![]() And it is the engine of our economy, especially now that we are in the throes of a recession. McCaffery: Funny, that's the most common question I get, and the one I use to start the Question and Answer section at the back of Fair Not Flat. Q: But isn't it dangerous to tax consumption? Spending is the engine of the economy isn't it? Rates keep going up, until families that spend more than a million dollars a year ($1,000,000) on themselves pay a total tax on their marginal purchases of 50%. ![]() For these relatively affluent families, this tax adds to the actual sales tax or VAT to get progressivity. As I said, only families of four spending more than $80,000 need pay this supplemental tax, and at rates starting at 10%. Then the upper middle and upper classes would fill out a "supplemental spending tax" form every April. McCaffery: Everyone would pay taxes on the things, or the goods and services that they buy. That latter change poses a huge and welcome simplification for most Americans: they'll no longer have to fill out tax forms or file tax returns. But the Fair Not Flat plan differs from that proposal in being more technically consistent and in substituting an actual national sales, or value added tax (VAT) for the lowest brackets of the tax. Yes, it is very similar to the Nunn-Domenici "USA" or "unlimited savings accounts" plan, proposed in Congress in the mid-1990s, and I give credit to that proposal in the book. Q: This sounds like the USA Tax plan that was proposed about seven years ago by Senator Pete Domenici and then-Senator Sam Nunn. And no one would be taxed directly on savings or investments. Necessities would be taxed less than ordinary and luxury items. Only the few families who spend more than $80,000 a year would be subject to the supplemental tax. Under the system I propose, a family of four would pay no tax on their first $20,000 in spending, and 10 percent on the next $60,000. McCaffery: A supplemental tax on spending for the wealthiest individuals would make the sales tax progressive. Q: But how does it work? What does it mean to have a progressive national sales tax? The wealthy can and should pay a bit more at the margins of their luxurious lifestyles. You can get almost all of the benefits of these flat tax proposalsin terms of simplicity, economic efficiency, and the fairness of the tax basewithout abandoning America's longstanding and sensible commitment to at least moderate progressivity in tax burdens. It won't raise tax rates on the middle classes to pay for tax reduction for the rich. McCaffery: My plan, the Fair Not Flat tax, is progressive. How does your proposal differ from theirs? Q: There have been a variety of proposals for a flat tax on incomefrom folks like Congressman Dick Armey, Senator Arlen Specter, and presidential candidates Steve Forbes and Jack Kemp. Until we fix that, we're stuck with a system that overburdens the working classes while letting the wealthy off scot-free. Worse, we can see in hindsight that the Tax Reform Act of 1986 mainly shored up the income tax's status as a wage taxit did nothing about the surprisingly simple ways in which the rich can avoid taxes. The income tax is still far too complicated, inefficient, and fundamentally unfair. But less than two decades later, we're right back where we started. This was a major piece of bipartisan legislationthe centerpiece of Ronald Reagan's second term as presidentand it did indeed close a vast array of loopholes and lower tax rates. Take, for example, the Tax Reform Act of 1986. Until we rethink that, tax reform is doomed. ![]() These all relate, as I explain in the book, to our obsession with taxing savings directly. McCaffery: If we try minor, ad hoc reforms just to close loopholes here and there, we do nothing about the deep, fundamental, and structural problems in the tax code. Can't we just reform it or close the loopholes in the tax code to make it more equitable? Q: OK, so the present system isn't fair to everyone. The wealthiest people in the United States with property pay little to no taxes today, while ordinary wage earners like you and me can't escape from paying high taxes, ranging from a third to half of our earnings! Add to that the tremendous complexity and inefficiency of our system, and you have what I take to be a disaster on your hands. To explain how badly broken it is, why it needs repair, and how we can make that repair happen. McCaffery: Well, yes, and that's a large part of the reason I wrote Fair Not Flat. But is the income tax system so broke that it needs a complete overhaul? Author of Fair Not Flat: How to Make the Tax System Better and Simpler
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