What Tax System Taxpayers Want

In honor of the economist Milton Friedman’s birthday, NTU Foundation once again opened up the polls to taxpayers across the country to see which fundamental tax system change they support. As many Americans know, Friedman was a supporter of tax reform in favor of broadening the base and increasing bureaucratic efficiency. This poll has become a tradition for Americans as NTU and Foundation continue to research the different revenue collecting proposals in Congress and state capitols. Taxpayers were given several different options to choose from:

  • FairTax: A consumption-based national sales tax on all new goods and services. It would repeal the 16th Amendment and eliminate all income-based taxes, including refundable tax credits that are counted as increases in federal spending. The Internal Revenue Service would also be phased out over a four-year period. A monthly “prebate” would be sent to every household to cover taxes on necessities up to the federal poverty level. While the measure is said to be revenue-neutral, NTUF found that it would decrease budgetary outlays by $96.9 billion over five years if enacted in FY 2014.
  • Flat Tax: A modification of the current income-based system where progressive income brackets would be replaced with a single 17 percent rate for everyone above the poverty line. The measure would repeal all income tax credits (including refundable credits) and would likely lead to reductions in costs associated with IRS enforcement and staff. If S. 173 was signed into law in FY 2014, the federal government would cut spending by $85.8 billion in the first year.
  • Keep the Current System: A hybrid-progressive income-based system with thousands of credits and deductions. In the modern seven-bracket system, the more that one earns, the more they must pay to the IRS. Many measures have been proposed, including Congressman Dave Camp’s (R-MI) idea to consolidate the number of brackets and reduce the number of credits. New spending would occur if the reform was introduced and then signed into law by simplifying the Tax Code (and decreasing costs for the IRS) and dedicating new funds to infrastructure projects. NTUF determined that Rep. Camp’s plan could increase spending by $126.5 billion over eight years but that does not include lower IRS costs and possible savings from consolidating refundable tax credits.
  • National Transaction Tax: A defined percentage tax on every financial transaction or transfer involving currency, stocks, or bonds. Congressman Chaka Fattah (D-PA) proposed, specifically, a one-percent transaction tax in the 112th Congress as well as a repeal of the income-based tax system. Individuals making under $100,000 and households making under $250,000 each year would receive a one-percent credit to help offset the tax. Though H.R. 1125 did not call for an increase or decrease in the federal budget, it is likely that monitoring the millions of transactions would require new funds and personnel; exactly how much is unknown.
  • Value-Added Tax: A flat rate imposed on goods and services each time they change hands within a supply chain until sale. Currently in operation in Europe, a VAT is a fee on the value added to a product as it makes its way through the levels of production. The tax is ultimately passed onto the consumer in a similar end-result like a sales tax. Though a VAT has been discussed in the past, few legislators have put forth a version that would replace the current system. Back in the 102nd Congress, Congressman Robert Wise (D-WV)* proposed to have the Department of the Treasury study the VAT. Similar to the Transaction Tax, a VAT would likely require more federal funds to keep track of the millions of transactions of goods and services throughout the supply chain.

What did taxpayers vote for this year? Over 170 people voted in our poll with half voicing their support for the FairTax. The Flat Tax came in second at 39 percent. Demand for a National Transaction Tax, Keeping the Current System, and a VAT fell into the single digits, similar to last year.

Thanks for everyone who voted in our poll this year! We will be doing more of these as Congress continues to propose alternatives and marginal changes to our current tax system.

Have a thought or question on the FairTax or any of the other options? Leave a comment below and our NTUF experts will get back to you!

* Email me if you want to see Rep. Wise's BillTally report from the 102nd Congress. NTUF has back to the 107th Congress online.