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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 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…

          Oops!

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