Contrary to the previous tax that you just heard about that most of you think is ludicrous,
some libertarians think that these two taxes are a good idea that I'm going to talk about.
The flat tax is not flat and the fair tax is not fair.
Our current income tax system, inaugurated in 1913 with the adoption of the 16th Amendment,
began with a 1% tax on taxable income above $3,000, $4,000 for married couples.
A series of surcharges of up to 6% were applied to higher incomes, with the maximum rate being 7%
on taxable income over $500,000. Less than 0.5% of the population ended up paying income tax.
Tax. From these humble beginnings, the income tax soon blossomed, thanks to World War I,
into a tax with a minimum rate that doubled and a maximum rate that reached 77% on income
over $1 million. The rates did not fall significantly until 1925. In the middle of the Great Depression,
The top rate rose to 79 percent. During World War II, the tax rate for those in the highest
income bracket reached an astounding 94 percent. The Internal Revenue Code of 1954 resulted
in 24 brackets with rates ranging from 20 to 91 percent. The top rate remained at 91
until 1964. Under the Economic Recovery Tax Act of 1981 and the Tax Reform Act of 1986,
the top marginal tax rates were lowered to 50 and 28 percent respectively. The Economic
Growth and Tax Relief Reconciliation Act of 2001 established the current tax brackets
of 10, 15, 25, 28, 33, and 35%. There's no question that the federal tax code is too long,
too complex, too intrusive, too confusing, and too inequitable. The members of Congress responsible
for the tax code would not even disagree. As a consequence, cries for tax reform can always be
be heard from every quarter, and especially around election time.
There are even organizations dedicated solely to tax reform, like Americans for Tax Reform,
Reform AMT, Citizens for Tax Justice, and Americans for Fair Taxation.
Since the federal government is always looking to increase its revenue, while at the same
In the meantime, making Americans feel better about paying their taxes, it has also climbed
aboard the tax reform bus, most recently in 2005, when President Bush formed the President's
Advisory Panel on Federal Tax Reform.
I am sorry to say that principled libertarians who welcomed gradualism toward the goal of
while substantially reducing or abolishing the income tax, while at the same time shunning any compromise of the principle that taxation is theft, like those friends and supporters of the Mises Institute, are in the minority.
Liberals who want to use the tax code for their social engineering and income redistribution schemes are not opposed to taxes on principle.
Barack Obama ran campaign commercials openly boasting that no taxes would be raised on
any American making under $250,000.
This of course means that he intends to fleece any American making over $250,000.
Conservatives are not generally opposed to taxes on principle either.
They have no problem taxing the American people to fund bloated defense budgets, U.S. military
Adventures Around the World, the CIA, FBI, and anything related to law enforcement or
security, faith-based welfare programs, educational vouchers, abstinence education programs, the
war on drugs, and various conservative pork projects. But what's up with libertarians?
Brink Lindsey of the Cato Institute, supposedly a libertarian think tank, wrote in an online
Tax Reform also offers the possibility of win-win bargains.
The basic idea is simple.
Shift taxes away from things we want more of and onto things we want less of.
Specifically, cut taxes on savings and investment, cut payroll taxes on labor, and make up the
shortfall with increased taxation of consumption.
Go ahead, tax the rich, but don't do it when they're being productive.
Tax them instead when they're splurging, by capping the deductibility of home mortgage
interest and tax incentives for purchasing health insurance.
And tax everybody's energy consumption.
All taxes impose costs on the economy, but at least energy taxes carry the silver lining
of encouraging conservation.
Plus, because such taxes exert downward pressure on world oil prices, foreign oil monopolies
would wind up getting stuck with part of the bill.
So says Brink Lindsey.
Shift taxes, increase taxes, tax the rich, impose new taxes, use the tax code to influence
public policy, what kind of a libertarian tax reform plan is this?
How about reduce, cut, eliminate and abolish taxes?
Not deductions, not exemptions, not credits, not shelters, not loopholes, taxes.
Two specific tax reform plans that some libertarians have fallen for are the flat tax and the
and the Fair Tax. Both plans promise to invigorate the economy, increase employment, and raise
everyone's standard of living. Neither one is true to its name. Neither one is an incremental
step toward overall lower taxes. Both are fraught with problems and contradictions.
Both are revenue-neutral plans that would fund the government at the same obscene level
that it is funded right now.
The flat tax is an income tax.
It is the tax reform idea that has been around the longest.
First proposed by economist Milton Friedman in 1962, the flat tax entered the mainstream
through a 1981 Wall Street Journal article by Hoover Institution economists Robert Hall
and Alvin Rabushka, called A Proposal to Simplify Our Tax System.
This article grew into a 1985 book published by the Hoover Institution Press called The
Flat Tax.
A second edition was published in 1995 and an updated revised edition in 2007 that can
hardly be called either revised or updated.
Aside from this book, the flat tax gained national prominence when House Majority Leader
Dick Armey pushed the idea of a flat tax after the Republicans gained control of Congress
during the Clinton administration.
A few bills based on the Hall-Ribushka plan were then introduced in Congress, but came
to nothing.
Other incarnations of the flat tax were pushed by both Democrats and Republicans.
Another incarnation of the flat tax is that of former Republican presidential candidate
Steve Forbes.
His 2005 book is called Flat Tax Revolution.
Under a flat tax, everyone's income is taxed at the same rate.
Forbes says 17 percent, Hall and Robuchka say 19 percent.
And not only are there no tax brackets, there are generally no tax deductions other than
and Personal and Dependent Allowances, Social Security and Medicare taxes would remain as
they are now, the appeal of the flat tax is simplicity, you can do your taxes on a postcard
size form, says Steve Forbes, goodbye compliance costs.
The problem with the flat tax is a simple one, the flat tax is not flat, and furthermore,
No one actually pays 17% or 19%. In fact, taxpayers don't even pay the same percentage.
The flat tax is actually a highly progressive tax. It is more progressive than our current
system and effectively has more tax brackets. Who said progressivity requires graduated
tax rates? Under the Forbes plan, a family of four would pay no federal income tax on
on its first $46,165 of income.
A family of six would owe nothing until its income exceeded $65,930.
And those figures are sure to have increased since they were first proposed back in 2005.
But not only would many families pay no income tax, they still might get a refund anyway
Because the Forbes plan includes a refundable child credit and earned income credit.
If you want an example of a real flat tax, look no further than the 2.9% Medicare tax.
Everyone pays 2.9%, split between employer and employee, on every dollar earned, no matter
what one's marital status, number of dependents or income level.
Now, I am in favor of neither the tax nor Medicare, but if you're looking for a genuine
flat tax, then the Medicare tax is your tax.
The fair tax is a consumption tax.
It is the most radical tax reform plan bar none.
It also has the most vocal and intolerant proponents.
The fair tax is the brainchild of three businessmen concerned about the crippling effects on the
and the economy of the current federal tax code.
After adopting the name Fair Tax for their tax reform plan, they formed Americans for
Fair Taxation in 1997 and enlisted Representative John Linder to introduce fair tax legislation
in Congress.
Linder first proposed the Fair Tax Act in the House in July of 1999 and has reintroduced
a Fair Tax Bill at the beginning of every term of Congress since then, including the
current term of Congress.
Although Linder's Fair Tax Bill languishes in the House Committee on Ways and Means every
time it's introduced, it always has a number of co-sponsors, including Tom Tancredo and
Duncan Hunter, but not Ron Paul, the acknowledged taxpayer's best friend.
It also has its share of supporters outside of Congress, including Mike Huckabee and Neil
Bortz.
The latter is author, with Congressman Linder, of the Fair Tax book, published in 2005.
A paperback version of the Fair Tax book was issued in 2006, with some notable changes
to correct false statements made in the original hardcover release.
Roberts and Linder also published a sequel, Fair Tax the Truth, Answering the Critics,
and that was published just last year.
And I should add, it does mention the Mises Institute in there as a horrible place that
dared to publish articles against the fair tax.
I am getting weary of writing about the fair tax.
Every time I think I've written my last article on the subject, some new opportunity presents
itself and I take the bait, as I'm doing right now.
I don't consider myself to be an expert on the fair tax.
Although the idea of the fair tax has been around since 1997, I had never even heard
of it until I wrote an article for the Mises Institute in 2005 on the evils of the withholding
tax.
It was only after my inbox was bombarded with mail from fare taxers trying to sell me on
the fare tax that I actually looked into it.
If you have read any of my articles on the subject, on the Mises website, you know that
I didn't like what I saw.
The fare tax is a national retail sales tax of 30% on the final sale of all new goods
and services.
All new goods from cars and houses to prescription drugs and food. All services from heart operations
and funerals to rent and haircuts. Because it would replace the personal income tax,
there would also no longer be withholding tax, capital gains tax, the alternative minimum
Tax, or taxes on interest and dividends. Even your gambling winnings would no longer be
taxed under the fare tax. Of course, there would be no tax deductions either. The fare
tax would likewise eliminate corporate income tax, estate tax, gift tax, unemployment tax,
social security tax, and Medicare tax. The appeal is obvious. No more tax code. No more
No more taxes withheld from paychecks, no more 1040 forms, no more record keeping, no more compliance costs, no more IRS audits, and if that weren't enough, the fare tax also includes a monthly rebate to offset the taxes paid on basic necessities.
But for a plan that promises such a utopia, the problems with the fare tax are legion.
The stated rate of the fare tax is too low to achieve the promised revenue neutrality.
The amount by which it is claimed prices would fall under a fare tax system has been grossly
exaggerated.
There is nothing to prevent an income tax from being reinstituted, giving us a two-headed
hydra of an income tax and a consumption tax.
Not only would state and local governments have to pay a national sales tax to the federal
government.
The federal government would have to pay sales taxes to itself on all its new purchases.
I don't know what the amount would be, but what do you suppose the amount of fare tax
would be on a B-1 bomber or a nuclear submarine?
Since I've already written extensively about the problems with the fare tax, I will stop
Let's stop with its problems here and focus on why the fair tax, like the flat tax, is
not true to its name.
So why is the fair tax not fair?
Well, first of all, what's fair about a consumption tax?
Why is it that people who rightly criticize the income tax are so quick to accept the
national sales tax on consumption?
The Fair Tax perpetuates the fallacy that the government has a right to confiscate a
percentage of the value of each new good sold and every service rendered.
This is no different than claiming that the government has a right to the portion of each
American's income.
As Murray Rothbard explained, the consumption tax, on the other hand, can only be regarded
as a payment for permission to live.
It implies that a man will not be allowed to advance or even sustain his own life unless
he pays off the top a fee to the state for permission to do so.
The consumption tax does not strike me in its philosophical implications as one-wit
more noble or less presumptuous than the income tax.
Now, the fair tax is also not fair because of the rate.
What is fair about the government taking a 30% cut on every transaction?
I know the fair taxors claim the rate is only 23%, but when I buy an item for a dollar and
I end up paying $1.30, the basic math I learned in elementary school tells me that I paid
a tax rate of 30%.
But regardless of whether the rate is 23 or 30%, why should the bloated, pork-laden leviathan
and we call the federal government get anywhere near this much of our income.
And finally, maintaining that the fair tax is a fair tax system or one that is fairer
than our current system is highly subjective.
Neil Bortz himself even acknowledges this in his newest book on the fair tax, quote,
Whether a tax system is fair is a complicated economic and philosophical question, one that
inevitably involves oversimplification and subjective judgment.
If you want an example of a real fair tax, then consider the equal tax.
I first saw this proposed by Joe Sobram.
Let every American pay the same amount, no deductions, no exemptions, no exceptions.
Sobern Reasons
The billionaire doesn't use the police or the streets any more than the pauper, maybe
less, since he presumably hires private guards to protect him and has less need of the police
and he is less likely to drive long distances than to fly.
Now I wouldn't like paying an equal tax any more than I would like paying an income tax,
but it is certainly a fair tax.
But not only is the flat tax not flat and the fair tax not fair, the flat tax is not
fair and the fair tax is not flat.
I better repeat that.
Not only is the flat tax not flat and the fair tax not fair, the flat tax is not fair
and the fair tax is not flat.
According to Hall and Ryabushka, the flat tax system they propose is both fair and progressive.
The poor pay no tax, and the amount that a family pays rises with income.
They say their flat tax is fair because it is based on the principle that income should
be taxed exactly once as close as possible to its source.
But how can a system that punishes success and fosters class envy be considered fair?
And why should it be considered fair that income is taxed exactly once as close as possible
to its source?
Just because every American would pay the same rate under the flat tax doesn't necessarily
make it a fair tax.
Making the tax code less progressive is not enough, as Rothbard again explains.
The flat tax movement is part of a process by which the government and its allies have
been able to split and deflect the tax protest movement from trying to lower the taxes of
everyone into trying to force everyone into paying some arbitrarily defined fair share.
It is no consolation to a wealthy person who is stripped of his money by the federal government
that a poor person is likewise relieved of his money by the same percentage.
One of the reasons fair tax supporters claim that their tax is fair is that it has a flat
rate that everyone would pay.
But the fair tax is about as flat as it is fair.
I already mentioned that the fair tax includes a monthly rebate to offset the taxes paid
on basic necessities.
This so-called pre-bait is based on the government poverty level and family size. Thus, although
everyone would pay the same rate under the fair tax, the end result would be that some
Americans would pay no taxes at all, some would have most of their taxes offset, and
some would get more money back than they actually paid in taxes. This makes the fair tax an
An Income Redistribution Scheme Under the Guise of Tax Reform
Neither the flat tax nor the fair tax is a step toward the libertarian goal of substantially
reducing or abolishing the income tax.
Neither tax reform plan is an incremental step toward lower overall taxes.
They could be, however, if their promoters recognize that the problem is taxation itself,
not the tax code. All they have done is shift the debate from how much of the wealth of
the American people the federal government confiscates to the manner in which this wealth
is confiscated. We don't need compassionate tax reform that makes people feel better about
paying their taxes. We need radical tax reform that reduces, cuts, eliminates and abolishes
With the federal budget fast approaching $4 trillion, I can't think of anything that is more of a waste of time than quibbling about how the government can make the tax rates flatter or fairer, while it robs us of trillions of dollars.
dollars. The only fair tax is a tax low enough to flatten skyrocketing congressional spending.
Like educational vouchers and the privatization of Social Security, the flat tax and the fair
tax are gimmicks that libertarians should avoid. Thank you.