Steve Forbes - The Victory NH
Interview
Part I
Where better than
New Hampshire to begin the upcoming debate on tax
reform? And who better to do so, than the leader of
the Flat Tax Revolution — the President and Chief
Executive Officer of Forbes and Editor-in-Chief of
Forbes magazine... Steve Forbes...
VNH:
First off, Ambassador Petrone sends his regards, and
asked me to tell you he agrees with Newt Gingrich
that the flat tax is an idea whose time has come.
Forbes:
Wonderful. There’s nothing like having the right
allies when fighting for something so important.
VNH:
You’ve written a book,
Flat Tax Revolution - Using a Postcard to Abolish
the IRS. Take us through the basic idea and then
I’d like to talk about how it affects and benefits
different segments of our population.
Forbes:
Well, basically what we do is take the whole 9
million-word federal income tax code beast, - all the
rules and tenant regulations - and throw the thing out,
throw it in the dumpster of history.
It is beyond
redemption.
The thing has been amended 14,000 times
since the mid 1980s. We need to just replace it
with a simple flat tax.
There would be generous
exemptions for
adults and children. A family of
four, for example, would pay no federal income tax
on the first $46,000 of income. And then above that,
they’d pay only seventeen cents on the dollar. If you
have four kids, the first $65,000 you earn would be
tax free. Anything above those thresholds, you’d pay
only seventeen cents on the dollar. Seventeen
percent.
There would be no tax on your savings; no
alternative minimum tax (which is the alternative
maximum tax). No death tax. You’d be allowed to leave
the world unmolested by the IRS. As I like to say,
“No taxation without respiration.” And it can be done
literally, on a sheet of paper,
a post card.
|
"A
family of four, for example, would pay no
federal income tax on the first $46,000 of
income. And then above that, they’d pay only
seventeen cents on the dollar."
|
On
the business side, we’d cut the profits tax from 35%
to 17%. And for small businesses (they’ll love this
– we’d do it for everybody, but small businesses
will love this in particular), we’d get rid of
depreciation schedules. No more worrying when you
buy a piece of equipment whether you qualify for a
credit or accelerated depreciation, or what the
useful life of the thing is. All that would go by
the boards.
If
you make a business investment, say, buy a truck or
piece of machinery or furniture or whatever, for
your business, you would get an immediate write-off.
Now, if you have a loss, you carry it forward until
future profits use it up. This way there would be a
huge investment incentive; you would not have to
worry about depreciation schedules. And that, I
think, would enormously simplify life, especially
for small business people. I can’t tell you how many
times at airports people come up to me and complain,
and rightly so, about how much time and money they
have to spend with accountants and lawyers.
|
"If
you make a business investment, say, buy a truck
or piece of machinery or furniture or whatever,
for your business, you would get an immediate
write-off." |
VNH:
Let’s take this a little bit further, how does this
simplify filing for small business people who will
still have to figure out their income in some way.
Forbes:
Actually it makes it simpler on the business side
because you could literally do it on a sheet of
paper. You’d take your revenues, subtract out
salaries, materials, and investments, and then pay
17% on the remainder. The nice thing there is that
it is only taxed once. So if you have a business,
let’s say for argument’s sake you make $100,000
(just picking a number), you’d pay 17% tax. You have
$100,000 profit, the other $83,000.00 is free of
tax. If you wish to take it out as a dividend, fine.
It’s not going to be taxed again.
VNH:
What happens to capital gains, and interest rates?
|
"And
this is very important - because people focus on
what they might lose not what they might gain,
everyone will have a choice. They can go
with the new system or they can stay with the
old system. In short, see for yourself which one
is better for you."
|
Forbes:
Capital gains taxes, would be gone. Interest rates,
because they’d no longer be taxed or deductible,
would come down probably, experts estimate, about
20%. So, for example, if you’re a homeowner, your
mortgage (let’s say you have a 6% mortgage now),
could probably refinance at 5%. And this is very
important - because people focus on what they might
lose not what they might gain, everyone will have a
choice. They can go with the new system or they can
stay with the old system. In short, see for yourself
which one is better for you.
VNH:
Now, that’s the point that when we talk to people
about your plan, they get the most excited about. It
sounds like something similar to what Hong Kong has
had for years.
Forbes:
Yes.
VNH:
Tell us a little about how it’s worked for Hong Kong
and why you think that a dual system like that is
the best way to proceed with this level of reform.
Forbes:
Well with a major reform, people may like the
concept, conceptually, but they wonder if there's
something they’ve missed, if they’ve been told all
of the facts. This way, we can go with the reform
and people don’t have to worry that the politicians
have slipped something past them. If they feel that
the new system is not good for them, they can stick
with the old one.
In Hong Kong, you have a dual system. They have
progressive rates with certain deductions from 2% to
20%, but they also have what they call the standard
rate — in essence, the flat rate of 16%. When you
fill out your return, you can pick either one. And
as a person’s income goes up, they can decide, “Hey,
let’s just do the 16%.” You have a choice.
VNH:
What a novel concept in this day and age. You
actually get to decide.
Forbes:
It sort of does the reverse of the alternative
minimum tax, where you have to pay whichever one
hits you the most.
VNH:
Two groups I want to touch on before we move on.
First, how does this affect retirees?
|
"Most
people don’t realize that. They pay tax on a
tax. You never get your Social Security tax in
terms of pay but you pay income tax on it. It’s
perverse...Your Social Security benefits will be
free of tax and they trigger no other kind of
taxes." |
Forbes:
This
would be good for retirees because it
would remove their Social Security income totally
from tax considerations. You’ve already paid tax on
your Social Security during your lifetime. Let’s say
you and your employer pay in $3,000 a year for your
Social Security. You pay tax on the portion you put
in, but then you also pay income tax on the tax.
Most people don’t realize that. They pay tax on a
tax. You never get your Social Security tax in terms
of pay but you pay income tax on it. It’s perverse.
Anyway, retirees will not have to worry, “Gee if I
keep working am I going to jeopardize my benefits?
If I earn some money or have saved and have interest
income, am I going to trip up and have part of my
benefits taxed?” That all goes by the boards. Your
Social Security benefits will be free of tax and
they trigger no other kind of taxes.
VNH:
How will the flat tax affect corporations, small
businesses, and investors?
Forbes:
Well, what it means, in terms of businesses, is that
income is taxed only once. So if you earn a profit,
you pay the 17% tax. Then it is free of tax after
that, so you don’t destroy capital. And I think it
improves corporate governance. Especially among
larger, publicly held companies, the tendency has
been to hold onto a lot of profits, because, in
effect, if we hand it out, it’s just going to get
taxed. But we already found 2 years ago, when the
dividend tax on personal income was cut from 38%
maximum to 15%, companies started to make bigger
payouts. Because if they didn’t, they would have had
to justify why they could get a better return
investing that money than they could if they
returned it to the shareholders, letting them invest
their money themselves.
|
"...
more capital going to maximum opportunities
rather than it being sheltered or pooled or put
aside because the tax man is going to take it
away from you." |
Microsoft, for
example, last year did a $30 billion special
dividend. It never would have done that if we had
the full double taxation we did before. The flat tax
would allow capital to go where the opportunities
are, would not punish the accumulation of capital –
it would not punish or destroy capital by taxing it
more than once. So the flat tax would lead to more
flexibility, more capital going to maximum
opportunities rather than it being sheltered or
pooled or put aside because the tax man is going to
take it away from you.
VNH:
It sounds like the Flat tax will benefit everyone
except, of course, those in the tax business. In
your book, you talk about H&R Block’s efforts to
stop the flat tax in 1996. What exactly did they do?
Forbes:
When I ran in the New Hampshire primary in ’96
they did a mailing warning people of the impending
end of civilization! Homes would be destroyed! And
hot lava would poor from the sky! It was a gross
misrepresentation. For example, for homeowners,
first of all, everyone gets a tax cut. Now if you
have more money in your pockets, even if you have
fewer deductions you end up with more money. I think
that is good for housing. You have more money, you
can buy a nicer home.
The other thing, which we just mentioned, is that
interest rates would come down as well. So you
combine more after- tax income (even if your pretax
income goes up not one penny, you still have more
after-tax income) and your monthly mortgage payment
goes down. In the real world, that is good for
housing. But what the governor of New Hampshire did
in ’96, for example (and I recount this in the
book), was to talk about the 17% tax rate, but
managed to forget to mention those generous
exemptions. And then said, “Look how terrible this
is!”
VNH:
So by now focusing on this being a choice, it takes
away the argument about destroying home values, and
lava flows, and the rest of it.
Forbes:
Sure. And even if you didn’t have a choice (which
you will), the flat tax would be good for housing
because you would have more money to buy a house, and the
cost of financing that house would come down.
|
"...when
Reagan, for example, took office in 1981, the
top 1% of wage earners paid 18% of federal
income taxes. By the end of the decade when
Reagan left office, the top 1% were paying 27%
of federal income tax receipts, even though the
top rate had been cut from 70% to 28%... If
you want to soak the rich, lower the rates and
you’ll get more money out of them."
|
VNH:
It seems that every effort at tax reform is greeted
by cries of "Tax cuts for the rich."
One of the things we like to point out is that the
top 20% of wage earners pay 80% of the taxes. In fact,
Rush Limbaugh has a wonderful breakdown on his
Website that has helped us persuade a lot of people. But the
thing that seems even harder for some folks to grasp
is that lowering tax rates brings more money into
the government. This is something that you take some
time on in the book. Take us through how this works.
Forbes:
When tax rates are reduced, you end up collecting
more money from high income earners. This
happens for two reasons: first, it becomes less
efficient for people to try to shelter their income
—
they can spend their time doing more fruitful
things. Second, with a simpler system, there are
fewer places to hide income. So when Reagan, for
example, took office in 1981, the top 1% of wage
earners paid 18% of federal income taxes. By the end
of the decade when Reagan left office, the top 1%
were paying 27% of federal income tax receipts, even
though the top rate had been cut from 70% to 28%. So
you make things simple. When you reduce tax rates,
not only do you get more economic activity because
people start more businesses, take more risks,
create more jobs but also you end up collecting
more from high-income earners. If you want to
soak the rich, lower the rates and you’ll get more
money out of them.
VNH:
And if memory serves, President Reagan wasn’t the
first to take this approach. Didn’t certain
Democrats once believe in cutting taxes?
|
"...back
in the early 1960’s - as hard as it is to
believe today - the Democrats were the
tax cutters and the Republicans opposed tax
cuts
as fiscally irresponsible."
|
Forbes:
Back in the early 1960s – as hard as it is to
believe today – the Democrats were the tax cutters
and the Republicans opposed tax cuts as fiscally
irresponsible.
When President
John Kennedy proposed reducing tax
rates (23% across the board),
Republicans said, “You’re going to cut income tax
revenues 20% - that’s irresponsible.” Well,
eventually, the tax cuts got passed, and guess what
happened? Income tax revenues went up, especially
from high-income earners. The economy blossomed.
Going back to the 1920s, the Harding/Coolidge tax
cuts – same effect: The rates were cut, which
resulted in more prosperity, more government
revenue. We saw a minor version of this with the
Bush tax cuts of 2 years ago when the capital gains
rate was cut from 20% to 15%. The dividend tax was
cut from 38% to 15%. Some personal income tax rates
were cut – not as much as I would have liked —but
hey, you take what you can get. There were some
business incentives, and guess what? The economy
started to grow, 3% to 4% from the sluggish stale
pace it was before.
So experience repeatedly shows that it works, and
the
countries that in recent years that have tried the
flat tax have found the same thing. In the book
I go through the countries that have versions of the
flat tax such as Lithuania, Latvia, Estonia. Russia
put one in 4 years ago and guess what happened even
there? Government receipts in real terms more than
doubled in 4 years.
VNH:
Ironic, isn’t it? Who’d a thunk that Russia would
get a flat tax before we did?
|
"That
Vladimir Putin would be more radical than we are
on tax cuts." |
Forbes:
Yeah. That Vladimir Putin would be more radical than
we are on tax cuts.
But you know, it underscores something. Former
Communist countries, especially in Central and
Eastern Europe, want fast growth. Therefore, they
don’t look to Germany or France. They look to
countries like Ireland and Hong Kong and say,
“they’ve grown rapidly; they’ve slashed their tax
rates. We want fast growth; we’re going to do the
same thing.”
VNH:
Speaking of “the rich,” Warren Buffet seems to have
a strange aversion to eliminating the
Death Tax. Could you talk a bit about how
he can protect his earnings by putting them into
foundations and other shelters, where most people
can’t afford to do that.
Forbes:
Well, one of the things that happens with the Death
Tax is that if you have the resources
—
“major league” resources
— you can find ways of setting up trusts, find ways
of getting assets distributed, find ways of making
distributions of preferred stock to shelter your
income. The Death Tax really hurts people who’ve
built up a business — several million dollars — or
have a house or other assets whose value has
increased over time. These folks can’t hire an army
of lawyers so they have to go to a mutual fund like
Fidelity, which has a foundation fund — which would
be their substitute for The Ford Foundation. They’re
the ones who get slapped hardest by the Death Tax.
One other point: Your assets have already been
taxed over your life time; why should they be taxed
again when you leave this earth?
Here’s a simple way of looking at it: If you own a
business, you pay taxes on your profits and on your
own income. You pay property taxes all your life on
your house. Yet when you leave this world, it all
gets taxed again - and that’s not right. But there’s
another factor. People say, “Well, aren’t we going
to have British-like, embedded aristocracies?” The
answer is no. Because without a Death Tax, you’re
less likely to hire platoons of lawyers to put money
into trusts. You’re more likely to make direct
bequests to your children or grandchildren. And
guess what happens? Future generations suddenly find
they have their own needs in life, and the money in
real terms gets recycled and dissipates very quickly
because it is spent. The way things are now
structured a lot of fortunes have been preserved
because the heirs weren’t allowed to get their hands
on the money in the trusts. And the reason the
trusts were set up, in many cases, was to avoid
death taxes. So you’ve prevented the money from
being recycled.
VNH:
Recycled and put to work in a way that would benefit
everyone.
Forbes:
Put to work sooner, yeah.
VNH:
We were talking earlier about making the flat tax
optional and how difficult change is for a lot of
people. What do you say to the naysayers who think
that scrapping the tax code would lead to too much
disruption in the economy, that state budgets and
deficits would be thrown into chaos during the
period of transition.
|
"...
on both the State and Federal level, if you look at
the numbers, the problem has been not a lack of
revenue, it has been a lack of any kind of
spending restraint." |
Forbes:
The answer is, if prosperity is chaos, let’s
have more of it. If there were a more prosperous
economy, States would immediately land a windfall
because, even though the Federal rates would be
lower and during the first four years of my tax cut
the Feds would not take in as much as they would
under the current code, after that they would get
much more. (And I’m being very conservative on
that. I think it will be much faster, but let’s be
conservative on this to be safe.) The States,
because they haven’t cut their rates, would
immediately get a windfall. I think what would
happen is that States would come under a lot of
pressure, just as they did when
Reagan cut taxes in 1986. When the top rate went
down, eventually to 28%, States came under enormous
pressure to reduce their tax rates. Even
New York State under Mario Cuomo cut income tax
rates.
So it will be good all around. Remember, on both the
State and Federal level, if you look at the numbers,
the problem has been not a lack of revenue, it has
been a lack of any kind of spending restraint.
VNH:
So in the first 4 years of this plan, revenues to
the Federal Government (and I know you’re being
conservative in your projections), would go down?
Forbes:
They’d go down slightly. Remember, we’re talking
about a $2 trillion budget. But after ten years, the
government would be up at least $56 billion that it
wouldn’t have otherwise had. More importantly, the
American economy would have 3.5 million more jobs
than it would have had otherwise.
Remember, this is not about Washington. Washington
can go continue mucking up its finances. We’re
talking about the rest of the nation. If Washington
is inconvenienced but the rest of the nation
benefits, don’t you think the rest of the nation
should come first?
|
"Remember,
this is not about Washington. Washington can go
continue mucking up its finances. We’re talking
about the rest of the nation.
If Washington is inconvenienced but the rest
of the nation benefits, don’t you think the rest
of the nation." |
VNH:
No argument here. The other approach that’s getting
the most attention is the call for a national sales
tax. How does it compare to the flat tax, and (you
touched on what other countries have experience with
the flat tax) what about those who have adopted a
national sales tax?
Forbes:
There are a couple of challenges. Let’s start with
one that is unique to the United States.
If we put in a national sales tax, we must
repeal the 16th Amendment to the Constitution
because that allows Washington to impose a National
Income Tax. If we don’t repeal the 16th Amendment, I
guarantee you that this country will have what most
states have and what most countries have — both an
income tax and a sales tax, or a consumption tax or
VAT; or what Canada has, a general services tax
(Australia has the same thing). So you’re going to
get both. So first you have to repeal the 16th
Amendment, or else adding a new tax means we’re
going to be burdened even more.
And when you have a 30% tax — as we would under the
current proposal for a national sales tax — the
challenge comes from two areas of compliance: one is
services — you go, for example, to a lawyer for
advice. That’s not a product, you can’t put a
computer chip on a lawyer’s words it’s hard to track
so how do you enforce it? A kid comes and cuts your
lawn, or somebody comes and fixes a leaky pipe in
your house — it would be very tempting to do barter
or pay cash if you have a 30% tax on that.
The other challenge is (since it’s a final, retail
sales tax), that if you’re a business, you’re not
supposed to pay sales tax on your raw materials, on
your “inputs” (as economists call them). In many
states, they still tax you. They shouldn’t, but they
do. But let’s say you produce steel furniture. You
don’t have to pay 30% tax on the lumber you buy;
only when you sell the furniture do you collect the
tax and then remit it to Uncle Sam. But that raises
the question: Who is going to determine whether
you’re buying it for a business or for personal use?
Let’s say you sell furniture, and buy some lumber at
Home Depot, who’s going to make sure that you’re
buying it for a piece of furniture you’re going to
sell on E-Bay, instead of for a chair for your
kitchen? Somebody has to be around to check out and
enforce this. So yes, we’d get rid of the IRS with a
national sales tax, but we’d have to have somebody
to enforce a national sales tax. And when you go to
Home Depot, are they supposed to go through an
elaborate procedure to determine what you’re buying
their stuff for?
Don’t get me wrong, it would be better than what we
have now, but it does have certain challenges. And I
think it’s just easier to move straight to a flat tax.
VNH:
Now if I understand the idea, whether it’s 23% or
30% on top of everything we buy, to keep this from
being a regressive tax, everyone then would get
rebate checks from the government?
Forbes:
Yes. And I point that out in the book. Everyone
would get
a rebate check.
What they say is when you go to work, you’d fill out
a sheet with your Social Security number to get the
rebate. Well, what if you’re not working? Where do
you go to fill out your sheet? And they say, “Well,
your Social Security number will take care of
enforcement.” The last I looked, in terms of
employment, there are a lot of illegals with faked
or illegal Social Security numbers working in this
country. Are they going to get a rebate? How are you
going to ferret the legals from the illegals?
|
"'I
guarantee you, politicians are going to say,
“That’s not enough. If you elect me, I’ll raise
your rebate.'" |
If you look at the whole, sad history of the Earned
Income Tax Credit, there’s a lot of fraud there. The
other challenge is that , even if you could get a
foolproof system, they’d have to send out 130
million rebate checks, or whatever it is, each month
and somebody in New York is bound to say, “Wait a
minute. The cost of my essentials are higher than
they are in Oklahoma or Alabama. I should get more
money back because it costs me more to buy the
‘essential’ items that the rebate check is supposed
to cover.” And then I guarantee you, politicians are
going to say, “That’s not enough. If you elect me,
I’ll raise your rebate.” And then they’re going to
say, “Should Bill Gates get the same rebate as the
guy who works at Wal-Mart? And then off we go…
VNH:
With all the opposition to just making small
adjustments like the President's tax cuts permanent,
how do you propose to fight the lobbyists, the
public sector unions, and even the elected
officials, who will lose — as
Milton Friedman
has called it — their
greatest source of power, the tax code, if the
flat tax succeeds?
Forbes:
It’s nice to be able take your money and then buy
your vote, isn’t it? It’s a great system.
VNH:
It truly is the darndest thing. So how do we really
fight these entrenched powers?
Forbes:
There are two ways to do it: The first is with
grassroots efforts, like Victory NH, that are truly
leveraging the Internet
and making the most of this
electronic age. Then you have ways that everyone can
use to reach out on their own, from talk radio and
writing letters, to taking the time to call your
representatives. In
Flat Tax Revolution,
I spell out in plain English how this can be done. For instance, if
a story appears on the President’s Tax Commissions
report, it’s a perfect tie-in for you to write a
letter to the editor saying, “Here’s why the flat
tax would be good.” Just keep it short, so they’ll
be more likely to print it.
There are a lot of things that citizens can do. If
politicians sense there’s no real interest in doing
any of this, guess what’s going to happen? It’s not
going to happen. But if there is grassroots support
— active people blogging, emailing, holding town
hall meetings, and calling talk radio and their
representatives; candidates (especially those running for
President, when they’re trying to “break out from
the pack” during a primary) are going to say,
“Here’s a way to excite the voters, and have a
chance to be number one”. Because if you combine the
Executive Branch with public opinion, this thing is
unstoppable.
|
"... if you combine
the Executive Branch with public opinion, this thing
is unstoppable." |
VNH:
In the foreword of your book,
Newt Gingrich
wrote that he believes there is a real
opportunity for the kind of grassroots revolution --
that drove
The Contract with America -- to literally impose
the Flat tax on Washington. Now, you just touched on
this a bit. In New Hampshire, obviously, we have a
unique opportunity to ensure that every presidential
candidate hears about the Flat tax. What would you
like the members of the Victory NH network to ask or
tell the candidates from both parties?
|
"I
think you start with a simple question: Why
do you tolerate the current tax code? If you’ve
been in the Senate or the House for a number of
years, why have you left this beast in place
when you know it’s so hideously unfair and
corrupt? " |
Forbes:
I think you start with a simple question: Why do you
tolerate the current tax code? If you’ve been in the
Senate or the House for a number of years, why have
you left this beast in place, when you know it’s so
hideously unfair and corrupt? And then you say, why
don’t you go with the flat tax? Ten other countries
have tried it. Germany is now considering it, Greece
is about to go with it, what are we waiting for?
Shouldn’t we, the bastion of free markets, be the
leader here? Even Democrats are going to have a hard
time defending the current code. So by asking
questions, politicians know this issue is on
people’s minds.
VNH:
Any final thoughts on the flat tax before we switch
over to other issues?
Forbes:
The final thought is that we don’t have to put up
with it any more. As a free people, we can change
this thing, we can kill the beast that is consuming
so much of our time, energy, well being. That’s what this country is all about. What we don’t
want is a situation resembling what happened in the
Gulf Coast – where everyone is waiting for everyone
else to take the lead. We the people have to take
the lead.
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