The past few weeks have been very busy writing book two in the FreedomRedux series, Birth of the Republic.  One of the issues that I had to deal with in the novel was a tax structure for the new nation.  I think we can all agree that what the United States has right now is not working.  The current system is bloated, inefficient, and a drag on the economy.  Elected representatives in Washington D.C. have consistently expanded the tax code over time in an attempt to micromanage the economy and solicit campaign donations and political favors from those receiving preferential treatment under the code.

So the question is, what should the new nation use for its tax structure?  I like the idea of a flat income tax, but there are a lot of supporters of the fair tax, which is a national sales tax.  While researching the tax issue, I came across a system called the neutral tax, which is what will be adopted in the novel.

The Neutral Tax is very simple.  ALL federal taxes on citizens and businesses are eliminated and replaced with a single flat tax on the gross government revenue of each state.  Each state is free to have the tax structure of its choosing, thus allowing for the state by state experiments in democracy that the Founders so desired.

Unlike every other tax structure, it can’t be argued that this system favors one group over another, since the state, not the federal government ultimately decides what form the tax will take.

As I read more about the Neutral Tax, the more I believed that this would be the ONLY way to have a meaningful tax reform in this country.  Switching to this system would not be difficult for the nation; in fact of all of the alternate tax solutions I have seen, I think this would be the easiest to implement.

Here is an example to show how the current tax mix is used in calculating the change to a state’s tax rates.  The average American currently pays 47% of his taxes to the federal government and 53% to the state.  If a state previously had a flat of 10% tax on income and it wanted to apply The Neutral Tax equally across all taxpayers while collecting the same revenue for itself, the state’s tax rate would increase to a flat 18.9%. 10% would still go to the state and the additional 8.9% would go to the federal government. Put another way, the state/federal mix would be 47% (8.9%/18.9%) going to the federal government and 53% (10%/18.9%) going to the state. At the same time, direct federal taxes on individuals and businesses would go to zero, fully offsetting the tax increase at the state level.

The Neutral Tax would alleviate the federal government from concerns about small tax policy details and enable it to focus its attention on its other duties. It will also reduce the potential for corruption — the federal government will no longer have direct control over tax policy details, so Washington politicians will no longer be able to peddle tax loopholes. Since the only tax decision at the federal level will pertain to the size of the federal government’s share of state and local tax revenue, The Neutral Tax has the potential to reduce partisanship at the federal level on this one major issue.

I’m sure that local politicians would welcome the ability to have more control over local tax policy.  For far too long, the federal government has taxed the citizens of each state, and then return the money to the state with strings attached.  The neutral tax would lessen the incentive of the state to take a handout from the federal government.

The Neutral Tax will enable a dramatic reduction in the size of the IRS and completely eliminate its interaction with individual taxpayers and businesses. The primary function of the IRS will become collecting tax revenue from the states, which can be accomplished with a relatively small staff.

I think the neutral tax is an excellent system, and would greatly benefit the nation.  There is no reason that the two parties could not come together to implement such a system.

Thanks for reading! Please leave any comments below; I’d love to hear what you have to say about this tax system!  Just a quick reminder that the Escape to Freedom ebook is still on sale for $.99, and is available in both the kindle and B/N Nook formats.  Click here to go to the kindle site and here to go to the nook site