John Gaver

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How can a flat income tax eliminate the IRS?

There has been a lot of talk lately, with members of Congress suggesting that we go to a flat income tax, with no deductions or other breaks, so you can fill out your tax return on a postcard and that this would somehow eliminate the IRS. But wouldn't there still have to be someone to audit all those postcards?

Wouldn't there have to be someone checking to see that the millionaire reported all of his income, that the waitress reported all of her tips, and that the corporate C++ programmer reported his income from developing websites on the side? Does anyone really believe that the government is suddenly going to trust everyone to report all of their income?

It seems to me that the IRS would become far more prevalent in our lives, under a flat tax. I mean, think about it…

1) Have you ever heard of a government agency getting smaller? Then consider that it currently takes weeks to audit a millionaire and months to audit a billionaire and under a flat tax, those audits will take an hour or two. What will the IRS do with all that spare time?

2) Consider that with no tax shelters to examine, the IRS will have to be more aggressive in finding what is not reported at all.

I'm thinking that instead of eliminating the IRS, the IRS will not only continue, but that with all that spare time, they'll perform 30 or 40 times more audits than they do today and they'll be far more aggressive in doing so. Worse, since the income of most millionaires (except crime lords) is well documented and tracked by the banking system, the IRS will probably focus on middle and low income taxpayers, where cash payments are common and banks aren't required to report every small deposit.

Seems to me that the IRS would not only continue under a flat tax, but low and middle income people, who work off book, would be most hurt by it.

Am I missing something here?

By the way, this is the question that moved me away from supporting a flat income tax and ultimately led me to support the FairTax.

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    Apr 4 2014: Randy and Presten, you are both right. There is one absolute truism about a flat income tax and that is that it won't stay flat for long. President Reagan inherited a tax code that had 15 brackets, topping out at 70% and managed to flatten it to just two brackets - 15% and 28%. But the addition of additional brackets back into the tax code began with the very next president and every president since has presided over the addition of at least one more tax bracket. We're now back to 7 tax brackets since 1988.

    It's very clear that as long as we give the federal government the power to tax income, they will not allow that income tax to stay flat nor simple. A complex progressive income tax, with lots of tax loopholes, benefits those in government, by giving them to tools to play favorites with the tax code and both parties are guilty of this. By contrast, a sales tax benefits taxpayers and doesn't lend itself to favoritism, which explains why the leadership of both parties keep trying to undermine the FairTax. It takes away their primary tool for political payback.

    Of course, it's also the only tax plan that completely eliminates the IRS, unlike a flat income tax that will actually make the IRS more prevalent in our lives.

    So to sum it up, a flat income tax won't stay flat and won't eliminate the IRS. It's only a placebo, aimed at maintaining an easy path back to the current system.
  • Apr 4 2014: There are also five simple steps a Congress - who wants the convoluted tax code so they can curry favor with potential allies/donors - could take to turn the "simplified" Flat Tax back into the current mess:

    1) Depreciate rather than expense capital costs.
    2) Make interest expenses deductible and interest income taxable.
    3) Tax capital income (such as dividends and rent) and capital gains.
    4) Do not allow inventory purchases to be deducted until the inventory is sold.
    5) Impose graduated rates for different income groups.

    The whole thing needs to be blown up and reconstituted as a simple, fair consumption tax that exempts 100% of legal residents from paying taxes on "necessities" as determined by HHS (something they do all the time for welfare and food stamp purposes). Spend more, pay taxes that gradually increase the more you spend. Spend less, and you are completely untaxed from the federal level.

    One more brilliant thing... the FairTax brings in the same amount of revenue as the current system. The Flat Tax as proposed does not (bringing in less).

    • Apr 4 2014: First we need to decide if spending is good or bad. Is saving good or bad?

      Spending creates demand for goods and services, creating employment opportunities for others, economic activity, keep money moving.

      Saving removes money from circulations, slows economic activity, reduces job opportunities for others, reduces total economic activity.

      A tax code should encourage spending and discourage accumulation of cash and cash equivalents.

      Money is the lifeblood of an economy, and it only works when it is moving.
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        Apr 4 2014: Unfortunately, that viewpoint only (1) appears to work when you incorrectly assume a closed economic environment and (2) even then it has many problems. The fact is that (1) we don't live in a closed economic environment and (2) when people spend now, they are neither building their own net worth nor investing in business that create jobs.

        (1) Look around your house and see how many things have names like Sony (Japan), Toyota (Japan), Samsung (Korea), Puma (Germany), Braun (Germany), Hyundai (Korea), L'Oreal (France), and Lenovo (China). Then look for things manufactured in the USA, by U.S. workers.

        In fact, today most U.S. homes contain items representing far more foreign work hours than U.S. work hours. Furthermore, the fact that pay overseas is lower is more than offset by the far larger number of such foreign-manufactured items found in U.S. homes.

        Furthermore, spending doesn't create NEW demand, but only demand for existing products (i.e. there is no growth or what is called "stagflation").

        (2) By contrast, when you encourage savings, most of that money goes primarily into U.S. business, allowing expansion of U.S. businesses, where the vast majority of jobs created are right here in the USA.

        What this boils down to is that when we encourage a SPEND TODAY economy, we create far more jobs overseas than at home. At the same time, that Spend Today economy severely limits savings that funds primarily U.S. businesses and U.S. jobs.

        By contrast, when we encourage savings today, two things happen. (1) People have more money to spend later. (2) Even those who only have a simple saving account fund U.S. business, since most U.S. banks invest that savings in mostly U.S. businesses. That investment creates new jobs and the development of new products. With more job-holders earning money, more people with disposable savings and more new products being developed, NEW demand that didn't exist before is created. Therefore, we have growth and much of that is permanent.
        • Apr 4 2014: 1) International trade deficit is a separate issue that would need to be addressed with a separate solution.

          However, the trade deficits (international or domestic) are enabled by the loose lending created to keep the economy functioning despite the massive leaks. We buy from foreign countries, then borrow the money back, then borrow again, then buy from them again. This is the EXACT same thing that is occurring domestically on a much larger scale!

          Look at this chart of when total debt began to explode upwards.

          Compare to this chart.

          We brought down the top marginal income tax rate, allowing money to flow out of active circulation into the hands of a few, very rich people. The only way we could make the economy function in the face of these drains, was to loosen credit markets and let loose the unsustainable debt monster to create new money.

          2) Investing in business IS spending. Back when the tax code worked, you got deduction for such spending, as well as other spending. The only things that are not spending is "stuffing in your mattress" or "lending out" both of which are horrid for the economy.

          The progressive income tax code which has twice worked before, provided low taxes at incomes up to about 10X-ish median income. This easily allows the "average" and even the majority of the upper class to put away plenty of money. What the steeply progressive top rate, with confiscatory high top rate, avoidable via deductions for spending (including on creating/growing business, hiring people, etc) prevents is a few people accumulating tens of thousands of years worth of median income.

          And, that is where the real drain is. 100 million households saving 20 years of income each does not impact the economy the way 1 million households acquiring 1,000-20,000 years of median income.
        • Apr 4 2014: "By contrast, when we encourage savings today, two things happen. (1) People have more money to spend later. (2) Even those who only have a simple saving account fund U.S. business, since most U.S. banks invest that savings in mostly U.S. businesses."

          Central banks can create money/lending without savings. There is no reason that less savings must result in less money available for business to borrow into existence.

          AND, business wouldn't need to borrow more money to fund their growth, IF they had more revenue because people were spending more money.

          Total income must exactly match total spending. Reducing spending drops revenue.

          You seem to assume that each dollar is spent one time. I can spend it now, or spend it later. In reality, if I spend it now, it creates income to someone else, that can then spend it. Some of that spending will be used to buy goods and services from me, allowing me to spend the money both NOW and LATER, by keeping the money actively moving through the economy.

          It is saving it now that prevents someone from earning it now, then spending it to buy from me later, so that I can spend it again later.
        • Apr 8 2014: @Darrell Shimel Jr. Unless you are literally burying it, saving does not prevent someone else from earning that dollar. Why wouldn't the savings be invested into new industries to create new jobs?

          Why are you trying to use the tax code to encourage consuming, anyway? Can't the companies that profit from the consumption do their own advertising??
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        Apr 5 2014: Darrell, it's always a good idea to look at the past, as possible predictor for future behavior of people. But when using the past as a predictor, it's important that you look at what's changed, since that time. Otherwise, your assumptions for the future could be way off.

        That's the case with the historical references that you made. You see, in the past, if a wealthy person wanted to both live well and have access to top level communications for managing his business, his only choice was the USA. But all that began changing back in the 80's. Today, we have FedEX, Skype, and cell phone service all over the world. You can get top flight medical care in dozens of countries around the world. The point here is that it was possible to tax billionaires at 70%, in the past, because there was nowhere else for them to go and that situation no longer exists.

        In the 60's and 70's the number of Americans leaving the USA every year was estimated to be in the 10 to 50 thousand range. By 2008, Zogby stated that "by a modest estimate" more than 3 million Americans "relocate" offshore every year. That means they moved their primary residence offshore. Now not all of those people will stay gone. But if you want to look at historical trends, about half of Americans who move their primary residence offshore, never return. At a few tens of thousands a year, it wasn't a problem. But at more than 3 million a year, it has become critical. That's because the people who are leaving are almost exclusively among those who earn more than $100k per year (the people who pay 70 of all federal personal income tax).

        In the past, you could hit them with punitive taxes and they had no choice but to pay them. But today, they're leaving at alarming rates and those who are left won't be able to make up the difference. The fact is that the old paradigm of punishing success will no longer work. We have to be smarter and "entice" the job creators and top taxpayers to stay. That's what the FairTax does.
        • Apr 5 2014: ". By 2008, Zogby stated that "by a modest estimate" more than 3 million Americans "relocate" "

          You can keep posting it, but it is still wrong. There is no way this number matches wither the World Fact Books, net migration of +750K a year, nor does it match Census reported population gain given out birth/death ratios.

          To entice people to stay, you can ensure their taxes do not go up by offsetting their higher rates with deductions. Sure, you can move offshore, but to whom are you going to sell and to whom are you going to lend? Americans. And, whether you live here or not, we can tax that income before you receive it. In fact, by only offering the deductions for spending to those that spend money in the USA, the STRONG incentive is to NOT leave.

          FairTax simply allows more money to flow into fewer hands, puts the burden even more heavily on the middle class, and discourages spending while encouraging saving, both of which kill demand for goods and services and therefore jobs.

          FairTax is the the exact opposite of what we need.

          We need a tax code that fights inequality, encourages spending, keeps money moving, and reverses out dependence on unsustainable debt. That is the tax code that has twice worked. Very steep income tax (payable on all US revenue whether the recipient lives in the country or not), that is easily avoidable by spending/investing (not loaning) to take advantage of deductions.

          FairTax would be an absolute disaster far worse that our current disastrous tax policy. FairTax is more of the same that is destroying the middle class.
        • Apr 6 2014: I question your assumption that a highly progressive income tax, with confiscatory high rates, actually promotes the spending and jobs you posit. High income tax rates do not substantively affect already acquired wealth. What they do is protect those who already have wealth, and have the resources to engage in investment activities that are not taxed, or taxed at much lower rates.

          For instance, someone with large sums of money can invest in municipal bonds that return monies tax free.

          What a highly progressive tax rate does is serve as a barrier to entry into the ranks of the wealth. As such, it is more a tool of class warfare than a means of promoting economic activity.
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        Apr 5 2014: You may trust numbers generated by career government bureaucrats, whose jobs are secure, regardless of accuracy, over those of an independent company, whose continued profitability is based solely on their record of accuracy. But I don’t. Sometimes, “good enough for government work” is the best that’s available. But Zogby couldn't stay in business if they weren't accurate.

        Also, before trusting a DC bureaucrat's WORDS, you should temper them with their ACTIONS. After all, actions speak louder than words.

        Ask yourself, why they would pass such laws as those listed below, if they weren’t truly afraid of what’s happening with wealthy taxpayers permanently leaving the USA. Each of the following laws apply only to expats who have a net worth of $1MM or fit certain related income thresholds (later updated to $2MM).

        1996: 26 USC 877(a)(1)
        (Part 1) Requires wealthy US expats to pay US tax for 10 years after they cut all ties with the USA, but This even includes former US citizens who live and earn 100% of their income offshore, hold a foreign passport and have no US assets. (BTW, this didn’t work)

        1996: 26 USC 877(a)(1)
        (Part 2) Requires publication in the Federal Register, of the names of all wealthy expats. (They said it would shame wealthy taxpayers into staying. Turns out expats now consider it a badge of honor.)

        1996: 8 USC 1182(a)(10)(E)
        Allows wealthy expats to be permanently denied re-entry into the USA for any reason.

        2004: Public Law No 108-357
        Requires wealthy people who permanently expatriate to file formal renunciation. (They knew that hundreds of thousands or even millions were leaving, but only hundreds were showing up on their List of Shame. Bummer!)

        2008: Public Law 110-245
        Implemented the first ever true Exit Tax on US expatriation (a tax on the "unearned" capital gains of your worldwide estate).

        Every one of these laws is aimed squarely at wealthy expats. If wealth flight isn't serious, why would any politician even consider such autocratic laws?
        • Apr 6 2014: I am not arguing that rich people leave. I am challenging your numbers. And, as soon as I get the time, I'll make a post about this point of yours regarding "rich people leaving" and show why your argument that a national sales tax would stop it.
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        Apr 5 2014: There's also a lot ancillary evidence of the alarming expatriation rate of wealthy US taxpayers.

        For decades, Forbes has created 2 lists aimed at tracking wealth. Neither of these lists claims to be 100% accurate. But they do use the same methodology for building those lists year-to-year. Therefore, any error in the data from any one year will probably be very similar in preceding/following years. The two lists are the "World's Billionaires" and the "400 Wealthiest Americans".

        Analyzing those lists shows that between 1999 and 2009, the number of billionaires in the US climbed a mere 27%, with a 20% growth in wealth, while during that same time period, the number of billionaires worldwide climbed a whopping 166%, with a 90% growth in wealth. This means the number of worldwide billionaires grew at a rate six times faster than US billionaires and worldwide billionaires net worth grew four and a half times faster.

        So does this mean our billionaires aren't as smart as foreign billionaires or are our billionaires BECOMING foreign billionaires?

        Former Congressman, Bob Bauman, who is the chief legal counsel for 2 of the largest expat organizations, The Sovereign Society and International Living, went on record in the book, "The Rich Don't Pay Tax! …Or Do They?", stating:
        "During 2009 and continuing today, the Sovereign Society and International Living, have both experienced a marked increase in interest among many people who are considering moving assets and themselves offshore.

        This is evidenced by unprecedented increases in our membership and much higher attendance at our offshore conferences.

        My personal talks with many of these Americans shows a very real fear about the current policies of the US government..."
        Finally, there's a telling social indicator. The number of expat bars in other countries have skyrocketed since 1990.

        Our punitive tax system is fast driving wealthy taxpayers out of IRS jurisdiction. The FairTax would reverse that flight.
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    Apr 6 2014: John,
    One thing more about the fair tax or the VAT or the flat tax or, God forbid, our currant progressive system.... however it works out, what is not needed is this constant grab by congress and the administration to keep taking funds for a myriad of purposes... and I would agree that there are situations out there of hunger and poverty and illness and and and.... people have problems and need help to solve these problems... what I have always said is the worse solver of problems is the Federal Government.... I give you.... the war on drugs, poverty, education, finance and the hundreds more that the Feds have attempted to solve with great increases in costs, additional Federal employees, etc. and fail so miserably. Yet, every time some politician gets up and tells us that Washington will fix our problem du jour.... we all stand up and cheer.... have we become stupid or just totally clueless?
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    Apr 6 2014: John,
    If I remember the history of the modern tax system, it was a flat tax, sort of, a one page return and not much of an IRS.
    As I remember the story, a few years earlier The Feds went bust and JP Morgan got couple of banker friends together and floated the Feds until they got some funds flowing.
    As the money flowed and the government found more and more things to spend it on... well in a hundred years, here we are, a penny then is about a quarter today. Government spending adds no wealth, it effectively devalues currency and that is why I dislike the Fair tax as it does nothing to constrict spending. It is simply another way to collect the same funds.
    The flat tax, if properly done, will provide an equitable burden on all citizens, establish an appropriate collection system, eliminate thousands of pages of loop holes, and best of all, restrict spending to income received...
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      Apr 6 2014: Indeed, Mike, a properly structured flat income tax might manage to be equitable for a short time. But twice, we have had a flat or nearly flat income tax. I'm talking about the original income tax and the two rates implemented by President Reagan. Each president since then has overseen the addition of at least one tax bracket and numerous more tax breaks.

      Unfortunately, history has shown us conclusively that a flat income tax won't stay flat. Worse, since current members of Congress have learned of the power that a progressive income tax gives them, a flat income tax would likely not stay flat past the next presidential or maybe even the next congressional election.

      Speaking of history, the place where the government realized the power that a tax on income gave them, be it flat or progressive, was when they used the IRS to bring down Al Capone. They realized that if they could use the IRS to bring down the biggest gangster of the era, they could easily use the IRS to bring down or at least intimidate anyone they chose.

      In fact, the biggest problem with any income tax is the is the agency that is required to oversee it and audit those tax return forms. You see, even a pure flat income tax would have to be audited, to insure that everyone was reporting all of their income. Therefore, any tax reform that leaves the IRS (or any similar tasked agency) intact, won't fix the problem.

      A sales tax, such as the FairTax, is collected by independent retail businesses. The state sales tax collection agencies collect from those businesses and if necessary, audit some of those businesses. Then, the federal government collects from the states and audits the states. Nobody audits individuals (unless that individual is also a sole proprietor in a retail business). But even when a sole proprietor is audited by the state, as in 45 states today, they don't audit to determine the taxes that the business or individual paid, but the taxes that the business collected and passed on.
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        Apr 6 2014: John,
        I know I had wistful thinking. I have lived where there is a sort of Fair tax. It is called a value added tax. In most purchases in that place, at that time, it came to 19%. That is a big bite.
        I would rather see a government funded to do what was established in the Construction. So, to get in my perfect flat tax world , It would take at least the repeal of the 16th amendment, A balanced budget amendment with a taxing authority, and to end congressional overreach, term limits and repeal of the 17th amendment. I know, a lot to ask but not impossible.
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          Apr 6 2014: Mike, your VAT experience is similar to mine. I lived in London for a time.

          The problem with a VAT that makes it so bad (and the difference between it and the FairTax), is that it still makes the phony attempt to taxes business and business is never taxed. They just pass on the cost of those taxes, plus the cost of compliance, and then add a percentage of profit, to boot. So a VAT doesn't lower the cost of products at all.

          The FairTax, completely does away with the fraud of taxing business. That removes around 30% of the cost of manufacturing most products. Competition will drive the price of those products down accordingly. So unlike a VAT, that adds more cost to the existing cost of those products, the FairTax first eliminates around 25-30% of the cost of products and then adds 23% back in, but to that new lower price. So, although under the FairTax, prices may fluctuate slightly - some up and some down - the net will be that the total cost to the consumer will be pretty much what it is today.

          You're right about making a flat tax work. It would take a constitutional amendment that specifically required it to remain flat and that limited breaks to only a standard deduction, so Congress can't use the income tax for favoritism. Such an amendment would also have to prohibit the fraud of a business income tax. But even that would still require an IRS to audit the tax return forms, to insure that everyone reports ALL of their income and that's the major problem with any tax on income.

          Only a VAT or sales tax will eliminate the IRS and get the government out of our private financial affairs. But since a VAT actually adds cost to things, that leaves only the FairTax.
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        Apr 6 2014: John,
        Your take on the VAT is right on.... I didn't know you were familiar with it.
        But, you keep addressing corporate taxes. Like the T-shirt says "Corporations don't pay taxes, people pay taxes" And... 95% of tax law is focused on corporate tax and loopholes for the corporations to get out of paying taxes. If you look at the real numbers, we have an 35% tax rate for corporations and the most biggest pay 0 - 5 %. Business taxes are a joke on us individuals.
        The original taxes a century ago were like.... enter your total income ( regardless of source) ..... subtract $50,000.... pay 1% tax on the balance... that is as complex as it needs to be. Someone smarter then me should be able to calculate a percentage that would be applicable. If the percentage is in an amendment, congress wouldn't be able to pad the numbers to get funds for earmarks of pet projects to get voter support. Senators would be non affiliated and appointed by the states like in the very old days, We could change the rules for one 5 year term for congress and the president.... I figure that is about how long a man could stay trustworthy before being corrupted by the system.
        Most income today is sent all digital sent /https/ so fraud would be hard, we would still need something like the IRS but about 10% of the current manning.
        As you might guess, I have given this a bit of thought.... in passing....

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          Apr 6 2014: Mike, I just read that Michigan has voted to call for an Article V Convention. I'm not sure, but that should put us pretty close to the threshold for forcing an Article V Convention. So we could very well see the 16th Amendment repealed in the not-to-distant future and some sort of amendment that calls for a very specific and highly limited form of taxation.

          While I think that a constitutionally mandated flat tax on income and not savings, applied only on individuals and with only one basic deduction, would be moderately acceptable, I don't like taxing income, since it's regressive and effectively punishes production (labor) and savings (investment), while rewarding irresponsible spending.

          I would love to see an amendment that required all taxes to be collected in the form of a sales tax and that the amount of tax going to each branch of government would be required to be shown on each receipt. When the millions of clueless people saw how much they are really paying in tax, they would go ballistic and demand that the federal government, the states, the counties, the cities, the school boards and others, dramatically cut spending.

          That, I believe, is the best thing about a sales tax. It's totally transparent, since the full amount of tax shows up on every sales receipt. No more payroll taxes that people don't realize they eventually pay, in the form of lower salaries. No more corporate taxes that are passed on to the consumer. No more withholding that people don't think of as their money. Just one single and highly visible tax, reminding people, with every purchase, just how much they pay for government services, most of which they could supply for themselves, for far less money.

          As you suggest, it would be nice to get a term limits amendment, too. The best idea I've heard would require that an elected official has been employed in the private sector for a certain percent of time out of a certain number of recent years, immediately prior to his election.
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          Apr 6 2014: By the way, Mike, As a former IT security guru, you should know that https is not as secure as many think. It's good enough for protecting your data from casual hackers. But that's about it.

          A dedicated hacker, with access to some compute power, could capture the stream and break the encryption in a few days. Granted, such effort would only be worth it if the hacker had reason to suspect that the stream contained valuable information. But the likelihood of valuable information being contained in a particular stream increases significantly on April 15. Just sayin…
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        Apr 7 2014: John,
        I am taken aback about https... All my bank account and bill paying stuff, I look for the https.
        However, he who steals my silk purse is holding a couple of pig ears
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          Apr 7 2014: That's why the elite hackers don't attack most https traffic. It takes too long, unless there is reason to believe that there is a pot of gold inside. Capturing a stream is easy. But then you have to have access to a lot of compute power, to process that stream for days. So you've spent days and at the end, you have the social security number of a wino or welfare mom. Not a great use of time and compute power.

          Like all encryption, https can be broken. It just takes time. Unfortunately, the bit count of https is not all that high, which means that in the not to distant future, it will be able to be cracked on a laptop. The only thing that higher bit counts give you is that it will take longer to crack. But even my 4096 bit PGP key will be able to be easily broken 50 years from now.

          The Japanese JN-25 code that US code-breakers cracked, to give them a heads-up into the Japanese planned attack on Midway, took months to crack and even then, they only knew parts of it. Today, the JN-25 code could be cracked on a laptop, with less than 100 original messages, in only a few seconds.

          So this brings up another issue. Hackers could capture thousands of hours worth of https streams and store that data on cheap storage devices for 20 years or so and then process it with newer, faster technology, looking for SS numbers, credit card numbers, etc. that are still valid. The problem here is that we won't know if that's actually being done for another 10 years or so, since all that data is still to complex to be quickly decrypted by today's technology. But 10 years from now, it will be a snap. Think about it…

  • Apr 3 2014: No it will not eliminate the IRS for several reasons. One is that the political class will still get lobbied by K street for breaks in corporate taxes, the politicians will still want to squeeze campaign money out of them, and they can still use tax benefits including the earned income tax credit to buy votes. A flat tax on income will not stay flat. It will be amended, amended, infinity and beyond. IRS will audit estates on death, stock transfers, trusts, and end up with the same power they have now.
  • Apr 3 2014: I know you understand the weaknesses of the flat tax compared to the FairTax inside and out, John. Not only does the flat tax not eliminate the corrupt IRS, it fails to eliminate two extremely regressive taxes we all take for granted under the current income tax, namely the payroll tax, and the embedded taxes which find their way into the cost of every item purchased at retail. Again these taxes fall most heavily on the poor and the middle classes.
  • Apr 3 2014: You are missing nothing, John Gaver, with the possible exception that under a flat income tax, the same people who currently do not file or pay taxes will continue to do so. The tax gap created by pimps, pushers, prostitutes, pornographers, the legal - yet underground - economy, and visitors to the country amounts to over $400 Billion annually - revenue that the rest of us must pay. The Fair Tax is the only tax collection system that will expand the tax base to include all those scofflaws.
  • Apr 8 2014: All valid points, and why I promote the FairTax.

    Our entrepreneurs aren't any less bright, but our tax system penalizes them for being bright.
    Out businesses aren't any less productive, but every American product or service has a 20% tax penalty built into the price that is absent from their competition.
    One reason we have so many millionaires in Congress is because they have the power to make, or destroy, companies with the stroke of a pen when writing tax policy, and supplicants much offer them "bribes" or face financial ruin. That power is revoked under the FairTax.

    In fact, the greatest challenge our businesses face in the global markets is located in Washington. The answer to most of their problems is located in the FairTax.
  • Apr 8 2014: Studies don't really confirm your hypothesis that the current tax system is concentrating money into fewer and fewer hands. In fact, most of those who are rich today are first or second generation wealth who derived their wealth from new products, industries, or services.

    That said, I'd entertain going back even further. We didn't have an income tax during the most productive years of our Nation's growth, prior to 1913. Let's go back to those days if you want explosive growth.

    And, at the same time, let's shrink government to those days as well!!
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      Apr 8 2014: Steve, that's a very important point that you made. In fact, Fortune magazine reported several years ago, that roughly 80% of those on their list of wealthiest Americans, were first generation billionaires. Very few families manage to stay on top for long, unless they are politically connected.

      What that means is that, at least for a little while longer, this is still the land of opportunity. But those Forbes' lists also indicate that wealth in the USA is growing at a severely smaller rate than worldwide wealth. Either our billionaires aren't as smart as foreign billionaires or our billionaires are leaving and becoming their billionaires.

      BTW, most members of Congress enter Congress with less than half a million net worth and leave with a net worth in the 8 or even 9 figure range. Then, if they can get a son or daughter elected, they can build a dynasty. The two clans who seem to have done that best are named Kennedy and Bush.

      Also, here are just a few of the recognizable names of people who have renounced US citizenship:

      John “Ippy” Dorrance (Campbells Soup) - Ireland
      Kenneth Dart (Dart Container) - Belize
      Sir John Templeton (Templeton Fund) - Bahamas
      Mark Mobius (Templeton Emerging Markets Fund) - Germany
      Fred Freible (Locktite) - Turks & Caicos
      Michael Dingman (Abex & Ford) - Bahamas
      Joseph Bogdanovich (Star-Kist & H.J. Heinz)
      Ted Arison (Carnival Cruise Lines) - Israel
      4 of the J. Paul Getty grandsons

      Of that group, only Dorrance and the Getty grandsons inherited their wealth.

      I should also point out that John Templeton said that he saved more than $100M in taxes, in his first tax year offshore. That's $100M in income tax that the rest of us had to make up. Worse, each person on that list could probably say the something similar. So just this small list probably represents over a billion in lost taxes, each and every year from now on, as long as they or their heirs don't return. Think about it…
  • Apr 7 2014: I think that all taxes should be sales taxes. Get rid of the IRS altogether. Big taxes on big ticket luxuries like yachts and presidential suites at hotels, and the like.

    If the American people knew how much they were paying in hidden taxes, which is what personal income taxes are because it hides my tax from you, they would rebel.

    consider the car you (probably) drive. Let's say it cost you $30k. UP to 80% of the cost of that car is made up of hidden corporate taxes. But Corporations don't pay taxes. They add the amount they paid for costs of goods, includes the taxes of all of the companies that have come before it in the supply chain. So when you go to the DMV, and you pay your sales tax plus registration taxes, you think you are paying taxes on the car, but you are not. You are paying sales taxes on the $6k car plus the $24k of taxes paid by all of the vendors and shippers that have already written their portion of those taxes off as a cost of doing business.

    America should wake up.
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      Apr 8 2014: Gail, you hit the nail on the head. Many people are easily misled and thing that businesses pay income tax and that the payroll tax doesn't reduce their pay.

      I would love to see a constitutional amendment that required that the only form of taxation could be a sales tax, with the amount of tax going to each government agency printed clearly on every receipt. No income tax. No property tax. Just sales tax. When people saw on their receipt, what they really pay for this mediocre government, they would demand less spending.

      However, your idea of big taxes on big ticket items has already been proven to be not just a failure, but to have a huge negative impact on US business. Several years back, we had a number of the best yacht builders, right here in the USA. Then the government imposed a luxury tax on those big ticket yachts. Within two years, we were down to just one mega-yacht-builder and that one was struggling to stay afloat. Some 8000+ jobs were shipped overseas because of that luxury tax. As much as they may have wanted to buy American, nobody wanted to pay such a premium for "Made in USA".

      When Microsoft co-founder, Paul Allen, spent more than $200M for the yacht Octopus, it was a Lürssen (German). When he bought Tatoosh, it was a Nobiskrug (German, but Arab-owned).

      Luxury taxes just drive luxury purchases offshore and that drives those jobs offshore.

      A single rate sales tax, with a cost-of-living rebate allows the effective tax rate of the rich to be higher, while the poor pay zero or close to it. If that 200M yacht had been built in the USA under a FairTax system, it would have cost around $150M before tax and the FairTax would have brought the price back up to about $200M and Allen could have had made in USA workmanship for that same price. But the luxury tax drove the purchase to Germany.
  • Apr 6 2014: Let's have a rumble in the tax code.....

    In this corner: a 23% federal sales tax, added on top of a 10% local sales tax. No other taxes such as income or capital gains.

    In the other corner, a highly progressive tax code that effects all income earned from USA revenue, payable regardless of citizenship, that is offset by almost all domestic USA spending and non-security (debt) investing.

    Let's take someone making $10 million a year from USA revenues.

    Sales Tax: The person receives the entire $10 million. If he spends it inside the USA, he is hit with a 33% tax, but if spend outside the USA, much,. much lower sales tax rate. Assuming they stay in the USA and spend their income: tax burden = $3.3 million. If they leave, much lower.

    Income Tax: The person is handed the $10 million. If they spend $9 million of that in the USA, they can $500K of the other $1 million Stay in the USA, total tax burden $500K. Leave the USA, total tax burden $9 million.

    Oh... now I see why sales tax would make people stay, and high income tax with lots of deductions for almost all spending would make them leave.... clearly it is your argument that people would do whatever caused them to have the highest tax burden.
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      Apr 6 2014: Darrell, your numbers ignore that under the FairTax, the corporate income tax vanishes. Competition would drive retail prices down to that product's new "natural price" (the price based on costs, demand and other economic factors).

      Ink jet printers are almost a commodity and have a very low profit margin, where THX receivers have a rather high profit margin, since they can sell so few of them. Those profit margins would remain the same. But with around 30% being taken off the cost of US manufactured goods, in the form of business income tax and related overhead, US manufactured products would drop in price to their new "natural price".

      Suddenly, automobiles manufactured in the USA would cost 25 to 30% less, while foreign manufactured cars would cost the same. Nothing would change for the auto workers. Their pay would remain the same, except that they would get 100% of their pay. The 23% FairTax would be added to both cars. So which car would people be more likely to buy?

      Better yet, it works the same way overseas. The US manufactured car would have no income tax component built into the price, while the foreign cars would carry that tax load. The US car would therefore cost less.

      The end result wold be that more US products would be purchased, both here and abroad. US businesses would make the same percentage profit on each sale, but they would sell more. Employees would not only keep their entire paycheck, but they would choose when to spend and pay tax.

      So Paul Allen, for example, would find it much cheaper to fuel his megayacht in the USA than anywhere else, even after paying the FairTax on the purchase. By the way, Allen spends more than $200K per yr on just that yacht - almost all taxable under the FairTax.

      Foreign companies would rush to build factories here (creating US jobs), to avoid income tax in other countries and to be able to compete against other US built products. Foreign investors and US expats would rush to invest here for similar reasons.
      • Apr 7 2014: "But with around 30% being taken off the cost of US manufactured goods, in the form of business income tax and related overhead,"

        Oh.... now I understand... You're just flat out clueless...... OH. Why didn't you say so in the beginning. Would have saved time.

        Corporate tax is charged on profit, NOT on gross revenue. Therefore, a company that sells $10 billion worth of printers, but spends $8 billion to generate the income (an impressive 20% operating profit), would only be taxed on the $2B. The 35% corporate tax rate would then be $700 million, or 7% of the total revenue.

        Now, that tax is paid on corporate profits, even on foreign countries, based on their USA revenue. So, If that tax was removed, it would reduce the costs for USA companies AND foreign companies equally.
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          Apr 8 2014: You are correct about the 30% being taken off of only the profit. But that savings flows up and down through the entire distribution chain. The petrochemical company that made the plastic, the mining company that mined the copper for the wire, the distributor, the wholesaler, the trucking companies that bring all the components together and deliver the final product to the stores… Every company that provides a product that is used in the product, currently pays income tax on their profits and they pass that cost along to the manufacturer, who in turn, passes it on to the retailer, who ultimately passes it on to the consumer.

          Some items have larger and some smaller profit margins. So not all products would drop in price equally, under the FairTax. But the average, including the eliminated compliance (accounting) costs, would be in the range of around 20 to 35 percent. Add the FairTax rate of 23% back in, even on items that are reduced in cost only 20% and most people will still see a savings, due to the prebate.

          You see, that 23% FairTax rate is misleading, if you don't read the bill. That's because, under the FairTax, most people will actually pay well under 11% effective rate, after prebate. Only the very rich big-spenders will pay anything close to 23%.

          Better yet, the only people who will ever pay the full 23% are illegal aliens, who don't get the prebate. This will give poor US citizens, who want to work but can't, due to companies hiring illegal aliens at below minimum wage, will suddenly have a 23% tax benefit over illegal aliens. The Illegals will see their cost of living go up 23%, while poor US workers will have 100% of their taxes, or close to it, rebated. Illegals will no longer be able to afford to work for below or even at minimum wage. Given a choice of hiring an illegal alien at above minimum wage or a US citizen at a similar pay, companies will choose the citizen, since it removes the legal liability associated with hiring illegals. Cool…
    • Apr 6 2014: Darrell, You need to revisit your numbers.

      Under the FairTax, a person earning $10 million keeps $10 million until they spend it on new goods and services. Then they pay the FairTax, $2.3 million. In other words, they got $7.7 million of value from their $10 million income.

      Under the current system, if someone earns $10 million, they pay at least 15% in taxes right off the top (assuming capital gains), but it could be as high as 39%. That leaves them with $8.5 million. If they turn around and spend it, they are paying the embedded taxes of about 20%, for another tax extraction of $1.7 million. When all is said and done, they only receive $6.8 million in value from their $10 million, maybe as little as $4.9 million depending on the source of the income.

      The FairTax creates a much better environment for both the poor, and the wealthy!!
      • Apr 7 2014: Yes, we agree the current tax system sucks.

        We need to return to the tax code of the 1950s, with very high top rates, but deductions for almost all spending done within the USA (including non security (debt) investments).

        This tax code was designed to keep money moving within the USA, and the result was the creation of the middle class.

        And tax code that allows too much money to pool into too few hands, will doom the economy. We will be like the Gilded Age, before the steeply progressive income tax with deductions for spending.... all the money in a few hands, and the masses living in poverty.
  • Apr 4 2014: "You see, Zogby reported in 2008 that "by a modest estimate" more than 3 million Americans relocate offshore every year. Then consider that since Obama took office and began his "Soak the Rich" agenda, Federal Register reports show that formal expatriations of rich people have increased 13-fold."

    I cry foul!!!! Does not come close to passing the smell test!

    1) CIA World fact book puts us at a net migration rate of 2.4 per 1000. With 300 million people, that means a net migration of +720,000 people per year.

    Legal immigration is about 1 million a year, with an estimated illegal immigration now under 500K. per year, and some estimates WAY below that.

    3 million Americans leaving per year would give us a negative net migration rate of some 1.5 million a year, not positive 720K.

    Based on available data, it must be closer to 500K to 750K that leave the USA each year.

    2) Perhaps the CIA is lying.
    Then Census must also be lying. Net birth/death is adding about 1.6 million people a year(and falling). But we know from Census that population is growing almost 3 million a year (281M to 308M 2000-2010)

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      Apr 6 2014: First, the agency whose mandate is most closely tied to counting expats, the US Bureau of Consular Affairs, stated in their 1999 report on Americans living abroad, for the US Census, that it's impossible to get an even remotely accurate count of US citizens living abroad, without enormous expenditures that could not be justified. Furthermore, a 2004 report from the GAO reinforced the conclusion that counting Americans overseas would not be cost-effective.

      By contrast, the CIA's mission is primarily involved in the gathering of foreign intelligence and only relates to the counting of Americans living offshore in the most general sense, of creating the World Factbook. Their numbers are, at best, only a very rough estimate of expatriations and probably derived from the Bureau of Consular Affairs, who have admitted the inaccuracy of their numbers.

      Zogby, on the other hand, used proven survey methods and applied them not to expats, most of whom are hard to find, but to US citizens, who have not yet left. Due to the difficulty of the subject, they surveyed 103,645 Americans, which is far more than the typical 1000 to 2000 that they use for most surveys. You see, since their profitability is based on their accuracy, they won't release numbers that they can't stand behind.

      But let's ignore Zogby and use the government numbers that are admittedly inaccurate.

      If there are only 720K Americans leaving a year, ask yourself how many of them are poor. FYI, Zogby found that 36% of those who were planning to leave planned to spend more than $200K on a home (that will buy well over 3K sq. ft. in most countries) - far more than the US average. Then consider that the top 5% of taxpayers (who pay 60% of all federal personal income tax) is about 6.8M. So how long would it take, at an expatriation rate of just 720K/yr, for most of that top 5% to leave? In the mean time, most of those who come here, have their hands out.

      Even using government numbers, we still have a serious problem.
      • Apr 7 2014: And how does allowing them to earn money in the USA tax free, then spend it outside the USA, mostly tax free, keep them I the USA?

        The tax code that created the middle class... that is, high rates with lots of deductions, allows people that live in the USA to make money mostly tax free (as long as they spend it in the USA) but anyone that lives outside the USA and does not spend/invest here to get deductions, would pay very high rates.

        If, as you say, rich people leaving is an issue, then it argues against a FairTax based on purchases (within the USA) and for a progressive income tax with deductions for spending in the USA.

        Your FairTax rewards spending money outside the USA, while mine rewards for spending in the USA.
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          Apr 8 2014: Now your questions aren't even making sense. What's this about earning money here and spending it outside the USA. If you're talking about the FairTax, it actually encourages buying US made products, in the USA, since those products would cost less than comparable foreign made products that still contain an income tax component in the price, before any VAT or other taxes are applied at purchase.

          The tax code didn't create the middle class. Free enterprise created our middle class, despite a success-punitive tax code. But for the time period when that was happening, there was no other place on the planet, where free enterprise was tolerated, much less, encouraged. That's no longer the case. Today, countries like Ireland, Spain, Panama, Ecuador, Belize and many others are trying to outdo each other in promoting their low taxes and free-enterprise-friendly economic environment.

          20 or 30 years ago, the wealthy were willing to accept huge tax rates, because even after US taxes, it would have cost them dearly, to move offshore. Today, as we increasingly try to punish success, many are finding that they can't afford to stay. Back then, most countries weren't safe. Communications were lousy. The internet was in its infancy and few people even had email. There was no such thing as FedEX or DHL. But today, with changes in political climates and new technologies, a businessman can safely live on and operate his business from the vast majority of tiny islands.

          Your claim that the FairTax rewards spending money outside the USA shows that you haven't read either HR-25, "The FairTax Book", or "The Rich Don't Pay Tax! …Or Do They?" If you had read any of them you would know that prices of US manufactured products will be lower around the world, but particularly when purchased in the USA. That's why most foreign manufacturers say they would build more plants here, if the FairTax were to become law. They know that otherwise, they won't be able to compete against US products.
      • Apr 7 2014: I did more digging, trying to find data. I found multiple sites saying 3-7 million Americans live overseas with the government's best estimate put at about 5.2 million. The vast majority are in the 25-35 range. This includes military, diplomats and other people sent overseas by the government.

        The number of these people that give up their citizenship is measured in the hundreds per year. 2010 was a record, at 743.

        No, not 743K. 743.

        So, EVEN IF it is half a million leaving each year, then average length of stay outside the USA would be about 10 years.
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          Apr 8 2014: You're looking at old data.

          In 2012, there were 3001 formal renunciations of US citizenship. That's up 13-fold, since Obama took office and began his "Soak the Rich" campaign. In fact, that NYT article that you cited came out a day after I reported it and sent a press release to all of the major news outlets. I'm always the first to report that date each quarter.

          1300% increase in expatriation:

          Links to source expat data:

          As for that 5.2 million "estimate" by the government, of Americans living offshore, I've read that before. But that estimate is based on the US Bureau of Consular affairs report and they stated very plainly that they knew that their numbers represented a very significant undercount. On the other hand, while I was living in London, I read where the UK government estimates that more than 2 million Americans live in England, Wales, Scotland and Ireland. If both estimates were correct, that would leave only 3.2 million for the rest of the world. But according to that 1999 Consular Affairs report, just 3 cities in Canada was home to more than 650K private Americans. You can believe that 5.2 million "estimate" if you choose. But the numbers just don't add up.

          Also, the length of stay is not what's important. It's how many NEVER RETURN. Historically, the rule of thumb has been that about half of those who move their primary residence offshore will never return. Some intend to never return, while others plan to return but get comfortable in their new country.

          On my last trip to Panama, I spoke with a realtor who deals only with North American buyers. She doesn't speak a word of Spanish. But she is just one of many who do that. Trump Tower Panama was just completed last year and it's almost full. Seems US expats can't get down there fast enough.

          Even using the most conservative numbers, wealth expatriation has become a serious problem. Ignore it at your own peril.
  • Apr 4 2014: Payroll tax: Make hiring people more expensive = fewer jobs.

    Sales Tax: Take more money from people that are likely to spend it anyway, means less spending->less demand->less jobs.

    Income tax that can not be avoided with deductions: Take money from people that would spent it.

    Very steep income tax with deductions for almost all spending: Encourages spending creating demand for goods and services, encourages hiring, keeps money moving, prevents accumulation of too much money into too few hands, reverses our dependence on unsustainable debt growth, reverses inequality, makes people less dependent on government. It has worked twice in the past. In the 1910s, ignighted the Roarin' 20s. In the late 1930s to mid 1960s, created the vast American middle class.
  • Apr 4 2014: Some see the income tax as a way to fund government.

    It could be so much more.

    Money is the lifeblood of an economy. It only works when it is moving.
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      Apr 4 2014: As you state, money only works when it's moving. But the problem with an income tax system is where that money is moving. It's moving offshore.

      It's an undeniable fact that an income tax ALWAYS leads to favoritism… ALWAYS! It creates an opportunity to promote class warfare, which will ultimately give the government more power. Karl Marx knew this. That's why a progressive income tax was the second step in his "Communist Manifesto."

      But what he and others who have promoted an income tax fail to take into consider the fluid nature of money. Like lightening, it takes the path of least resistance. When a government starts overtaxing those with money, revenue ALWAYS falls. The tax and spend economists will always come up with some excuse. But they can't explain why this drop in revenue so consistently occurs when taxes on the rich become punitive. Actually, they know the answer. But to admit that answer, would be to admit that their favorite way of manipulating voters doesn't work.

      You see, Zogby reported in 2008 that "by a modest estimate" more than 3 million Americans relocate offshore every year. Then consider that since Obama took office and began his "Soak the Rich" agenda, Federal Register reports show that formal expatriations of rich people have increased 13-fold.

      With an income tax that allows the government to manipulate the tax code, to abuse the rich, money certainly is moving. It's moving offshore.

      So after most of those who pay 70% of the taxes (top 10% or over $116K income) are gone, who will shoulder the tax load that they used to pay, to keep the government running then? If we lose 1/3 of our tax base (about 1/2 of the top 10%), everyone else will see a 50% tax increase. I can't afford that. Can you?

      The trick is to not only keep money moving, but to make sure that as least as much is moving in, as moving out. Replacing personal and business income tax with the FairTax will reverse that flow and all that new money will create new jobs in the USA.
      • Apr 4 2014: "It's an undeniable fact that an income tax ALWAYS leads to favoritism… "

        And it is undeniable that low/no income tax always allows too much money to flow into the hands of too few people.

        All other taxes such as payroll or sales, discourage economic activity by taking money out of the hands of people that would spend it. Only a steeply progressive income tax with deductions for spending, creates incentive to keep money moving, prevents too much money from pooling into too few hands, and keeps the money moving, creating economic activity.

        While an individual may be able to move their net worth offshore, they can not move their income off shore. If they make money selling goods and services to American, in U.S. dollars, then they have to pay the income tax on that income before they can take it out of the country.

        AND, just increasing the income tax on the rich is not what I am proposing. I am proposing offsetting the taxes with higher deductions for spending. You only get those deductions IF you leave the income in the country and spend it back into the economy.

        So, in fact, the high income tax, with deductions, ENCOURAGES people to keep their income in the country.

        Let's be clear. I am NOT talking about increasing the total tax revenue of the government, or even shifting the burden significantly to the rich.

        Higher tax rates, offset by higher deductions, acting as a revenue neutral means of encouraging the rich to spend their high incomes to take advantage of the deductions.

        In fact, economic growth from the increased spending would create jobs, allowing drastic cuts in government spending on social programs. I am no "big government" Democrat. I am pro-well-regulated capitalism.

        Keep money moving, within the private sector economy. Not in the hands of govt. Not taxes that discourage spending and allow hoarding of mass sums of money by a few.