Currently, nearly all federal tax receipts come from activity within the states. The Neutral Tax would merely change which entity does the collection and allow the states to set their own tax policy. When The Neutral Tax is enacted and all direct federal taxes are eliminated, the states, in order to keep their budgets constant, would initially increase their taxes by a matching amount, thus maintaining overall revenue neutrality. This simple swap of state for federal tax collection is the basis of the power of The Neutral Tax.
The Neutral Tax will be collected from the states electronically on a daily basis. Since The Neutral Tax is a flat tax on gross revenue with no deductions, there are few, if any, computations necessary to calculate the tax due. The actual tax due will be reconciled on a monthly, quarterly, and/or annual basis, and any adjustments made at that time. This operates similar to how businesses currently compute and pay their estimated taxes.
In the unusual event that a state were to go bankrupt, its obligations to the federal government would be handled exactly the same way as a business that goes bankrupt. The state would generally still be liable for any taxes due (which would not be significant since they are collected daily), as well as ongoing federal tax obligations. The federal government’s claims would take precedence over all other unsecured creditors.
State and local governments are already required to accurately report their finances to the public. State laws require government financial reporting to be accurate, with criminal penalties for willful misrepresentation by government employees/auditors. It is unlikely that a government employee could personally gain by underreporting revenue to the federal government such that they would risk criminal prosecution for falsifying records.
Notwithstanding, just like with corporations reporting to the IRS now, there could be federal criminal penalties for state/local executives that knowingly falsify information in order to underreport federal taxes due and the federal government would have extensive powers to audit state/local governments. Also, if a state was found to be underreporting, the IRS could impose penalties and interest the same way they currently do with individuals and businesses.
It is highly unlikely that a state would state withhold The Neutral Tax revenue from the federal government, but if it did, the federal government has many options for collecting the funds, just like they do with private business, such as seizing bank accounts, assets, etc. In addition, because there are many dependencies between the states and the federal government, the federal government would have many additional options that it could threaten the states with, including cessation of flights into and out of a state, nationalizing the National Guard, denying transfer payment to state residents, etc.
Under the Neutral Tax, if a state/local government retains any control of a privatized service, the gross revenue of the services provided under the contract would be included in the computation of gross state/local revenue. For example if a city contracted trash pickup with a private firm, which then charged residents $25/month for trash pickup, the entire $25 would be included in the computation of gross state government revenue because the local government is still exercising control over the contractor via a legal agreement.
Thus, The Neutral Tax will not encourage state/local governments to contract government services to private firms solely for the purpose of reducing their federal tax liability.
The Neutral Tax provides a broad, highly stable source of revenue to the federal government, so it is strongly advised that the 16th Amendment (the federal income tax) be repealed to guard against the federal government seeking additional revenue in the future by reimposing direct taxation. Certain provisions could be included in The Neutral Tax legislation which could help encourage the effort to repeal the 16th Amendment. Since The Neutral Tax is non-partisan, it should make any such effort to repeal the 16th Amendment more likely due to the overwhelming majority of legislators and states required for repeal.
Under the Articles of Confederation, Congress did not have the explicit power to tax the states, but instead it could “requisition” (i.e. ask) them for funds for specific uses. The Neutral Tax is different because is not a request for funds, but an ongoing mandatory obligation of the state to remit to federal government the flat share of its revenue.
No, a Constitutional amendment is not required to enact The Neutral Tax. Under Article 1, Section 8 of the Constitution, Congress has a broad power to lay taxes, providing they are “uniform throughout the United States”. The Neutral Tax is completely uniform because it is flat and does not discriminate among the states and court cases have upheld such taxes when similarly applied. Also, The Neutral Tax would not fall under the “apportionment by population” clause (Article 1, Section 2) because it is not a direct tax.
Implementing The Neutral Tax would effectively end the IRS “as we know it”. It is likely that a relatively small IRS staff would remain to handle the administrative tasks required to collect the money from the states. Since it would only be taxing 51 or so different entities, it is conceivable that the IRS would only be a few hundred employees, down from its current 100,000+ levels.
All of the new IRS’s interactions would be with the states. There would no longer be any direct interaction between individual citizens and agents of the IRS.
In addition to completely eliminating corruption and cronyism related to the federal tax code, The Neutral Tax will act to reduce the level of state cronyism and corruption from its current levels for the following reasons: 1.) Citizens will now be hyper focused on the tax and spending policies of their state. Currently there are overlapping local/state/federal tax systems, so it is difficult for taxpayers to fully understand the tax code and how each tax affects their overall tax burden. The Neutral Tax reduces the number of tax structures citizens need to follow, which will increase transparency in general. 2.) There will be much more competition and resulting comparisons between states, which will make it more difficult to hide graft, because a state with a high level of graft will stand out among its fellow states. Like public companies, states which are noncompetitive for any reason will stand out from their peers. 3.) The Neutral Tax will generally encourage states to create flatter, simpler tax codes, which provide less opportunity for corruption related to the state tax code.
Since the Neutral Tax is not in effect yet, each state currently differs as to how much of their tax burden goes to the state vs. federal government. Under The Neutral Tax, every state will be paying the same percentage of their revenue to the federal government; for some states, that will be less than they pay now, and for other states it will be more. It is up to the state to determine how these differences are allocated among their citizens and businesses. The federal government could also ease the transition by offering temporary tax rebates that decline over time to states that pay more under the new method.
Here is a list by state showing the current federal tax burden and how it will change under The Neutral Tax:
Irate citizens with pitchforks and torches can be very motivational. There is really no way around a battle with the machinery of federal government. The good news is that the approval rating for Congress is so low, public opinion could finally get people motivated to take those decisions out of Washington and bring them closer to home.
Any “non-micromanaging” tax reform proposal, including the Fair Tax, flat tax, 9-9-9, etc. will all have problems with adoption because, to some degree or another, they eliminate the federal politicians’ ability to tinker with the tax code. The Neutral Tax has a better chance than any of those singular proposals because it has the potential of getting all parties seeking federal tax reform working together under the same reform banner.
The Neutral Tax would most likely be enacted at a revenue neutral rate, meaning the rate would initially be set to bring in the same revenue as the current system. Notwithstanding, there is nothing to prevent The Neutral Tax being implemented as either an overall tax cut or tax hike by adjusting The Neutral Tax rate accordingly.
Even though The Neutral Tax would be revenue neutral when viewed statically, in the long run, it offers a number of advantages over the current monopolistic federal tax system, including:
* The Neutral Tax will encourage and reward states with simpler tax systems, thus it will reduce the costs of compliance and reduce distortions in the market caused when federal government uses the tax code to meddle in the economy.
* It Reduces Uncertainty – Because the tax system will no longer be held hostage to the politics of federal monopoly control, tax structures can adjust more predictably over time and thus allow individuals and businesses to plan accordingly.
* Simpler tax systems encourage organic growth and thus lead to higher gross tax revenue.
* The Neutral Tax integrates the federal, state and local tax systems, thus allowing citizens to decide exactly how they want to allocate their tax dollars between the various levels of government.
Each state has a unique tax structure, but assuming a state has a flat tax rate of 10%, under The Neutral Tax, the new rate would be 18.9% (the increase is offset by the elimination of direct federal taxes), with 10% still going to the state and 8.9% going to the federal government.
This example also assumes that the current federal/state tax ratio of 47% remains constant (8.9% / 18.9% = 47%), the state applies the tax burden across the board, and revenue neutrality is desired.
Every state will pay the same flat Neutral Tax rate. This means that states with higher taxes per capita will pay more federal taxes per capita than lower tax states. It makes sense for citizens of higher taxing states to pay somewhat more to the federal government because, in effect, those citizens are voting with their tax dollars that they desire more government services in general and are willing to pay more for it. This voluntary inequity between the states is a very small price to pay for the wonderful self regulating effects of The Neutral Tax. Just as in business and there are multiple suppliers competing for your dollar, The Neutral Tax results in more choices, more efficiency and better service overall.
As is the case now, the federal government would be able to quickly change the tax rate as needed in a war or crisis.
If you have additional questions or need clarifications on any of the answers above, please email [email protected]