Because the dreaded “holiday” landed on a Saturday, Tax Day is now upon us.

This is a great day to review tax reform alternatives. Here is a list of qualities I think important in an overhaul of the way we fund the gov'ment (in order of importance):

• No tax on Income
• No withholding, taxpayers know what they are paying
• No tax on capital
• Hard for Congress to raise
• Consistant with the rest of the law (burden of proof on the IRS)
• Simple to understand
• Hard to cheat
• Stops the government from collecting personal info

The Fair Tax

This is my personal favorite. I don’t expect it to be law in my lifetime, but that does not stop me from dreaming.

The principle objection I have is the upheaval in the economy the switchover would cause. There would be a lag time for producers of goods to realize the tax advantages under the new law. During this time prices would decline very slowly as producers recoup the last few years of tax burden under the current system. During this time the high sales tax would also be collected. The Fair Tax people have a reasonable answer for this, I just don’t buy in on that one point.

Repeal of the 16th Amendment is key to this proposal. The income tax would rear its ugly head very quickly once the Fair Tax was in place. Undoubtedly, the income tax fans would try selling it as “The Rich Man’s Tax” as they did when the 16th Amendment was being debated. Class warfare is not a new thing in US politics.

Flat Tax (Armey/Forbes)

While this misses one of my top point (No Income Tax), I would support it as a pragmatic alternative. The Fair Tax is better in many ways, but this is much more likely to happen. It would be hard for Congress to raise the rate and it is much easier to understand and comply. It does reduce the size and reach of the IRS, but not enough for my liking. As proposed, it would abolish withholding. Imagine the jubilation when the first no-withholding paychecks arrive. Then imagine the uproar when people fill out their first postcard and see what government is actually costing them. Priceless.

Value Added Tax

Yuccccck. Bad tax! Bad!

This is bad on so many levels starting with the European experience. It is easy to cheat, taxes the end user very heavily (they ultimately pay all the steps) and still requires a ton of paperwork (on par with today’s system). Still, if this were the only alternative I would support it as it kills off the income tax.

Further Thoughts

Here is a good History of the Income Tax in the US. Interesting reading, especially the rationale the SCOTUS used to shoot down the tax, requiring the income tax supporters to pass the 16th Amendment

the U.S. Supreme Court decided that the income tax was unconstitutional because it was not apportioned among the states in conformity with the Constitution.

This cartoon from 1933 still has relevancy. The more thengs change, the more they stay the same. The rest of the gallery is very entertaining, in a dark way.

What is truly sad is that most people do not think about taxes except around this “holiday”. Reform is hard when the voters are only paying attention 1 week a year.

Linked: basil's blog, The Pirate's Cove