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What's Your Favorite Tax Plan?


For savers, wealth erosion comes in two main forms: Inflation and taxes. Inflation, or a rise in prices that erodes your buying power, can slowly eat away at your "real" earnings, meaning that even cash can result in losses if the inflation rate outpaces your yield. The other form of wealth erosion, taxes, is much easier to see. After all, you pay taxes regularly, including paying taxes on the interest earned from your savings account.

Some believe that our tax code has become too complex, and that it is unfair to a large percentage of the population. After tax deductions and credits, and other breaks, there are quite a few Americans who actually don't pay taxes at all. Additionally, there are some who think the complexity of the system allows for wealthier Americans to pay less than their "share." As a result of these concerns, the idea of a flat tax is gaining traction. Indeed, two plans have already been presented by presidential candidates to overhaul the current system and replace it with some form of a flat tax:

  1. Herman Cain's 9-9-9 Plan: By now, most of us are familiar with this plan. The idea is that there is a flat tax of 9% for income, 9% for businesses, and a 9% federal sales tax (added on top of state sales taxes). Recently, Cain added some provisions meant to ease the income tax burden on the poorest, since had received a great deal of negative blowback for the plan, which some estimates say would raise taxes on 84% of tax payers.
  2. Rick Perry's 20% Flat Tax: Most likely learning from the backlash against Herman Cain, Rick Perry introduced his own flat tax. Perry's flat tax comes with simple deductions, especially for those making less than $500,000. The most interesting aspect of Perry's plan, though, is that it's optional. You can choose whether to pay the flat tax, or pay according to the current system. (Perry hasn't been clear on whether this state of affairs would be permanent, or just a bridge to switching everyone over to the 20% flat tax).

In either case, though, there are major changes that would take effect. With Cain's plan, you are almost guaranteed to pay more in taxes, since the federal sales tax would raise costs significantly. With Perry's plan, you wouldn't have to pay more (at least as long as you have the option of keeping with the current system), but revenue would be severely limited. As a result of massive cuts, you might see changes to the programs you might be used to, since the funding would no longer be there.

Other Ways to Collect Taxes

A flat tax, in some form, is attractive to many because it provides a certain element of "fairness." There are few loopholes and deductions to take advantage of, and everyone pays the same percentage of their income (after any deductions, of course). In many flat tax scenarios, taxes on investment, interest and dividend income are done away with. There are flat tax scenarios, though, that allow for taxes on interest and capital gains.

Another option that is attractive to some is the idea of a tax on consumption only. Instead of taxing income, taxes are only paid when items are bought. This would likely result in some sort of Value Added Tax (VAT) system, as well as a national sales tax scenario. The prices of goods would go up, since there would be a tax collected on them. However, income wouldn't be directly taxed. Different scenarios for a consumption tax include those that:

  1. Only apply to new items. So what you buy second-hand, and had already been taxed once on the initial purchase, wouldn't be taxed again, so you wouldn't pay sales tax on used items.
  2. Exempt grocery purchases. That way, consumers aren't paying high prices on grocery items. You would still be taxed for eating out at restaurants, but food items at the grocery store wouldn't be be subject to the consumption tax.
  3. Additional luxury tax levied on top of the regular consumption tax for certain luxury goods and other luxury purchases
  4. Additional tax for "unearned" income: Some scenarios involved with a consumption tax actually allow for taxing interest income, dividend income and capital gains. This "unearned" income would be subject to taxes, but people wouldn't pay taxes on income derived as a result of their productive labor.

The idea of being taxed only on what you purchase, rather than paying income taxes on your productivity, is an intriguing one for many. Proponents believe it would encourage thriftiness, and encourage savers to keep saving. After all, right now, you are taxed on what you make, and there isn't much incentive to keep you from saving. (Quite the opposite. In the current low-rate environment, the incentive is to borrow, since yields on cash are low, and you can borrow for much less.) However, if you could pay lower taxes by saving your money, rather than spending it, more people might be inclined to cut their expenses.

This would change a great deal about our economy, having the possible effect of shifting it away from one driven by debt-fueled consumer spending. A fundamental change in the way we think of what makes a "good" economy would have to be experienced as well, since we would no longer be looking to encourage economic expansion by inflation. It's probable that there would be a great deal of financial pain and difficulty for many before emerging on the other side.

What do you think? Do you think our tax plan needs to be overhauled? What type of plan would you like to see? Do you think that our economy would benefit from moving away from being growth obsessed to favoring savers a little more?

Previous Comments
  |     |   Comment #1
How about Ron Paul's "No income tax?"
  |     |   Comment #2
I think the worst wealth erosion comes from low interest rates and devaluing the dollar.
  |     |   Comment #3
None of the candidate proposals get adopted (except for the bush tax cuts), so it's a waste of effort to discuss them. The best way to save with low taxes is long term capital gains, but you won't find those at a bank (except at their high commission brokerages).
  |     |   Comment #4
 nuff sair right S J?
  |     |   Comment #5
Go to the 'Fair Tax' plan cold turkey, as Cain's 'triple 9' plan to supposedly transition to the 'Fair Tax' is very dangerous.
  |     |   Comment #6
I would not mind the 9-9-9 plan as a transition to just a national sales tax.
  |     |   Comment #7
Whatever the merits or demerits of a flat tax, the justification for such every time it has ever been proposed it to eliminate unfair tax writeoffs. But tax writeoffs have nothing to do with whether the tax rates are flat or not. In fact, in theory, we could eliminate all writeoffs to be "fair," and retain our graaduated tax rtates as-is. Or, we could go to some other graduated tiers for tax rates, as we eliminate writeoffs. 

That is, the flat tax and the graduated tax are NOT interlinked! The entire discussion of a flat tax has been VERY dishonest, falsely suggesting that the only way to eliminate unfair writeoffs is to go to a one-tier flat tax. The real reason behind the arguments for a flat tax are not to eliminate writeoff but to make it so the rich do not pay higher rates. 

I would simply like to see an honest discussion of the proposals, and let people really understand and decide on the merits, not on some emotionally based dislike of something else, of certain writeoffs they don't like that have nothing to do with a flat tax.
  |     |   Comment #8
One thing noteworthy about Romney's tax plan is that there would be no taxes on interest (in addition to capital gains and dividends) for taxpayers earning less than $200,000 a year.
  |     |   Comment #9
I think that the complexity of the tax code has nothing to do with the "flatness"/regressiveness/progressivness of rates.  I am all for simplifying the code, removing deductions and writeoffs and tax shelters, and then re-adjusting the rates to be revenue-neutral but more progressive.  For example, all income sources should be treated the same, without preferential treatment given to dividends, cap. gains, or inheritance, and without the extra taxes imposed on wages (payroll).  Get rid of special treatment for certain industries over others.  Make everyone pay taxes on ALL their income equally.  Then I would increase the number of tax brackets, and increase the marginal rate on the very wealthy while reducing it for the middle class.

The tax code could be five pages long, and still be progressive.  Having a few different tax brackets is far from complexity, in my mind.
  |     |   Comment #10
I agree with Anonymous - #2, what good are money for if they don’t multiply and all of the commodities are up because the Dollar is down.
Inflation and taxes are secondary by product of lost value in the Dollar.
  |     |   Comment #11
It is pretty simple: eliminate all tax deductions and lower tax rates for everyone. It doen't have to be flat, but the rates need to be significantly lower for all taxpayers. I also think it is very unhealthy to have 50% of all tax filers paying no federal income tax. This change doesn't have to be revenue neutral, but it won't fly with me if you eliminate my deductions and you do not lower my tax bracket.
  |     |   Comment #12
The only thing that concerns me about only having a sales tax and no income tax is that it will treat the unemployed unfairly.  Unemployed people (who have exhausted their benefits) will not receive the benefit of not being taxed on their income, but will suffer the consequence of having to pay higher taxes on goods they need for survival. That doesn't seem fair to me.
  |     |   Comment #13
I see Miranda is back with more right-wing garbage. A flat tax would be horribly regressive and extremely advantageous to the wealthy. Where is the other side in this "article"? Where is the tax plan that raises the cap on Social Security tax above $100K, treats capital gains the same as any other income and eliminates tax writeoffs for the wealthy? I think Miranda posts here after her day shift at the RNC.

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