It’s Time for Sanity in the Tax System


Today I am going to take a break from the normal stock investing advice and turn to an issue that should be of concern for most Americans, and that is the complexity of the tax system.  This is not a discussion of who should pay taxes, or how high taxes should be, or anything of the like.  This is just about the complexity involved in trying to comply with the current tax system and all of the time and money wasted in that effort.  This is very relevant to the subject of stock investing because there are many little maneuvers that investors do that have no other purpose than to reduce taxes.

Whether a Conservative, a Liberal, an Authoritarian, or a Libertarian, I’m sure that most people would agree that far too much time is spent on compliance with the current system.  Even Albert Einstein commented that there was nothing more difficult to understand than the income tax.  Companies need to have whole departments whose sole purpose is to work through the paperwork for withholding and tax compliance.  Many companies also have whole departments who determine which actions the company should take to reduce taxes.  Many business decisions made, including which state or country in which to locate factories and the headquarter, when to make various acquisitions or sales, and at times even which business lines to go into are heavily influenced by tax considerations.

On a personal level, we spend all year keeping receipts, setting up medical and child care accounts, tracking business expenses, and then filling out mounds of paperwork that the IRS can’t even fill out correctly to determine our taxes.  Why are we spending all of these hours performing these tasks that no one wants to do instead of spending that time with our families or doing hobbies we enjoy?  There should be a better way, and there is.

The alternative is called the Fair Tax.  Information can be found here: http://www.fairtax.org/site/PageServer .  The Fair Tax removes all of the hassle involved and would save millions (perhaps billions) of wasted dollars each year by eliminating all of the expense of tax compliance and tax avoidance.  It would also greatly reduce the cheating that goes on.

The essentials of the Fair Tax are as follows:

1) Everyone receives a standard “Prefund.”  This is a certain amount of money that is paid to each citizen at the start of each year.  For example, each individual would receive $15,000 at the start of the year.  This would cause those at lower-income brackets to pay less in taxes or even pay no taxes at all since the taxes they would pay would be covered by the prefund.

2) A flat sales tax would be charged on all goods and services.  It is estimated that the flat rate would be in the neighborhood of 25%, but realize that many prices would drop by a corresponding amount because all of the business taxes and costs of business compliance would be removed.  Also realize that most people pay in the neighborhood of 20% of their income out in taxes – this would only be 25% of the amount an individual spends.  Those who save would pay lower taxes than those who spend, encouraging saving and personal responsibility.

Advantage are as follows:

  • There would be no income tax forms.  There would be no IRS.  There would be no need to set up IRAs and medical Savings Accounts.  There would be no need for tax preparers.  No one would need to spend any time worrying about paying taxes, it would all be done automatically with each purchase.
  • Everyone would pay taxes for all money spent.  This means that the sales clerk, the business executive, and the drug dealer would all be paying taxes. 
  • All of the dollars that are currently held overseas by corporations would be brought back into the United States where they could be spent on new factories and business lines, expanding businesses and creating more jobs.
  • It would be far simpler to start a business since the complexities of complying with the tax code could be removed.  Individuals could spend their time working on growing their business rather than filling out forms.  How many businesses were not started, and therefore never became a large business with hundreds of employees because someone with a great idea gave up when faced with the complexities of tax compliance?

If this sounds like a good idea, check out the website and tell a friend.  For those who would rather spend their time filling out tax forms and jumping through hoops to reduce taxes, my sympathies to you.

Comments appreciated! What are your thoughts? Questions?

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