Plan to abolish the IRS could use refinement

  • By James McCusker
  • Friday, October 5, 2007 6:35pm
  • Business

The popularity of Congress has continued to decline to the point where it is difficult to find anyone who holds a favorable view of our lawmakers in Washington, D.C.

In that context, maybe we can be forgiven for misinterpreting a slogan. Automobile license plates in the District of Columbia bear the words, “Taxation without representation.” When first seeing one of the plates, our initial thought was that it meant drivers there are OK with being taxed; they just don’t want the added burden of being represented by senators and representatives. Given the popularity of Congress, it made perfect sense, in its own way.

We were mistaken, of course. The license plates are part of an effort to change the legal and voting status of the District of Columbia so that it more closely resembles a state … or something.

As is noted in Ecclesiastes, there is a time for everything. This is the perfect time for Congress to consider two issues that resurface with whalelike regularity: tax reform and statehood for the District of Columbia. These are not issues that have any real possibility of passage, so they are especially attractive to a Congress running on backup batteries.

The D.C. statehood issue lacks a real constituency outside the beltway and is probably going nowhere, again. But for both policy wonks and the media, tax reform has a particular attraction at this time because of the presidential campaign. With so many candidates crowding around, each searching for a signature issue, one or two might latch on to tax reform and give it visibility.

This season’s tax reform scheme is called Fair Tax and its core idea involves getting rid of the Internal Revenue Service, Congress’s only true rival for the most-despised title. And, sure enough, several candidates have expressed enthusiasm for the idea.

Essentially, the Fair Tax would get rid of income taxes and substitute a national sales tax. It is supposed to be revenue neutral in the sense that it would neither raise nor lower the amount of money flowing to the federal government. All that would change would be the method of collecting it.

Sadly, neither life nor economics is that simple. Even the origins of the Fair Tax idea turn out to be complex. It appears to be the outgrowth of a bitter dispute between the Church of Scientology and the IRS. When Scientology lost the argument, it came up with a way to make its enemy disappear — the Fair Tax.

In its current form, House Bill 25, the concept of making the IRS disappear is still the active ingredient in the Fair Tax idea. The proposal, which has over 60 co-sponsors in the House, begins with a litany of taxes, income taxes, payroll taxes, gift and inheritance taxes, etc., which would be eliminated.

Irrespective of its most recent origin, the idea of a national sales tax in one form or another has been around for some time. Most of the proposals in the U.S. have been modeled on the value-added tax that is popular with British and European governments.

The differences between a value-added tax and a sales tax are important, of course, but the fundamental economic question about the Fair Tax comes from a different source: the difference between income and expenditure. An income tax is applied to money that flows in; a sales tax is applied to money that flows out.

For many of us, of course, the amounts are identical. One way or another, every dollar that comes in seems to find a way to go out. Whether things would stay this way, though, if we were taxed only on what we spent, not what we earned, is a significant economic question.

A national sales tax would seem to encourage savings — discouraging spending by taxing it. How much it would reduce spending is unknown, though, and that is just one reason why the promise of its being revenue neutral is an empty one. Estimates of what the revenue-neutral national sales tax rate would be range from about sixteen percent to more than fifty percent — not a level of precision to inspire confidence.

Employers would welcome being relieved as tax-collectors-in-chief, certainly, and states are actually in a good position to collect a national sales tax. That said, there is no reason to assume that a sales-tax structure drafted and controlled by Congress would be any less complicated than our current income tax.

The Fair Tax needs a lot of work before anyone could take it seriously, and even more work before it could safely be turned loose on the economy. Of course, we could say that about Congress, too.

James McCusker is a Bothell economist, educator and consultant. He also writes “Business 101” monthly for the Snohomish County Business Journal.

Talk to us

> Give us your news tips.

> Send us a letter to the editor.

> More Herald contact information.

More in Business

A closing sign hangs above the entrance of the Big Lots at Evergreen and Madison on Monday, July 22, 2024, in Everett, Washington. (Ryan Berry / The Herald)
Big Lots announces it will shutter Everett and Lynnwood stores

The Marysville store will remain open for now. The retailer reported declining sales in the first quarter of the year.

George Montemor poses for a photo in front of his office in Lynnwood, Washington on Tuesday, July 30, 2024.  (Annie Barker / The Herald)
Despite high mortgage rates, Snohomish County home market still competitive

Snohomish County homes priced from $550K to $850K are pulling in multiple offers and selling quickly.

Henry M. Jackson High School’s robotic team, Jack in the Bot, shake hands at the 2024 Indiana Robotics Invitational.(Henry M. Jackson High School)
Mill Creek robotics team — Jack in the Bot — wins big

Henry M. Jackson High School students took first place at the Indiana Robotic Invitational for the second year in a row.

The computer science and robotics and artificial intelligence department faculty includes (left to right) faculty department head Allison Obourn; Dean Carey Schroyer; Ishaani Priyadarshini; ROBAI department head Sirine Maalej and Charlene Lugli. PHOTO: Arutyun Sargsyan / Edmonds College.
Edmonds College to offer 2 new four-year degree programs

The college is accepting applications for bachelor programs in computer science as well as robotics and artificial intelligence.

FILE — Boeing 737 MAX8 airplanes on the assembly line at the Boeing plant in Renton, Wash., on March 27, 2019. Boeing said on Wednesday, Feb. 21, 2024, that it was shaking up the leadership in its commercial airplanes unit after a harrowing incident last month during which a piece fell off a 737 Max 9 jet in flight. (Ruth Fremson/The New York Times)
Federal judge rejects Boeing’s guilty plea related to 737 Max crashes

The plea agreement included a fine of up to $487 million and three years of probation.

Neetha Hsu practices a command with Marley, left, and Andie Holsten practices with Oshie, right, during a puppy training class at The Everett Zoom Room in Everett, Washington on Wednesday, July 3, 2024. (Annie Barker / The Herald)
Tricks of the trade: New Everett dog training gym is a people-pleaser

Everett Zoom Room offers training for puppies, dogs and their owners: “We don’t train dogs, we train the people who love them.”

Andy Bronson/ The Herald 

Everett mayor Ray Stephenson looks over the city on Tuesday, Jan. 5, 2015 in Everett, Wa. Stephanson sees  Utah’s “housing first” model – dealing with homelessness first before tackling related issues – is one Everett and Snohomish County should adopt.

Local:issuesStephanson

Shot on: 1/5/16
Economic Alliance taps former Everett mayor as CEO

Ray Stephanson will serve as the interim leader of the Snohomish County group.

Molbak's Garden + Home in Woodinville, Washington will close on Jan. 28. (Photo courtesy of Molbak's)
After tumultuous year, Molbak’s is being demolished in Woodinville

The beloved garden store closed in January. And a fundraising initiative to revitalize the space fell short.

Everett Mayor Cassie Franklin, Advanced Manufacturing Skills Center executive director Larry Cluphf, Boeing Director of manufacturing and safety Cameron Myers, Edmonds College President Amit Singh, U.S. Rep. Rick Larsen, and Snohomish County Executive Dave Somers participate in a ribbon-cutting ceremony on Tuesday, July 2 celebrating the opening of a new fuselage training lab at Paine Field. Credit: Arutyun Sargsyan / Edmonds College
‘Magic happens’: Paine Field aerospace center dedicates new hands-on lab

Last month, Edmonds College officials cut the ribbon on a new training lab — a section of a 12-ton Boeing 767 tanker.

Gov. Jay Inslee presents CEO Fredrik Hellstrom with the Swedish flag during a grand opening ceremony for Sweden-based Echandia on Tuesday, July 30, 2024, in Marysville, Washington. (Ryan Berry / The Herald)
Swedish battery maker opens first U.S. facility in Marysville

Echandia’s marine battery systems power everything from tug boats to passenger and car ferries.

Helion Energy CEO and co-founder David Kirtley talks to Governor Jay Inslee about Trenta, Helion’s 6th fusion prototype, during a tour of their facility on Tuesday, July 9, 2024 in Everett, Washington. (Olivia Vanni / The Herald)
State grants Everett-based Helion a fusion energy license

The permit allows Helion to use radioactive materials to operate the company’s fusion generator.

People walk past the new J.sweets storefront in Alderwood Mall on Thursday, July 25, 2024, in Lynnwood, Washington. (Olivia Vanni / The Herald)
New Japanese-style sweets shop to open in Lynnwood

J. Sweets, offering traditional Japanese and western style treats opens, could open by early August at the Alderwood mall.

Support local journalism

If you value local news, make a gift now to support the trusted journalism you get in The Daily Herald. Donations processed in this system are not tax deductible.