The Entrepreneurial Mind

One of the most potent shots in the arm for our entrepreneurial economy over the long-term would be fundamental tax reform. Cross-sector and cross-economy studies show the impact of tax rates and tax complexity on entrepreneurial activity. I am one who advocates that since our economy is now driven by entrepreneurs owning small businesses (just over 50% of GDP according to the most recent SBA estimate), it is now time to rethink our approach to taxes in this country.

So far only one major presidential candidate, Gov. Huckabee, is advocating a plan similar to the Fair Tax that had gained some traction over the past year. It replaces the income tax with a sales tax. Before the lefties out there start gnashing their teeth and wringing their hands, note that most plans being discussed have provisions to rebate a large portion of tax back automatically each year to, in effect, exempt lower and lower-middle families from the impact of any tax.

I saw this morning in a story from the LA Times sent to me by Andy Tabar that the mainstream media is launching some preemptive strikes. Let's take a closer look.

The opening paragraph frames the story quite nicely for the left:

Mike Huckabee, one of the most conservative Republicans in the 2008 presidential race, has embraced one of the most radical ideas on the campaign trail: a plan to abolish all federal income and payroll taxes and replace them with a single 23% national sales tax.

"One of the most conservative Republicans"? Given his position on many issues I would not call him conservative. I guess since most of the rest of the field seems to be big government, liberal Republicans, the relative positioning is correct. But conservative? Hardly!

Next line is also interesting:

The idea -- dubbed the "fair tax" by proponents -- ....

Do I sense a bit of irony in the writer's tone here?

Note that this story is a report on the 2008 campaign and not an editorial. Here is the writer's take on the tax reform movement:

The sales tax proposal has been around for years but languished on the fringes of practical politics and policy. Tax professionals generally regard the idea as impractical, regressive and even "crackpot," as one critic puts it.

For more on my view of the criteria of practicality, please see my recent debate with the NFIB over the wisdom of practicality and political expediency.

But, wait... The writer brings in an expert. She talks to tax professionals! No ox getting gored there! The last time we relied on tax professionals to fix the tax system was Pres. Reagan's so-called tax reform. All that act achieved was to lead to the doubling of the tax code -- now over 65,000 pages long.

The writer then goes on to paint this position as political suicide by citing examples of previous politicians who crashed and burned due to there support of tax reform. We see some hint of the oppositions strategy -- fear tactics. They will talk about an "added" 23% tax, failing to mention that the income tax goes away. Oh, and they also omit the key provision that exempts a large number of Americans from paying the tax through a simple across the board refund.

Then, as a final attempt to discredit, the author ties the plan to Scientology and Texas millionaires (they clearly must be the worst kind...). I kid you not:

Among the early advocates of a national sales tax were members of the Church of Scientology, a group that battled the IRS for years to gain recognition as a legitimate religious institution eligible for tax-exempt status.... [T]he issue was taken up by another group, Americans for Fair Taxation -- better known as Fairtax.org -- founded in 1995 by a group of Texas millionaires.

Please know that I do not endorse Gov. Huckabee. My approach has been to comment on and support positions, but not candidates. On taxes I like his proposed system, but note that he is silent on scaling back on the federal government and reducing the total tax burden. Remember that to fuel an entrepreneurial economy we need to not only simplify the system, but also cut the tax rates.