Friday Rant: Is It Time to Trash The Federal Tax Code and Levy Spend?

As frustrating and paralyzed as our U.S. democracy is, election politics enable fertile debate that otherwise falls flat. Not that the ideas are new, but it is rather exciting to air them out. The Republican presidential candidate, Herman Cain, is a case in point. In seizing upon some of Ronald Reagan's old rhetoric -- without Reagan's gifted panache -- and dusting off the 'trash the tax code' drum that spends most of its time in the closet, Mr.Cain is on a bandwagon that's likely to gain a lot more traction.

Thursday's WSJ quotes Cain saying "If you don't have a job and you're not rich, blame yourself." Cain's sipping the same Horatio Alger cool-aid here that Reagan was drinking during his campaign when he suggested that people on welfare ought to have their walls papered with "want ads." What the heck, beating on the poor makes some people feel better about themselves – but I digress. Cain's 9-9-9 (a flat 9% personal, business and national sales tax [VAT]), along with his rival Rick Perry's endorsement of a flat tax, is attractive in its simplicity and egalitarianism. And "KISS" (keep it simple stupid) always carries well when compared with a tax code that has become so complex that nearly everyone pays someone else to prepare their filings.

How simple is it? Let's look beyond the rhetoric. Flat tax and consumption tax detractors quickly shoot back that taxing everyone at the same rate is regressive and unfair because lower income families spend most, if not all, of their income on necessities. That can be easily balanced with a system of exemptions and tax credits for those whose income falls below a specified threshold and that have, in other countries, produced an increase in income tax filings. But what are the real rationales, efficacies, and impact of revamping the U.S. tax code in this manner?

Almost exactly two years ago on Spend Matters, I covered a 90 minute KPMG sponsored webcast conducted by The Tax Governance Institute titled Will the US Adopt a Value-added Tax (VAT)? That post and webinar are well worth revisiting and the following excerpt is especially relevant as this topic gains momentum:

"Upon indicating that the US ranks 5th in the world when it comes to overall taxation (28% of GDP all in) compared with the top 4 countries at 35-50%, Mr.Gutman paraphrased Sen. Daniel Patrick Moynahan (for whom he once worked) as having said "Everyone is entitled to the facts but no one is entitled to their own facts". Which led to the question: "What about reducing spend?" The answer was straight forward and simple indicating that the overwhelming bulk of the US annual budget consists of net interest on the deficit (currently 800 billion dollars), defense, social security, medicare and medicaid where cuts, if tenable, would barely make a dent in reducing the deficit (which was not to say that spending should not be scrutinized, reduced and held in check). It is also interesting that of the 28% of GDP US tax revenue, federal taxes comprise 18-20% with state and local taxes at 9.5-11.0 %... [and]Given the above background information, along with the fact that the US is among the few countries in the world without a VAT -- 145 countries have a VAT and most that don't are underdeveloped -- the panelists seemed unanimous in believing that the US will ultimately need to implement one as a far more equitable, transparent and enforceable instrument vs. expanding existing tax structures."

A flat tax rate system in conjunction with taxing personal spend that would largely exempt saved and invested income is extremely attractive on a number of levels. And like it or not, ameliorating our growing and critical deficit debacle will require increased tax revenues in addition to curtailing government spending.

So yes, it is time for a flat tax and VAT system – if not past due. But campaign promises rarely materialize and Messrs. Cain and Perry are no exception. Once it gets out that their skeletal proposals would ultimately represent an aggregate tax increase, their implementation will likely remain politically insurmountable... good news for CPAs.

- William Busch

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