Can a “Neutral Tax” actually work?

On the surface, the answer is “no, a Neutral Tax wouldn’t work” Dig just a little deeper and some interesting things happen. Preconceived notions of how the tax code is supposed to be written melt away. Intriguing prospects of states, local governments, and individual Americans having more say in how much money goes to the federal government start to emerge.

In short, this could work.

We’ll be exploring the concept further in the coming weeks. As this article is being written, it’s tax reform season. Perhaps we should put an asterisk on it and call it tax reform* since technically what’s being proposed by the GOP isn’t really reform. It’s tweaking the current tax system. It’s a step in the right direction as it will reduce the tax burden for most tax-paying Americans and businesses, but it’s still just a tweak.

What is a Neutral Tax? If you haven’t heard the concept, you’re not alone. Many politicians and organizations in DC have been made aware of the plan, but nobody has picked up the mantle or looked into it more deeply. We’re going to do just that. In essence, a Neutral Tax is one that puts the responsibility of collecting and distributing taxes to the states. There would be no federal income tax. DC would collect money from the states based upon a set percentage of their revenues.

As written, it’s revenue neutral. This is important when looking at tax plans because it allows an apples-to-apples comparison. It also means that there wouldn’t need to be a long-term transition. If implemented, it would require changes at state tax agencies and a gutting of the IRS. The way the government receives tax dollars would change but the amounts could remain the same. They wouldn’t have to, though. In fact, we would likely want to couple this plan with major cuts to the federal budget and requirements to stay within that budget.

Any good tax plan needs accompanying spending cuts, otherwise it’s likely very temporary.

There are many pros and a handful of cons that we’ll be exploring going forward, but one of the most important benefits is that this enables states to truly compete. Today, there’s a small measure of competition, but since DC is the biggest player in taxes, individuals and businesses have a hard time running from them. They’re a monopoly and they cover the entirety of the land.

With a Neutral Tax, the people CAN run. They can vote in a way that makes more of a difference; everyone’s vote counts more at the state level than it does at the national level. The idea that people can “vote with their feet” is important, but some would argue that it’s not that easy. To that argument we’d remind people that it’s not so much the reality of people voting with their feet as much as it is about the threat itself. It doesn’t take a million people moving from California to Arizona to put California’s government on notice about outrageous taxes. The threat posed by an adjacent state with much lower taxes would be enough to make an impact on California with the Neutral Tax. As fellow California residents know, that hasn’t been the case when the federal government is the biggest individual taxer in the equation.

When states are made to compete with each other over their tax system, the overall tax burden on the people will be reduced.

This is a hard sell to politicians in DC. It effectively removes many of the chess pieces they move around in order to stay in office and appease special interests. It puts way more power in the hands of the states than just about anyone on Capitol Hill would like to see. This is why it’s so important that we gain a full understanding of what it is and how to implement it if it’s truly the right way to go. This will be a Federalist Party project. Don’t expect Democratic-Republicans to line up supporting it any time soon unless we’re able to build a groundswell of support.

This is the most pro-federalism tax plan we’ve seen to date. We need more perspectives on it. We have people running through it all now, but we’re a grassroots organization. That means we want as much feedback from everyone, including YOU. What are your thoughts on this concept?