2-4-8 Tax Blend

Fair Tax

Flat Tax

Legislation 113th Congress:

120 bills to amend the Internal Revenue Code have been filed. There were 4,428 changes to code in last decade.

New Plan

Fair Tax Act and Flat Tax Act sponsors are listed below.

113th Congress: H.R. 25 has 75 co-sponsors and the Senate companion bill, S. 122 has 8 (as of 10-21-2014). Referred to House Ways & Means.

113th Congress: H .R. 1040 has 11 cosponsors and no Senate  companion bill (as of 10-21-2014).

Type of taxes and Taxes replaced

Current Income Tax: Individual and corporate income taxes, payroll, self-employment, capital gains, estate, gift, and alternative minimum taxes (AMT).

Base and rate

Current Income Tax: Taxes the same income multiple times.  Marginal income tax rates range from 10 to 39.6% for persons and 15 to 39% for corporations.  Payroll taxes at 15.3 percent. Estimated net tax base is $8.000 T and revenue neutral rate is 24.7%.; (2010  est.)

2% on individual wealth $56T 2010, $83T 2014

8% individual and C corporation income

4% VAT

26% on individual income for those electing no wealth tax, plus estate, gift and capital gains tax. Charitable deduction allowed for transitional jobs.

Taxes income once when spent.  Revenue neutral rate is 23%.  Has the broadest base and lowest rate possible* of any tax plan that does not tax the poor or double tax income.  Estimated net tax base is $9,511 T  (2010 est.).

*[the newer 2-4-8 tax blend has a much broader tax base with lower rates]

Statutory rate is 19% of taxable income plus payroll taxes remain in effect.  Estimated net tax base is $8,614 T.  Revenue neutral rate is 22.92%; however, payroll taxes increase marginal rates by 15.3% on labor.   (2010  est.)

Progressivity and upward mobility

Current Income Tax: Steeply accelerating marginal rate structure taxes those who have to save or earn more in a given period to accumulate wealth. Earned Income Tax Credit households face the highest marginal rates. Payroll taxes impose regressive rates on labor.

It is estimated that 98% of taxpayers would elect 2% wealth tax with low 8% tax on income. With low rates no tax expenditures (credits, deductions, special rates, deferrals and exemptions) or prebates are needed. The wealth tax exemption encourages savings for emergencies and retirement. (The very wealthy need no further encouragement).

The prebate untaxes spending up to the poverty level, literally untaxing the poor. Since taxation is based on consumption, the FairTax allows taxpayers maximum choice as to the level and timing of taxation. The FairTax rewards hard work, savings, and wealth accumulation.

[The FairTax severly "punishes" consumption].

A standard deduction results in a progressive effective income tax rate; however, the retention of current payroll taxes maintains the regressive tax on labor.

[Note that the combined payroll tax rate is 15.3%]

16th Amendment: The 16th Amendment is required to impose the income tax system. [The amendment was actually required to avoid state apportionment].

The 2-4-8 Tax Blend simplifies the income tax code and does not require a change to the Constitution.

FairTax plan promotes repeal and is the only proposal that can repeal the 16th Amendment.

Requires 16th Amendment. Does not protect against coexistence of VAT and income taxes.

IRS: $12.1 B budget w/ 100,000+ employees

Simplified code will make domestic enforcement easier and allow focus on international avoidance of taxes.

Abolished. Administered by states and small sales tax bureau in Treasury Dept.

[The administrative costs are paid to states and businessises instead of IRS]

Little or no reduction in IRS as it has to run both existing system and flat tax.

Effect on the economy  Taxes savings, labor, investment, and productivity multiple times, creating a disincentive to work, save, or invest thereby reducing real wages.

Most economic income from investments is not taxed unless the asset is sold - something the rich can easily avoid. This causes workers to be over-taxed and 90% of families to lose wealth.

Untaxes wages, savings, and investment; lowers interest rates by about 25; increases capital stock, productivity, and real wages.

Eliminates the tax bias against savings and investment, lowers interest rates. Increases productivity but taxes labor income at a higher rate than capital.

Compliance rates and effect on tax gap: System increasingly disregarded, contributing to unfairness. Through evasion and innocent error, tax gap now totals more than $450B.

Low 8% C corporation rate will eliminate most corporate avoidance. VAT is a tax on businesses, not on individuals.

Simplified 8% or 26% withholding will make compliance much easier.

Reduced tax rates, fewer numbers of collection points, visibility, and simplicity ensure the FairTax is enforced at lower cost with higher compliance rates. States have used sales taxes for over 60 years.

Improved compliance from simplification and rate reduction; however, same number of collection points as current law and international enforcement is complicated through territoriality.

Complexity and compliance costs: 73,954 pages of tax code, regulations, and IRS rulings. More than 6B man-hours wasted filing an est. 249M forms by 2010. Total annual compliance costs exceed $431B.

Simplification will enable automation of tax return preparation. Worldwide tax jurisdiction will be maintained for enforcement in globalized markets.

Occasional preparation of wealth balance sheet is useful.

Individuals exempt from filing tax returns. Businesses making retail sales will file sales tax returns for a total of about 15 to 20M tax filers. Compliance costs reduced 90%.

Tax withholding and payroll tax deductions from paychecks continue. Individuals and businesses must still track income and file income tax forms. Compliance costs reduced by 50%.

Border adjustability:

Ensures U.S. exports are taxed twice – once by the U.S. tax system and then by the importing jurisdiction with ad valorem taxes. Favors imports over domestic products by failing to tax imports after VAT rebates (a 17% price advantage).

VAT is used by every developed economy in the world because it is the fairest way to tax different types of businesses across different tax jurisdictions.

Naturally border adjustable. U.S. exports are not taxed since consumed abroad, but imports are taxed on an equal basis as U.S. produced goods. World Trade Organization (WTO) compliant.

Favors imported goods and effectively punishes exports. Could potentially be made border adjustable; however, uncertain if border-adjustable subtraction method VAT would be approved by the WTO.

Other international competitiveness concerns:

Imposes the highest marginal corporate tax rate in the world, impelling companies to locate overseas and market back to the U.S.

The U.S. should have a fair and competitive tax system. It would damage the global economy and invite retaliation for the U.S. to become a tax haven.

Makes the U.S. the only advanced country in the world with a zero rate of taxation on income, creating the world’s largest tax haven for direct investment.

Makes the U.S. the only advanced country in the world with a zero rate of taxation on income, creating the world’s largest tax haven for direct investment.

Taxpayer rights:

Tax code requires massive disclosure, recordkeeping, individual audits, and collection activities where constitutional protections yield.

Individuals and businesses should be taxed fairly and in a way that encourages full employment (no payroll tax) and equitable distribution of the burden (optional wealth tax).

As the Founding Fathers intended, the FairTax does not directly tax individuals and privacy rights are preserved.

A flat tax still requires individual reporting, individual audits, and collection activities.

Effect on non-filers and illegal immigrants:

An estimated 18% of “taxpayers” have simply dropped out of the system and no longer file returns. The income tax fails to capture the cash payments and other undocumented transactions with illegal immigrants.

The VAT applies to all domestic purchases. It is much harder to hide wealth than income and with a low rate of 2% it may not be worth the risk of penalty - up to and including forfeiture.

Non-filers and illegal immigrants are taxed when they purchase goods and services for consumption. Illegals who do not have a valid SSN will not receive the prebate. Hence, the FairTax fosters coordination of tax and immigration policy.

Unlikely the tax gap attributable to non-filers will change. Nonpayment of payroll taxes by illegal immigrants will likely remain problematic.

Payment of taxes

Taxes due when income is earned or an item of income is sold or exchanged. Income & payroll taxes deducted from individual paychecks.

Taxes can be computed and paid at any time. Income is not dependent upon computing tax expenditures. Net Wealth is averaged for the reporting period.

Taxpayers pay tax when they elect to consume beyond the poverty level. Retailers are provided a credit of one one-quarter of one percent to offset compliance costs.

Taxpayers are taxed on income when earned.

Social Security and Medicare funding

Labor foots the bill with a highly regressive 15.3% payroll tax on wages up to $106,800 and 2.9% Medicare tax imposed thereafter.

The payroll taxes are replaced such that most low wealth families will pay an 8% income tax instead of a 7.65% share of the payroll taxes. An increase of 0.35% that will pay for a guaranteed jobs program.

A portion of the tax is dedicated to funding Social Security based on total wages and the current payroll tax rates. Social Security benefits are adjusted to preserve purchasing power.

The flat tax leaves the payroll taxes under the current system in place to fund Social Security and Medicare

Visibility and effect on future tax burden

47% of filers pays zero income tax and are completely unvested in the tax system. Among the hidden costs they do not see are the $431B in compliance costs, $307B in corporate taxes, and the drag on economic growth from the deadweight loss it engenders. Estimated to be 2-5% of GDP.

Some economists look only at the total numbers and not at the distribution of wealth and opportunity. Like the FairTax the 2-4-8 Tax Blend eliminates the job killing payroll taxes. The same tax rates are offered to wealthy investors and low wage workers; as well as to C-corporations and pass-through business structures.

The FairTax ensures a built-in downward pressure on the size of the government by vesting everyone equally in the tax system, by exposing the full costs of the federal government, and by requiring the government to raise taxes for everyone rather than to shuffle taxes from one industry or income class to the next.

The flat tax buries capital value- added taxes in the business sector. The flat tax’s touted two-thirds supermajority to raise rates offers only illusory protection, as a simple majority can override that supermajority requirement.

Sustainability and feasibility

Lawmakers, policy makers, economists, and taxpayers agree that the current system is a monstrosity held in place by an intricate web of special interest groups and must be replaced. Changes are adopted every year.

The federal government cannot force the states to participate and some will not. [cf. ObamaCare could not force the states to increase Medicaid participation]. Large purchases will be made in jurisdictions where tax can be avoided.

Once enacted, taxes must be raised on every consumer in the U.S. to change the base. States have used sales taxes for over 60 years; they are in effect in 45 states. The tax can be collected in conjunction with state sales taxes.

A flat tax just won’t stay flat. Nearly flat in 1913, it eventually devolved into the mess we see today. The flat tax bill itself cannot even be introduced in pure form.

Adapted from " How the FairTax Compares, October, 2014", Karen Walby, Ph.D., Director of Research, Americans For Fair Taxation. October 21, 2014. 2-4-8 Tax Blend description added.

Others have also exposed problems with the FairTax. See "Fairtax is not a code. It is political Theater". and the writings of Stephen C. Ethridge, Esq.