Another Reason for the Flat Tax

Yak and Guides in Tibet - photo by JoAnn Sturman 

Scott Sturman

A recent article in the Wall Street Journal reported religious conservatives in the fledgling Indonesian democracy wish to impose a five year prison sentence on anyone criticizing the country’s president or vice president.  Appalling?  Of course, but at least their motivations are plainly in view.  Muzzling political opposition in the United States takes on more subtle tactics, and none is more nefarious than using the IRS to penalize citizens who disagree with those in power.  Administrations from both parties have not been squeamish about sending the dreaded letter from the Treasury Department to overly vocal dissidents.  The question is, which essay, speech, or political contribution will be the last straw and enough to provoke Prince John to send the Sheriff of Nottingham knocking at the door?

Since its inception, FIYE has supported the flat tax–not only for its simplicity, fairness, predictability, and computational efficiencies, but as a way to prevent politicians and bureaucrats from rewarding or punishing tax payer behavior:  Flat Tax Revisited    Taxing the Uber-Rich   Taxes–Not Getting Your Money's Worth.  The blind impartiality of the flat tax allows the marketplace rather than the granting of special benefits and loopholes to define the collection of taxes.  With no one group, individual, or corporation receiving tax exemptions, the inability to tinker with the system or resort to heavy handedness, which no politician seems able to resist, will shift power away from Washington and all those scalawags who call it home.

Flat Tax Revisited

Along Marangu Trail Kilimanjaro - photo by JoAnn Sturman

Scott Sturman
fliesinyoureyes.com

Skip a rope skip a rope...

Cheat on your taxes don't be a fool
Now what was that they said about the golden rule
Never mind the rule just play to win
And hate your neighbor for the shade of his skin

Skip a rope skip a rope...

Henson Cargill 1968

Every so often I have the pleasure of exchanging emails with Warren Coats, a University of Chicago trained economist, who retired from the IMF in 2003 and currently serves as an advisor to the IMF for the central banks of Afghanistan, Iraq, and Kenya. I thank him for discussing consumption and flat taxes and suggest reading his article regarding consumption taxes:

US Federal Tax Policy

In 1994 I wrote an essay entitled Flat Tax for the newsletter “Common Sense Solutions.” At the time it was apparent the tax code was fraught with so many loopholes, deductions, credits, and exemptions that is was impossible to fix it without major reform. Equally insidious, it allowed lawmakers to socially engineer the country by either encouraging or discouraging economic activity to suit their needs but often leading to inefficient economic consequences. The prodigious waste of time, resources, and expenses to compute the income tax weighed heavily in the decision. Seventeen years after the original article and mired in a recession, the tax code is more complicated and must be scrapped in favor of a better alternative.

Taxation should be simple, reproducible, fair, and transparent, and to attain these goals necessarily devoid of rules which complicate its computation. The two options which provide these advantages are the flat tax based on income and the consumption tax. There are huddles to overcome with the implementation of both, but either one is preferable to the current tax system. In both cases all other forms of federal taxation would be discarded.

Value Added Tax (VAT) or consumption tax is the most popular form of taxation in the world. It has a number of advantages including the relative ease in which taxes are collected and an inherent neutrality between specific economic activity and taxation, where tax law neither rewards of penalizes individual financial behavior. Under the program everyone who consumes pays taxes and “has skin in game.” Most of the VAT systems provide rebates to all tax payers in the form of a monthly check from the government which is intended to soften the impact on low income groups. In the United States the major impediments to its implementation are unfamiliarity and the potential for lawmakers to easily increase the general tax rate. It remains to be seen whether the American public would be willing to pay 20% more for each and every transaction for the benefit of not having to pay income tax, capital gains tax, inheritance tax, etc. This may have been the case when a supermajority of Americans paid income tax, but with only about 50% currently contributing it would be surprising to see a ground swell of support for a consumption tax.

The flat tax is based on income, and without accurate income reporting some advantages are lost. This problem is becoming more acute with the globalization of the economy and the ability of major investors to hold substantial assets in off shore locations. The vaunted simplicity of the flat tax is not so simple, since income can vary substantially depending on it is treated by accounting rules. Unlike the consumption tax, any form of income is subject to taxation albeit at a lower level than currently charged. Flat tax lacks some of the philosophical purity of the consumption tax, since there are penalties for saving and investment. However, the flat tax is an easier sell to the public, where the income tax concept is ingrained firmly.

Whether a consumption tax or flat tax is preferable should form the national debate and not how to put more duct tape on the federal income tax system. The best way to overcome special interests, promote efficient taxation, and enhance personal economic freedom is to keep it simple. It is looking more and more that the consumption tax is the solution.

Taxing the Uber-Rich

Fig Tree Arch in Tanzania - photo by JoAnn Sturman

Scott Sturman
fliesinyoureyes.com

Tax revenue is collected with a sleight of hand which is the envy of the most masterful magician. At least tax rates are easy to understand and clear for all to see, but the tomes of exemptions, credits, and special circumstances are accessible to only the well connected who probably wrote them.

The wealth distribution of the country is increasingly skewed toward the very rich, and it is no coincidence the tax code is more complicated than ever. Should a hedge fund manager be able to treat short term profits as long term capital gains rather than ordinary income? Should real estate developers be able to defer profits and retain equity without tax penalties through the 1031 exchange program? Should alpaca farms be granted special tax credits or farmers paid not to grow?

Tax withholding makes collecting taxes less painful than it should be and breeds too much complacency. Consider for a moment that income taxes are not withheld, but the tax bill still comes due each April 15th. There is another difference, however; the IRS and state tax agencies do not accept checks or credit cards. The taxpayer must appear in person and pay cash. Taxation is transformed from a series of numbers on a monthly pay statement to cold, hard money. Imagine peeling off $100 bills and handing them to the IRS agent, then walking down the street to the state tax offices to repeat the process. If this was not bad enough, one might be surprised to find only half of the neighborhood participating, since barely 50% of Americans currently pay income tax. Suddenly, the tax payer is not so ambivalent about those who capitalize on obscure rules to avoid paying Uncle Sam.

What would be particularly galling is not seeing the likes of mega billionaire Warren Buffet, who once boasted his secretary paid more income tax than he, waiting in line to make his contribution. Certainly the representatives of many major corporations would not be in the queue, since their companies’ enormous profits are somehow largely exempt from the tax burden.

Who are these rich people who operate outside the norms of society? Contrary to the view of the President, $250,000 annual income is not uber wealthy. Most earners at this level such as professionals, two income families, and small business owners could not maintain their current lifestyle if they were to quit work. The uber wealthy have no such constraints as life continues unchanged and independent of working status.


In May of 2010 the New Yorker Magazine published a story “The Influencer” about Haim Saban, a Hollywood billionaire, major donor to the Democratic Party, and confidant of the Clintons. The article highlights an interesting life and the opportunities available to those who have political connections at the presidential level. In fact Mr. Saban stated there are three ways to influence American politics: donate to political parties, establish think tanks, and control media outlets. All of which he has fulfilled.

In 2000 Saban and his partner Rupert Murdoch sold Fox Family Worldwide to Disney, yielding Saban a $1.5 billion profit. His capital gain tax consequences to the federal and state governments were 27% or $405 million. After reading the article it is clear that the super rich who have access to accounts, lawyers, politicians, and government officials, pay taxes under a different and negotiable set of rules. The maneuvers described in the story should provoke an outcry from those who are footing America’s bills to demand tax reform - no more shelters, deductions, allowances, deferrals, or special write offs, just a simple and fair flat tax.

Taxes - Not Getting Your Money's Worth

Preparing Dinner in Nepal - Photo by JoAnn Sturman

Scott Sturman
fliesinyoureyes.com

It is unreasonable to expect good governance without a tax code that mirrors this ideal. Theoretically tax revenue pools resources to provide benefits tax payers cannot obtain individually. Now into my fifth decade of paying taxes, it is apparent most of these funds are spent unwisely, and politicians have lost sight of fiscal responsibilities and adherence to the provisions of the Constitution.

Taxation is more than redistribution of money. A social engineering component is inherent in any system which rewards or punishes behavior by establishing arbitrary deductions, credits, and incentives or levying penalties and fines. Powerful interest groups are able to influence law makers to enact rules and regulations that benefit the well connected and their constituents. Senior committee chairman solidify their coveted positions by doling out favors and making deals that are not in the best interests of the country. Economic choices are made based on the tax code rather than efficiencies. Compounding the problem is the prodigious amount of time and expense necessary to compute tax bills. These are strong arguments for scrapping the graduated income tax and establishing either a consumption or flat tax.

However small the portion, everyone should pay federal and state income taxes. As fewer people pay taxes, the tax burden becomes “someone else’s problem,” and there is no impetuous to correct underling problems or demand financial prudence.

One of the most unfair and egregious acts perpetrated on my children’s generation is the manner in which the Security System has been administered. They are expected to pay for the retirement of others, including those who never paid into the system, but unless changes occur there is little chance they will receive similar benefits. These are regressive taxes, where everyone pays the same rate irrespective of income. One can argue the relative merits of a government sponsored retirement system, but the original intent of the social security trust fund was to set aside these savings for future retirement. However, during the Johnson Administration, Congress shamelessly made these monies available to the general fund, where they were no longer safe from free spending politicians.

The next generation cannot expect the political establishment to solve these problems without intensive voter involvement. A politician may go to Washington, D.C. or the state capital with the best interests of the electorate in mind. Yet with rare exception, it is too difficult to maintain ones innocence and integrity. The mantra for the next generation should be term limits, social security taxes spent only on retirement benefits, abolition of the graduated federal and state income tax systems, and the initiation of a flat or consumption tax.