That's exacty what the difference is. Muni bond are purchased by high net worth individuals. The income is not earnings and has special tax treatment. If you still don't get it, there's a reason. Quote from Ray Liotta in Goodfellas: "Payroll taxes are for suckers". err... well maybe he actually said "Jobs are for suckers."
Lot of good points made in this thread. The current tax system can fairly be described as an abomination. I contend that a democracy is in trouble when nearly half the population pays nothing or next to nothing in federal income taxes. That democracy is also in trouble when even the most educated and sophisticated professionals cannot figure out their taxes on their own but are forced to hire accountants and lawyers. So what to do? The consumption tax looks appealing on the surface, but there are a myriad of troublesome details. It is profoundly unfair to those who spent a lifetime paying taxes under the current system, but then would be forced to pay high consumption taxes during retirement, when they could least afford it. No one has mentioned the problem of multi-level taxation. Most products go through various stages of manufacturing. Do you tax them at every level? Or do you provide a huge tax incentive for vertically integrated firms? If you tax every level,how do you capture tax on foreign manufacturing? How about industries that are high volume, high value but low margin, like distributorships? Is it fair to tax them, or their customers, at the same rate as Microsoft and Intel , with their 50% profit margins? Politically, there are two huge reasons a consumption tax is a non-starter. The left will never agree to the lack of progressivity. The Democrat Party has made an obsession out of opposing any tax relief because it is a "giveaway to the rich." How will this be any different? Conservatives should fear a consumption tax even more. Why? Because there will have to be a transition period. Since the revenues from a consumtion tax will kick in gradually, we will be told that it will be necessary to continue the income tax during this transition period. With two streams of revenue to plunder, the political class will find it impossible to let one of them go and terminate the income tax. If anyone doubts this, you should reflect upon the assurances that were given when the constitutional amendment that legalized the income tax was under consideration. Voters were assured the tax would never be more than 3 or 4 %. Too bad they didn't write that into the amendment.
Personally, I find the idea of a flat tax to be very attractive. Tax all earned income at one rate, no deductions, no capital gains or estate taxes. The main problems with that idea are political. Every special interest would demand a deduction. Of course, the massive and politically powerful real estate industry would fight to the death to maintain the mortgage interest deduction. States would fight to maintain the property tax and state income tax deductions. The medical profession would fight to keep medical deductions. Add them all up and the "low" flat rate would begin to get pretty big, if we are to cover current revenues. Then we get the same political arguments about progressivity. Like it or not, the flat tax would probably end up being a big benefit to high earners. Otherwise, why bother with it? Perhaps this would be somewhat alleviated if you didn't allow state and local taxes to be deducted, since most of those high earners live in high tax jurisdictions, but it would still be a massive problem cosidering that a huge part of the population pays little or no federal tax now. Try explaining to them that paying 25% versus nothing is really quite fair. The simplification aspects are easy to overstate. What will be deemed income? That's easy to define for a wage earner, but plenty troublesome for the small businessman or entreprenuer. One of the main battlegrounds for the IRS for decades was trying to get at income that was disguised as capital gains. The '87 tax act made that fight a lot easier, but it devastated the real estate industry and was a major factor in the S&L bailout. Be careful what you wish for.
One of the more intriguing proposals I have seen came from I believe Alan Reynolds of the Cato Institute. He proposed the creation of an alternative flat rate system along the lines of the hated Alternative Minimum Tax, which most high or even upper middle income taxpayers are already subject to. Basically, there would be a system with a fairly generous standard deduction and a flat rate, perhaps 28%. You could choose to use it or you could just use the existing system. Your choice. The revenue effects should be fairly neutral since most of the people who would use it are already subject to AMT. The biggest attraction, other than simplicity (which would greatly reduce compliance costs and the resultant buden on the IRS), would be as a test bed to see how a flat tax would work. Hopefully, it would reduce the attractiveness of tax shelters and redirect investments from them to more productive uses. Don't hold your breath.
OK Hans, then please explain to me how a consumption tax could work with ZERO exemptions. Explain to me how the poor would not be taxed unfairly when considering non discretionary items such as food. I've never seen such a proposal, and don't see how it could work. Enlighten me.
You've never seen it because you are too damn lazy to look it up. here let me hold ewe lil 'and. http://www.fairtaxvolunteer.org/smart/index.html http://www.fairtaxvolunteer.org/smart/faq.html
Excellent Commentary Actually the matrix is very simple.. Today´s consumption tax... To purchase $1,00 worth of goods (fed only) Wealthy... $1.38 Middle ... $1.28 L. Middle.. $1.18 Poor........ $1.05 Add 3 to 7 points to include state and locals.... ........................................................................ Propose $1.15 consumption items $1.15 LT cap gains Propose $1,15 flat income ......................................................................... The other key to this equation is to make sure that this matrix creates more efficiency in producing goods and services which involves the absolute reduction in prices when considered on a worldwide basis...such that the number of good paying jobs increase....tax revenues are at an optimal pace and in sinc with a progressive future which diminishes the size of government...and thus gives back more independence and freedom to the population... I think that a 10% flat tax and nothing else on incomes to both individuals and corporations would be the best move for the US ...for all income classes...... Much of the world could not compete with this structure...and all international businesses would come a runnin to the USA....
you are mighty confused there libertad. INCOME TAX is NOT a CONSUMPTION TAX, sales tax is however a consumption tax. give up if you do not(or are unwilling) to understand the difference.