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Words for the Week #3

February 08, 2023

Words for the week #3:

National Flat Tax,  National Sales tax.

There has been a lot of press in recent weeks and months about doing away with the current Income Tax system and changing to a "Fair Tax"  a National Flat Tax or a National Sales Tax.  The premise being that either of these would be a much more equitable tax system by sharing the tax burden.  Under a National Flat Tax there would be no laddering exemptions for various incomes, but there would be a single tax rate for all.  In a National sales tax the tax burden would be placed on every individual purchase, meaning that no matter your income, the taxes would be levied on usage, spending, or consumption.

National Flat tax = 20% of all income no matter where it was generated.

Examples:  Income- $50,000 = Tax- $10,000  Income $200,000 = Tax-$40,000  Income- $1,000,000 = Tax-$200,000

a flat tax system can be much simpler than a progressive one, making it possible for all individuals to fill out their own tax forms. A flat tax also could eliminate virtually all compliance costs (e.g., payments to professional tax preparers) and probably reduce red tape significantly.  There would be significant monitoring of income levels and at what level for income to begin being taxed.  Incomes below certain levels could be exempt from Income tax.  The tax burden could be shifted to still impact the income levels that currently pay over 95% of all tax revenue.

National Sales Tax = 20% of all purchases and consumption no matter what your income level. 

Examples: Purchase: Refrigerator $2500 = Tax $500.00   Car $35,000 = Tax $7,000  Home $300,000 =Tax $60,000  

A National sales tax is regressive because it impacts the poor the most. To make it more progressive, the Fair Tax Act might include a provision that all Americans would receive a monthly “prebate" that would be equal to the sales tax rate being disbursed on a federal level based on the monthly cost of living at the federal poverty level. For example, the poverty level for a family of four is $27,750 in 2022, (according to the Department of Health and Human Services), so the "prebate" of the sales tax rate of 20% would be $5,550.00.  The challenge with the Prebate system is that it would not take any longer that a generation for that to be perceived as an entitlement and place every citizen, and possibly non-citizens, on the government payroll.   This too could also eliminate virtually all compliance costs (Tax Forms).  Items such as food and medicines could be exempt from sales tax.

The Fair Tax is unfair to those who aren't earning an income, such as seniors. It would be especially unfair to the first generation of seniors because they paid income taxes all their lives and would have to start paying higher sales taxes in addition to the taxes they've already contributed over decades.

My comments:

The expression of what the Flat Tax Rate or the National Sales Tax rate will be is still being debated and negotiated.  I have heard of rates being between 10% and 40%.  I chose the 20% rate for the above examples for ease of doing the math. 

My personal preference would be for a National Flat income tax. If I had to make a choice.  The difficulty of administering a national sales tax, on top of state sales taxes, and adding exemptions and exclusions seems as unmanageable and cumbersome as the current tax system.  We would be trading the IRS for another agency to monitor that system.  There would be so many more opportunities for abuse of the system and provide an easier road to government  control.  I am also one of those seniors who would be adversely affected by the change but the next generation wont be bothered by that.  I'm hoping here is plenty of opportunity to debate and discuss this, and enable us to educate ourselves be for making a massive change.  Questions we need to pose and have answers to, from the next slate of electors and elections.  I will be asking and listening.  I hope you will be too.

Please input any questions or comments and let me know any issues or words that you would like to have more information on.

Next weeks "Words of the Week".    Risk Tolerance.  What is it?  Why is it important to you?