Taxing Times: Flat tax versus Sales Tax

Laib, Steve A41 at MDBE.COM
Wed Jul 26 14:37:00 MDT 1995


                                                    TAXING TIMES 7/26/95
                                               FLAT TAX   v.  SALES TAX
 
              (c) by Steven D. Laib JD MS (tax)
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     As a general rule, one can safely state that any tax system should be
able to separate the citizens from a portion of their money as painlessly as
possible, with a sufficient degree of fairness, and at the same time provide
the government with enough money to do its job.  If it were possible to
define exactly how painful or painless a system was, or to arrive at an
absolute standard of fairness, the job would be a lot easier.
 Unfortunately, this has not been possible.  Perhaps even worse is the fact
that no one has been able to define exactly how much money a government
truly  needs, and this complicates the issues of what is fair and painless.
 It gives us pause to reflect on what is a "vital program".  The seminal
questions are of course, "Vital to who?", and "How much benefit do they
actually derive from it?", but I digress.
 
     The majority of dollars taxed away from the general public by the
federal government come in the form of the Federal Income Tax.  Regardless
of whether or not anyone considers it legal, constitutional, or enforceable,
it exists, and is enforced against members of the public on a daily basis by
agents of the Treasury Department; usually employees of the Internal Revenue
Service.  Critics of this tax, who do not challenge its constitutionality,
generally attack it on two fronts.  The first of these is financially based,
and the second, procedurally based.
     The financial challenge to the Income Tax rests on the fact that it
simply takes too much money away from the average person, and thereby
constitutes what is effectively a penalty for living and having the good
grace to be earning a living.   This is amply evidenced by the fact that a
single person cannot be expected to live at a middle class economic standard
within the personal exemption and standard deduction allowed by the present
state of the law.  You are not allowed the normal ordinary and necessary
expenses of living such as food, clothing, shelter and medical care.  The
government has consistently, since the law was changed in WW 2, been taken
by the idea that they come first, and your ability to survive comes second.
 
     Compare this with the way a business it taxed.  Businesses are allowed
to deduct food  in the form of loans, raw materials, employee costs and
supplies; clothing in the form of advertising, promotions and PR costs;
shelter - rental of office space, etc.  All of the business costs can be
assumed to be legitimate to the business.  All such similar costs are
necessary to the individual as well.  We all must eat, we are all supposed
to wear clothes (including Berkeley's naked guy) and we all are supposed to
have a place to live.  Yet how we pay for it, after taxes is our problem.
 If the govt. takes too much from us and we can't afford housing, tough
luck.  (Put this in the context what have been called the "employed urban
homeless".  If the tax bite were less, they probably would have no trouble
finding a place to live. )
     The bottom line here is that the government does not owe anyone a
living, but it does owe them the right to keep enough to live on if they
earn it honestly.  This is not happening, and will not unless the law is
substantially changed.  Lowering rates is an excellent idea, but it must
take into account the fact that the people have a cost of living to meet,
and that since government owes its existence to those people, it should
avoid punishing them.
 
     Now to the procedural question.  The real issue here is the IRS.
 Martin Gross gives an excellent, if brief examination of what is wrong with
the IRS in his recent book on the tax system.  In short, Congress has
granted unconstitutional powers to the IRS, and the courts have turned a
blind eye and a deaf ear to all complaints on the subject.  Clearly, the
Bill of Rights is violated in several specific ways.  First, filing with the
IRS is mandated, but requires the filer to essentially testify against him
or herself.  Second, the IRS is allowed to hold the public guilty until
proven innocent.  Third, they have unconstitutional powers of search and
seizure.  Fourth, they are allowed to go on "fishing expeditions" in the
form of TCMP or Taxpayer Compliance Monitoring Project audits; something
which is banned to every other agency of the federal government.
     It is clear that the American public holds the IRS in roughly the same
esteem as the KGB was held in the USSR.  This is demonstrated in a variety
of ways, including the number of conspiracy theories which abound regarding
the IRS, and the difficulty which many people attempting to research
taxpayer behavior and attitudes for scholarly purposes have in getting
answers.  All of the above make it clear that regardless of whatever the IRS
may have been useful for at its inception, it has clearly outlived its
usefulness, and it has become an embarrassment to a society which prides
itself on its so called freedoms and liberty.  (Anyone listened to the Blues
Bros. song "Red White and Blues" recently?)
 
     What does this all have to do with the flat income tax?  Simple:  If we
have one, it must be enforced in a just and constitutional manner.  It must
also allow the general public to retain enough to live on.  If this is
possible, it would be a good idea.  Martin Gross does not believe that it
will work, and I tend to side with him.  Under a true flat income tax would
be very easy for the  code  to be revised once again, as it has been in the
past.  It could be incremental, or sudden, but either way it would be a bad
idea.  What we need is the ability to forestall such changes, and to protect
the public from future excesses.  This same applies to the IRS.  If any form
of income tax is retained, it appears to go without saying that the IRS
would stay as well.  This is unacceptable.  It is imperative that the public
be placed in a tax system which does not subject them to unconstitutional
proceedings.  Placing the IRS within limitations appears to be a difficult,
if not impossible task, therefore, the only real way to deal with the
situation is to eliminate the IRS and the income tax as well.
 
     What about the Sales tax?  It has the advantage of no personal audits
by the IRS, and it allows people to "keep" their earnings.  (I am ignoring
FICA and so on for now)  If the tax is limited in that essential items such
as food, housing, medical care and so on are not taxed, then it takes on a
much more respectable edge.  It would do a lot to eliminate any regressivity
which has been the primary problem for sales tax advocates.  This is also
Gross' view, and he states it well.
 
     Finally, the issue of changes in the tax code should be addressed.
  Incremental change has been a major problem over the years.  If one
studies the history of taxation, not just on one tax, but on all of them,
taken together, it becomes easy to see how the government plays games with
its taxing authority, and steadily increases the burden in the mistaken
belief, or in spite of contrary evidence that the public can afford to "pay
a bit more so that they can benefit" in some possibly quite questionable
way.
     It is the opinion of this writer that the taxing authority of Congress
needs some specific limitations.  First, the new law generally meeting the
guidelines covered above must be enacted.  Next, the power to raise the rate
of taxation or the manner in which it is assessed would be subject to a 3/4
supermajority vote AND a declaration of war or national emergency.  The
emergency must be specifically identified, and the tax act on which it is
based would expire when the emergency is over.  This provision could be used
only once every 15 years, except in the event of successive DECLARED wars.
     Finally, there must be a broadened level of taxpayer protection.  Under
a sales or consumption tax the states should be held responsible for
collecting the tax.  The burden of proof in questionable cases should rest
with the state, and the federal authorities should not be allowed to hold
the state or the citizen responsible for any perceived errors in
collections.



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