Low-rate taxation would markedly increase after-tax returns, thus fostering saving, investment, and overall business expansion and, in turn, job and wage growth. There’s a lesson in the FreedomTax – The nation doesn’t need tax reforms with still too-high tax rates and the accompanying need for offsetting tax breaks to foster this. Bottom line, the FreedomTax is not just another flat-tax proposal. Indeed, it’s the only flat-tax proposal. And, most significant, it’s the only proposal for fundamental income-tax reform, critical to ever achieving real and lasting reform.
By James K. Jeanblanc l July 10, 2017
The FreedomTax, with its low 10% flat-tax rate, is a new income-tax-reform proposal among the many already proposed. It’s easy to give it a passing glance and pigeonhole it as “just another flat tax.” But, tagging it as such is to mask its revolutionary character and downplay what it would achieve.
Despite first impressions, the FreedomTax is not “just another flat tax.” Indeed, of the reform proposals bearing the flat-tax label, it’s the only one deserving that label.
More than that, the FreedomTax dramatically differs from all other income-tax reform plans, including the “flat taxes.” It’s the only one based on coherent principle how income, itself, should be taxed. And, it’s the only one proposing to fundamentally redesign and restructure the income-tax system for real and lasting income tax reform.
The FreedomTax is in a league of its own.
The “Want-to-Be” Flat Taxes. Over the years, several “flat-tax” plans have been proposed, ranging from that of Robert E. Hall and Alvin Rabuska in the early 1980s (19% flat rate) to that of Steve Forbes in 2005 (17% flat rate). Recently, additional “flat-tax” plans have surfaced, such as that of 2016 Presidential candidate Ben Carson (proposing a rate of 10%, later raised to 15%).
Despite their flat-tax labeling, none of these plans are true flat-tax plans. Rather, all are single tax-bracket plans, to be distinguished from the common tax-reform plan with multiple-tax brackets. All of these “flat taxes” are personal-tax-return based and look to the person being taxed. The taxpayer’s lowest level of income is excluded from taxation (zero-taxed) before that single flat-tax bracket is applied to the taxpayer’s income above that level.
Unlike these “flat-tax” plans, the FreedomTax would tax all income the same (whether business or individual) and all at the same flat-tax rate regardless of recipient, payor, or use to which put. There would be no personal deductions, exemptions, or tax credits. The FreedomTax is the only true flat tax.
All of the Other Proposals Lack a Principle of Income Taxation. There’s the old quip about a man who wanted to paint his house purple with green polka-dots, but worried his neighbors would think him crazy. A sympathetic friend quipped, “Don’t worry. Tell them you are doing it for tax reasons.”
As the quip illustrates, our income tax has no discernable principle of taxation. This is true of all the other tax-reform proposals, including the “flat-tax” proposals. Some persons are to be taxed; others, not. Some income is to be taxed; the rest, tax-sheltered. There are tax rates for here, different rates for there. Higgledy-piggledy does not make for principle.
The FreedomTax is based upon solid principle: All income is to bear its fair share of the income tax burden and all is to be taxed the same, no exceptions. Structured under this principle, the income tax would be given much needed conceptual integrity. Proposed special-purpose income deductions, exclusions, exemptions, and tax credits would be easy to see as violations of this principle, and be more easily opposed as serious threats to having a low-rate, tax-neutral income tax system for everyone.
All the Others Lack Fundamental Reform. The other tax reform plans, including those proposing a “flat tax,” would continue the current system of filed personal-tax returns.
It’s the universality of this system under which every taxpayer must report all of his income to determine a person-tax liability, which has been the enabling vehicle for the tax mess to grow to what it is today. Retention of this nefarious system gives license to its future use to create more personal tax breaks and tax brackets, and clouds the focus of the tax as an income tax. And, that single tax bracket of the “flat-tax” plans would provide a ready foundation upon which to build the additional tax brackets.
This universal-personal-return system is an antiquated and highly-inefficient tax-collection system. The FreedomTax would junk it in favor of a modern system focused upon income, not prone to repeat a tax mess after every reform made. The 10% income tax would be collected at the source of payment in the case of salaries and wages, interest, dividend, and retirement income. Once received, this income would be fully taxed.
Most Americans would never have to file a personal tax return, not even a postcard return. They would be freed from IRS scrutiny, fear of tax audits, and tax-return-preparer fees. Only business income, involving business expenses to be accounted for, would require tax-return filing and only for that income, to be taxed at the same 10% flat-tax rate as all other income.
Others Even Lack Honesty. The “flat-tax” plans (including the multi-tax-bracketed “BetterWay” Plan) retain the personal-return system and make the bold promise that the average taxpayer would only have to file a postcard tax return (or postcard-like return). This is bait to gain plan acceptance, destined for a switch after enactment.
The IRS, responsible for auditing and checking upon taxpayers, is not likely to be satisfied for very long with taxpayers merely listing their totals on a simple postcard return. Surely, it will insist upon more to be filed, such as supporting schedules listing income items and the payors. Other verifications will be required to support claimed tax exemptions, deductions, and credits.
The FreedomTax is not a bait-and-switch plan. As explained above, it’s the plan with a formal structure for most Americans to be free of all tax-return responsibility.
Time for the FreedomTax Revolution. The FreedomTax would achieve breath-taking tax simplification and massive reduction in the tax-compliance burdens. The Tax Code would be reduced by an estimated 95%. Because all income would be taxed the same, there would be far fewer tax regulations and tax forms. Moreover, great tax efficiency would be achieved, saving the Treasury billions in tax administration costs. Business decisions no longer would be tax-driven.
Low-rate taxation would markedly increase after-tax returns, thus fostering saving, investment, and overall business expansion and, in turn, job and wage growth. There’s a lesson in the FreedomTax — The nation doesn’t need tax reforms with still too-high tax rates and the accompanying need for offsetting tax breaks to foster this.
Bottom line, the FreedomTax is not just another flat-tax proposal. Indeed, it’s the only flat-tax proposal. And, most significant, it’s the only proposal for fundamental income-tax reform, critical to ever achieving real and lasting reform.
James K. Jeanblanc is tax counsel to the law firm, Grove, Jaskiewicz & Cobert in Washington, D.C. During the tax reform act of 1969, he was directly involved in the House-Senate drafting sessions. He is a graduate of the University of Illinois School of Law and received his LL.M. degree in Taxation from George Washington University. He is a former adjunct professor of law for the Tax Policy Seminar in the graduate law program of the Georgetown University Law School and has been a lecturer of law in the graduate law program of the George Washington University Law School. He is a former chairman of the Committee on Tax Accounting Problems of the Tax Section of the American Bar Association. Formerly, he was an attorney in the Office of the Tax Legislative, U.S. Treasury Department and an Assistant Branch Chief of the Corporate Tax Branch of the Legislation and Regulations Division of the Internal Revenue Service. He is the author of the FreedomTax and has a half-century of income tax experience involving tax legislation, tax regulation, IRS ruling, tax planning, and tax controversy matters. He is Senior Fellow for Tax Policy at the Selous Foundation for Public Policy Research and a contributor to SFPPR News & Analysis.