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Steve Forbes - The Victory NH
Interview
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"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
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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.
Click here to read Part 2 of our exclusive interview with Steve Forbes…
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