ASSOCIATION
FAIR TAX

Fair Tax vs. Flat Tax

Is the Fair Tax a fair tax? If President Bush gets his way, profound new changes to the tax code will be implemented. How will that affect traders?

Here is the original writing by Robert A. Green, CPA, for his article in Active Trader magazine published in February 2005. See an update on FairTax in Robert Green's December 2005 article for Active Trader.

The GOP has taken control of the White House and both houses of Congress and they are talking about a mandate received from voters (both the popular vote and electoral college) to pass the initiatives they proposed and stood for in their campaigns.

The GOP is on a roll with tax reduction and reform
A significant part of the GOP agenda is tax reduction and reform.

In President Bush’s first term in office, the GOP passed important tax reduction legislation, even in the face of a divided Congress (with no clear GOP majority).

In 2003, the highest “progressive” income tax rates were reduced to 35 percent on ordinary income and 15 percent on long-term capital gains.

Qualifying dividends were treated like long-term capital gains at the lower 15-percent rates. This gives companies an incentive to pay out dividends to reward investors, so investors have another profit alternative besides having to sell shares.

The GOP agenda has consistently been to take money out of government hands (coffers, programs and plans) and to turn over these funds to the American taxpayer, our consumers and investors. The GOP believes that individuals and the private economy can better deliver products, services and now savings than big government can.

The Democrats believe that big government is good and that private businesses tend to be corrupt. The GOP thinks the reverse. Railroads were built by the government and they all failed because of corruption. The Great Northern built by Henry Hill was all privately financed and it was the best railroad ever built.

This debate goes far beyond taxes; it goes to health care, social security and beyond
The GOP wants to “privatize” health care with its new “Health Savings Accounts” (HSAs) and “Health Reimbursement Arrangements” (HRAs).

Rather than the privileged having third parties pay their medical costs through health-care insurance and the unfortunate fending for themselves against fast-rising health-care costs, the GOP wants many Americans to partially self-insure with tax advantages from government. The GOP believes that if Americans are given the proper tax incentives they will self-insure and, once in control of their own health-care monies, will spend more frugally on health care and have sufficient savings to take care of their own needs.

Health care is one of the fasting growing budget busters and the GOP thinks these new programs will help.

If the government scraps the income tax code for a national sales tax, won’t the tax incentives for HSAs and HRAs disappear?

The GOP is now suggesting the same type of self-insuring or privatization for social security. Rather than pay into the government's social security trust funds and get a low rate of return with great government administration cost (reduction of those funds), taxpayers should set up their own social security investment accounts. This is an extension of the HSA reasoning above.

So far all these proposals are good for traders
Instead of paying insurance companies and the social security administration funds you may never get back, traders can take control of these funds in their own accounts and, when allowed, invest them prudently.

Traders know how to invest funds and, in general, can probably get better returns than the government.

But the GOP is not resting on tax reduction; they are talking now about repealing the income tax code. Some traders will come out better off and some worse off.

Fair or Flat Tax; what’s your preference?
The GOP thinks that income, estate and gift taxes are unfair and that’s why they titled their new national sales tax idea a “Fair Tax.”

The idea was floated in the summer of 2003 and has gone on the back burner since. This writer thinks the Iraq war and election debates buried it, but now that Bush has been re-elected with a perceived mandate, this writer expects it to rise again into the national tax debate.

The GOP also invented the “Flat Tax”, which is an idea that’s been around for decades and has been mostly advocated by people such as Malcolm Forbes Jr. of Forbes magazine. Flat tax means do away with progressive tax rates; that system means that lower income people pay a lower tax rate and the rates progressively increase to the maximum highest rates on the rich.

In the 1970s, the highest progressive tax rates were 70 percent, certainly an amount that dissuaded taxpayers from working harder. It also encouraged many taxpayers to avoid taxes with tax shelters and other schemes.

The Reagan revolution advocating “supply side economics” drastically lowered tax rates and, as a result, many tax shelters were legislated out of business (passive activity loss rules, mark-to-market accounting on commodities per IRC section 1256).

Congress left much of the income tax code in existence and just tinkered with it, so whoever took control in the future (Dems or GOP) could raise or lower rates more as they liked.

The GOP wants to either lower the rates even more with a flat tax or scrap the tax code entirely and replace it with a sales tax.

Flat tax has been on the table for decades and it’s never shown much promise in being passed. It looks, feels and smells like a giveaway to the rich without much help for the less fortunate.

The GOP did succeed in 2003 with top-rate reduction because it was accompanied by rate reduction across the board for all taxpayers and it also took millions of poorer taxpayers off the tax rolls entirely.

Flat tax also has an ugly underside that does away with popular tax deductions, especially the type of deductions favored by America’s great middle class. Specifically, home-related deductions (real-estate taxes and mortgage-interest expenses). Cave into that home lobbyist group and the other groups cry foul (charitable and states).

So flat tax will be construed as class warfare and the GOP can lose on that point. Better to fight it out on what’s fair for all taxpayers – yes or no to an income tax.

Carl Rove, President Bush’s architect for election success, has been very successful in drawing the black and white lines around important issues of the day. You were for Bush or the enemies; you were for values or vice; and now you will be for the income tax or repeal of it – along with all the financial scandals caused by tax cheats and their high-priced CPAs and attorneys.

There are no bills for Flat Tax in Congress but there are two matching bills for the new Fair Tax in both the House and Senate.

Plus, Bush has been already selling the Fair Tax concepts during his campaign and days in office afterwards. Bush is not alone; several key GOP members of Congress (some in committee leadership roles) are also on the Fair Tax bandwagon. One thing we all learned from President Bush in his first four years is that he is a man of his word. He does what he says he will do, he is a man of conviction and principal, he likes to keep things simple and fair, and Fair Tax plays into all these hands.

What happened to the Flat Tax initiatives? They have been a trial balloon for a long time.
Flat tax never passed, but the trial balloon has helped reduce top progressive tax rates from more than 70 percent to half that amount.

To some extent, flat tax can be considered to have been achieved already. Now the GOP wants to go much further, with far greater reform, in the form of the Fair Tax.

“Flat tax” refers to flatter or one flat income-tax rate(s), replacing the current system of graduated (or progressive) income-tax rates on the next higher-level of marginal income.

Progressive tax rates are considered a liberal idea. The concept is that richer people should pay more than others and so forth down the income strata line.

In political duels, the GOP is known as the party of the rich bent on lowering tax rates for the rich.

Individual rates are currently the same as corporate rates – both max out at 35 percent. The Bush goal was to limit tax cheating between individuals and corporations, and having the same rate helps in this regard.

To date, flat-tax proposals also include the discontinuance of many popular tax deductions, most of which are the main tax deductions for the middle class. Flat tax does not threaten business, since the flat tax is assessed on net income, which is revenue minus cost of goods sold and minus expenses.

Flat-tax proposals are always shot down when the discontinued deductions are brought to the surface. These deductions include itemized deductions which include state income taxes, real-estate taxes, mortgage-interest expenses, investment-interest expenses (business traders deduct this on Schedule C), charitable deductions and miscellaneous expenses (where employees deduct expenses).

That’s why the Bush GOP seems to be talking up Fair Tax over Flat Tax, but are they one in the same – a wolf in lamb's clothing?

Flat Tax is just not politically correct. It appears to be a tax cut for the rich and it attacks the cherished tax deductions of the middle class.

Tax rates drop, but not that much to affect the middle class, and by taking away all the middle-class tax deductions, their effective tax rate is increased and the net effect may cost them more.

Is the Fair Tax a trial balloon to sell other tax reduction plans, or will it truly fly?
Fair Tax (national sales tax) legislation has been introduced in both houses of Congress (H.R. 25 “Fair Tax Act of 2003” introduced in the House and S.1493 “Fair Tax Act of 2003” introduced in the Senate).

Google “Fair Tax” or learn about and read both bills in Congress at www.salestax.org (click Sales Tax, Legislation and then each bill respectively). Stay abreast of developments at U.S. Representative John Linder’s (R-GA) Web site.

Here’s the big question: Is the GOP bent on Fair Tax as the bill exists now or is the GOP using Fair Tax as a bargaining tool to push the Dems to accept more of their tax reduction and privatization strategies for health care, social security and the investor class?

Bush’s GOP has already scrapped the estate tax code as of 2010 with phase-outs until then and a sunset provision to bring the estate code back in 2011.

Maybe Fair Tax talk can help do away with the sunset provision and the GOP can succeed in scrapping the estate tax code first, saving the income tax code.

Next the GOP will probably try to reduce the highest progressive tax rates on ordinary income even more, which if brought down to a low enough point will be tantamount to a flat tax rate success. This can happen without attacking home and charitable deductions – a non-starter for sure.

The Bush GOP can also succeed in privatizing social security and Medicare insurance by expanding on health-savings accounts (to replace Medicare) and social security savings accounts.

Finally, Bush can succeed in repealing income taxes on portfolio or investment income.

That leaves an income tax code on business, employment and other earned income. If nothing else is accomplished, that is a historic amount of change by itself.

It makes America a tax-free investment zone and it may attract foreigners in record numbers to invest in American markets and finance America’s deficit.

Speaking of tax-free countries, imagine if America did entirely scrap its income tax code; rich foreigners would move to America in record numbers (and they would be welcome by immigration) and move their businesses with them.

Would the European Union cry foul over tax policy? You bet they would, with their social welfare states and income tax rates of more than 50 percent on many of their taxpayers. Bush’s GOP would say wake up you blue countries and smell the red-state tax smarts.

If a plethora of rich people live in America and luxury goods are plentiful the budget will go back to a surplus in short order with a national sales tax. It’s easy to evade taxes with international financial engineering (offshore companies, etc.), but it’s hard to take delivery of a luxury car in America without paying the sales taxes. Income and money are fleeting, hard assets subject to sales tax are not, especially with homeland security on the uptick.

Remember, most successful banks in America (the ones that have American flags in their lobbies on every major street corner of America) evade taxes in the billions by moving funds around the world faster than you can read this sentence.

Tax cheating is turning the stomach of President Bush and his moral majority crusade. Think of it as values coming to the tax scene.

It's one thing to write this all off as fantasy and assume it will never happen. But can you really afford to allow the simple red state mentality and values to crush your tax plans?

OK, you scared me or got me excited about Fair Tax. What plans should I make?
Whether Fair Tax is Flat Tax on steroids, a bargaining tool for more Bush tax cuts including privatizing of health care and social security, or a realistic plan, traders need to trade around these trial balloons and plan their own taxes accordingly.

One thing to count on for sure is that Bush’s GOP control of Congress will push hard and soon for privatizing social security and health care and for lower tax rates.

As long as the income tax code remains in effect, Bush’s GOP should continue to be tax-friendly towards business, the securities and commodities markets, traders and investors.

Traders and investors want lower tax rates on trading gains. Bush lowered the long-term capital gains rates to 15 percent and included dividends in those rates, and we expect more of the same here. These rates may be reduced even further – even down to zero, as stated above.

IRC 475 mark-to-market (MTM) accounting is a great tax benefit for business traders; it's mostly suggested for securities traders, since they don’t benefit from IRC 1256 60/40 tax treatment for commodities and futures traders (see below). IRC 475 MTM gives business traders ordinary loss treatment, which unlocks huge potential tax refunds vs. unutilized capital-loss carryovers. We don’t see any threat to these rules unless the entire income tax code is repealed.

But we can’t say the same for precious 60/40 tax treatment (see below).

Business traders save lots in taxes with business deductions, including home-office, education, travel, entertainment, supplies, services of every kind and more. We don’t see any threat to business deductions with any of the income tax code tinkering ahead. Yes, if the code should be scrapped, business deductions become a moot point.

What’s going on with 60/40, the lower tax rates on commodities and futures?
Commodities and futures traders (and forex currency traders who elect out of IRC 988) pay lower tax rates than securities traders, who pay the progressive tax rates on ordinary income (because short-term capital gains are taxed at ordinary income tax rates).

Commodities/futures traders are subject to IRC 1256 treatment which means that 60 percent of their gains (no matter the holding period; they are marked-to-market at year end) are considered long-term capital gains taxed up to 15 percent and the other 40 percent are taxed at the ordinary tax rates. Do the math: 60 percent * 15 percent and 40 percent * 35 percent means the highest blended rate is 23 percent. That’s a material 12-percent less than 35 percent on short-term securities trading gains and ordinary income.

During the last-minute conferences between the Senate and House in crafting the 2003 Bush tax cuts, the Senate wanted to repeal 60/40 tax benefits for commodities and futures traders. Illinois members of the House, prodded by the Chicago futures exchanges, succeeded in fighting off the Senate conferees and saved the day on 60/40.

Congress seems bent on MTM for securities, since wash sales and straddles lead to tax cheating and they are almost impossible for the IRS to effectively police.

The securities and futures exchanges are competing viciously for new business with new instruments, and the Commodity Futures Modernization Act (CFMA) of 2000 did not resolve all battleline issues.

The Senate tried to repeal 60/40, but if you mesh the Bush GOP agenda with a push to put securities and futures markets on equal footing, it’s a better idea to give 60/40 to all traders. That would be a boon for securities traders.

But what would that do to IRC 475 decisions? Ordinary gains and loss treatment trumps 60/40 benefits. Remember, IRC 1256 allows a three-year carryback of 1256 losses but only against 1256 contract gains.

How will these new tax initiatives affect the markets?
In this writer’s opinion, these Bush GOP tax initiatives will improve rather than make the budget deficit even worse. However, the Dems will cry wolf and parade the Robert Rubins of the world around to say the deficit will get much worse.

True supply side economic advocates think that lower tax rates (or no tax rates) can improve the economy and government coffers. These initiatives reduce government expenses considerably with privatization, and sales taxes can bring in tons of revenues with our consumer-driven economy.

A 23-percent extra cost in the price of goods and services can be made up with price deflation caused by Asian and Internet competition. The EU countries double the price of their gas with national sales taxes, and that’s much higher than 23 percent. But it doesn’t stop demand. Perhaps this is even where the Bush GOP got its latest ideas. Bush knows oil and gas markets well enough.

America will become the place to live and work and a rich/brain drain will occur in the EU and Asia, with rich people and their businesses moving to America. That will create millions of new American jobs. The American consumption economy will increase significantly, and that will raise government revenues.

Public companies, taxed as C-Corps on the entity-level, will save all these taxes and their rates of return will immediately climb up to 35 percent, the top corporate income tax rates. Companies will no longer have tax incentives to outsource and go abroad and not repatriate their profits. That all led to lost American jobs and less consumption in America, a double whammy for the American economy. Public companies all around the world will merge with American public companies and/or move to America. Germany and France can already hear that sucking sound and German Chancellor Schroeder and French President Chirac won’t find a helping hand with Bush when they cry foul. Daimler Chrysler could be based in Detroit.

It’s time the EU wakes up and realizes its taxing policies are its downfall and America is again leading the world in terms of concepts for change. Ireland won’t buckle under pressure from Brussels and it will remain a tax haven and the fastest growing economy in the EU.

But be careful. Remember, fair tax may only be a trial balloon. The good news is that with fair tax, flat tax, or exemption of tax on investment gains and lowering of the corporate and individual taxes, it’s all good for the economy and budget. The Dems just don’t get it.

Think of this all as a vacuum cleaner with a great sucking motion. Budget deficits hurt the dollar and that sucks money out of the U.S. and back to Asia. Higher taxes suck rich people and companies out of the U.S. Lower tax rates or scrapping of the income tax will suck rich people and jobs back into America.

Supply side economics with lower tax rates fixed the American economy in the early 1980s and it helped fix the budget deficit. Remember those high tax hawks who claimed otherwise? They are in the dust bin of history now.

Give Bush and the GOP a chance and don’t let the media elites who don’t know beans about taxes dominate the bully pulpit of change.

The Dems say high taxes are the high moral ground and how a kinder and gentler society progressively helps the poor and less fortunate. Robin Hood takes from the rich and gives to the poor. That’s class warfare and Robin Hood is either a hero or a villain.

But is it moral for the government to take half of your profit from hard work and invest it in the big dig of the Dems so they can pass it out among cronies and never let it wind up in the hands of our school children and people in need?

Is it moral for the Dems to preach about the horrors of outsourcing jobs one minute and then shop in Wal-Mart, buying everything made in China, the next? Doesn’t the latter cause more outsourcing? Not that outsourcing is a bad thing.

OK, enough preaching, what’s the bottom line?
Traders, get ready for the tax wars to begin. Bush’s GOP is on a roll and we can expect all of the above to commence at once. The blue state media elite will cry budget-busting foul and the markets may be volatile – just what traders want.

If the Bush GOP succeeds, that should lead to higher stock prices in general (as long as other bear market forces don’t trump them).

60/40 should be safe to survive – maybe securities traders will get 60/40, too. Business expenses will survive, but can long-term tax plans change?

Herein lies the biggest problem. What Bush and the GOP do today – scrapping the tax code or not, which may even require a Constitutional amendment – can all be turned back upside down if and when the Dems take control of Congress and the White House again. Sort of like selling the GOP short when the price runs up too high. That will be a good trade, so keep your tax planning horizons short, too.

A Fair Tax may be unfair for traders with (income) tax loss carry forwards
Remember that almost half of all active traders lose money, and most therefore don’t owe any income taxes at all.

Losing traders qualifying for “trader tax status” (business treatment) who timely elected IRC 475 mark-to-market accounting may apply their ordinary business expenses and losses against all other types of income, including from their spouse on married filing joint tax returns.

Negative losses translate into “net operating losses” (NOLs) which may be carried back two tax years and/or carried forward 20 tax years.

But what happens when the musical chairs game music stops? If Congress does repeal the income tax code, all your NOL and capital-loss carryovers may be permanently lost tax benefits. That surely would not be a Fair Tax effect.

There a millions of Americans still holding huge capital loss carryovers and NOLs related to the bear markets of the early 2000s and permanently trashing their tax loss carry forwards would save the Treasury billions of dollars.

This brings to mind an old maxim: Always be a little suspicious of change and who it benefits the most – the party bringing the change or the one affected by it?

A true Fair Tax would allow loss utilization first, or as a special clause. I don’t believe this type of clause exists in the current versions floating in Congress.

Yes, if you repeal income taxes you don’t need a mechanism to average out taxes over three (or 20) tax years, as the NOL does for the current income tax code. But where do you draw the line on change and why leave taxpayers holding the bag on unutilized benefits?

A simple fix: Allow business traders and even investors to deduct all trading and capital losses in full before the income tax is repealed. And allow unutilized losses to be carried back two tax years. I highly doubt Congress will do this, because it will cost a fortune and I suspect this is one of the clear benefits to changing the rules in mid-play.

Compare traders under income tax vs. Fair Tax systems.
Most traders spend between $5,000 and $30,000 per year on computers, equipment, furniture, supplies, books, various trading services and other business expenses – all which would be subject to the national sales tax.

In addition to business expenses, traders spend varying amounts on personal and family expenses. Assume one spends $100,000 per year on business and personal expenses. That total multiplied by 23 percent equals a national sales tax of $23,000.

The current Fair Tax bills include a “family consumption allowance.” To preclude any citizen from paying the Fair Tax on the basic necessities of life, a rebate check is sent (in advance) each month. Also called a "prebate" check, the amount of the rebate is determined by family size (not income). The annual prebate for a single person is $2,141 and $2,873 for a family of two.

So, figure the Fair Tax will cost the above trader around $20,000 per year.

Let’s compare the national sales tax to the income tax.

For the above trader to generate sufficient income (and pay income taxes) to have available $100,000 for spending (without using savings), that trader may need to report income of about $130,000. With itemized deductions and exemptions, that trader may also pay around $20,000 in taxes. So this seems to be a parity point for the above example.

If this trader loses money, then he would pay zero tax and the national sales tax would cost much more. Of course, the trader would probably have to spend less, which brings up an interesting point.

Isn’t this another problem of musical chairs? Savings in the past were subject to income taxes and now when used for spending, they will be taxed twice. There should be an exemption for that, but how to craft and administer one seems impossible.

If traders makes twice the income but spend the same amount and save the rest, they will come out way ahead with a national sales tax. Plus they will get a double benefit, because income on savings will also be tax-free.

Our country is averaging more net debt then liquid savings, so most Americans will come out ahead here. Making money to pay back debt will be tax-free, and paying off debt will not be subject to sales tax.

Will savers rush to spend on consumption to avoid the new national sales tax before it passes? It certainly seems tempting and only “fair” and that can be another reason why the GOP likes this new tax idea – like an immediate tax cut benefit to the economy.

Of course these are all the details that will be debated in crafting the final bills to make them truly fair for all. Remember how tough it was to discuss debate and pass “tax-free dividends?” It winded up being a tax-reduction rate only and the devil was in the details.

Will your tax headaches go away and can you save money on accountants and lawyers?
A tax based on sales (your purchases) rather than on income would change your accounting needs drastically. Few taxpayers account for their state sales taxes and most would also opt to skip tracking of their national sales taxes.

So most traders could skip having to worry about how much they make or lose trading and rely on their brokers for proper reporting – just like most Americans rely on their banks, and errors are very infrequent. It might be wise for some traders to continue reconciling trades with their brokers.

Money managers would still need to keep good accounting, since they owe investment activity reports to their investors.

Caution! Let’s hope that gross proceeds on securities or commodities sales are not subject to the sales tax, which of course would have to be at a far lower rate. I have not heard any talk of this. For example, Nevada has floated a tax on securities gross receipts and that could chase traders out of Nevada.

Will state sales tax cheats use similar tricks to avoid the national sales tax?
Cheating on sales tax has become widespread in America.

The most famous recent sales tax avoidance case is Dennis Kozlowski of Tyco International; he was indicted by the state of New York for failing to pay sales taxes on very large purchases of artworks.

Millions of Americans, knowingly or inadvertently, cheat on sales taxes every day by purchasing goods over the Internet. If you live in a sales tax state and purchase goods over the Internet from a vendor without “nexus” in your home state, that vendor may not charge you sales tax. Nexus is defined differently in each state, but in general it means a vendor must have a presence in your home state such as an office, employees, assets or a sales organization.

Few Americans realize that if they avoid sales tax, they still owe “compensating-use” tax and they, rather than the vendor, are responsible to pay their taxes. It's sort of like a broker not reporting income on a Form 1099, but the trader still being responsible to pay income taxes on that income, under the current tax regime.

Goods move freely between states in intrastate commerce, but goods don’t move freely between most countries. Many vendors will seek to move offshore, not to avoid income taxes (in fact the ones who moved offshore for that may move back to America) but to avoid sales tax by doing away with nexus in the U.S. This can undermine the benefits of a national sales tax mentioned above. I am sure the current bills and future drafts will focus in on this issue in a major way. Don’t count on cheating on sales tax.

States have been cracking down on sales tax cheats with great success. They simply get the mailing lists of the vendors who don’t charge sales tax and ask them for a list of their assets or show up at the doors to investigate. They ask for proof of sales tax being paid or you owe the compensating-use tax plus penalties and interest.

Will blue, high income-tax states follow the new federal rules (and repeal their income tax regimes)?
Do we have another constitutional-level fight brewing?

Historically, almost all states base their own income-tax systems on the federal standard. For example, most states start with federal adjusted gross income (AGI), add a few of their own special modifications and then simply apply their own tax rates.

Some states have already repealed an individual and/or entities income tax. For example, Texas (Bush’s home state), Washington, Nevada, Delaware and Florida have no individual income tax.

These states make up for that revenue with sales taxes, and Texas and Washington have taxes on all entities (even pass-through entities set up for federal purposes).

In the last round of tax cuts, the 2003 (Bush) Tax Act, many states refused to agree with all the tax cuts. California, New York, Massachusets and some other states did not pass the new bonus depreciation rules, requiring a modification addition for those extra depreciation deductions.

California froze NOLs. There are many other examples as well, too long to include in this article.

What’s important to understand is that states are acting up against the federal tax makers and not just the blue states.

How will the states react to repeal of the income tax, especially by constitutional amendment? That will make gay marriage constitutional amendment discussions seem like small change (and it's not).

Can states keep in place their own income-tax regimes? Won’t that burden taxpayers with two systems, and undermine the concept of reform?

Will states get a share of the national sales tax? Will states escalate their own sales taxes and compete against the national sales tax? This doesn’t sound good and a war of words and action seems evident.

One goal of scrapping the income tax code is to simplify the tax code and do away with overly aggressive professionals and taxpayers who seek to pay less than they should. If states still keep the income tax code, taxpayers may have to deal with two taxing systems and still seek to avoid income taxes.

A flat tax will deny state income tax deductions which will hurt high-taxing states such as California and New York. Will this be construed as another red state attack on blue states?

How about just reforming the current income tax code?
Is it fair to tax only certain types of income and not others? If you tax income, shouldn’t it be net income after all fair deductions? How can you give preference to one type of deduction over another?

Fair? Maybe not. But fiscal policy and pork-barrel politics, yes. This is the ballyhoo of government in America and don’t count your (Tyson tax-break) chickens on tax reform until they hatch.

Throw out the idea of a postcard (simple) tax return; that could only be feasible for W-2 employees. But employees will cry foul if they lose their precious deductions for their homes.

Business should be kept on a level playing field. That means revenues minus costs’ of goods sold minus expenses equals net income for all businesses, manufacturer or trader alike.

We are all for closing tax loopholes and ending special tax breaks for special interests. While you are at it, why not cancel the ability of lobbyists to influence Congress to such a great degree?

For that matter, why not do away with pork-barrel politics altogether and not allow Congressmen to push through special tax breaks for their constituents? This all sounds great in sound bytes and by design, but is it the American way, where the huckster, entrepreneur and every man for himself attitude prevails and helps us all succeed. Isn’t the current system of business, consumer, special interest, lobbyists, pork barrel politics and fiscal income-tax policy all part of the American way? The answer is yes, but there is still room for some of these new ideas and America succeeds best by reinventing itself. Call it the creative destruction of the American taxing system. Let Bush and his GOP bomb throwers cause some havoc in the system and reform it!

But it doesn’t do anyone much good, except CPAs and tax lawyers, to change the system and change it again soon thereafter. If the realities of tax tinkering (fiscal policy and pork-barrel politics) are too strong, then skip this round of reform.

Congressmen run for office by catering to the special interests of their home state and districts, which may include a special business interest. Congressmen out of office often become lobbyists and the revolving door of tax benefits goes on forever.

Bottom line
Sit back and enjoy the show. Bush and the GOP have the bully pulpit and tax, health and social security reform are on the agenda, and all three share common concepts and principals. The rhetoric will be high, the media debate intense, the misinformation and forecasting very wrong, and the changes will be volatile. The 2003 Tax Act changes were nothing compared to what’s coming. The markets will react, so catch the swings in the right direction. I hope this article helps lay out the concepts in an easy-to-understand fashion. Unfortunately when it comes to taxes, it’s never easy to understand it all. The best approach is to plan to pay what you currently pay and maybe even more – there is no free lunch!