There is an old saying: Two things are certain, Death and Taxes.
Scientists are working hard every day to work on the Death predicament... but what are we doing about taxes?
Currently in the US, every dollar that we make is taxed on the order of +60% over four levels of government and by many means of taxation. We have Federal Income tax, Social Security and Medicare tax, State income tax, state sales tax, property tax, stamp tax, gas tax, gift tax, real estate tax, car tab tax, recreational vehicle tax, estate tax, luxury tax, capital gains tax, etc, etc, etc... I think the point is well made in that list...
So the general question that I would like to discuss is: With all these taxes on our achievements and wellness, not only how do we succeed, but why do we try?
It is very well known, and even discussed by Karl Marx, that the best way to stimulate economic growth is by reducing the taxation of the people. Imagine that... even the brainchild of the Communist Manifesto went forward understanding that communism stifled economic prosperity. But it seems that his followers today fail to grasp the fundamentals of economics, and have instead focused on his dreams of a Utopian communist society (aka Pipe Dream!)
Our infinitely complicated tax code in the United States is currently set up to stifle non-government controlled economic growth. There are penalties on savings, penalties on success, penalties on achieving breakthroughs in business that may bump you into a "higher tax bracket". So the harder you work, the harder you are taxed... Therefore, it is better to achieve the minimum and settle for modest results.
Let's look at an example. Imagine that you make $100 in a month in your business. The government says that if you make $100 in your business, you will be taxed $15. Your after tax earnings are $85. Now, suppose you had a boost in business, and the next month you made $101. The tax code is set up in a way that you are now in a new tax bracket, being taxed at a higher rate, and you will be taxed $20 for the month. So your second month after tax income, though you had more business, was $81. This is how our tax system currently works...
So where is the incentive to work harder?
It is in a new tax code system.
Currently, our tax code is 16,845 pages long... it is a mess of varying taxes, tax exemptions, blah blah blah... So how do we fix it?
Two solutions have been suggested: Fair Tax and Flat tax. Which one is better?
The Fair Tax is a plan that would eliminate income tax, and move the entirety of the Federal Tax to a consumption based tax rate of around 23%. What this means is that of the $101 made in the month, you get $101 in your pocket (or bank). Then the tax is applied when you go to purchase, say, a ream of paper for $5. The price after tax would be $6.15. Supposing that the ream of paper is the only purchase you needed to make in that month, your $101 will have been taxed only the one time, leaving you with an after tax amount of $99.85. Food is exempt from the consumption tax... so it is voluntary tax based on the level of your consumption. Assuming consumption rates stay the same, the net income to the government will be revenue neutral. However, there will be a boom to the economy because there is more money on the front side of the consumer process, so consumption rates would likely increase (though one would hope that SAVINGS rates increased!). There are a few down sides to the Fair Tax. The first glaring one is that to protect the citizens from a consumption tax AND an income tax, there will need to be a constitutional amendment. Repeal the 16th and rewrite to ensure that the Congress does not impose an income tax. The second is the uncertainty in tax revenue. You can predict trends in income, but if those trends do not pan out, the revenue will be short (which is fine by me... the US government does not need a 3 Trillion dollar budget!)
The Flat Tax is a flat, one rate, income tax. No matter what tax bracket you are in, you pay one tax one time. CATO institute suggests that maximum economic growth occurs with a total tax rate around 18%. That means if you make $100 you pay $18. If you make $101, you pay $18.18 and so on. There are no tax brackets, no penalties for success... just a one sentence IRS tax code that says: If you live and work in the US, You pay 18% income tax.
Of course neither tax fix deals with state and local taxes... so the flat tax rate would have to consider state and local tax rates to achieve the maximum economic growth. The logic behind the 18% is that all of the taxes listed above must add up to 18%.
Is one better than the other? I think they are equally effective in limiting government control on personal success and economic progress.
Is one easier to implement than the other? Yes. The flat tax would be the first step in halting the out of control government, and making a proactive change in our economy and society. The fair tax is a radical idea that would take much time and money to implement... though once implemented, it could be a great way to leverage power from the government back to the people (imagine consumption strikes to limit income to the government!).
The idea is economic freedom. The medium for freedom is through a people smart tax code. The rest is up to us.