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.
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