Thursday, March 29, 2007

A Fair Tax?

Is there any such thing as a FAIR tax? Generally a fair tax is one you pay and an unfair tax is one I pay. The present system is a graduated tax based on income, but with a hodgepodge of deductions, credits, penalties which boggles the mind.

One proposal is the 'flat' tax. A truly flat tax would tax you at the same percentage whether you made $ 1 million a year or $ 1000 a year. Most fair tax proposals modify the concept somewhat by allowing some deductions, credits and penalties--just not as many as the present system.

Another idea would be to retain a graduated scale based on income, but reduce the percentage rate and eliminate most deductions. In my opinion this method could allow an amount for exemptions up to a maximum similar to the way the military pays allowances for dependents which does not keep increasing if you have ten kids. Also a standard deduction to cover normal living expenses could be added. Further deductions might be allowed for uncontrollable expenses which might arise such as major medical costs. Deductions for interest and taxes on million-dollar homes should be part of the standard deduction since living in a million-dollar home is a discretionary cost.

Another thing which would be necessary would be to allow all costs which are necessary to produce the income. A grocery store may only make a profit of 2% on gross receipts while someone like me who has very little business expense might make a profit of 90% of gross receipts. An employee should be treated no different than a self-employed person and should be allowed to deduct 100% of employee business expense without deducting the 2% of Adjusted Gross income which is the case in the current system.

I believe a greatly simplified system would be in the best interest of both the public and the government. The reduced cost of administration would offset the reduction in taxes which would result.


Ulli...The Wall Street Bully said...

I think in theory this is a great idea. However, I'm afraid that once you start making exceptions to allow for a vaiety of deducutions, we'll be in the same situation we're in now — given enough time.

taxxcpa said...

I would agree, but even if there were no deductions whatsoever, it wouldn't be long until they started creeping back in.
Politicians make tax laws and politicians buy votes by "cutting" taxes and allowing deductions, exemptions and credits with one hand while reaching in your pocket with the other hand.