The Liberty Issues Tax Plan

"... we need equal tax rates on both income and consumption -- when government is so large that any single tax (on either sales or income) would distort economic decisions."

"Fact is, we lost the late 1970s tax revolt. We sent one message: no more taxes. But the political class learned something different. They learned how to keep expanding government, by shifting taxes away from middle-class voters. Today, these hidden taxes on employers and investment are destroying jobs and reducing living standards. "

©Copyright 1994-1996 by Liberty Issues and Michael J. Hihn. All rights reserved.

Tax simplification is fashionable again. Several individuals and organizations are trying to exploit the initial interest in Jerry Brown's 1992 proposal. Dick Armey's flat tax is analyzed elsewhere.

The Cato Institute is pushing replacement of the income tax with a national sales tax. Cato's math is better than Armey's. But there's more than math involved.

Cato addresses two popular goals: make taxes fully visible, and reverse the current bias against savings and investment. A sales tax is certainly visible. But reversing the current bias creates ... another bias. The tax code now causes Leviathan to punish investment. Cato would have Leviathan punish consumption.

More investment would help our economy and improve living standards. But to force that investment, through government's taxing power, cannot be supported by rational defenders of liberty. If we don't trust the market to allocate resources properly, who will?

Details vary, but tax policy is mostly debated as supply-side economics vs. demand-side economics. Each is a statist notion; only the victims change. In a free society, government takes no sides. Ronald Reagan's tax cuts were not supply-side only.

In any society, free or otherwise, individuals make decisions and set priorities. The most fundamental decision is between savings and consumption. In a free society, those decisions are based on market judgments and consumer preferences, free of artificial influences caused by tax policy.

In a utopian society, there would be no taxes. In effect, consumption and income would be taxed at 0% each. Obviously, taxes would have no influence on spending or investment choices.

But that's also true if consumption and income are taxed at 30% each, or even 50% each. We'd bitch a lot more, and work a lot less. But the tax code would be neutral, favoring neither savings nor consumption. Thus, we need equal tax rates on both income and consumption -- when government is so large that any single tax would distort economic decisions.

How high those tax rates are -- the total tax burden -- is a separate issue. The tax burden is determined by government spending. But we're looking now at tax policy only. The goal is to define a tax policy that allows the market to function freely, with minimal distortion by government.

The tax rates shown here are revenue neutral. They could be lower. But again, cutting spending is a separate battle.

The Liberty Issues Tax Plan has three components: A 9% flat tax on income, a 9% national sales tax on ''non-essential'' spending, and a 0.9% tax on capital transactions.

The transaction tax replaces the current capital gains tax, and applies to stocks, real estate, investment art, etc.. The corporate income tax is repealed, along with gift and inheritance taxes. And I help pay for it all by repealing nearly $1 trillion per year in tax loopholes.

For wages and salaries, the income tax would be collected as a payroll tax: 9% of all wages over $15,000, with no deductions. Interest and dividends would be taxed at 9%, withheld at the source. The vast majority of American workers would never again file a tax return.

Americans want and support tax exemptions for family and children. We can best handle those as sales tax exemptions -- unless you'd rather file income tax returns.

A national sales tax would have the following exemptions for individuals: food, rent, medical care, children's clothing, tuition, basic utilities (local phone rates, not long distance), and mass transit.

For business, additional exemptions would match those in most states: items purchased for resale, production equipment, etc. At the federal level, this taps into the growing number of foreign transplants, many of which now switch profits abroad.

Remember Paul Tsongas? His Pander Bears? He wasn't kidding. We again hear calls for yet another middle-class tax cut. But a middle-class tax cut is the last priority for legitimate tax reform.

As libertarians and conservatives, we know the rich now pay a much higher percentage of total income taxes. That means somebody pays less. You and me. The middle class. Nobody wants to hear that. But consider the facts.

But first, let's see if we can agree on the issue. It's the fairness issue: What's a ''fair share'' of the tax burden? That question is a fundamental clause in the American social contract.

I suggest that most Americans believe the middle class should pay its own way. Business and the rich should look after themselves and the poor. I disagree personally. But that's what most Americans believe. Can we agree on that -- for most Americans?

That begs a question: Is the middle class paying it's own way? In my 1995 Statistical Abstract, 1992 is the latest year reported in detail. I simply added the numbers for the heart of the middle class: $25,000-75,000 in adjusted gross income.

That group reported 48.3% of all personal income, but paid only 40.8% of personal income taxes. How does this square with your earlier answer on tax fairness?

Fact is, we lost the late 1970s tax revolt. We sent one message: no more taxes. But the political class learned something different. They learned how to keep expanding government, by shifting taxes away from middle-class voters. Today, these hidden taxes on employers and investment are destroying jobs and reducing living standards.

The Liberty Issues Tax Plan reverses these deadly consequences.

The total tax package is revenue neutral. It closes nearly $1 trillion in current loopholes, the biggest of which are tax-exempt pension and endowment funds, profits on residential home sales, and the tax exemption on employee benefits.

Pension and endowment funds would pay the 0.9% transaction tax, and the 9% withholding on dividends and interest. These funds are now supposedly tax exempt. But as shareholders, they pay (indirectly) the corporate income tax which would be repealed.

Yes, I would tax everything that moves. That's what flat taxes are supposed to do -- expand the tax base, then slash marginal tax rates. At 0.9%, the capital transactions tax should have only negligible effect on now-exempted activity. On a $100,000 house, that's $900 total: $180 added to the down payment, then $5.28 per month added to an 8% 30-year mortgage.

Now the best part. Repealing the corporate income tax will immediately boost corporate profits by 50%. If nothing else changes, the stock market will then increase by 50%, creating nearly two trillion dollars of new investment capital.

That's real capital, not a bubble, fully supported by real underlying profits. That's the capital we need to fully invest in more American workers, to reverse our declining industrial base, and to start restoring living standards.

We'd recreate the capital destroyed by ''soak-the-rich'' tax policies. And we'd repeal those ruinous policies.

Finally, the federal treasury would no doubt suffer short-term or unexpected revenue losses, during conversion to any radically new tax policy. To cover any contingencies, I'd tap into that stock market boom.

For no more than three years, capital gains would be subject to the 9% flat tax rate, but indexed for inflation. That's also fair, in the short term, because the capital transaction tax would shift the burden from sellers to buyers.

If you see anything better, let me know.