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nemethnm

Fair Tax

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The bill would repeal the 16th Amendment.  That would prevent the income tax from returning.
Adding a national sales tax would be a simple matter, whereas repealing an amendment to the US Constitution is much more difficult: it requires ratification by 3/4 of the states. So actually, there cannot be a bill that both adds a federal sales tax and simultaneously deletes income tax. First they will add a sales tax; then maybe they will abolish income tax. The second step is optional. And unlikely.

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No, the bill actually gets rid of the tax code. Perhaps repealing the Amendment is a different matter but, if the bill passes, the IRS and the income tax will be abolished.

BTW, I was in Columbus the other day.

Edited by Moose

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The fact that congress would have to both repeal the 16th amendment and initiate the FairTax plan separately is true. But we have to put more faith in the public, and the politician's desire to please his constituents. I, for one, have not lost hope in the idea of freedom. Do you really think the American public would allow the government to enact one law, and not the other. They could not possibly get away with such disapproval from the number of people that will surely express their displeasure.

I just finished Neal Boortz's book and I like the idea and think it could work.One confusion though: If the state governments don't follow suit with the FairTax plan, what will prevent from an overall consumption tax and a State sales tax, plus the burden of living in a state that receives state income taxes?

Edited by dratip

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Do you really think the American public would allow the government to enact one law, and not the other. They could not possibly get away with such disapproval from the number of people that will surely express their displeasure.
I surely do not think that the American public would allow the government to enact a law which allows taxing income, and yet, here we are.

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Yeah, but the income tax was kind of snuck past the American people. I don't think anyone in 1913 could have predicted that the income tax would become the juggernaut that it is today. It is one of the great lessons of the 20th century that you cannot give the government a helping hand without them taking your whole arm...then the other arm...then both legs.

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Is there an Objectivist rationale to oppose this tax proposal?
First, there are no fair taxes, so the proposal loses from a basic cognitive perspective. Second, the proposal is "unguaranteed". That is, there is no guarantee that this will not turn into income tax plus huge VAT (as high as it is in Norway). It would be easy to reinstate the relevant portions of Title 26. The pattern of the various states, which found that sales taxes were insufficient, is ample evidence that the power to tax is not one that governments are shy to wield.

The only thing that would be a positive step would be if taxation were reduced. But the proposal simply changes the form of taxation, and does not touch the questions of level or legitimacy of taxation. A better proposal would be to leave the method of taxation alone, but statutorily limit the level of spending. Without a spending limit and with a legal power to tax (as they will have), they can increase the sales tax to 30% and reinstate the IRS with the snap of a finger.

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First, there are no fair taxes, so the proposal loses from a basic cognitive perspective. Second, the proposal is "unguaranteed". That is, there is no guarantee that this will not turn into income tax plus huge VAT (as high as it is in Norway). It would be easy to reinstate the relevant portions of Title 26. The pattern of the various states, which found that sales taxes were insufficient, is ample evidence that the power to tax is not one that governments are shy to wield.

The only thing that would be a positive step would be if taxation were reduced. But the proposal simply changes the form of taxation, and does not touch the questions of level or legitimacy of taxation. A better proposal would be to leave the method of taxation alone, but statutorily limit the level of spending. Without a spending limit and with a legal power to tax (as they will have), they can increase the sales tax to 30% and reinstate the IRS with the snap of a finger.

The fair tax seems promising in the respects that it would be significantly cheaper for the government to implement and that the overall procedure would be vastly more transparent to individual tax payers.

So supposing the Fair Tax was implemented on the condition that it would replace the income tax* and that the level of taxation would be (unfortunately) comparable to what it is today**, would you still be against its implementation? If so, why?

I am not necessarily committed to the Fair Tax under this hypothetical myself. I would need to do more research before coming to a decision. Nevertheless, its potential to decimate tax collection related expenditures seems very attractive. Unfortunately, most of today's politicians would likely view the massive savings as an opportunity to increase government spending elsewhere.

*and possibly other forms of taxation; I forget which ones Neal Boortz suggested in his book.

** I know that this is an imprecise and overly simplified statement. If you think that the statement is so vague where it makes the question unanswerable, please express why.

Edited by DarkWaters

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So supposing the Fair Tax was implemented on the condition that it would replace the income tax* and that the level of taxation would be (unfortunately) comparable to what it is today**, would you still be against its implementation?
I don't like bad solutions that are a tiny bit better, because they confuse people. It's like the government taking over health care and things go bad, so there is some tweak in the system that seems to make things better for a while and people get all happy and forget that they are fundamentally dealing with an evil. I think we need to squarely face the fact that taxes are unjust, unfair, and evil, and any cosmetic adjustment will just insulate people from having to face the reality of taxation of any kind. Now on the other hand, if I were convinced that I would actually pay substantially less tax, on a reliable basis, then I could support the idea as a short-term "Save my ass, you suckers can deal with the problem in 40 years" solution.

The presupposition in your question contains some really big if's. The bill does not contain any "no tax increase" guarantees, has no guarantee that income tax cannot be put back in place after a few years of cooling off, and does put in place a mechanism for additional taxation that will never be removed. A better question would be, suppose someone did come up with a proposal that actually eliminated the IRS and made income taxation impossible, would I support that? If there were caps on the sales tax (and I did the math and decided it would be to my advantage), yes. The current proposal amounts to a tax hike, so I'd say nuts to that noise.

Remember that the bill does not eliminate the IRS, it repeals certain taxes collected by the IRS -- they will still have other taxes to collect. At the same time, it necessitates the creation of a new federal tax bureaucracy. It might be that it would be a smaller and cheaper bureaucracy, but I wouldn't take that assumption to the bank.

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Remember that the bill does not eliminate the IRS, it repeals certain taxes collected by the IRS -- they will still have other taxes to collect. At the same time, it necessitates the creation of a new federal tax bureaucracy. It might be that it would be a smaller and cheaper bureaucracy, but I wouldn't take that assumption to the bank.

Yes, the current bill sounds pretty lousy. I was more curious if you would still be against the essential ideas of the Fair Tax if a significantly better bill was drafted.

Anyway, I reflected on this some more. Although the costs of administering, enforcing and maintaining the tax code might be noticably cheaper under a hypothetically better Fair Tax proposal, the extent of the cost reduction is still unclear. There will still need to be a bureacracy to collect the appropriate amount of taxes from retailers who will be collecting the taxes. There will probably also be a large agency to detect fraud. That is, to avoid individuals from claiming personal expenditures as business expenditures.

Unless if a bill explicitly eliminates part of the IRS, it might be too optimistic to expect a substantial reduction. I suspect that these federal employees will find some way to rationalize their continuing existence, even after their original purpose has expired.

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Actually one cost reduction that cannot (readily) become a pot of money for politicians to spend on other things is the reduction in the cost of the tax as seen by businesses. The corporate income tax, along with the armies of accountants who do nothing other than prepare the corporate tax return, and the otherwise totally irrational decisions made for tax purposes, AND the resultant costs of the tax and the effort to do the paperwork, that simply get passed on to the consumer, disappear. This is not money saved by the government so it cannot simply be spent on other things.

Since the sales tax would actually be collected by the same agencies that already collect state sales tax, there would be little increase in federal bureaucracy. (I do not, on the other hand, know what would happen in states that do not already have sales tax, e.g., Montana.) States that have an income tax where they basically leverage off the fact that you have filed a 1040 (like Colorado) have an interesting problem in that the 1040 would go away and they'd have a harder time collecting the info they need to charge you their tax. (Insert sound of world's smallest violin.)

Also your costs of dealing with the 1040 form disappear, and anything you might be doing simply because it's a tax writeoff now would be non-sensical and you could do something more productive with your efforts and money.

This of course assumes that the income tax cannot come back. The last I saw this proposal was coupled with a repeal of the 16th amendment (the one that allegedly allows for the income tax). I wonder if that has changed, and if so I am for the reasons previously identifed by previous posters, a lot less enthusiastic (If I got that number wrong I apologize in advance.)

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The corporate income tax, along with the armies of accountants who do nothing other than prepare the corporate tax return, and the otherwise totally irrational decisions made for tax purposes, AND the resultant costs of the tax and the effort to do the paperwork, that simply get passed on to the consumer, disappear.
Okay, that's a substantial matter that I hadn't thought of. From an individual POV, the benefit will be indirect in reducing costs for companies making it possible to lower prices more while staying alive, so there could be a drop in cost of goods. Then we'd have to compare that with the 23% increase in the cost of goods (as oppoed to the income tax rate that you pay). I would be surprised if my fed marginal tax rate was higher than 23% minus trickle-down tax accounting savings, but I don't know how much the tax-accounting costs are for a pound of spuds. I'd also need to think about how long-term capital gains are are taxed less but buy the same amount of car, so from a "dollar spent" perspective it would be a tax hike. Any support I would give to the proposal is absolutely contingent on the bottom line; I think I'd want to hire a tax accountant to tell me whether I should support or oppose the proposal (setting aside the option of adding an income tax a decade later).
This of course assumes that the income tax cannot come back. The last I saw this proposal was coupled with a repeal of the 16th amendment (the one that allegedly allows for the income tax).
I don't see any evidence of a constitutional amendment to repeal the 16th in the House or Senate bills. The House version is here, and the Senate's is here. This only repeals a section of the IRS code, not the empowering constitutional amendment. I don't know from a legal POV whether it's kosher to mix ordinary changes in the code with constitutional amendments, and certainly it would make it tough to get the bill passed because it would require 2/3 approval.

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Okay, that's a substantial matter that I hadn't thought of. From an individual POV, the benefit will be indirect in reducing costs for companies making it possible to lower prices more while staying alive, so there could be a drop in cost of goods. Then we'd have to compare that with the 23% increase in the cost of goods (as oppoed to the income tax rate that you pay). I would be surprised if my fed marginal tax rate was higher than 23% minus trickle-down tax accounting savings, but I don't know how much the tax-accounting costs are for a pound of spuds. I'd also need to think about how long-term capital gains are are taxed less but buy the same amount of car, so from a "dollar spent" perspective it would be a tax hike. Any support I would give to the proposal is absolutely contingent on the bottom line; I think I'd want to hire a tax accountant to tell me whether I should support or oppose the proposal (setting aside the option of adding an income tax a decade later).

[Please note, since I have recently been accused of their use: "scare quotes" in this reply are used by me to indicate the sense of so-called or alleged or allegedly and are not for emphasis or to try to scare people. That includes their use earlier in this note.]

Don't forget that this will also eliminate the social security and medicare taxes, 7% or so, which are visible on your paycheck, with another 7% "paid by the employer" which means it's really part of your compensation that you never see--it's part of the employer's cost of having you work for them. I prefer to think of that latter 7% as part of the embedded tax that goes away, because: Rather than pay it to you once it is no longer being paid in taxes, your employer will probably lower the prices of his products instead. Remember that most people are unaware of that "employer paid" tax and even if they are aware of it, do not think of it as part of their compensation.

I believe the expectation is that rather than getting your entire nominal wage, companies will instead cut peoples' pay to the extent of the withholding--that is part of what is referred to as embedded taxes. Prices would drop but the tax would make up for it. I personally do NOT think this will happen. Certainly the unions would throw a fit. Everyone else would complain as well. So what will happen is we will see all of our paychecks but prices paid for things (including the tax) will rise. I don't believe they will rise as much as take home pay because a lot of embedded costs (those compliance costs, corporate income tax, the "employer share" of social security) will all vanish, rather than be added to your take-home pay and remain a part of the price charged for the product you help your employer produce.

I don't see any evidence of a constitutional amendment to repeal the 16th in the House or Senate bills. The House version is here, and the Senate's is here. This only repeals a section of the IRS code, not the empowering constitutional amendment. I don't know from a legal POV whether it's kosher to mix ordinary changes in the code with constitutional amendments, and certainly it would make it tough to get the bill passed because it would require 2/3 approval.

Good info; thanks. That to me is one of exactly three downsides to this proposal; the possibility of ending up with both taxes. (The other two are 1)the disruption caused by the transition, which IMHO will be more than made up for by the US becoming the world's biggest corporate tax haven and our no longer spending hundreds of billions of dollars on compliance costs, and 2) the possibility that Congress will start exempting things from the new tax and thereby leave us with a complicated mess of a tax code all over again.) Of course all of those factors would be ameliorated by shrinking the scope of government greatly. Even if it's not shrunk enough to satisfy us, it would still help.

[edit: thought of something else] States that have an income tax today would no longeer be able to free-ride on the back of the federal government's enforcement mechanisms. My state (Colorado) simply has you plug a couple of numbers from your federal tax form into theirs, then volunteer to pay more money for various bullshit causes. If the federal forms did not exist, the state would have a much harder time administering its income tax. Might encourage it to repeal the son of a bitch.

Edited by Steve D'Ippolito

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Don't forget that this will also eliminate the social security and medicare taxes, 7% or so, which are visible on your paycheck, with another 7% "paid by the employer" which means it's really part of your compensation that you never see--it's part of the employer's cost of having you work for them.
I'll have to look into that. I don't pay SS (yes it's true, by legal miracle I'm exempt); I can't remember if there's a Medicare line. I'll add that to the computation, if I pay anything, to see if I save of lose money under the proposal.
I believe the expectation is that rather than getting your entire nominal wage, companies will instead cut peoples' pay to the extent of the withholding--that is part of what is referred to as embedded taxes.
I don't follow that. If income tax goes away, why would my employer cut my wage by, say, 18%? They may be able to pay the same gross pay and not have to additionally pay the employer's SS contribution (zero in my case) so it's net-cheaper by the amount of the employer contribution. Then there is the question of whether employees will demand better retirement packages since there will be no SS, thus employers will end up paying the same amount to a retirement fund (just non-statutorily).
Certainly the unions would throw a fit.
And non-unions. So I think it's kind of a wash in terms of employer costs, though there's no question that being rid of SS is a benefit.
the possibility that Congress will start exempting things from the new tax and thereby leave us with a complicated mess of a tax code all over again.
The most likely sources will be "qualified customers" and "differential rates". Non-profit orgs don't pay income tax, but there is not a corresponding exemption for the federal sales tax, so that would be a very likely first exception. Then, sales tax systems frequently have lower rates for food versus non-food (including differences for eat-in vs. take-out), and I bet that two rates would exist.

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The most likely sources will be "qualified customers" and "differential rates". Non-profit orgs don't pay income tax, but there is not a corresponding exemption for the federal sales tax, so that would be a very likely first exception. Then, sales tax systems frequently have lower rates for food versus non-food (including differences for eat-in vs. take-out), and I bet that two rates would exist.

Supposedly sending what they call a "prebate" check to every household, based solely on the number of people living in it, would take care of any perceived need to not tax necessities. (The amount of the check is intended to refund the tax paid on spending up to poverty-level.) Whether that would be enough to keep the egalitarians from dorking around with the absolutely flat nature of the tax collection itself is another matter. And any such dorking around would make it worse than it already is. (Reminder lest anyone forget that a 23% (inclusive) 30% (exclusive) tax rate of ANY kind is beyond hideous!)

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The Fair Tax Initiative repeals the 16th Amendment, eliminating both the IRS and the income tax. Don't fall for their line and scare tactics.

The Income Tax does not give the federal government the authority to levy Income Taxes, that is a common misconception among libertarians. Abraham Lincoln was able to levy an income tax during the civil war in order to pay for it and back then, there was no 16th amendment. Read the following link for further information.

http://www.thepriceofliberty.org/04/04/16/greenslade.htm

Edited by Miles White

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The Income Tax does not give the federal government the authority to levy Income Taxes, that is a common misconception among libertarians. Abraham Lincoln was able to levy an income tax during the civil war in order to pay for it and back then, there was no 16th amendment.

Which proves nothing about its constitutionality.

Among the unconstitutional and dictatorial acts performed by Lincoln were initiating and conducting a war by decree for months without the consent or advice of Congress; declaring martial law; confiscating private property; suspending habeas corpus; conscripting the railroads and censoring telegraph lines; imprisoning as many as 30,000 Northern citizens without trial; deporting a member of Congress, Clement L. Vallandigham of Ohio, after Vallandigham - a fierce opponent of the Morrill tariff -- protested imposition of an income tax at a Democratic Party meeting in Ohio; and shutting down hundreds of Northern newspapers.
Constitutional Problems under Lincoln
, James G. Randall, Urbana: University of Illinois Press, 1951

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Which proves nothing about its constitutionality.

Repealing the 16th amendment would be a whole lot of effort to change something that won't even be gauranteed to be abolished. If we are to abolish the income tax, then I beleive it would be more beneficial to purpose an entirely new amendment that specifically puts an end to it.

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Repealing the 16th amendment would be a whole lot of effort to change something that won't even be gauranteed to be abolished. If we are to abolish the income tax, then I beleive it would be more beneficial to purpose an entirely new amendment that specifically puts an end to it.

It's the same thing. One repeals an amendment by passing a new one. See Amendments 18 and 21.

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It's the same thing. One repeals an amendment by passing a new one. See Amendments 18 and 21.

Is there any evidence that the implementation of the Fair Tax would create a massive black market for good and services, to circumvent the tax? Perhaps the low sales tax effective in most places that have one, is too low to create much of an incentive to break the law.

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Is there any evidence that the implementation of the Fair Tax would create a massive black market for good and services, to circumvent the tax? Perhaps the low sales tax effective in most places that have one, is too low to create much of an incentive to break the law.

That's a compelling argument against the Fair Tax. Proponents of a national sales tax say one of the merits of their measure is that it would force undocumented workers to pay their "fair" share of the tax burden. But with a nationwide retail tax of 20 to 30%, who would insist on being scrupulous about following the law, especially on big ticket items? So another black market emerges to replace the one that has supposedly just been eliminated.

Tom Knapp puts it very well:

The "Fair" Tax passes. The price of, say, new computers, goes up by 30% at the cashregister. So, I start a computer business. I buy the computers wholesale (no tax) for re-sale. Then I cut open the boxes, take the machines out, turn them on, turn them off (or, if I'm really crafty, stick a CD in their drives which loads the machine up with on-the-fly-generated "personal information" to create the illusion that they are pre-owned). Finally I re-sell them "for resale" (no tax) to another business I own (or have an arrangement with) in the next state over, which stocks them on its shelves as "used" -- at the same price as Best Buy's "new" machines, but without the 30% tax on top. Best Buy isn't going to be happy. Neither is the Department of the Treasury. But ...

In the first state, I'm legit. I bought the machines for re-sale (no tax), I sold them for re-sale (no tax). In the second state, it's going to be difficult to prove that they're not "used" (no tax -- I may need to keep two sets of differing invoices/receipts, one in each state, but that's not a big deal). It's going to take a federal agency to catch me at it. Does it really matter whether we call it the "IRS" or the "'Fair' Tax Enforcement Bureau?"

You might think the government will crack down on this in no time. But which branch of the government? Not the IRS. The Fair Taxyers tell us that it will be eliminated right away.

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That's a compelling argument against the Fair Tax. Proponents of a national sales tax say one of the merits of their measure is that it would force undocumented workers to pay their "fair" share of the tax burden. But with a nationwide retail tax of 20 to 30%, who would insist on being scrupulous about following the law, especially on big ticket items? So another black market emerges to replace the one that has supposedly just been eliminated.

Tom Knapp puts it very well:

The "Fair" Tax passes. The price of, say, new computers, goes up by 30% at the cashregister. So, I start a computer business. I buy the computers wholesale (no tax) for re-sale. Then I cut open the boxes, take the machines out, turn them on, turn them off (or, if I'm really crafty, stick a CD in their drives which loads the machine up with on-the-fly-generated "personal information" to create the illusion that they are pre-owned). Finally I re-sell them "for resale" (no tax) to another business I own (or have an arrangement with) in the next state over, which stocks them on its shelves as "used" -- at the same price as Best Buy's "new" machines, but without the 30% tax on top. Best Buy isn't going to be happy. Neither is the Department of the Treasury. But ...

In the first state, I'm legit. I bought the machines for re-sale (no tax), I sold them for re-sale (no tax). In the second state, it's going to be difficult to prove that they're not "used" (no tax -- I may need to keep two sets of differing invoices/receipts, one in each state, but that's not a big deal). It's going to take a federal agency to catch me at it. Does it really matter whether we call it the "IRS" or the "'Fair' Tax Enforcement Bureau?"

You might think the government will crack down on this in no time. But which branch of the government? Not the IRS. The Fair Taxyers tell us that it will be eliminated right away.

One thing not brought up is that unless you come up with a scheme like this it takes two people, conspiring, to avoid a fair tax--a seller and a buyer. Right now it only takes one person to cheat on the income tax, and as a result the government is reduced to spying on everyone via their bank accounts to try to catch evasion.

Certainly there would have to be a government agency out there looking for evasion; hell they could even call it the "IRS" but I understand they want the advertising benefit of "getting rid of" it. The IRS *would* be gone, truly gone, under whatever name it is reconstituted, from the average person's life, and certainly from everyone's personal llife, under the FairTax; the government would be involved *only* with businesses and to a much lesser extent--and a much less destructive way--than they are now.

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Certainly there would have to be a government agency out there looking for evasion; hell they could even call it the "IRS" but I understand they want the advertising benefit of "getting rid of" it. The IRS *would* be gone, truly gone, under whatever name it is reconstituted, from the average person's life, and certainly from everyone's personal llife, under the FairTax; the government would be involved *only* with businesses and to a much lesser extent--and a much less destructive way--than they are now.

If under the Fair Tax the government will be able to collect the same amount of revenue it now collects -- a point the Fair Taxers strongly emphasize -- then it will still be stealing the same amount of wealth from us. I don't call that any "less destructive."

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If under the Fair Tax the government will be able to collect the same amount of revenue it now collects -- a point the Fair Taxers strongly emphasize -- then it will still be stealing the same amount of wealth from us. I don't call that any "less destructive."

Yes and no. certainly the level of parasitism is the same. (BTW they do it that way because they figure that reforming taxes AND cutting the size of government in the same bill-which they would like to do--is unmanageable now.)

But right now the income tax as it currently exists causes companies and individuals to make otherwise irrational decisions to reduce their tax load. Money is sunk into otherwise unproductive "tax shelters." The structure of our corporate taxes actually encourages multinational corporations to leave the US (a US company is taxed, by the US, on profits it makes here and abroad, and must pay the other country's taxes as well on the profits made abroad; a foreign company doing business here ONLY pays US tax here and the foreign tax there).

A sales tax would not be paid by corporations AT ALL (though it would be collected by those who sell things in the US) and thus this country would be the largest tax haven in the world. Companies locating here and producing goods for export would pay zero, zip, nada taxes on what they export.

Also the hundreds of billions of dollars spent on complying with the minutiae of the internal revenue code would vanish.

The tax bite out of our economy would be the same percentage, but it would be distributed in a more uniform, less arbitrary manner, making it less destructive to the economy as a whole.

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