A Better Tax Plan

While eliminating the corporate income tax would be a giant step toward stimulating the economy it is far from the ‘best’ solution.

Why?  Simply because it leaves the vast majority of businesses, those operating as sole proprietors, partnerships, LLC’s and S Corporations untouched with their profits taxed as individuals.  Note:  These are number of filings and have no relationship to earnings or profits.  It should also be noted that many unprofitable businesses choose to file as individuals in order to write off losses against other income.

While many of these might opt to incorporate to realize the tax advantage, it is a complex process and frequently an expensive process.  Incorporation has other purposes than tax planning such as liability and raising capital, purposes that may be at odds with small business needs and goals.

A majority of small businesses are likely to continue in their present form which leaves them subject to taxation.

To fully unleash the small business community and encourage the establishment of new business, which all agree is the real driver of job creation and economic growth, we need to eliminate all taxation on small business.

Replacing the income tax with a consumption tax accomplishes that goal.

All consumption taxes are not created equal.

The value added tax (VAT) is very popular in other parts of the world, but it has generally been applied in addition to a income tax and it has typically been increased exponentially by politicians who simply cannot control their spending habits.  It also requires massive bookkeeping efforts to track, apply and collect.  In most applications the tax is built into the cost of the finished product and is not clearly visible to the consumer.  An increase in the VAT is typically recognized as ‘inflation’ by the consumer.

A national sales tax (Fair Tax) is another form of consumption tax.  A national sales tax could also be applied as an addition to the existing income tax and as such would be just as bad as the VAT.

The Fair Tax, as currently structured in the bills currently in the House and Senate, avoids being an addition to the income tax by requiring the repeal of the 16th amendment to the constitution and eliminating congress’s ability to tax income.

The Fair Tax also addresses the regressive nature of a sales tax on lower and fixed income individuals by providing a pre-bate which offsets the impact of the tax on incomes up to a poverty level.  It is ‘fair’ because it provides this pre-bate for everyone regardless of income.

It is generally agreed that we get less of what is taxed (in this case consumption) and more of what is not taxed (in this case income and/or savings).  Isn’t this exactly what we need to stimulate economic activity?

Wouldn’t it be great to not have to consider the tax implications of an investment in a business?  Money would automatically be spent where it would generate the most value to the business.  Now, under the current tax system, we must consider the timing of an investment and how it impacts taxes rather than what is needed to sustain or improve the business.

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