manage all of those transactions. Hence, they make the big mistake that any spending increases the economy and adds jobs, but in reality, jobs are a product to production and nothing can be purchased if it has not been produced.

    All taxes are destructive regardless of what type, and just for all of you socialists, the upper 20% of wealth holders pay over 90% of the taxes.

    As for the rest of the comments on this post, there is no such thing as laissez-faire capitalism in the US or anywhere else. That would require NO government regulation at all, and no taxes of any kind.

    Lastly, all people are governed in part by greed, If you are not greedy, then why are you trying to make as much money as you can by investing in the market.

    It is simply amazing to me that there are so many people that fail to study the subject of economics and just parrot what they hear.

    GoldOil, you missed your calling, you should be a socialist not an investor.

  • Report this Comment On July 08, 2009, at 7:44 PM, Sunshyne43 wrote:

    Since we will have to rely on our elected officials to change the way we are taxed, the NRST and the flat tax don't stand a chance. Any law that takes away their privileges and power over us will not get out of Committee! As you might surmise, I have no respect for the majority of elected officials currently sitting in the House of Representatives and Senate. We like to say that some foreign governments are corrupt -- we need to look at our own more closely. The pension plan that they voted for themselves is nothing more than highway robbery. They are stealing from us to fund a comfortable retirement for themselves while our 401(k)'s and IRA's have been decimated. I cannot see a way out of what has been created in Washington, D.C. I'd bet that if each one of them was put under the microscope like they did Senator Ted Stephens, not one of them would come up innocent. So I don't expect any "fair" tax relief from our Federal Government any time soon.

  • Report this Comment On July 08, 2009, at 8:39 PM, drjames9664 wrote:

    The single most deterrent to the accumulation of wealth by the middle class is the income tax. The wealthy always pay off the politicians so that endless loopholes to avoid the tax are produced every year. Offshore accounts further help the wealthy hide their money. The wealthy have access to the tax attorneys on K Street to further limit their exposure. A wealthy person can structure his wealth so as to show no income at all, thus totally avoiding the tax. Criminals pay no income tax which is a better alternative than declaring income and thus exposing themselves to prosecution. The so-called poor pay no income tax. The illegal immigrants pay no income tax or any other tax for that matter.

  • Report this Comment On July 08, 2009, at 8:43 PM, drjames9664 wrote:

    Continued: The cost of compliance is excessive and a drag on businesses which usually pass on the cost to the consumer. The Fair Tax is the only viable alternative as it is fair, simple, researched, documented by credible economists and will make it much more possible for the middle class to actually save something. Criminals, illegals, visitors, the rich and the middle class will all pay a "fair" tax. Wise up citizens, take the power of the IRS Gestapo away from the politicians. JM

  • Report this Comment On July 08, 2009, at 9:25 PM, dutchmanii wrote:

    What we have here is a failure to rationalize. Yes, the Fair Tax would do the trick and what gets me is these people that say it would only bennifit the the rich. Bah, Hum-bug. Look, right now if you eliminated the ability of a lawyer, contractor, etc. to be able to deduct as a business expense food used at meetings, tickets to Yankees baseball games, company meetings at Remington Park Horse track with all the food and trimmings as a business expense. Only one of the crooks that is protected by the current system would say something negative about the Fair Tax. I invite each and everyone of you to really be honest and read the H.R.25 Fair Tax proposed legislation, or the books mentioned above. The "So called poor" would make out like a bandit and fairly I might add as there would be a prebate monthly of what it is expected a person at some determined level of income would be taxed for food, and necessities. Anything over that ammount of consumption would fall above the prebate level and then they would pay the tax.

    One thing you fail to think of is all the money that would be collected from Drug Dealers, Prostitutes, the gangsters/mob and all those that do business under the table/cash basis. They have to eat and get clothed as well, they even have to have some form of transprotation and that Lawyer that wants to have a "Trust account meeting" at Yankee Stadium would have to pay the Fair Tax on the tickets.

    Wow, wouldn't that be great! I mean it would make most people HONEST and paying what I consider their way for a change.

    But if you want to keep on disillusioning yourself you have that right too. But there are better ways and the Fair Tax is definitely one of them.

    Fool On

  • Report this Comment On July 09, 2009, at 8:45 AM, PirateDaddy wrote:

    A consumption tax is the best way to go. Its the most fair and will bring the most prosperity to our nation. But I do not like this idea of reporting to the Feds what our incomes are. Just have a flat tax on all new items bought and leave it at that. Its easy, its predictable and its fair. It also leaves the American people more in charge of their own lives.

    Abolish the 16th Amendment and institute the FAIRTAX!

    www.fairtax.org

  • Report this Comment On July 09, 2009, at 8:56 AM, Florestani wrote:

    This is a really dumb idea. Stop and think a minute: there is NO value to money saved, or invested, on the premise that you don't pay income tax on it as a result. Why? Because, what good is money saved or invested unless you plan at SOME point to actually spend it? So, what difference does it make if you spend it now (and pay tax on it) or save and invest it, then spend it later (and pay tax on it? As a matter of fact, if it grows while saved or invested, then you'll pay even MORE tax on it when you spend it. Money in a hole under a tile in your basement is useless unless eventually you, or someone else, spends it!

  • Report this Comment On July 09, 2009, at 9:01 AM, Florestani wrote:

    If you want to change taxes, set the tax rate on short term capital gains at 95% and the tax rate on long term capital gains at 5%. Then watch this market volatility disappear overnight (read "dump the short sellers, options traders, and Atlantic City Casino From The Comfort Of Your Own Living Room" croud). The stock market could once again become a place to INVEST. While you're at it, make an even lower tax on dividends to reward companies that actually make any money and pay it out to its shareholders!

  • Report this Comment On July 09, 2009, at 9:49 AM, ed1007 wrote:

    >>>Do the math everyone...12% would payoff the deficit within 10 years while maintaining a BALANCED BUDGET! Is that too much to pay? It is a lot LESS than 98% of Americans pay, BUT it is MORE than the top 2% of wealthy Americans pay.<<<

    Stop confusing wealth with income. they are not the same.

    >>>Someone needs to explain how consumption taxes to discourage consumption and encourage saving will grow any sector of the economy?<<<

    Ok... the money saved would increase the lending power and decrease the cost of capital. This would stimulate new business and grow the economy.

  • Report this Comment On July 09, 2009, at 10:02 AM, money4eds wrote:

    Forget trying to fix areas that are broken in the economy. Do two simple things, flat tax based on consumption (National Sales Tax) no exemptions & shrink the govenment spending. When the government money comes back to consumers it will be spent, saved and invested.

    In a free market everything works. Regulated markets require too much work to keep them going. Read what our founding fathers wanted the government to be and that is not what it is today.

  • Report this Comment On July 09, 2009, at 10:10 AM, BMFPitt wrote:

    Consumption tax tends to encourage deflationary spirals. I'm not saying what we have now isn't an atrocity, but this isn't really any better.

    What we should do is remove all tax decuctions other than a standard deduction, dependant deduction, and charitable contribution (which would have to meet a cetain standard) deductions. Create a 3 bracket system for poor, middle class, and rich where the ratios of the rates are fixed so raising/lowering taxes for one raises/lowers them for all. Now mandate a balanced budget and suddenly every pet project will come with a price tag that each voter can see.

  • Report this Comment On July 09, 2009, at 11:02 AM, Melaschasm wrote:

    "There are a couple bottlenecks on the northeast rail corridor -- you can't get double-decker rail containers under the overpasses and through the Baltimore tunnel. If you cleared those bottlenecks out it would cost you about $6 billion; but the immediate benefits would be $12 billion. So if you do that project with borrowed money you're ahead $6 billion."

    This statement can not be correct. If $6 billion invested this year would net a $12 billion profit next year, the government would not have to spend the money, private industry would have done so already.

  • Report this Comment On July 09, 2009, at 11:13 AM, Crump151 wrote:

    Need more jobs/manufacturing in this country?

    Institution of the FAIR TAX would almost immediately bring back to our economy over 13 T R I L L I O N dollars that has been sitting in off-shore accounts because of the Cap. Gains tax. 13 Trillion influx into our economy without us taxpayers being put into more debt. It's a no-brainer!

    By-the-way, Obama could declare a 6 month Cap. Gains holiday,......... and probably get a few trillion back into the economy very quickly,....................but will he (?),...........I think not,......it's too simple,...and it wouldn't make him look like the guru that everyone tries to make him out to be.

    Linder/Boortz FAIR TAX Plan is the very best plan I've ever seen! Read the book!!!!!

  • Report this Comment On July 09, 2009, at 11:59 AM, Rustyismydog wrote:

    Yup, the earlier comment on retirees picked up the killer point for this plan:

    People's economic lives unfold in two parts. During the first part, they earn money, pay income taxes on it and (hopefully) save enough of that after-tax money to serve them in retirement. In the second phase, after retirement, their income drops to zero (or a very low number) and they start to spend their savings to live.

    Under the Frank scheme, those retirees would be taxed again on their spending. If you think these people, as a group, are facing problems now--and they are--try reducing their income by the amount of the Frank tax.

  • Report this Comment On July 09, 2009, at 12:45 PM, UKIAHED wrote:

    FairTax – sounds like perpetual motion to me – something for nothing – hmm…always worked in the past…

    As taken from the FairTax site:

    • Low-income households experience a 26.7 percent welfare gain under the FairTax

    • Middle-income households experience a 10.9 percent welfare gain

    • High-income households experience a 4.7 percent welfare gain

    So, everyone gets a gain (saves tax)? Then tell me again how you collect more in taxes to reduce the deficit/debt?

    The FairTax rate of $0.23 out of every retail dollar spent on new goods or services (again from the FaitTax site)

    Ok – seems simple enough to me. So,

    Sending my kid to college just cost me 23% more

    My daughters wedding just cost 23% more

    Those medical expenses – 23% higher (guess what that would do to your insurance premium)

    My car gets repaired after an accident (they use new parts) – 23% higher (again with the increase in insurance)

    My house gets rebuilt after a hurricane (new parts) – 23% higher cost (oops – more insurance premiums)

    Buying that new car just cost 23% more

    Building your dream house – 23% more

    That vacation for your 10th anniversary – 23% more.

    That funeral for grandma – 23% more

    And it’s a simple plan as well – easy enforcement. Let’s see – I want to build a new fence (23% more – right?). So the mill buys the tree from the landowner (does the mill pay 23% more?), the wholesaler buys the 2x4 from the mill (does he pay 23% more?), Home depot buys the 2x4 from the wholesaler (do they pay 23% more?), my contractor buys the 2x4 from Home depot (does she pay 23% more?), I pay the contractor for the fence (and lots of 2x4s – do I pay 23% more?).

    The simple answer would be the end user pays – right? Hmmm – Home depot buys 100 2x4s. 20 get purchased by a contractor (no tax?) 40 get purchased by homeowners (tax?), 20 get purchased by the local homeless shelter volunteers to build a room (tax?), 10 get used by home depot to build a display (tax?)(then they sell the display used – no tax?), 10 get warped and thrown away (tax?). Fit that on your easy tax postcard…

    Easy? My favorite FairTax calculation. My 15 year old babysitter charges me $15/hour – this is a service right? Now he has to charge me an additional 23% - and file a tax return to account for it? Simple

    BTW – just what is a new service? Don’t employees provide a new service for their employers? Then the company has to pay 23% of your wages as a tax? If this is false – then I can see that walmart would love this proposal – no payroll taxes, no corporate income taxes – just you and I paying that extra 23% on their sales (nothing out of their pocket).

    Enough of the rant – enjoy and have a great day. 300 million people – nothing is free or easy…

  • Report this Comment On July 09, 2009, at 1:25 PM, vdronex wrote:

    Consumption based tax with a large standard deduction... Great idea!

  • Report this Comment On July 09, 2009, at 1:43 PM, ndsufool wrote:

    New ideas are fine in an academic sense, but politicians aren't going to dramatically change the tax code. Remember, politicians are interested first in getting re-elected, and I don't know where making good policy falls in their priorities.

  • Report this Comment On July 09, 2009, at 2:03 PM, devilinside wrote:

    Why are so many people on here so down on the wealthy. I'm by no means wealthy but I do adhere to the rights of all people to work hard, be successful and accumulate wealth HONESTLY!

    As investors isn't that what you are trying to do? Create wealth for you, your family and your future retirement. Do not begrudge others that were successful in doing so.

    The real problem is Government growth, it's out of control. I'd rather eek out a meeker living than have the Gov't trying to run our lives and making important decisions that effect us and our families on a daily basis.

    Wake up america. Socialism at is't finest has come to America, no longer the land of the free.

    I wish you all happiness and prosperity and you won't have to share it with me.

  • Report this Comment On July 09, 2009, at 5:09 PM, BlueBoomerHD wrote:

    If you would like to make money, then keep it safely and fearlessly till you care to spend it... You require a civil society. If you want recourse when someone rips you off, you need laws defining what constitutes a fair deal...

    You require a government, laws, law enforcement, etc...

    The civil society in these United States did not come easy or free and is not sustained that way either.

    Enjoy your life, make some money and pay your taxes, like it or not, to maintain the environment where you are able to thrive.

  • Report this Comment On July 09, 2009, at 6:20 PM, voteoutcongress wrote:

    "The key to implementing Frank's plan is taxing consumption after we emerge from the downturn. "Tell people today that there's a consumption tax coming so they all go out and spend," he said. "I better buy the car now and not wait. You get immediate stimulus."

    As for the long run, Frank said that if you phase the tax in gradually, you would shift money from consumption to investing, which means faster growth in the long run. "It's a proposal that says we'll have faster growth, and we won't consume as high a percentage of our national income as we do now," he said. "The challenge is to make a transition from our unsustainable 'borrowing-consuming economy' to a 'save-and-invest economy.' We can do that."

    --------------------------------------------------------------

    This guy is clueless. He wants to spurn a temporary stimulous and then have consumption stop. Just knowing that consumption will provide economic stimulous to this country lies at the heart of the problem.

    This Plan will kill the economy since the morons in Congress and the Federal Reserve have sold out America and created an economy based on consumption of goods and not production of goods for far too many insidious reasons to go into here. To tax consumption which now makes up 70% of our GDP will cause people to stop consuming and will put just about every small business (where most of the few jobs left are) into bankruptcy ensuring more job losses. With this guys plan, who will be earning a paycheck to save? Just how will the leeches in congress get their blood from the citizenry to further their unchecked collectivist dreams?

  • Report this Comment On July 09, 2009, at 7:47 PM, xetn wrote:

    And what prey tell, makes any of you believe that the fair tax or flat tax would remain the same after it was passed? When the income tax was instituted in 1913 the maximum rate was 7% for income over $500,000. and no tax on less that $20000. But as any "Fool" knows, the rates just keep getting higher and higher. In short, once any system is initiated, you can bet that politicians will change the tax to suit the circumstances. THERE IS NO FAIR-TAX!

    All taxes are government theft, at the point of a gun. The other tax is event worse; that is the result of inflation of the money supply (printing money out of thin air) which ultimately results in price inflation (the reduction of purchasing power). This price inflation is a hidden tax and can be much worse that the "regular" tax. Since 1913, the year the income tax and the FED were created, the value (purchasing power) of the dollar has lost over 95% ( it now takes $21.60 to purchase what $1.00 did in 1913).

    What really needs to happen is to curb the government's appetite for spending, reducing the need for taxes, and to end the FED's ability to create money out of thin air.

  • Report this Comment On July 10, 2009, at 11:18 AM, jackcrow wrote:

    Well their are plenty of opinions on how we get taxed so I'll dodge that heated debate and focus on where we spend money.

    Our rail system is in decay and slowly being pulled up. Our crown jewel highway system is turning into nothing but patched potholes and frightening bridges. The locks in Great Lakes are antiquated. The ports along the Miss and the Columbia are sub par.

    Soon the most productive nation in the world won't be able to effectively move its products.

    Municipal water supplies are beyond max capacity and water quality is hitting levels we haven't seen in 50+ years. Water treatment is in the same boat, one good gully washer storm and everything downstream is on a boil order.

    Our electrical grid is both dumb and under capacity. Pickens just junked his wind farm because he couldn't move the power he was going to generate. The system is also vulnerable to attack.

    All of the above are things that governments are suppose to be involved in, in some capacity. All of them have a direct impact on our health, wealth and well being. Most of the above, if invested in, will pay for themselves on a national and regional scale.

    Governments can invest, not just provide benefits and services.

  • Report this Comment On July 10, 2009, at 11:53 AM, mpendragon wrote:

    The claims of the fair tax people about the rate you'd need to charge to make up for income tax are deceptive at best. They often quote something like 23% but they define sales tax rate in a rather novel way. They use amount of tax as a percentage of the price+tax.

    The conventional way is like this:

    sales price = $100

    tax rate = 30%

    sales price + tax rate = $130

    The fair tax people do this: (tax portion of the final price)/(the final price with tax included) = tax rate

    so a fair tax calculation looks like this:

    sales price = $100

    sales price + tax rate = $130

    (130 - 100)/130 = ~23% - this is the tax rate they quote

    So with a fair tax your taxes go down 7% by redefining what tax rate means which is pretty scammy.

    Another problem is enforcement. The real 30% sales tax rate + state taxes + city taxes are likely to be on the order of 37-40% which gives people a huge incentive to buy things with cash under the table so we'll need something much larger and much more invasive than the IRS to keep that under control. The sad fact is that it's easier for the government to take money out of a person's paycheck than their pocket because of the number of transactions involved.

  • Report this Comment On July 10, 2009, at 2:18 PM, Micorazon wrote:

    Abolish the IRS and the entire tax code with it; it's too cumbersome, too full of loopholes and contradictions, and besides, NOBODY understands it all. Never mind the complicated formulas and gradations; replace it with a 1% consumption tax on everything, similar to the European VAT.

  • Report this Comment On July 10, 2009, at 7:18 PM, eyeswideoopen wrote:

    The consumption tax on all goods and services is not Robert Frank's new idea. This idea was proposed under the name "Fair Tax" by Rep. John Linder in about 2004. After researching it, I had the ah ha moment when I found out that Canada has a Goods and Services tax. What that spells is "harmonization" for global "governance". It makes sense logically for a one world governing structure (assuming you are a lowlife, dirtbag, globalist traitor) to have a taxing scheme that does not depend on citizenship (as if citizenship means anything under the WTO modern day slave trade system called services).

    Linder is a republican and his proposal was immediately inclusive of all goods and services. The democrats version of the Goods and Services tax will be phased in beginning with the Cap and Tax on Energy that was just passed. The tax part of it is the consumption tax on energy. Watch for up and coming legislation to include the consumption tax under different names - but ultimately, it will include everything as the Fair Tax did.

    For the record, there is no republican party nor is there a democrat party. Whoever is writing the legislation for them just puts a different wrapping on the package to appeal to the braindead sheep but the content of the package is the same.

  • Report this Comment On July 10, 2009, at 7:34 PM, catoismymotor wrote:

    Here is the real skinny about the Fair Tax. It is a far better system than what we have in place. It will save you money, time and effort. Please open your mind for ten minutes and go here http://www.fairtax.org/site/PageServer?pagename=about_main for the details. Okay? Do we have a deal? I knew I could count on you.

  • Report this Comment On July 10, 2009, at 8:09 PM, DarthVater wrote:

    Being here from Europe I have never managed to understand how this tax system can be equitable to anyone. I reviewed the fair tax proposals and that looked quite promising to me because of the admin overhead it will safe, not only in the Government but also the payroll processing in the corporations. However, it is a very narrow proposal just addressing how income taxes on salaries can be replaced with a consumption tax.

    It does not address any of the other taxes at all. Taxes on salaries I can comprehend and I think that could be managed with little overhead if it was a flat tax for everyone with no deductibles whatsoever, like it works in HongKong and Singapore. What drives that insane complexity is income tax on interest and dividends, capital gains taxes, estate taxes etc.

    Get rid of that. And get rid of property taxes too. Not even our most oppressive communist regimes in history would have been cynical enough to tax the people's houses away. They made it very hard for someone to acquire property. But once you got it then it was really yours.

    Cover the remaining funding needs with a VAT and not a cynical sales tax that threatens to criminalize the whole country. VAT is collected at the point of consumption but only if there is a value added, not if you buy a used car from someone privately (there is value lost).

    With a flat income tax on salaries like in Asia and a VAT at the point of consumption like in Europe and no other taxation whatsoever you have two tools that you can emphasize differently depending on your political priorities and a very lean collection process with minimal enforcement needs.

    And while you are at it: I am not aware of any other country that can afford entertaining different competing taxation authorities. We have federal systems too in Europe but all tax is collected in one place and then allocated to federal, states, municipalities etc. per the yearly budget.

  • Report this Comment On July 10, 2009, at 9:47 PM, memoandstitch wrote:

    "If you don't match others' spending on housing, Frank said, then it's your kids who go to the inferior school, because the quality of school districts tracks neighborhood prices very closely."

    There is no requirement that parents must send their kids to schools in their home district. Many kids in Thailand travel a hour or two to get to their desired school everyday. It's a pain but it doesn't require anybody to take on excessive debt.

    Also, in your example, it's easier to move the schools or build new ones than to move the tax system.

  • Report this Comment On July 11, 2009, at 12:31 AM, Ibeatmykids wrote:

    there are tens of millions of people that make their living illegaly such as illegal immagrants, drug dealers, and all sorts of others. These people don't pay income tax. If there was a NATIONAL SALES TAX they would. If everyone bared the load it would be easier for us all.

  • Report this Comment On July 11, 2009, at 3:33 PM, HarryCarysGhost wrote:

    What about a 15% flat tax on everything.

    If I buy a pack of gum for a buck it costs $1.15.

    If I sell a stock for $1,150 profit

    $1000 for me $150 for the Government.

    If I trade in my hours for a handful of dimes,(income)

    lets say $115,000.

    $100,000 for me $15,000 for Gov.

    Every time theres an election this idea gets blown out of the water,

  • Report this Comment On July 11, 2009, at 10:48 PM, txblonde09 wrote:

    This guy is a professional? Sorry, but it's a completely asinine idea.

    FAIR TAX. Read about it, discuss it, think about it. You only pay tax on what you buy - that goes for everyone who makes a purchase in America - includes illegal immigrants, the mob, gangs, hookers, drug lords. It levels itself because it is based on how much a person spends.

    It will work and work well for us tax paying Americans who pay for those who don't. Tell your elected representatives you support it, not some preposterous scheme like this article, and not another tax increase to pay for the out of control spending in Washington.

    FAIR TAX. It will work.

  • Report this Comment On July 12, 2009, at 12:39 AM, tomojr wrote:

    Each of us is bound into forced labor up to the maximum 39% federal income tax rate. We are indentured servants. Not to mention the state sales taxes we pay, state income taxes, federal and state gasoline taxes, telephone taxes, you get my point.

    This is not what the Founding Fathers intended this great Republic to be. If the federal income tax was abolished, federal revenues would shink to 1997 levels. The problem is not in the revenue generation although they are taking far more from us than we are receiving, rather in the incessant spending of Congress. Drunken sailors at least sober in the morning. This game has progressed far enough. It is time the American people got mad and took their Republic back. I am not advocating guns and bullets, rather the ballot box. All incumbents should be shown the door.

    The majority of social programs undertaken in the past 80 years would cause Thomas Jefferson and his peers to vomit. I am very supportive of those in need, however, rendering a way of life, trapping them in poverty or addicted to the breast of the federal government must end. NOW.

    AIG, fail, GM, fail, Chrysler, fail, Goldman Sachs, fail. Each of these companies should be buried. Others would have picked up the crumbs.

    The question is, are any of you going to rise up and put yourself on the line, just not in the literal way the signers of The Declaration of Independence did in signing their death warrant had our fight for liberty and freedom from tryanny failed?

  • Report this Comment On July 12, 2009, at 7:39 PM, prose976 wrote:

    Who are these people who think the government is here to incentivize, corale, cajole and direct anything. The government is elected and voted into existence to factilitate opportunity and moderate justice for the citizens who voted it in.

    The idea that it is the job of the government to do anything more is ludicrous. The ineffectiveness of government has been demonstrator through the centruries, and it's progression toward absolute power never ceases. It's like the blob - you remember the old movie with Steve McQueen - where it just keeps getting bigger and bigger, and nothing can be done until eventually the puny masses find a way to do away with it.

    The tax system was meant to implement the barest necessities for the benefit of all. It has become an enormous beast that has become a vehicle by which our government can finally imprison the people.

    Forcing people to spend or not to spend by way of incremental taxation will not only create an even larger glut in the tax code, but it will increase the size of government who overseas, audits and prosecutes under these new laws that most Americans will a) not fully comprehend and b) will encourage even more lawlessnes (because there will now be laws punishing us for spending money).

    What an insane propostion to correct our deficit, savings rates and other fiscal problems.

    I'll tell you what. Chop government in half. Install a ten percent consumption tax across the board (applicable to everybody who consumes for whatever reason) including businesses, travellers, wellfare recipients, etc.

    That ten percent, plus the regular state taxes, plus social secutiry, etc. etc. combined with reduced government will put the power back into the private sector where government jobs will now be taken by private citizens and business and the economy will be back on its feet in no time. Not to mention the morale of the people.

    Governement always attempts to solve the problems it causes by created more government, more beaurocracy, more laws and by modifying its poor attempts at making everyone happy. This crazy incremental tax idea is just another way for the government to grow, overstep its bounds and drag this country just a little further into the abyss.

  • Report this Comment On July 13, 2009, at 3:26 PM, pgoossen123 wrote:

    Consumption Tax sounds great. I'll take money for my labor in the U.S. and spend it in Mexico. The most unfair part about the Consumption Tax is changing the rules in the middle of the game. When 0% financing has been the rule for businesses and government has encouraged for decades to spend like crazy since it represents 2/3 of GDP

    Don't get me wrong...I'm all for the Consumption Tax, but how will it transition smoothly and be fair for those who up to this point, have been saving and now want to enjoy the fruits of their labor and not get taxed twice?

  • Report this Comment On July 13, 2009, at 10:18 PM, Dannysea wrote:

    Problem with Fairtax is taxation without representation.

    Like the way you think xetn!

    The gov't and non profits are both insatiable! And yes I believe and support both. Both would eat you alive if you let them. They are an end to their own.

    But the one would not be needed if we did away with the first.

  • Report this Comment On July 13, 2009, at 10:23 PM, thisislabor wrote:

    Favorite comments:

    xetn: "GoldOil, you missed your calling, you should be a socialist not an investor."

    Florestani: "there is NO value to money saved, or invested, on the premise that you don't pay income tax on it as a result." ... lol.

    ed1007: "Stop confusing wealth with income. they are not the same." ^ ^ good point.

    BMFPitt: "Now mandate a balanced budget and suddenly every pet project will come with a price tag that each voter can see." .... ?

    UKIAHED: "FairTax – sounds like perpetual motion to me – something for nothing – hmm…always worked in the past…" ROFLMAO that is the best single post i have read all week

    xetn: "And what prey tell, makes any of you believe that the fair tax or flat tax would remain the same after it was passed?" I love common sense applied.

    jackcrow: "Governments can invest, not just provide benefits and services."

    mpendragon: "The claims of the fair tax people about the rate you'd need to charge to make up for income tax are deceptive at best." how 'bout they are a flat out lie? ... just my 2 cents...

    eyeswideoopen: "What that spells is "harmonization" for global "governance". It makes sense logically for a one world governing structure (assuming you are a lowlife, dirtbag, globalist traitor) to have a taxing scheme that does not depend on citizenship (as if citizenship means anything under the WTO modern day slave trade system called services). " ... he's got a point. we are called America for a reason, we are not the Roman's.

    DarthVader: "Being here from Europe I have never managed to understand how this tax system can be equitable to anyone." .... "What drives that insane complexity is income tax on interest and dividends, capital gains taxes, estate taxes etc." ... Hi, I am an H&R Block tax preparer and am willing to explain any questions you might have. feel free to ask.

    Ibeatmykids: "If everyone bared the load it would be easier for us all." point granted where point given. of course at minimum wage you can't afford a car to pay for roads you don't even use.... just sayin'.

    prose976: "Who are these people who think the government is here to incentivize, corale, cajole and direct anything. The government is elected and voted into existence to factilitate opportunity and moderate justice for the citizens who voted it in.

    The idea that it is the job of the government to do anything more is ludicrous."

    pgoossen123: "I'll take money for my labor in the U.S. and spend it in Mexico."

    ...

    You know, as a tax preparer I have had alot of time to study the tax code, ask why, and contemplate it over the last 4 years. I'll quite frank when I say that I think at least the income tax code is very fair the way it is. I'm not so sure about the estate taxes or corporate taxes, I think both need to be lowered quite honestly, but I don't think at this point the problem the US has is with it's revenues as much as it is with it's expenses.

  • Report this Comment On July 14, 2009, at 1:34 PM, bonzo75 wrote:

    can anybody out there, preferably a nobel economist, (I know they follow the comment sections!) tell me why in this age where electronic transactions are the norm and physical cash is on its way to obsolescense why are we even bothering to collect tax money. The administration costs of doing that are enormous, and inefficient.

    It is understood that with all economic decisions some benefit and some are sacrificed.

    My plan is to eliminate the tax code, the IRS all of it (i am sure the states and counties will keep the old manual collection system.) Why the helll isn't the tax cost built into our currency. Why do we need to see how much we pay in taxes every year. If we build the tax cost into our dollar, we don't see it, we don't have to collect it and we don't have to stress about how much tax we pay.

    What do I mean, why doesn't it work like this. the government needs cash to pay for programs we turn on the printing press (aren't we doing that now) so we monetize our taxes, the cost of our programs (military, education, social net, new healthcare, ) are built into our currency. thus we never have to collect, administer, etc, the dollar reflects the costs already. hence if the USA are savers and prudent spenders we have a strong dollar,. If we print money so we can pay for excessive programs and are wasteful we have a weak dollar. The first losers of course being the accountants and financial types since a lot of their jobs would be lost. They are obsolete anyway in the digital age a computer program can replace them. this has already occurred as programs like Quickbooks have killed off a lot of the routine book keeping business. The printing of money sending it out, and then collecting it back in the present time is old, inefficient and plain dumb. any thoughts you nobel laureates out there

  • Report this Comment On July 14, 2009, at 11:03 PM, thisislabor wrote:

    bonzo75 that is a really good idea. but, counter anser A) well I guess because we are the worlds reserve currency B) our populations feels as though the lower 80% shouldn't have any of THEIR money pay for any government programs//benefits.

  • Report this Comment On July 15, 2009, at 11:48 AM, TrophyHusband wrote:

    This does provide some incentive to save... or does it? I am not exactly sure about the consequences. 1) In order for me to pay less tax, I would need to spend less and save more because I only pay tax on what I consume. However, what am I saving/investing for then? I want to spend it some day and I just have to pay tax on it when I spend it later. No matter what, I am paying tax on every $1 of it unless I save it till I die and then it is like not even having it... 2.) retired people who don't have any income, but are living off of their savings will be taxed more than someone who is working and not spending anything. Although this is not that bad for the country overall, it really sucks for the retirees who were part of the old system for their entire careers. 3) This penalizes the services industry and at a high level, my observation is that it has to be a step backwards, when you have a tax system that would incetivise generalism and penalize specialism. What I mean is the specialist, say an orthopaedic surgeon, currently has a housekeeper, has someone mow his lawn, has someone change his oil, change his spark plugs, build his patio, he hets his food at a restaurant, buys his wine from the shop down the street. But this system would promote the generalist family who grows their own vegitables, does their own brake-jobs on their car, sews their own clothes, plays their own music. It seems to me that as a society we are better off with incentives in place to be specialists and not generalists. What if all the rocket scientists and genetic engineers said, hey, I am not doing this any more, I can have a simple life and do all of my own chores and be better off.

    sorry for the mispellings and bad grammar.

  • Report this Comment On July 15, 2009, at 2:14 PM, ed1007 wrote:

    I guess to me the question that needs to be asked and answered before this discussion even starts is "Do we want to charge people based on the benefits they derive from the economy, based on their saving vs. spending, based on the benefits derived from the services provided by the pooling of resources by the government, or by their level of "need." In the first case a graduated tax on income (similar to what we have now) or a flat rate income tax would make sense. If the goal is to tax people based on their utilization rate, a sales or VAT tax makes sense. etc. etc. If we want to tax based on the level of need (would say the inverse of need is the key factor) a wealth tax makes sense.

    My personal belief is that all three of these should be employed. A flat rate income tax with NO deductions except one and a per person credit that equates to the rate times twice the national poverty level. A flat national sales tax on all items or a slightly higher flat national sales tax on all items except food and medication. Plus a flat estate tax on the amount over 100 times the poverty level (no trusts, etc. except those set up to care for a minor child or disabled dependent).

    This addresses all three issues. Those who are deriving more benefit from living here (i.e. higher pay) would pay more. Those spending vs. saving would pay more. Those that have extremely high means would pay more, at least at the point of death.

  • Report this Comment On August 11, 2009, at 9:41 AM, raimunelar wrote:

    It just blows me away as to how many of these comments are pro tax and all the thoughts of how to raise more taxes for a totally socialist government!

    Repeal the Income tax and replace it with nothing! We are most of you so interested in paying tax on your labor anyway. Do you feel that your labor is somehow owned by the government? Follow the constitution and fund the fed with tarrifs and exise taxes. Liquor, cigs, legalize and tax pot use luxury taxes and most importantly reduce the size, the scope and the POWER of the federal government. Enough of this stupid rhetoric about how to raise more money for the hungry and thirsty BLOB which just uses this power to control and manipulate us. Wake up !

    Elect Irwin Schiff, Rand Paul and Ron Paul and throw all the bums out of Congress and the Senate.

    Con- gress; the opposite of Pro-gress>

  • Report this Comment On August 13, 2009, at 5:26 PM, amayesin wrote:

    The trouble with all the proposed ideas that I have just read is that the government does not want to get smaller i.e.elliminate the IRS, simplify tax code etc. Why do you think they are pushing for this health care plan? Do you really think they care whether you are healthy or not? It is just like the income tax; another way to get into my pockets and get more money from my hard work and then spend it on pork to buy re-election. Nothing will ever change until enough americans let it be known that they will vote out their representatives in congress and the senate unless something is done to change the way the country is run. Unfortunately most everyone gets a check or benefits from the good ol' US government through all the social handouts and will never vote for less intrusive government. Face it.......we will be squeezed out of our wealth until nothing is left and then this house of cards will finally fall.

    CM

  • Report this Comment On October 30, 2009, at 4:17 PM, ObscuredVision wrote:

    The biggest benefit of the Fair Tax or some "reasonable" variant is that it would eliminate the inefficient use of capital that we all have to pay just to figure our taxes and pay the monstrous costs of collection. Certainly unemployment would go up in the noproductive support professions that are necessitated by the current tax system but they would transition to productive employment brought about by the more efficient use of capital. Congress would have less excuse to spend their time on micro issues. Naw! They'd just find something else to micromanage since they are elected by people who don't care about the big picture.

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