- Reviewed by David M. Kinchen
Chances are — if you haven’t already done so — you’re working on your 2012 Federal Income tax, or more likely, having someone fill out the forms for you. You’re not interested in reading Stephen Moore’s delightful and enlightening book on our grotesque beyond belief tax system, “Who’s the Fairest of Them All? The Truth About Opportunity, Taxes, and Wealth in America” (Encounter Books, 128 pages, sadly no index, $21.50). Too bad.
This book came out last October and is the best book I’ve read that demystifies our tax code — to the extent that such a thing is possible — and advocates a flat tax to replace our progressive income tax that’s not so progressive any more after 100 years of tinkering.
Yes, our beloved federal income tax is 100 years old this year, with the ratification of the 16th amendment to the Constitution by Congress on Feb. 3, 1913. I haven’t noticed any big celebration of the disaster that the federal income tax has become.
There were other attempts at a federal income tax, most notably the Revenue Act of 1861, which included a tax on personal incomes to help pay for the Civil War. The tax was repealed 10 years later. I didn’t know this nugget, but I came across it in my research: We’ve even had a brief fling at a flat rate federal income tax enacted in 1894 by Congress and ruled unconstitutional in 1895 by the U.S. Supreme Court because it was a direct tax not apportioned according to the population of each state. The 16th amendment eliminated the objections to direct taxes not apportioned to the population of each state. Here is the entire 16th amendment: “The Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.”
Moore is a rabid advocate of the flat tax, also known by its alternative name the fair tax, and says that flat taxes have successfully worked in economies as diverse as Hong Kong and Russia. Hong Kong adopted the 15 percent flat tax on incomes 50 years ago when it was a British colony and has become a “glittering model of tax efficiency and Sanity ever since,” Moore writes. Russia collects more taxes from its 13 percent flat tax than it did with a 50 percent income tax, he notes. Moore didn’t include a list of nations with flat taxes, so I did some research and came up with this from the Cato Institute:http://www.cato.org/policy-report/julyaugust-2007/global-flat-tax-revolution. This referenced item tells how the flat tax was advocated by U.S. Rep. Dick Armey (R-TX):
“It’s unfortunate that the United States is missing out on the tax reform revolution. Instead of the hundreds of forms demanded by the current tax system, the Armey flat tax would have required just two postcards. Households would have used the individual postcard to pay a 17 percent tax on wages, salary, and pensions, though a generous family-based allowance (more than $30,000 for a family of four) meant that there was no tax on the income needed to cover basic expenses.
“Taxes on other types of income would have been calculated using the second postcard, which would have been filed by every business regardless of its size or structure. Simply stated, there would have been a 17 percent tax on net income, which would have been calculated by subtracting wages, input costs, and investment expenditures from total receipts.
“While the simplicity and low tax rate were obvious selling points, the flat tax also eliminated various forms of double taxation, ending the bias against income that was saved and invested. In other words, the IRS got to tax income only one time. The double tax on dividends would have been completely eliminated. The death tax also was to be wiped out, as was the capital gains tax, and all saving would have received “Roth IRA” treatment.
“Another key feature of the flat tax was the repeal of special tax breaks. With the exception of a family-based allowance, there would have been no tax preferences. Lawmakers no longer would have been able to swap loopholes for campaign cash. It also would have encouraged businesses to focus on creating value for shareholders and consumers instead of trying to manipulate the tax code. Last but not least, the flat tax would have created a “territorial” system, meaning that the IRS no longer would have been charged with taxing Americans on income earned—and subject to tax—in other jurisdictions.”
Flat taxes are particularly favored in the former satellites of the Soviet Union, with Estonia adopting a flat tax in 1994. I counted 17 nations using flat taxes of varying percentages. There may be more.
Tax-the-rich Democrats like President Barack Obama aren’t impressed with the worldwide success of the flat or fair tax, despite the proven results. Our president is the best friend H&R Block and other tax preparers have ever had, as well as the best buddy of lobbyists who want to retain our stuck on stupid tax code: “President Obama has declared that the standard by which all policies and policy outcomes are judged is fairness,” Moore writes. “He remarked at the Associated Press Luncheon in 2012, ‘We’ve sought to ensure that every citizen can count on some basic measure of security. We do this because we recognize that no matter how responsibly we live our lives, any one of us, at any moment, might face hard times, might face bad luck, might face a crippling illness or a layoff.’ And that, he says, is why we have a social safety net. He says that returning to a standard of fairness where anyone can get ahead through hard work is the ‘issue of our time.’ And perhaps it is.”
Moore says his book “explores what it means for our economic system and our economic results to be “fair.” Does it mean that everyone has a fair shot? Does it mean that everyone gets the same amount of everything? Does it mean the government can assert the authority to forcibly take from the successful and give to the poor? Is government supposed to be like Robin Hood determining who gets what? Or should the market decide that? The surprising answer: Nations with free market systems that allow people to get ahead based on their own merit and achievement are the fairest of them all.” What about Warren Buffett and his famous statement that his secretary is taxed at a higher rate than he is. Moore: “Mr. Buffett ignores the corporate tax when he says he pays less than his secretary (Page 70)” Moore continues: “According to the Congressional Budget Office (CBO) in 2009 middle and low income families (earning $50,000 and below) paid an effective 13 percent of their income in all federal taxes, while those earning more than $2 million [presumably including Mr. Buffett] paid an average of 32 percent.” As a journalist, it’s been my pleasure to live in many places, from Indiana, to Wisconsin, to California, where I labored for the Los Angeles Times from 1976 to 1990. After a lengthy stay in West Virginia, we’ve lived in Texas since the summer of 2008. I was pleased to see that Moore, in his “States of Taxation” beginning on Page 90, calls out the job-creation success of states with no income taxes, like Texas and Florida, or low taxes like Georgia and Tennessee, noting that this is no accident.
Companies and people prefer to live in places with little or no taxation. In addition to Texas and Florida, the seven U.S. states with no income taxes are Alaska, South Dakota, Washington, Wyoming and Nevada. Moore notes (Page 90) that contrary to the conventional wisdom shared by President Obama and NY Times columnist Paul Krugman that people grin and bear high taxes, “But how do they explain a state like Texas? It has no income tax and yet it had almost all the new jobs from 2005-2010.” Speaking of Texas, for my review of a book by Chuck DeVore about the success of Texas compared with his native California, see: http://www.huntingtonnews.net/54666. Summing up, for a concise, but comprehensive look at the many aspects of taxation, you can do a lot worse than read “Who Is Fairest of Them All?”
Stephen Moore (born Chicago, IL, February 16, 1960) is an American economic writer and policy analyst who founded and served as president of the Club for Growth from 1999 to 2004. He is currently a member of the Wall Street Journal editorial board and frequently opines on the pages of their op-ed section. Moore is known for advocating free-market policies and supply-side economics. Moore is a contributing editor for National Review and a frequent economics commentator on CNBC’s Kudlow & Company. He also appears on Fox News’ On the Record w/ Greta Van Susteren. He is also a frequent commentator on CNN’s weekend program Your Money.
From the Crypt Keeper’s Vault, here’s one look at a subject I’ve blogged many times, the flat or fair tax:
August 4, 2005
COMMENTARY: Residents from Death Tax States Eye West Virginia; FairTax Plan Worth Considering to Slay IRS Dragon
By David M. Kinchen
Hinton, WV (HNN) – I wondered the other day why a prosperous businessman from Northern New Jersey was buying real estate – both residential and commercial – in Hinton. The bargain prices and low property taxes are reasons enough, but there’s a kicker that sprang to my head after reading a Wall Street Journal editorial (Aug. 1, 2005) on Connecticut Gov. Jodi Rell signing into law an estate tax – usually referred to as the “death” tax by libertarians and right-wingers.
Connecticut, which levies a tax of up to 16 percent on estates of more than $2 million, is one of 18 states and the District of Columbia that have retained their death taxes, even after the federal government began in 2001 to phase out the federal death tax. Guess what other wealthy state has a death tax: Tony Soprano’s home state, the Garden State of New Jersey! Makes you wonder why Bruce Springsteen and Jon Bon Jovi maintain expensive residences in their native state, but they probably have second homes in Florida.
West Virginia is in the majority in not having a death tax, along with such states as Florida, South Carolina, Georgia – sounds like a list of red states politically. Blue states – with the notable exceptions of California and Michigan – predominate in the listing of places with death taxes. The red states of North Carolina, Tennessee and Virginia are the only Southern states with death taxes.
Here’s a list of states with estate taxes: Illinois, Kansas, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, North Carolina, Ohio, Oregon, Rhode Island, Vermont, Virginia, Wisconsin, Connecticut, Nebraska, Washington state and the District of Columbia.
I know the next statement from defenders of death taxes will be “they only affect the rich, why should I worry?” You’d be surprised how the death tax – like the Alternative Minimum Tax on incomes – can often affect those who consider themselves anything but rich. It can kick in for even middle class taxpayers.
As I write this, I’m listening to Sean Hannity on the computer stream of WABC 77 out of New York. Neal Boortz is plugging his just-published book, “The FairTax Book” (Regan Books, 208 pages) written with Congressman John Linder (R-GA), on the FairTax plan. This plan would abolish the federal income tax and replace it with a “simple 23 percent retail sales tax on new goods and services.”
Coincidentally, Sean Hannity just referred to the very same WSJ editorial on Connecticut’s new estate tax! As Boortz and Linder reveal in this first book on the FairTax, “this radical but eminently sensible plan would end the annual national nightmare of filing income tax returns” – H&R Block, where I did taxes for a season hates this plan — while at the same time enlarging the federal tax base by collecting sales tax from every retail consumer in the country. The publisher describes the plan thusly: “FairTax, they [Boortz and Linder] argue, would transform the fearsome bureaucracy of the IRS into a more transparent, accountable, and equitable tax collection system. Among other benefits, it will:
” Make America’s tax code truly voluntary, without reducing revenue
” Replace today’s indecipherable tax code with one simple sales tax
” Protect lower-income Americans by covering the tax on basic necessities
” Eliminate billions of dollars in embedded taxes we don’t even know we’re paying
” Bring offshore corporate dollars back into the U.S. economy.”
This plan sounds good to me. I’ve been advocating for years a revenue-neutral flat tax to replace the impossible U.S. Tax Code. In the meantime, let’s be grateful that West Virginia has no death tax. This certainly should help those who plug the Mountain State as a four-season retirement destination, along with our relatively modest housing prices and less-than-confiscatory property taxes.