One of the things I really hated about being a solopreneur was paying taxes. “A necessary evil” I was told. I realized that death and taxes were certain in life but it didn’t mean I liked it.
Income taxes always seemed really unfair to me. The reason was I took a lot of risks to make income. I didn’t have a guaranteed salary. When January 1 rolled around, I always started at $0.
When I started investing in startups, one carve out in the tax code made it more appealing. The QSBS carve out recognizes the risk you assume investing in a startup. The assumption is a successful startup will raise standards of living. We need people investing in cancer drugs and they should get a financial benefit for assuming the risk.
I was a big flat tax fan. It was simple. No write-offs, 15%, send it in. Make $100k, keep $85k. Then I read about Hauser’s Law. Essentially, no matter what tax rates are, most people pay about 18% in income taxes due to loopholes and other carve-outs. I had heard about the Fair tax. There were guys I traded with on the floor that were big proponents of it. Of course, when you are mired in the stuff of life, it’s hard to engage academically.
Understanding the Fair Tax takes some time. It wasn’t until I read Professor John Cochrane’s editorial which he blogs about here and here that I did the math behind it. That caused me to write this. There is a lot of academic literature surrounding it and I hope that serious freshwater economics schools like the University of Chicago begin to engage in public debates about it.
The Fair Tax isn’t “fair” in the way one would use the term for positive or normative economics. It’s a consumption tax. You won’t pay for it if you don’t consume.
There are ways to avoid it, but they are pretty difficult to engage in. The fact that for most schemes, a sales receipt is generated puts an audit trail in place so the consumption tax is really hard to avoid. Basically, the only way to avoid it is to barter existing assets.
Is the idea radical? Maybe if you can’t embrace new ideas. On the surface, it seems radical. But, what happens to a person’s behavior when growing their income isn’t taxed at higher and higher rates? What happens to a company when they don’t have to worry about corporate, dividend, or other taxes?
Once you put pencil to paper and do the math, you can see for yourself how the cash flows change for your personal situation. In almost every single case, they change for the better. For people that would be disadvantaged, that could be ameliorated in the short run since all disadvantages are not long-run disadvantages that will persist in perpetuity.
The Fair tax takes thousands of pages of the US Tax code and condenses it into a few. No more IRS. No more loopholes. The wealthy actually pay more so it works like a wealth tax! There should be a lot that the left-wing likes about this proposal.
I am going to start working with the Fair Tax people because it is the best way to tax all Americans.
The threat is that they will put this in AND keep the income tax. This is good only if the income tax is killed with fire. Repealing the 16th Amendment would be the only way nuke the income tax from orbit. But in theory, it is a better plan.
As long as they don't charge a Sales tax on top of Fair tax...and plus one for Fed, one for State and one for NYC
I know them. They are scoundrels.