I like the overall approach of Herman Cain’s 9-9-9 tax plan. As I recently wrote, it focuses on lower tax rates, elimination of double taxation, and repeal of corrupt and inefficient loopholes.

But I included a very important caveat. The intermediate stage of his three-step plan would enable politicians to impose both an income tax and a national sales tax. I wrote in my earlier post that I had faith in Herman Cain’s motives, but I was extremely uncomfortable with the idea of letting the crowd in Washington have an extra source of revenue.

After all, Europe’s welfare states began their march to fiscal collapse and economic stagnation after they added a version of a national sales tax on top of their pre-existing income taxes.

But it seems that I was too nice in my analysis of Mr. Cain’s plan. Josh Barro and Bruce Bartlett are both claiming that the business portion of Cain’s 9-9-9 is a value-added tax (VAT) rather than a corporate income tax.

In other words, instead of being a 9 percent flat tax-9 percent sales tax-9 percent corporate tax, Cain’s plan is a 9 percent flat tax-9 percent sales tax-9 percent VAT.

Let’s elaborate. The business portion of Cain’s plan apparently does not allow employers to deduct wages and salaries, which means – for all intents and purposes – that they would levy a 9 percent withholding tax on employee compensation. And that would be in addition to the 9 percent they presumably would withhold for the flat tax portion of Cain’s plan.

Employers use withholding in the current system, of course, but at least taxpayers are given credit for all that withheld tax when filling out their 1040 tax forms. Under Cain’s 9-9-9 plan, however, employees would only get credit for monies withheld for the flat tax.

(more…)

BILL DALEY: Boehner’s office just called, sir.  He’s changed his mind.  Says you can address the joint session next Friday at 2:00 a.m.

OBAMA:  Cheeky b**tard.  All right, accept.  Eric, have Federal marshals available to round up and escort legislators to the Chamber.  Encourage them to be rough with Republicans.

JAY CARNEY: Our dirty tricks team affixed a wireless speaker under Joe Wilson’s seat, sir. We’ll trigger it to replay “You lie!” four minutes into your remarks.

BRIAN WILLIAMS:  Afterward, our technicians will enhance the audio, pinpoint the source, and nail him.  Wilson will deny, but voiceprint analysis confirms it’s his voice.

OBAMA:  And another firestorm.  Man never learns.

DAVID PLOUFFE:  Lotta voters throwing the Kool-Aid back in our faces, sir.  I wonder if a speech touting investment in urine-powered cars and prefabricated bamboo homes will help your numbers.

OBAMA:  Anyone with a better idea?

CARNEY:  Do a 180, sir: have a “Come-to-Jesus Moment” before the whole country, announcing you’ve finally realized you’re a socialist ideologue. (more…)

Since it is tax-filing season and we all want to honor our wonderful tax system, let’s go into the archives and show this video from last year about the onerous compliance costs of the internal revenue code.

Narrated by Hiwa Alaghebandian of the American Enterprise Institute, the mini-documentary explains how needless complexity creates an added burden – sort of like a hidden tax that we pay for the supposed privilege of paying taxes.

Two things from the video are worth highlighting.

First, we should make sure to put most of the blame on Congress. As Ms. Alaghebandian notes, the IRS is in the unenviable position of trying to enforce Byzantine tax laws. Yes, there are examples of grotesque IRS abuse, but even the most angelic group of bureaucrats would have a hard time overseeing 70,000-plus pages of laws and regulations (by contrast, the Hong Kong flat tax, which has been in place for more than 60 years, requires less than 200 pages).

Second, we should remember that compliance costs are just the tip of the iceberg. The video also briefly mentions three other costs.

(more…)

When a bad plumber or electrician comes to your house you might pay a lot of money for an incomplete and potentially dangerous fix of the problem.

But a band aide on a bad pipe just means that a potentially disastrous leak is still very much in your future and that the money you just paid has been wasted. That’s what the debate about the Bush tax cuts sounds like to me.

Of course it’s a bad idea to raise taxes when the economy is still struggling and while almost ten percent of the workforce can’t find a job. Of course it’s a bad idea to further punish our citizens when so many have seen their home values plummet beneath the loan amount.

But underneath this debate is this leaky and destructive pipe: the income tax system is a monstrosity that only continues because Washington insiders make so much money off it and because Congress—both parties—love the power over the citizenry that comes with plum assignments to the tax committees.

There is a huge lucrative culture in Washingtonthat has grown up around the income tax code that turns a blind eye to the destructive effects and almost comical complexity of the 68,000 pages of regulations in the tax code. They love the system and we hate it.

(more…)

In the past 15 years, I’ve debated in favor of a national sales tax, testified before Congress on the merits of a national sales tax, gone on TV to advocate for the national sales tax, and spoken with dozens of reporters to explain why the national sales tax is a good idea. Even though I prefer the flat tax, I’ve been an ardent defender of sales tax proposals such as the FAIR tax because it would be a great idea to replace the current system with any low-rate system that gets rid of the tax bias against saving and investment. I even narrated this video explaining that a national sales tax and flat tax are different sides of the same coin – and therefore either tax reform proposal would significantly improve prosperity and competitiveness.

I will continue to defend the FAIR tax and other national sales tax proposals that replace the income tax, but I wonder whether this is a losing battle. Every election cycle, candidates that endorse (or even say nice things about) the FAIR tax wind up getting attacked and put on the defensive. Their opponents are being dishonest, and their TV ads are grossly misleading, but they are using this approach because the anti-FAIR tax message is politically effective. Many pro-tax reform candidates have lost elections in favorable states and districts, largely because their opponents were able to successfully demagogue against a national sales tax.

The Wall Street Journal reaches the same conclusion, opining this morning about the false – but effective – campaign against candidates who support a national sales tax.

(more…)

I guess Mexico ’s President Calderon forgot to mention what happens to illegal immigrants on his southern border when he came to Congress to scold us for “discriminatory” treatment in Arizona.

They are summarily raped or killed and commonly stripped of every meager possession they carry by soldiers and policemen. Arizona ’s new law is downright humane compared to Mexico ’s brutal treatment of illegal immigrants and his false indignation was the height of hypocrisy.

Neither he nor Mr. Obama nor a lot of other holier-than-thou liberals ever want to talk about the central issue—we’re having a hard enough time paying for our own schools, healthcare, roads, and law enforcement without having to pick up the tab for millions of people here illegally.

Yes, President Calderon, the good people of Arizona got so tired waiting for our national government to do its job, they took it on themselves. Yes, they have decided to discriminate– between tax paying citizens and illegal beneficiaries of our own hard work and tax dollars. They decided that the rule of law, ignored by our federal government, would be enforced by state and local government.

I don’t begrudge illegal immigrants doing what they have to do to take care of their families but I have a family, too, and immigration laws are supposed to protect us from unrestricted access to the infrastructure that comes out of my family’s pocket. Social costs, jobs, security of our borders against criminals and terrorists and the rule of law are all at stake here. Every citizen knows that a primary responsibility of our government is to protect and secure our borders for all these reasons. The concern by the public in Arizona and elsewhere is entirely legitimate but, as usual, the response from Washington is anything but.

(more…)

Every economic theory – even socialism and Marxism – agrees that long-run growth and higher living standards are closely tied to saving and investment (a.k.a., capital formation). Yet because of double taxation, the current tax code penalizes those who are willing to forego current consumption to finance future prosperity. In an ideal system such as a flat tax or national sales tax, by contrast, there is no tax bias against income that is saved and invested.

One of the most self-destructive forms of double taxation is the capital gains tax. The Institute for Research on the Economics of Taxation has a superb three-part series on this issue, including studies on the economic impact of capital gains taxation, the impact of capital gains taxation on realizations (asset sales), and the grossly flawed revenue-estimating process used by the left to hinder good capital gains tax policy. For those seeking a faster introduction to the issue, this new Center for Freedom and Prosperity video explains why the capital gains tax should be abolished.

Unfortunately, Obama’s policies are steering America in the wrong direction. He wants to boost the official capital gains tax rate from 15 percent to 20 percent – and that is after imposing a back-door 3.8 percentage point increase in the tax rate as part of his government-run healthcare scheme. This is in addition to his other class-warfare proposals to impose higher tax rates on investors and entrepreneurs. If he succeeds, the American economy will suffer. Here are the six reasons outlined in the video why the capital gains tax is misguided:

1. Less investment – This is simple economics. If you make future consumption more expensive relative to current consumption with the tax code, people will respond by saving and investing less.

(more…)

Gloominess and despair are not uncommon traits among supporters of limited government – and with good reason. Government has grown rapidly in recent years and it is expected to get much bigger in the future. To make matters worse, it seems that the deck is stacked against reforms to restrain government. One problem is that 47 percent of Americans are exempt from paying income taxes, which presumably means they no longer have any incentive to resist big government.

Mark Steyn recently wrote a very depressing column for National Review Online about this phenomenon, noting that, “By 2012, America could be holding the first federal election in which a majority of the population will be able to vote themselves more government lollipops paid for by the ever shrinking minority of the population still dumb enough to be net contributors to the federal treasury.” Walter Williams, meanwhile, has a new column speculating on whether this cripples the battle for freedom:

According to the Tax Policy Center, a Washington, D.C., research organization, nearly half of U.S. households will pay no federal income taxes for 2009…because their incomes are too low or they have higher income but credits, deductions and exemptions that relieve them of tax liability. This lack of income tax liability stands in stark contrast to the top 10 percent of earners, those households earning an average of $366,400 in 2006, who paid about 73 percent of federal income taxes. …Let’s not dwell on the fairness of such an arrangement for financing the activities of the federal government. Instead, let’s ask what kind of incentives and results such an arrangement produces and ask ourselves whether these results are good for our country. …Having 121 million Americans completely outside the federal income tax system, it’s like throwing chum to political sharks. These Americans become a natural spending constituency for big-spending politicians. After all, if you have no income tax liability, how much do you care about deficits, how much Congress spends and the level of taxation?

Steyn and Williams are right to worry, but the situation is not as grim as it seems for the simple reason that a good portion of the American people know the difference between right and wrong. Consider some of the recent polling data from Rasmussen, which found that “Sixty-six percent (66%) believe that America is overtaxed. Only 25% disagree. Lower income voters are more likely than others to believe the nation is overtaxed” and “75% of voters nationwide say the average American should pay no more than 20% of their income in taxes.” These numbers contradict the hypothesis that 47 percent of Americans (those that don’t pay income tax) are automatic supporters of class-warfare policy.

(more…)

Like a good peasant, I have already filed an extension, so I am at least temporarily compliant with the friendly people at the IRS. But since it is tax day, perhaps a slight bit of criticism of the tax code is warranted. I have already posted on Biggovernment.com my video on the flat tax and warned about the risks of adding a value-added tax on top of the income tax in another video. I also posted a very successful video narrated by a former Cato intern about the harsh compliance costs of the internal revenue code.

So now it is time for some jealousy. There are more than 25 jurisdictions around the world that have flat tax systems and do not face the horror and anxiety of complicated tax systems. This is a remarkable change compared to 20 years ago, when there were less than five jurisdictions with simple and fair tax regimes. Some of these flat taxes, such as the ones in Hong Kong, Estonia, and Slovakia, are very close to the theoretical ideal and are great role models for other nations. Here is a video looking at this global flat tax revolution.

A few caveats are worth mentioning. Iceland no longer has a flat tax. After the financial collapse, a leftist government was elected that has reinstated a discriminatory rate structure. This is unfortunate, but I am not too upset since I was never comfortable defending a flat tax with a punitive tax rate higher than the highest tax rate in the American tax code.

Also, a flat tax is better than a so-called progressive tax, but it is not a silver bullet for economic growth. There are many factors that determine whether a nation is prosperous. As the video explains, Ukraine has a flat tax, but it is hardly an economic powerhouse since almost all other government policies are misguided. Sustained and rapid economic growth requires that politicians implement good (or at least decent) policy in a wide range of areas.

(more…)

Tax day is often marked by many political events objecting to our nation’s tax policies.  This year will be no different, as tea party groups and advocates for tax reform will be out in full force across the country.

Americans are upset with Washington, and it is easy to see why. Government dependency and spending is up, while nearly half the households in America (47%) will pay no federal income taxes this year. Meanwhile, Gallup reported this week that 63 percent of Americans believe their taxes will increase in the next 12 months. Private sector jobs are increasingly difficult to obtain, and special interest groups control the agenda on Capitol Hill.

Many wrongly claim that only the “rich” are affected by high tax rates.  In reality, the average American worker surrenders 27 percent of his earnings to federal, state and local governments, meaning the average American gives three months of his annual earnings to government.

Despite this high percentage, liberals in Congress want to take even more money out of the pockets of American workers by pursuing an agenda that increases taxes to pay for the policies being handed down by Nancy Pelosi and signed by Barack Obama. Liberals in Washington are spending the federal government into a record deficit of $1.5 trillion dollars this year alone.

America cannot continue down the current path because our spending levels are unsustainable. Spending needs to be cut and our method of taxation needs to be changed.

(more…)

My post last week about the flat tax generated a lot of friendly comment and email, but also some pointed questions about whether a national sales tax such as the Fair Tax would be a better approach. Since I’ve written favorably about a national sales tax, debated in favor of a national sales tax, and even testified to the Ways & Means Committee about the positive attributes of a national sales tax, I certainly have no objection to that reform. Any single-rate, consumption-base tax would be a vast improvement over our corrupt and punitive internal revenue code.

So why, then, do I spend most of my time on the flat tax? The simple answer is that I don’t trust Washington. We know the politicians are salivating at the prospect of imposing a broad-based consumption levy such as the value-added tax. And we know they want the VAT in addition to the income tax. What’s to stop them from saying they’ll impose a national sales tax, promising to repeal other taxes, but then pulling a bait and switch and giving us both? As I explain in this video, the national sales tax should only happen after supporters amend the Constitution to repeal the 16th Amendment and replace it with an ironclad ban on income taxation to protect against political duplicity.

Amending the Constitution, however, is a daunting challenge. Does anyone really think a proposed amendment to prohibit income taxation would attract the required two-thirds support in both the House and the Senate? Even when Republicans were in charge, there were not enough votes to approve a watered-down balanced budget amendment, so it seems unlikely that a far bolder proposal could attract sufficient support. And even if Congress approved such an amendment, what are the odds that three-fourths of the states would ratify?

(more…)

America’s biggest fiscal challenge is excessive government spending. The public sector is far too large today and it is projected to get much bigger in coming decades. But the corrupt and punitive internal revenue code is second on the list of fiscal problems. This new video, narrated by yours truly and produced by the Center for Freedom and Prosperity, explains how a flat tax would work and why it would promote growth and fairness.

There are two big hurdles that must be overcome to achieve tax reform. The first obstacle is that the class-warfare crowd wants the tax code to penalize success with high tax rates. That issue is addressed in the video in a couple of ways. I explain that fairness should be defined as treating all people equally, and I also point out that upper-income taxpayers are far more likely to benefit from all the deductions, credits, exemptions, preferences, and other loopholes in the tax code.

The second obstacle, which is more of an inside-the-beltway issue, is that the current tax system is very rewarding for the iron triangle of lobbyists, politicians, and bureaucrats (or maybe iron rectangle if we include the tax preparation industry).

(more…)

We will never control our government until we control the federal tax system.

It is corrupted and unfair and feeds unchecked government growth. It has made the federal government far more powerful than what was supposed to be its equal—our state governments. The income tax hides the cost of the government from plain sight and provides endless amounts of our money for the advancement of politician’s personal ambitions. It is very good for those in Washington and very destructive for the rest of us.

We’re being treated as if our only value as citizens is how much more money we can be made to give up from our paychecks. When it comes to more and more spending and more and more taxes, it is a one-way conversation. I’m ready to talk back and I don’t think I’m alone. That’s why I’m calling on every patriot to join me in a tax revolt march on Washington , D.C.

I’m leading a Tea Party Patriot team in a growing on-line tax revolt which arrives in Washington , D.C. on April 15^th to merge with the huge physical rallies that are already planned for that day. It’s a new technology that allows people to choose a graphic “avatar” to digitally march on-line to Washington with hundreds of thousands of other Americans. Even the homebound, recovering veterans and the elderly can add their voice to this new American chorus.

I’m seeing a lot of people remembering that politicians are supposed to follow the will of the people—not trample it. Like Boston Harbor , this is where we again make our stand.

(more…)

It is apparently a mystery to a lot political insiders why the Tea Parties have become so popular with so many Americans in state after state across the nation.

Many have simply tried to dismiss the phenomena as the ranting of a relatively small number of angry right-wing zealots. They are dead wrong but one gets the feeling the political class finds this easy dismissal far more comforting than the unsettling truths driving angry and vocal dissatisfaction by people from across the political spectrum.

“Real people” like me resonate in politics right now because of the growing chasm between what the political elites of both parties see as the best course for the nation—and for themselves– and the hopes and fears of the average American man and woman. In China that difference might mean very little to government as we saw in Tiananmen Square but, according to the Founding Fathers, such a division should not even exist here in the United States.

Those who are passionately protesting at Tea Parties and making themselves felt at the polls have rightly detected more than a hint of contempt for the average citizen. If everything were going well such elitist arrogance might be accepted, as it has been in the past. But things are not going well for our nation and more and more people are challenging the performance, ideas and motivations of those who hold themselves out as smarter and better than the rest of us.

(more…)