Clear Fog Blog

Political musings from Warren E. Peterson

We Have a Tax Problem Too

Posted by Warren Peterson on April 26, 2011

It is popular in conservative circles to say, “We don’t have a revenue problem in Washington, D.C. We have a spending problem.” But the truth is we have a taxing problem too and it needs to be solved along with controlling spending. Rahm Emanuel‘s famous quote, “You never let a serious crisis go to waste.” certainly applies to the debt crisis now facing the nation.

To stop the rise in and actually begin to lower the debt will require significant reductions in spending across the board. We may well come to the conclusion that after decades of prolific spending, especially the last two plus years of multi-trillion dollar deficits, spending cuts alone will not be enough. Before we leap into any tax increases, a discussion beyond the “tax the rich” rhetoric needs to take place. That discussion should result not in more tweaks to the existing 71,000-page nightmare called the income tax code. It should result in fundamental reform.

A new tax system needs to be relatively simple, transparent, fair and include everyone in the base. Two proposals have been offered:

1. The Fair Tax – Click HERE for a detailed explanation. In essence, it is a national sales tax collected at the retail level. It would replace all current taxes (Social Security, Medicare, individual and corporate income taxes, etc.). A mechanism for refunding monthly an estimated amount of the tax makes it somewhat progressive. A rate of 23% or more is a shocker but the theory is prices for goods and services will fall since there are no hidden taxes being passed through to the consumer and the cost of collection and enforcement would be dramatically lower. It is an intriguing idea but so radical that selling it to the public over the loud objections of special interests across the spectrum could be a mountain too hard to climb. With the Fair Tax, citizens would know every day what the Federal government was costing them.

2. The Flat Tax – Click HERE for a detailed explanation. This system would tax all income above a set amount; say $36,000 for a family of four, at a fixed rate (17%), no deductions or credits. Various options incorporating changes such as graduated rate have been suggested. CPAs and tax lawyers would hate it but most people would understand it as fair and transparent.

The two most difficult problems with either of these proposed tax systems would be how to implement and Congress. Picking winners and losers in the tax code is power and politicians would not give it up easily nor would those benefiting currently from some provision buried in those 71,000 pages.

Everyone agrees we need to reform our tax system. The debt crisis offers an opportunity for the people to demand it. Wasn’t the original Tea Party about taxes?

Cross posted on: SoundPolitics


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