How About a Major Tax Policy Overhaul that Could Actually Work? Introducing the Neutral Tax [Reader Post]

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I have a confession to make – I’ve been a bit of a hypocrite on one issue. I like to rib my lefty pals for their inability to offer any realistic, constructive solutions to the problems that they want to solve. There is no energy source we can use that won’t have a leftist opposing its construction, and none of them are willing to offer any kind of realistic policy for satisfying our energy needs. On the federal budget, they love to call for raising taxes that nobody will pay to balance the budget, while oblivious to the fact that we’re beyond the point where tax increases can have any meaningful impact. To some degree I’ve weighed in on taxes, and I didn’t give the conservatives much better treatment than the leftists when I had to explain that conservatives are the reason we’re never going to see a flat tax or a fair tax. Sure, I’ve weighed in with some proposals for tax increases to support our military by taxing the free riders (as in the rest of the world), and I’ve also called for tax increases designed to curb areas that hurt economic activity (politicians, lobbyists and trial lawyers). While my last two ideas would help raise revenues and modify some behaviors, in the larger scheme of things they would not have a huge impact given how ridiculously complex our tax situation is. And neither of my last two proposals have any chance of even being considered politically. So I’ve been guilty of the same accusation I so often throw out about not having any ideas that are both constructive and realistic.

Until now.

After a local Tea Party meeting one of my fellow attendees reached out to me and asked me to look over a proposal he had for tax reform. Given that this city has no shortage of people with grand ideas I was naturally skeptical. But then I read his proposal for the Neutral Tax, and when I was done reading I had just one thought… "What on Earth did this guy just say?" So I read it again, and it started to make sense. I didn’t share my initial reaction to disparage the Neutral Tax – it’s just that it’s such a different idea from anything I had read before that it didn’t sink in on the first reading. Think back to when you were in school and the first time you saw something like "Se habla Espanol?", or "(x + 2)(y + 3) =20", or your first Supply and Demand curve. Looking back you know that none of these concepts are complicated, but the first time you saw them it took a brief recalibration of your brain to comprehend what you’re looking at. If the first time you read the white paper (it’s an easily digestible four pages) it sounds like a foreign language read it again. It’s not a difficult concept; in fact it’s so simple it could actually work. Here is a quick summary:

The federal government stops taxing citizens directly, and instead applies a flat tax that is assessed against each individual state. It is then up to each state to decide how it wants to tax its residents. From there the state still keeps its cut for its own obligations while sending the feds their share.

That’s it, as simple as that. Really.

Changing over to a Neutral Tax system has a number of advantages:

  • It cuts away a massive level of federal bureaucracy. Yes, this will mean more tax bureaucrats at the state level but we are simplifying by building on existing systems while taking away an additional, complex (federal) system.
  • It allows states to compete for residents by offering different incentives. We already see this now:
    • Delaware uses a high personal income tax and no sales tax to encourage cross-border consumer spending to stimulate extra business.
    • Florida wants to encourage retirees and high income earners to move to their state by having no income tax. They use a higher sales tax, paid heavily by its strong tourism.
    • California wants to drive out its generally Republican voting middle class to retain a strong voting block of leftist interest groups of the extremely wealthy, very poor, and state union employees via a complex and punitive regulatory and taxation environment. Although this policy has the state heading off of a fiscal cliff, it has achieved its demographic goals quite nicely.
  • Taking away the power of the IRS also makes it far more difficult for our federally elected officials to use the tax code to peddle influence. Yes, this corruption will migrate to the state level, but being closer to its constituents will give greater accountability.

Are there flaws? Absolutely, as I just stated in my last bullet point. Are there obstacles to getting this passed? There certainly are, as the status quo will always guard its interests in staying put. But do we need to start thinking seriously about making real reforms to our tax code? You better believe we do.

The main reason I support this plan is that it satisfies my two basic criteria: Is it practical financially, and is it realistic politically? Financially, I say it is. While there are no revenue projections in the concept, that’s not the point right now. The feds can decide how high or low they want taxes to be and the states can decide what is the most efficient way to raise or lower the needed tax rates. Government spending levels is a separate issue, but since nobody else’s tax plans address that issue the Neutral Tax does not need to either at this time. And this has not even started to evaluate the stimulative effect of simplifying the tax code.

As for being politically feasible, I honestly think that the Neutral Tax is. It will be a major battle to make it a reality, but I think it has enough elements that many will find appealing combined with few enough negative aspects that would be used against the idea.

Anyone who’s been following my blog knows that I’m about as cynical as they come when it comes to our government’s actions and big ideas from people living inside the beltway (at least I think he does). But if a four page white paper can get approval from this ultimate cynic it’s certainly worth five minutes of your time to read.

It’s too late to repent when it’s the ultimate cynic

This is a new and different concept, so I’m really interested in hearing everyone’s opinions.

Cross posted from Brother Bob’s Blog

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I like it conceptually. The devil will be in the details of how each state’s share is determined. I imagine the only fair starting point is the census. The process would also have to be simple, easy to understand, and easy for every citizen to audit. Let’s say it’s something like this: not a dime flows to the feds until they have passed a budget in the normal manner (majority of both houses + Prez sig) *AND* which includes a one page chart reducing the bottom line to each state’s share based on the most recent census.

I still like the Fairtax as a better, more equitable to all citizens, idea for tax reform.

Having said that, this idea accomplishes one thing that can have a profound impact on how people view taxation. That is, in the states with already extreme differences in the rate of taxation dependent upon income, those differences become even more extreme, based on the probable execution of said idea, at state level, being somewhat relative to their current tax scheme/plan. For example, all of those states with the added burden on the upper income earners, will place the additional burden of collecting tax revenue for the federal government’s share of tax revenue equally, or similarly, upon those upper income earners.

As a result, those who live in such states, such as California, or Illinois, will see their burden increased, possibly to a point that makes movement to a neighboring state even more attractive as an alternative to paying such high taxes. Interesting.

I still see graft and corruption as inherent, detestable attributes of such a plan, however, being that it will be on the state level (closer to home, so to speak), it should make those more manageable than they are in the current system.

All in all, it is a much preferable plan than the current system is.

Obama might SAY he’s going after ”the rich,” but look at all of his proposals and you see he is really going after anyone with net worth.
Net worth is income left over after all living expenses are paid.
The poor have zero net worth.
Same with most ”wage slaves.”
Even some retirees have a pitiful net worth, relying, instead, on government promises that were SUPPOSED to have merely been safety nets ON TOP of their personal assets and family support systems.
So, who has a bit of net worth?
Working people in the professions, small business owners, frugal people.
Basically, the ants in the Ant and the Grasshopper fable.
When Obama said he wanted to ”spread the wealth around,” he was talking about taking the money (his idea is that it is EXTRA money) from these groups of people.

Your TEA partier’s idea of a neutral tax really would force a mass migration between states.
It would end up being a grand mugging by reality of each of the 50 states.

One thing I know would happen, because it has all my life, the baby boomers, as a demographic mountain, would bear the brunt of the taxes somehow.
Even as retired people, the states would find a way to target them….sales taxes, perhaps?

If there is a solution that goes easy on retired baby boomers in one state, that is where they will go.
Same with business owners to the extent possible.
Same with high-paid professionals.
This means some states (in thrall of their poor and illegals and slovenly) will be crying foul!
Who will be left to foot their bleeding heart policies?

@Nan G:

What you describe, Nan, regarding migration of people from one state to another, is the current, modern form of “Going Galt”. That is, moving from an area of oppressive taxation policies to areas more equitable to all, but only in relation to the states’ or locals’ taxation policies. On a micro-level, it is also happening on the federal level, but mostly in relation to business activities.

This plan would have the benefit of removing the federal impact, individually, on a person “voting with their feet” and moving from one state to another.

@johngalt: Allowing for unique and specifically localized (state level) collection mechanisms is exactly what I like most about the proposal. It’s a step back toward the original federalist concept of allowing each state to be a laboratory of democracy. As far as corruption is concerned, it will always be among us given the imperfect human condition. Better the corrupt be close at hand than sitting in far away capitals.

I agree with on this one. I like the FairTax much better because to make it work, you have to repeal the 16th amendment and get rid of the socialist income tax. To some, that is a hinderence. To me, that is a blessing. There is, however, one addendum to the FairTax I would make. It is currently a 23% built-in tax on all new items sold at the retail level. I would like to add that the rate be dropped 1% per year until it hits 15%.

I think the “Neutral Tax” will put more power in the hands of the state, which is a good thing. But as long as you have the 16th amendment you will have possibility of a repeal of the Neutral Tax and to go back to a full socialist income tax. And don’t you dare think for 1 second that the socialists won’t “community organize” to get their precious class warfare based income tax back.

@Bob

It eliminates all current federal taxes on citizens and businesses.

Huge (as it seems the federal gov’t feels it can expand exponentially on the tax payers dime without diminishing returns).

But replaces them with…

a singular flat tax on the gross revenue of each state government.

Caution. It doesn’t address:
o – Big money agendas: Cronyism, Unions, Lobbyists.
o – Out of control gov’t debt spending
o – Govt expansion taking over the formerly private sector
o – Who’s deciding on those stately quotas? The same people deciding ObamaCare waivers, GM closures, and introduced by the brain surgeon on Mark Levin those Ethics Committees and their Comfort Care.

I understand devesting the tax structure from the Federal Govt. But the states are still compelled to accept Federal Highway Funds. I understand the fight. But am not sure it’s time.

Interesting. It might curb California’s policy of deliberately packing itself with illegal aliens to increase the federal revenue take. As some of you may have observed, CA has deliberately attracted illegals via sanctuary city status. The census counts do not differentiate between citizen and non citizen and federal funds are proportionately allocated by state by population count not revenue collection. Additionally, due to this faulty counting method, CA has 5 or 6 more Congressional Reps than they are entitled to have at the expense of citizens representation of smaller states. As usual, liberals have set up an unsustainable fiscal situation of spending money they don’t have by foisting their financial needs upon others using legal trickery. Imagine if every state encouraged illegal immigration as CA did? The federal budget would explode leaving no funds for any other purpose but to make per capita payments.

Hence, this proposal will never see the light of day.

I still believe the fairest tax is a flat tax, everyone pays the same rate, with no deductions for ANYTHING. And substitute workfare for welfare. 100 million people on the government dole is no incentive to be self supporting. Work for a living, pay your fair share, or don’t eat! Obvioulsy, there are truly needy people that need help. but I don’t think there are 100 million of them.

Eliminating deductions would also have the advantage of reducing the IRS, simplifying the tax papers, eliminating the lobbying influence, and get rid of all those tax lawyers.

It is a win-win proposition.

@Stranded in Sonoma

Not only would the 16th Amendment need to be repealed/replaced, but the 17th Amendment would have to be repealed (the one that provides for the direct election of Senators). We would have to put the Senate in the hands of the states so they could place people who would watch out for states’ fiscal interests. I’ve wanted this amendment repealed for some time now even though in New York, we would probably never see a Republican Senator appointed by the state.

Please read about the Fair Tax before deciding what type of a tax system you want. It takes care of EVERYTHING. It should have been called the Federal Sales Tax, because it eliminates ALL Federal taxes and replaces it with a Federal sales tax. The other tax systems allow the ones not paying taxes now to keep not paying taxes. The Fair Tax even takes care of the ones on welfare, which the others don’t. The Fair Tax has the stupidist way I have ever heard of that I like.

These things wll happen with the Fair Tax:

(1) Since businesses won’t pay taxes, they will bring back their headquarters that were moved to lower tax countries.

(2) Other country’s businesses will put there headquarters here to avoid their country’s taxes.

(3) Illegals will start paying taxes now, since they will be taxed on everything new they buy.

(4) The IRS will be eliminated. The collection agency will be the businesses that collect the tax at the point of sale and send it in on a regular basis.

(5) The welfare system will be eliminated because the poor will be taken care of. No more people will be getting YOUR Social Security money.

(6) The price of the items we buy will stay the same. Lies are being told that the tax will be ADDED to the price of the products.

(7) You will get to keep ALL of your paycheck.

http://www.fairtax.org/site/PageServer?pagename=homepage2

@Brother Bob: #13
I believe the ONLY reason we haven’t had ANY change in our tax system is that too many people are making too much money of the system we have. The only way to stop this is to find a way to have elections that politicians aren’t allowed to spend ANY money. This way, the only ones the politicians have to pay back are the ones who voted them in, not the ones who financed their elections. There are different ways to do this, but I won’t go into them.

The only way to chang the system is to get rid of ALL of the politicians we have now. They won’t vote for any changes that will cost them money. The only ones who will change it are non-politicians who will put their country first and sign a contract saying what they will and won’t do if elected, and in the contract it will state that if the policitian doesn’t do as promised, they will resign by a preset date.

If we stay with the system we have, we could have EVERYBODY in the highest tax bracket some day. The system uses a FIXED rate that hasn’t changed since it was created. Years ago, people could start a job and not be in a tax bracket until their income increased enough. With inflation, the average wage gets higher and higher, so that the average full time worker starts off in an income tax bracket. As inflation keeps raising people’s wages, they go into higher tax brackets. Congress gets a tax increase every time inflation goes up, and they don’t have to raise taxes to do it. They just have to leave the tax code alone and our ancestors will be starting their work career at the highest tax bracket.

Another problem with the tax code is that the brackets aren’t separated. In other words, if a bracket ends at $50,00, and you earn $50,000.01, you don’t pay the higher tax on the $.01, you pay it on the whole $50,000.01, so that earning an extra penney can cost you hundreds of dollars.

> Another problem with the tax code is that the brackets aren’t separated. In other words, if a bracket
> ends at $50,00, and you earn $50,000.01, you don’t pay the higher tax on the $.01, you pay it on the
> whole $50,000.01, so that earning an extra penney can cost you hundreds of dollars.

This is incorrect. The income you make in each bracket is taxed at that bracket’s rate, regardless of how much you make. In your example, only the marginal $0.01 will be taxed at the higher rate. The real problem with the progressive income tax is that every additional dollar of your income (i.e. your extra effort) will be taxed at your highest rate, thus providing less incentive to earn more income and provide more value to the economy. That may have been the point you were trying to make: that the progressive income tax discourages that last extra bit of productivity at the margin.

@Tom: #15
I was going by what I was told or read a long time ago. I just sent an email to my financial planner . I figure he will know.

My main point I was trying to make is that the politicians can leave taxes the way they are and eventually EVERYBODY will be at the highest tax rate. The tax code should start at the poverty level and go up from there.

The Liberty Tax Plan which has been distributed to Newsmax, Golden Sachs, the state of Ohio and Pennsylvania and other entities. Romney & Ryan envision the plan of no taxes or collections of 10% on the buy and sell side of every product produced in the U.S. thus lifting the gdp in the product twice normal. This constitutes the Liberty Tax. The individual states will be the collectors of the Liberty Tax. Depending on the ratio chosen by congress be it 50:50 or 30:70, the latter ratio chosen because of the 16 trillion debt, the state will retain $30 for her state treasure and forward the$70 for the fed treasury but of the $100 of Liberty Taxes collected the fed government will receive $3500 ($70 x 50 states = $3500). This is exponential growth on a small scale. With shortfalls in the individual states, the state can lobby congress with their own states legislators. The elimination for all taxes includes federal income taxes, state income taxes, property taxes, utility taxes, excise taxes, with a trade off for the Liberty Tax. The tax is neutral and is a contributory tax with buyer and seller as partnership in settling the fed debt. All it takes is 10% from either side on the stipulated price of food, cars, boats, planes, farm products, port fees, airline passengers fees, all wages, all contracts, etc. (Wages considered as implied contracts with employer and employee.) Charge import and export fees. Consider: this is not collectings revenue twice a year or monthly but every second of the day transactions are occurring millions of times nationally. It is exponential income to both states and the federal government. Think of the many employees with the hospitals, banks, colleges, pharmaceutical industries, etc. It is exponential income from the Liberty Tax.

@Wallace Chin: #17
In my opinion, you can’t combine Federal and state taxes. They have to remain separate. Have you heard of The Fair Tax? It should have been called a Federal sales tax, because that is how it works. It eliminates ALL Federal taxes and puts a Federal sales tax on ALL new items. If each state would collect their taxes the same way, we wouldn’t have to fill out a Federal or state income tax return. Every time you buy something new, you pay your taxes. Used items wouldn’t be taxed. The best part is that what costs $100 before The Fair Tax is enacted, will cost $100 after it is enacted.

The rich will pay their fair share, because they buy higher priced items, so the tax on those items will be higher. Illegals will pay taxes that they don’t pay now, because they have to buy stuff. They even have a way to take care of the poor.

Since corporations won’t be paying taxes, they will bring their corporate headquarters back to the USA to avoid other country’s taxes. Other country’s businesses will transfer their headquarters here to avoid the taxes.

Their web site is at:
http://www.fairtax.org/site/PageServer

They have a calculator web site so you can figure your taxes with and without The Fair Tax. When I went to it, it was down.
http://www.fairtax.org/site/PageServer?pagename=calculator&autologin=true

Please read ALL of their information before you decide that The Fair Tax wouldn’t work.

The Fair Tax, “Liberty Tax” or just about any other tax scheme can be implemented by a state when The Neutral Tax is enacted at the federal level. The point is to let the states determine the best tax structures instead of trying to implement a “one size fits all” monopolistic tax structure at the federal level. The Neutral Tax is the only reform plan that creates a free market for tax reform policy.

Info on the “LIBERTY TAX PLAN” proposed to Romney & Ryan…….too late and too bad as the didn’t get it…..four years more. You can help by getting viral with the plan. Send for info: wechin@comcast.net

For information regarding the “LIBERTY TAX PLAN” write to: wechin@comcast.net

@Smorgasbord:
I don’t know how my ancestors are going to pay taxes at the top rate. They are all dead.
The current tax code has marginal rates. You only pay the high rate on the amount over each threshold; in your example making an extra penny does not cost you hundreds.