We CAN Move the Tax Mountain -- Here's How...

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By Patrick ColabellaCertified Public Accountant, Ed.D

Reading anything associated taxation brings a boring deer in headlights glaze to any reader's eyes but please, stay with me on this. All we hear nowadays as the alternative to the income tax is the hackneyed Flat Tax and Fair Tax. We don't hear of other alternatives because journalists don't really report on tax reform. Usually, around April 15th, they recite the gratuitous synoptic principles of these well-publicized non-workable models and just move on to the next story. They have a natural fear of dealing with this topic in depth as most of us do and judiciously hide ignorance of a topic. Americans feel they are hopelessly doomed to endure the income tax forever but it is just too complex a problem for us to ignore. The income tax is an immovable mountain deeply entrenched in our psyche. Can anyone think of another tax system that does not involve taxing income?

Is it proper for a democracy to have a tax law people just don't understand? We have evolved so far in every aspect of technology except for taxation. The income tax is an industrial revolution concept that has long since passed its functionality and sadly, mandatory education does not include "taxation" in its curriculum, so most of us are tax illiterates. Why that is so is not the issue. More important is how politicians abuse the complexity to socially engineer us and punish some, something King George tried to do in 1773. The income tax is the subtle master lever behind what is now becoming Socialist America. With the use of the earned income credit, the income tax is now shockingly a routinely used entry-level welfare entitlement. Interestingly, by the treasury's own calculations, abuse of the earned income credit costs the government over $6.5 billion in fraud annually.

My colleagues and I have formulated a better tax model. At the risk of boring you to death, this patriotic Web site is bravely bringing a new idea to your attention via the FOX Forum. It is called the "Withdrawals Tax." It was submitted to the President's Advisory Panel on Tax Reform several years ago but is reintroduced here to, it's hoped, start a dialogue for real change!

Briefly, the Withdrawals Tax is based on a single rate of tax that funds all levels of government, federal and local, collected by EFT on withdrawals from taxpayers' bank accounts, like an ATM usage charge or Easy Pass. The estimated tax rate is 5% but may be higher based on government budget needs; the rate would be adjusted by act of Congress. The lower tax rate is achieved by expanding the tax base but higher rates may be needed as budget needs arise. The tax is progressive and levied against individuals and businesses alike. This means there are a threshold and a graduated amount of withdrawal before you begin and as you pay the tax. Your paycheck will get deposited without income tax withholding. You can use all types of debt, tax-free. The loan repayments are taxed instead.

The tax essentially is a "back loaded" income tax on the vast sea of "consumption," which is considered by economists as the more precise measure of wealth. Based on a 5% rate an individual making $50,000 in New York would pay $8,325 in tax. If the entire amount were spent he'd pay $3,000 and infuse $5,325 into the taxpayer's spending power to fuel the economy. The downside is that the corporate tax may cause some prices of goods to rise, but not by much, because businesses are levied a "toll like" tax on all corporate expenditures making tax a fixed cost of capital recoverable in price of goods, much like a value added tax but without the onerous accounting associated with it. Securities trading is protected in this model but too involved to explain here. By automating tax collection, the entire public finance system becomes simple, less costly to administer, and more transparent. No, you will not be able to hide money in your mattress to avoid this tax. In fact, this tax captures the unpaid tax that is lost in the underground economy.

No tax returns need to be filed and the collection of revenue will be the same as the tax it replaces. Government can more effectively use this model to manage fiscal policy but not to socially engineer you. Also, if it were efficient for some states, this model can effectively eliminate cumbersome sales tax and estate taxes. In the end there would be enormous tax compliance savings but moreover we would realize a real human capital dividend by eliminating the endless painful effort and ongoing conflict between the government and its citizens in figuring and collecting taxes.

The income tax just has to go!