Barack Obama and John McCain both propose a grab bag of tinkerings with the Tax Code, raising taxes on the rich, cutting taxes on corporations, cutting taxes on the middle class, this and that, tweaks and twiddles here and there in an enormously complex accretion of legislation and IRS Regulations called The Tax Code, that leaves me wondering if they aren't Tweedledum and Tweedledee, or Tweedledeedler and Tweedledumber.

They're just slapping Band-Aids on cancer. The cancer of an enormously complicated Federal Income Tax Code that boggles all minds that encounter it. An enormously complicated Federal Income Tax Code that hammers the economy for $350 billion a year in tax compliance and tax distortion costs, and produces nothing but tax returns.

Americans for Fair Taxation developed a proposal for a "Fair Tax," a national sales tax, that was taken up by presidential aspirant Mike Huckabee, and promoted by Neil Boortz and Congressman John Linder in The Fair Tax Book: Saying Goodbye to the Income Tax and the IRS. It was a good effort, headed in the right direction, for all the right reasons, but not politically feasible.

In a nutshell, the Fair Tax would be a 23% national sales tax that would replace all other personal and business income taxes, estate taxes, and so forth. It would be made ostensibly progressive with a "prebate" to each taxpayer equal to the amount of Fair Tax each would pay on income equal to the Federal Poverty Level. Thus, a single person would get monthly prebate checks of $199, or $2,392 per year, equal to the taxes he, or she, would pay on an income of $10,400, the Federal Poverty Level. The amount of the checks would increase with spouses, and children, so that income equal to the Federal Poverty Level would be, effectively, untaxed. Confused already? Yes, of course.

The fatal defect in the Fair Tax is that it is highly regressive. It enables high-income people to pay a much lower tax rate than low income people.

Example:

Mary Flores didn't finish high school. She works hard as a waitress, her feet hurt terribly at the end of every shift, and she makes $20,800 a year. She has to spend all her money on necessary living expenses. She's just scraping by. She gets $2,392 in "prebates," which refunds the Fair Taxes she pays on her first $10,400 of income, and she pays $2,392 in Fair Taxes on her second $10,4000 of income when she buys stuff she needs. She'll have to retire when she's too old to work anymore. Until then, she can't afford to. She pays Fair Taxes of $2,392 on an income of $20,800, for a tax rate of 12%.

Jack Sprat is a very successful stock broker. He works in a fine air conditioned corner office with a great view. After work he plays tennis. On other days he plays golf. Except when he goes sailing. He makes $10 million a year. He spends $1 million a year on a very nice lifestyle, paying $239,200 in Fair Taxes. He invests the other $9 million in stocks, bonds, and commodity futures. His investments aren't taxed. And he plans to retire at 40, when he has $200 million. Jack pays Fair Taxes of $239,200 on an income of $10 million, for a tax rate of 2.4%. Mary, earning $20,800 a year, pays five (5) times the tax rate that Jack Sprat pays.

This is terribly regressive, and for this reason, alone, the Fair Tax is politically impossible. And, unfair.

But it embraces some good ideas, chief among which is the fact that the Fair Tax would eliminate the estimated $350 billion each year that individuals and businesses pay for tax compliance, tax accounting, tax strategies, and tax distortions, $350 billion that produces nothing but tax returns. If that $350 billion weren't spent on producing tax returns, it could be spent on producing real goods and services that real people really want and need, such as food, clothing, shelter, education, transportation, healthcare, energy, and so forth.

There is another solution to this problem, one that eliminates 100% of the $350 billion cost of tax compliance and tax distortion, and also eliminates the regressivity problem of the Fair Tax. It is the PROGRESSIVE FLAT TAX.

The "Flat Tax" has gotten a bad rap, because a true Flat Tax makes everybody pay the same tax rate, no matter how little or much they earn, and this is much harder on low income earners than on high income earners. Low income earners need all the money they earn just to get by. America has long since decided that taxes should be progressive, so poor people pay lower tax rates than rich people. And a Flat Tax isn't.

But, the "Flat Tax" can be made progressive very easily, by the simple expedient of adopting a large Median Income Standard Deduction, equal to Median Family Income for married filers (now about $50,000 a year), and half that for single filers (about $25,000 a year). Median Income is, by definition, the point at which one half the population earns less, and one half earns more.

People earning less than Median Income would pay no income taxes, and people earning more than Median Income would pay a flat tax rate on all income above Median Income. Thus, as I propose, married couples earning less than $50,000, and singles earning less than $25,000, would pay no income tax. And those earning more would pay a flat tax of 20% on income above the Median Income Standard Deduction (MISD).

But before I get to the details, let me make a few things perfectly clear.

ALL TAXES ARE INCOME TAXES

What do you pay your taxes with? Money. And where do you get money? Income. Either current income, or saved income (savings and investments). Thus, all taxes are paid with income, and therefore all taxes are either direct income taxes (the "income tax") or indirect income taxes (the "sales tax," the "estate tax," the "gas tax," the "property tax," and so forth). Because all taxes are paid with income. Because there is nothing but income with which to pay taxes. And therefore, all taxes are taxes on income, i.e., all taxes are income taxes.

Some folk fervently want to abolish the income tax, but this really changes nothing, it just replaces a direct income tax (the "income tax") with an indirect income tax (the "national sales tax"). Six and half a dozen. We have to pay taxes somewhere, and wherever the tax point is, we pay taxes with income.

TAXES ARE NECESSARY

As long as we have a large, complex society, we will have a government. And as long as we have a government, it must collect taxes to operate. We can argue for all of eternity about what the government can and should do, and we surely will, but the irreducible fact is that we will have a government, and it must collect enough taxes to pay for whatever it does.

DEDUCTIONS, EXEMPTIONS, AND CREDITS = HIGHER TAX RATES

The government spends 20% of Gross Domestic Product on government operations. So, it has to collect 20% of Gross Domestic Product as taxes, or run a deficit. The Tax Code is riddled with Deductions, Exemptions, and Credits, intended to encourage and reward this or that behavior, such as the Home Mortgage Deduction, which encourages house buying, but does nothing for low income people who pay no income tax anyway, and helps high-income, high tax-bracket people who need the deduction the least, the most (thus, the Home Mortgage Deduction is highly regressive). But every time you give a Deduction, Exemption, or Credit, to some people, you have to raise the tax rates on everybody to make up for the revenue lost to the Exemption, Deduction, or Credit. Or, raise the deficit. Thus Deductions, Exemptions, and Credits, are a zero-sum game, a sleight of hand, a deceit. For every Deduction, Exemption, or Credit, on one hand, your have to raise tax rates on the other.

By eliminating ALL Deductions, Exemptions, and Credits, except a very large Standard Deduction, we can achieve maximum simplicity, and transparency, and do it at the lowest possible tax rate that will satisfy the government's need for money. And with a single, large, Standard Deduction, and a flat tax rate on all income above the Standard Deduction, we achieve maximum tax fairness, and put everyone on as level a playing field as possible.

ALL TAX CODES ARE ARBITRARY: SIMPLE AND FAIR ARE GOOD

All possible tax codes are arbitrary. There is no "natural" tax structure. The objective should be to make the tax code as simple and transparent, and fair, as possible, to minimize tax distortions, tax avoidance, tax evasion, and tax fraud. If the tax is viewed as simple, and fair, people will put much less effort into avoiding it than if it is seen as complex and unfair. A simple, fair tax eliminates the reasons and opportunities to game the system. A simple, fair, tax, reduces tax-avoidance behavior to a minimum. And maximizes tax compliance. A low tax rate reduces tax-avoidance behavior to a minimum, and maximizes tax compliance, by minimizing the incentive to spend money and take risks to avoid taxes.

THE PROGRESSIVE FLAT TAX

The Progressive Flat Tax would have two components: (1) a Business Income Tax (BIT), and (2) a Personal Income Tax (PIT). It would replace all current personal and business income taxes, including the Inheritance Tax, and the Capital Gains Tax, and eliminate the hated and bizarrely complicated Alternative Minimum Tax, which Congress in its infinite wisdom can't figure out how to abolish.

THE BUSINESS INCOME TAX (BIT)

Today's "business income tax" is not actually a tax on income, but a tax on profit. A business profits tax. This creates a great incentive for businesses to structure, or distort, their affairs, so as to maximize their income but minimize their taxable profit. This distortion can be eliminated by the simple expedient of abolishing the business profits tax, and replacing it with a true Business Income Tax, or BIT.

The BIT would be a 1% tax on the gross revenues, gross sales, gross income, of all businesses in the US, all sales and rents of goods and services, wholesale and retail. Because this creates a cascade of tax collection points - the Farmer sells wheat to the Elevator Operator, who sells wheat to General Mills, who contracts with Union Pacific Railroad to ship the wheat to General Mill's food factory, which sells cereal to Food Distributor, which sells cereal to Big Grocer, which sells cereal to you - the farmer, the elevator operator, the railroad, General Mills, the food distributor, and the grocer, each pay 1% of their gross revenue as BIT, so that a 1% BIT on all business income embeds a national sales tax of about 3%-4% in all retail sales, simply, transparently, and as fairly and painlessly as possible. This is equal to the business profits tax that would be paid if all retail businesses in America made a profit of 7%, and all retail businesses paid a tax rate of 50% on their profit.

Businesses could add on a BIT of 1% to all sales, or simply embed the BIT in their prices.

This would eliminate all business tax planning, all tax strategies, all deductions, credits, exemptions, all depreciation schedules, and all opportunities and reasons for gaming the tax system to avoid taxes. It would make the Business Income Tax simple, transparent, and put all businesses on a level playing field. It would eliminate 100% of the cost of tax compliance, for all businesses. They would simply report their gross revenues, and pay a BIT of 1% on their gross income from all sources.

THE PERSONAL INCOME TAX (PIT) AND THE MEDIAN INCOME STANDARD DEDUCTION (MISD)

The Personal Income Tax (the PIT, appropriate, since many of us think that paying income tax is "the pits") would be a flat tax rate of 20% on all income, from all sources, over the Median Income Standard Deduction (MISD). Median Family Income is currently about $50,000, Median Individual Income is currently about $25,000, so the MISD would, now, be approximately $50,000 for a married couple, and $25,000 for a single taxpayer. The Median Income Standard Deduction (MISD) would be a large standard deduction equal to Median Income for couples, or singles.

"Median Income" is by definition that income level at which 50% of the population earns less, and 50% of the population earns more. By linking the Standard Deduction to Median Income, we assure that the lower-earning 50% of the population never pays the PIT, and only the higher-earning 50% of the population pays the PIT at a flat tax rate of 20% on all income above Median Income.

This guarantees that the Flat Tax of 20% is always a Progressive Flat Tax, and that as Median Income rises or falls, those earning less than Median Income will never pay the Personal Income Tax, or PIT. Examples:

1. Jack and Jill are married, and earn $50,000. On their tax return, they would report a gross income of $50,000, deduct the MISD of $50,000, and pay no PIT. Their tax rate would be 0%. Anyone earning less than Median Income would never pay any Personal Income Tax.

2. Jerry and Rhonda are married, and earn $100,000. They would report $100,000 in income, deduct $50,000 as their MISD, and pay 20%, or $10,000, on their income of $50,000 above median income. Their tax rate would be 10%.

3. John and Jackie are married. They earn $200,000. They would report $200,000 in income, deduct $50,000 as their MISD, and pay 20%, or $30,000, on their income of $150,000 above median income. Their tax rate would be 15%.

4. Joe and Ramona are married. They earn $1 million. They would report $1 million in income, deduct $50,000 as their MISD, and pay 20%, or $190,000 on their income of $950,000 above median income. Their tax rate would be 19.5%.

For single filers, just cut the numbers above in half.

In 1992, Bill Clinton, George H. W. Bush, and Ross Perot, were running for president. On their tax return disclosures, Bill Clinton, with the lowest income, paid a tax rate of approximately 22%. George H. W. Bush, with more income, paid a tax rate of approximately 20%. And Ross Perot, the billionaire, with the most income, paid a tax rate of approximately 18%. Thus it appears that rich people with good tax strategies can pay an actual tax rate of about 20%, and with the Progressive Flat Tax I propose, we peg the Progressive Flat Tax to that 20%.

Yes, we abolish all other Deductions, Exemptions, and Credits, but the tradeoff for the loss of all that is (a) a very large Standard Deduction, equal to median family or individual income, and (b) a low, flat, tax rate of just 20%.

CAPITAL GAINS TAXES

Yes, in the Progressive Flat Tax I propose, capital gains would also be taxed at the same, low rate of 20%. If we tax capital gains at a lower rate (currently 15%) then we have to raise the tax rate somewhere else, on people who don't have income from capital gains. Many investors and stock traders earn their entire income from capital gains, and it strikes me as fundamentally unfair that they should pay a lower tax rate than people who earn their income other ways. Why should, say, a carpenter, or a doctor, or a miner, or a chef, pay a higher tax rate on his income than a stock trader?

DEATH TAXES, ESTATE TAXES

To make this work, at a rate of 20%, the Progressive Flat Tax must be levied against all sources of income, including capital gains and inheritances. This engages the debate on whether estates, inheritances, should be taxed at all. My answer to that is, Yes, because an inheritance is income to the person who inherits the estate, and if we abolish estate taxes, then we have to raise taxes somewhere else. If people are paying a 20% tax rate on income they earn from their current labor, why shouldn't they pay the same 20% tax rate on income they inherit, without labor?

This raises the problem that many people have had to sell family farms, ranches, businesses, and homes, to pay estate taxes. This problem has a simple solution, but Congress, in its infinite wisdom, hasn't figured it out.

The solution is to levy the PIT, the Personal Income Tax, the 20% Progressive Flat Tax, on liquid and easily liquidated assets, fungible assets, such as cash, stocks, bonds, and so forth. Even trust funds, as they pass from one generation to another. "Fungible" means non-unique assets, for instance, there is nothing unique about a dollar, or a stock, one can be traded for another, and stocks and bonds can be traded for dollars. Inherited fungible assets would be taxable in the year they are inherited.

But to protect family farms, ranches, businesses, and homes, these unique, non-fungible assets would only be taxable when they are liquidated, sold, so if an individual, or a family, inherits a farm, ranch, business, or home, they don't report it as taxable income as long as they don't sell it, as long as they keep it in the family. If, and when, it is sold, it becomes taxable income. This protects family farms and businesses from the tax man, as long as they stay in the family, and eliminates the complexity of tax-basis accounting for inherited assets, since the inheritance of the farm or business is non-taxable until it is sold, liquidated, then taxed as ordinary income at the 20% Progressive Flat Tax rate when it is sold.

TAX DISTRIBUTION

Currently, the lower income half of the population pays less than 5% of all income taxes, while the higher income half pays more than 95% of all income taxes. The Progressive Flat Tax would change this distribution of the tax burden very little, simply arranging so that the lower income half of the population would pay no Personal Income Tax (PIT), while the upper income half would pay all of the PIT. Since you can't squeeze blood from a turnip, so to speak, we can't finance a $3 trillion government on the backs of the poor. The "rich" have to pay most of the taxes, since they have most of the money.

Everyone would, of course, pay the Business Income Tax (BIT) embedded in the price of all goods and services, so everyone would have some skin in the game, but since rich people buy more stuff, and more expensive stuff, than poor people, rich people would still pay most of the BIT, which would account for approximately 25% of tax revenue, and all of the Personal Income Tax (PIT) would account for approximately 75% of tax revenue.

LAWYERS, CPA'S, AND THE IRS

The casualties of all this would be tax lawyers, tax accountants, and the IRS. Most of the work for these folk would disappear, since the tax code would be enormously simplified. The IRS would not be abolished, but it would shrink dramatically in size and cost. But, these are mostly pretty smart people, and as the $350 billion cost of tax compliance is liberated for more productive uses, they would soon be absorbed by the business boom that would follow this $350 billion "stimulus package" shifting $350 billion from manufacturing tax returns, to manufacturing other goods and services of real intrinsic worth.

THE STIMULUS PACKAGES

Replacing the current tax code withe the Progressive Flat Tax would give us a $350 "economic stimulus package," by freeing up the $350 billion spent to produce tax returns to produce other goods and services of real intrinsic worth. Opening up ANWR and the Coastal Shelves and the shale oil of the mountain states to oil production to replace the 5.4 million barrels a day we buy from OPEC for $745 million (at $138 a barrel) would add another $275 billion a year, enough to create nearly 11 million new jobs for Americans in America.

By adopting the Progressive Flat Tax, and opening up our own oil resources, we can create a $625 billion per year "economic stimulus package" without incurring any new debt, and without any new inflation.

And we can have an income tax code that is simple, transparent, and fair.