The three leading tax reform proposals before Congress are:
-The FairTax,
-A flat-rate income tax, and
-Today’s tax code, but eliminating loopholes and deductions.
Let’s dismiss proposal three. Today’s tax code — even if simplified — remains murky, inefficient, costly to economic growth, and unfair.
First, however, we need a primer on what the remaining two tax reforms are. The flat tax is an income tax with a flat rate of 17 percent on wages, salaries, and business income. Estate and gift taxes go away.
Earlier versions of the bill taxed investment income, but only to businesses. In these versions the FICA/FUTA and Medicare taxes stayed in place. These taxes were eliminated in one of last year’s versions. Businesses can expense out capital goods rather than depreciate them. Deductions that are not “business inputs” are eliminated. To be fair to low-income people, the flat tax features high exemptions.
The FairTax is a bill in Congress with 58 sponsors. The measure repeals all income taxes, both corporate and individual, payroll and self-employment taxes — which are some of the most regressive taxes today — and estate, gift, and generation-skipping taxes.
The FairTax replaces these taxes with a national retail sales tax on consumption of new goods and services, without exception, but once and only once.