An ongoing series of IRS scandals has tax reform in the air.
A particularly loud group is pushing an ill conceived tax reform program called "The Fair Tax."
The Fair Tax Replaces the personal income tax with a whopping 23% National Sales Tax that will be added on top of existing state taxes.
Supporters of the FairTax make the false claim that their tax will end the IRS (tax collection).
What they are doing is replacing a personal tax with a business tax. This change reduces the need for individual audits, but will increase the need for business audits.
The Fair Tax places a 23% tax on sale of new goods and business to consumer expenses. Modern businesses tend to have extremely complex supply chains with multiple points of interaction with the mainstream economy. Deciding what is a final sale of a new item and the final sale of a service is extremely complex. It is as complex as the deduction problem.
The FairTax will require detailed business audits. Businesses will have to apply for tax ids and permits from the IRS. This gives the IRS the ability to target groups they do not like.
The current state income tax system is a complete mess. Different types of businesses have different tax rates. The rates are often collected through different agencies and have different rules. Food is often taxed at a lower rate than dry goods. Hotels are often taxed at a higher rate than clothes. Gas, you phone and utility bills are all laden with strange taxes.
If state sales taxes are a mess; then adding a national sales tax in the mix will create pandemonium.
For this last week I've been blogging against the Fair Tax.
The best way to defeat a bad idea is to create a better idea. With the other idea on the table, one can compare the ideas and see the fault of the bad idea.
While developing the Medical Savings and Loan, I spent a great deal of time thinking about the best approach to health care and tax reform.
Alongside my presentation on the Medical Savings and Loan, I developed a presentation called "The Object Tax."
The idea behind this reform is to apply proven design techniques from Silicon Valley to tax reform.
In the presentation I apply basic object oriented design techniques to tax reform ... hence the funny name.
The design starts by creating an abstract model of the existing system. Rather than taxing income, I simply state that I want to tax financial objects at some point between income and consumption using a progressive tax rate.
By breaking the current tax code into objects, I now have a tax code that can be implemented like the current income tax. I can also start experimenting with other ways of implementing the tax.
One way is to create a system of Tax Aware Accounts. A Tax Aware Account works as follows:
You have your entire paycheck (nothing withheld) deposited into the account. You pay taxes when you withdraw money for spending.
The tax aware account eliminates employee withholdings, w2, 1099 forms. If done correctly, it can eliminate the need for the annual tax return.
The great thing about this reform is that it does not require disruptive change. People happy with the income tax can continue to file yearly returns. It would only be adopted by people looking for a switch.
I wrote an intro to the Object Tax called "The Object Tax in a Nutshell"
With this reform on the table, I can argue that the Fair Tax is a Business Tax and not a true consumption tax. I make a variety of other arguments showing that the complexity of taxes is not the tax rate, but the process of accumulating tax info. With the Tax Aware Account, one touches a tax decision only once ... when you transfer money from the account.
The Object Tax is a much more elegant path to reform than the Fair Tax, and I put out a general challenge to the Fair Tax crowd to debate the issue.
My hidden agenda is that the Object Tax also happens to be the same basic structure as the Medical Savings and Loan. If my challenge to debate the Fair Tax is ever accepted, then I might be able to combine the two presentations in the same meeting.
I issued a challenge to debate the Fair Tax. I doubt anyone will take me up on the challenge, but if they do, I will be able to use the challenge as a vehicle to introduce the Medical Savings and Loan ... which is similar to the Object Tax.