Sunday, February 06, 2005

Flat Tax vs VAT

1) Toni made a comment to the previous post (Hi, Toni!!!) about flat tax versus consumption tax. I'm leaning toward flat tax. As a commission salesman by day, I know how hard it is to be the entrepreneur! We always get paid dead last! Only after everyone else is satisfied does the bill get paid and I get my commissions. So when I made an observation about the timing of Value Added Tax (VAT) payments, it stuck out as another impediment to the entrepreneur. The government wants its tax money up front!
Consider the lowly newspaper route. You have to pay the VAT, in full, for everybody in the chain production chain who went before you, before you make your first dime! Then you deliver the papers and wait until the end of the week to attempt collection. Then you try again and again until old man Scrooge finally coughs up what he owes you! You get to keep what's left after bad debts etc for your profit. Then you file your income tax and pay off Uncle Sam last! He has to wait. In Europe, the entrepreneur has to carry the burden of the government on his balance sheets out of his own pocket! Is it any wonder that entrepreneurship in Europe is low?
2) My prepay your mortgage private Social Security Account has another advantage. It helps poor individuals build net worth. That makes them more creditworthy. Which gets them lower interest costs on borrowing. Which increases cash flow. Which makes them richer, faster. For example, they use the added equity in their home to get a home equity loan that they turn around and use to pay off the high cost credit card debt. Whammo! They lower their monthly bills and get to keep more of their own money at an effective savings rate of 18% APY! Tax fairness for all! Power to the poor people! Cool huh!!! DO YOU THINK THE POOR AND THE MTV GENERATION ARE GOING TO LOVE PERSONAL ACCOUNTS?
Update 2/6/05 6:44 AM - More food for thought from the letters to the Editor in today's Chicago Sun-Times

A cure for Social Security
Congress should give serious consideration to the president's proposal to create an optional system of personal retirement accounts. A modest system of personal accounts could increase retirement wealth and could help bridge the gap between rich and poor (by giving low-income workers a chance to bequeath assets to their children).
However, we also need to eliminate some of the ''sacred cows'' of the Social Security system.
We need to stop shifting extra benefits to affluent workers with stay-at-home spouses. Spousal and survivor benefits are extra benefits because they are acquired through marriage -- not by the payment of Social Security tax. ''Means testing'' those extra benefits (to eliminate them for the wealthiest 30 percent of workers) could eliminate up to 60 percent of the actuarial deficit.
About 5 million state and local government workers are exempt from Social Security tax. By simply requiring the newly hired government workers to join Social Security, we could eliminate about 11 percent of Social Security's pending actuarial deficit.
The current method of taxing benefits is illogical, inequitable and confusing. If we start taxing Social Security benefits in the same way we tax other pension benefits, as much as 24 percent of the actuarial deficit could be eliminated.
We no longer require disabled beneficiaries (below retirement age) to get vocational rehabilitation. This is one reason Social Security disability costs are soaring.
Joseph Fried, Cleveland


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