Monday, April 21, 2008

Burgess Argues for Flat Tax

The News Connection ran an article in this week's paper that has been circulating by Newt Gingrich and Rep. Michael Burgess in favor of the flat tax.

The complexity of today's tax code is a consequence of countless deductions and exemptions aimed at promoting a variety of congressionally determined policy agendas. The result is federal law loaded with opportunities for avoiding taxes and exploiting loopholes at the expense of fellow Americans. Behind every loophole there is a lobbyist.

Very well said, but we'll come back to this.

No argument for GOP policy is complete, of course, unless it invokes the memory of the mythical one.
When President Reagan cut taxes in 1981, several good things happened. The economy grew, revenues increased, and jobs were created. It's hard to think of better medicine for our ailing economy than replicating successful reform of the tax code on an even greater scale. How do we do it? Flatten tax rates; simplify the code; and, shift the burden away from our families and small businesses.
This argument is a little hard to follow. Is the congressman implying that a tax cut is tax reform? If so, we have just experienced the most sweeping tax "reforms" in recent history. President Bush's tax cuts for the rich, which Burgess wholeheartedly supported, have been roundly condemned, adding trillions to our staggering national debt. We simply can't afford any more reforms like this.

The optional flat tax that Gingrich and Burgess propose would establish a deduction somewhere above the poverty level to exempt poor families, and eliminate the Alternative Minimum Tax. So far, so good. Remember that first paragraph? Now consider this statement.
And if a person had twice as much income as another, he or she would be taxed twice as much. Furthermore, a single rate tax structure would eliminate taxes on savings, capital gains and dividends.
The flat tax targets income, but the rich don't make their money through salaries, they make it through investments. There's the loophole. The crisis in the subprime mortgage sector left thousands on the brink of foreclosure, but one hedge fund manager made over three billion dollars shorting the housing market. Under Burgess' flat tax proposal, he would not pay one cent of taxes on that money. According to Robert Reich, Clinton's former Secretary of Labor:
The 25 highest-paid hedge-fund managers are earning more than the CEOs of the largest 500 companies in the Standard and Poor's 500 combined. While CEO pay is outrageous, hedge-fund and private-equity pay is way beyond outrageous. Several of these fund managers are taking home more than a billion dollars a year.
Under the current tax code these fund managers pay a reduced tax rate of 15 percent. Burgess and Gingrich think that's too much. Burgess' entire tenure on capitol hill has been one huge valentine to the ruling class, but at least he is consistent. Gingrich is hoping no one will remember that when he was running for president he criticized fellow candidate Steve Forbes, who made the flat tax the central theme of his campaign. Consider the following quote from 1996.

Gingrich was particularly dismissive of the part of the Forbes plan that exempts interest and other unearned income from taxation while taxing wages and salaries at 17 percent. "That's nonsense," Gingrich said. "That's not going to happen."
Gingrich suffered from a failure of imagination. He couldn't conceive that a policy so flagrantly biased toward the wealthy would ever be seriously considered in the public discourse. What a difference a decade makes.

Bill Clinton once said of the 80's:
“The Reagan-Bush years,” he declared, “have exalted private gain over public obligation, special interests over the common good, wealth and fame over work and family. The 1980s ushered in a Gilded Age of greed and selfishness, of irresponsibility and excess, and of neglect.”
That was just a test drive. The current occupier of the oval office no longer even tries to hide the GOP's agenda. With loyal servants like Burgess to do his bidding, why bother?

The last sop in the Gingrich-Burgess proposal is for the business world. Their proposal "dramatically" reduces the corporate income tax rate. Now ask yourselves, if the poorest people, the richest people and corporations are all paying less taxes, who makes up the difference? Logically, the flat tax may mean a larger tax bill for the middle class, or additional debt due to reduced revenues. The authors were hoping you'd be so dazzled by that reference to the Gipper that you wouldn't notice.

Update: Whosplayin insists this proposal is a tax hike for the middle class. Click here for more.


Anonymous said...

On Oct. 18, 2007 I attended a Heritage Foundation dinner. The guest speaker was Former Speaker of the House, Newt Gingrich. Newt fielded questions on the issue of the proposed flat tax plan. He said it was worth some real study. However, until some sort of computer model was created that allowed Americans to evaluate the results to their lifestyle needs, the flat tax would not happen.

If we are to follow the flat tax plan proposed by Mr. Burgress as mentioned in his article dated 04.17.08, this will lead to a system that is less efficient and less fair than the one we currently have under the IRS federal tax system. In principle, replacing the income tax with a consumption tax, such as the flat tax, offers the possibility of improving the efficiency, equity, and simplicity of the tax system. These gains are uncertain and depend critically on the details of the reform. At least some of the gains could be made simply by modifying the existing system.

Idealized consumption taxes may always look better than actual income tax systems. Once in place, though, they would be subject to the same compromises and pressures as the income tax of today. As such, a flat tax plan may not be the right answer.

My proposals for tax reform would shift the base of taxation from income to a Fair Tax or also called a National Sales Tax.

So, what is the Fair Tax Act? (Source: The Fair Tax Act HR 25, S1025) . . . The Fair Tax Act is a comprehensive proposal that replaces all federal income and payroll based taxes with an integrated approach including a progressive national retail sales tax, a prebate to ensure no American pays federal taxes on spending up to the poverty level, dollar-for-dollar federal revenue neutrality, and, through companion legislation, the repeal of the 16th Amendment.

The Fair Tax Act (HR 25, S 1025) is nonpartisan legislation. It abolishes all federal personal and corporate income taxes, gift, estate, capital gains, alternative minimum, Social Security, Medicare, and self-employment taxes and replaces them with one simple, visible, federal retail sales tax administered primarily by existing state sales tax authorities. {I will change this slightly to keep Social Security as a deduction under a new title of Retirement Investment Deduction.} The Fair Tax, taxes us only on what we choose to spend on new goods or services, not on what we earn.

The Fair Tax is a fair, efficient, transparent, and intelligent solution to the frustration and inequity of our current tax system.

The FairTax:
•Enables workers to keep their entire paychecks less retirement Investment deduction.
•Enables retirees to keep their entire pensions
•Refunds in advance the tax on purchases of basic necessities
•Allows American products to compete fairly
•Brings transparency and accountability to tax policy
•Ensures Social Security and Medicare funding
•Closes all loopholes and brings fairness to taxation
•Abolishes the IRS
•Creates Retirement Investment Over sight Department

The FairTax rate of 20 percent on a total taxable consumption base of $11.244 trillion will generate $2.2488 trillion dollars $158 billion more than the taxes it replaces.

I have some ideas that will enhance the currently proposed Fair Tax Plan with the following recommendations:

1. Reduce the currently proposed
fair tax rate from 23% to 20%.
2. Keep one deduction in the
paycheck referenced as a
retirement Investment
Deduction. Deductions can be
deposited in a 401-K account
or future retirement investment.
3. Any surplus tax money at the
end of the fiscal year will be
divided up between the U.S.
Government and the retirement
investment accounts 50% to the
government and the other 50%
between the retirement
accounts. By doing this, we
assure everyone being able to
live out their lives in a
dignified manner.

In Short;
1.) FairTax-Individuals do not
file. Businesses need only to
deal with sales tax returns.
2.) Federal Income Tax - Very
complex; 20,000 pages of
regulations; I.R.S. incorrect
over half of the time.
3.) Flat Tax - Withholding
continues. Individuals and
businesses must still track
income and file income tax

And of course, the single best thing about the Fairfax: the government will neither know nor care how much you make, how you make it or who you give it to.

Donald Tracey is an Independent Candidate for the 26th Congressional District of Texas

Unknown said...

Calling Bush’s plan “tax cuts for the rich” is not historically accurate. 13 million low-income earning Americans were taken off the tax rolls because of the Bush tax cuts, not to mention that the highest earners pay a larger percentage of the total income tax revenue than they did prior to Bush’s tax cuts taking effect. See Senator Hutchison’s March 11, 2008 press release by the Senate Republican Policy Committee for more details.

You told me to ask myself, “If the poorest people, the richest people and corporations are all paying less (in) taxes, who makes up the difference?” “Logically,” you add, “the flat tax may mean a larger tax bill for the middle class, or additional debt due to reduced revenues.”

Not if you know your history. You say that “the rich don’t make their money through salaries, they make it through investments.” Well, the truth is that in 2005, nearly half of all households reporting capital gains made less than $50,000. Moreover, 75% made less than $100,000. So, an elimination of the capital gains tax benefits many more than just “the rich”.

Furthermore, history tells us that when you do two things, reduce the capital gains tax and dramatically slash the top marginal income tax rate, net revenue to the treasury actually increases. This is because both of the above encourage investment into the economy necessary for job creation which, in turn, adds many more individuals to the tax rolls. So, yes, technically a larger percentage of revenue might come from the category typically classified as “middle class”, but that doesn’t necessarily mean taxes were raised on any one individual. It just means that unemployment dropped.

This is exactly what would happen under the Flat Tax, although personally, I favor the Fair Tax as well. Regardless, anything is better than what we have now.


Anonymous said...

Walt, that's a pretty misleading statement...

"...not to mention that the highest earners pay a larger percentage of the total income tax revenue than they did prior to Bush’s tax cuts taking effect."

You fail to mention that the top income tax rate was 38.6% before the Bush tax cuts and is now 35%. True Bush's tax cuts reduced the tax rate for everyone, but the biggest gains went to the rich.

And good luck to both of you trying to sell a 20%+ sales tax and not call it regressive...

"...replaces all federal income and payroll based taxes with an integrated approach including a progressive national retail sales tax"

A sales tax is inherently regressive because the tax burden decreases as income increases. You forgot to add something in there about illegal immigrants and how they sneak around in the dark evading taxes too scare us into supporting a "fair tax".

Unknown said...

Hey Matt,

The statement you quoted was not intended to be misleading. It’s simply fact, and it can be verified. In the year 2000, the top 1% of income earners paid 37% of all personal income tax revenue. Today, they pay 39%. My numbers are correct.

As for the Fair Tax, it is seemingly apparent that you have formed an opinion without having studied it. The truth is that the Fair Tax is a progressive tax – not regressive as you claim. The reason for this is because the Fair Tax includes a tax-exemption to every American household on spending up to the poverty level. Thus, a family who spends an annual amount equal to the poverty level would not pay any tax under the Fair Tax. Furthermore, a family who consumes an amount equal to twice the poverty level would pay an effective tax rate of 11.5%. Currently, such a family would fall into the 15% tax bracket, so the Fair Tax would reduce their tax rate.

To fully explain the burden that each income level would carry under the Fair Tax, consider a family of four who spends $200,000 annually. As with the family above, this family would be allowed to spend $27,380 tax free and would pay a 23% rate thereafter. This results in an effective rate of 19.85%. A family of four who spends $500,000 annually would pay a rate of 21.74%. Therefore, one can see that under the Fair Tax, the heaviest tax burden as a percentage of consumption will be carried by those who spend the most.