Frequently Asked Questions
- Why is the FreedomTax called the “FreedomTax?”
- Would the FreedomTax abolish the IRS?
- Would some taxpayers still have to file a tax return under the FreedomTax?
- What would be the impact of the FreedomTax upon tax-exempt organizations?
- What would be the impact of the FreedomTax on state and local bond financing?
- What about homeowners with large home mortgages, who would lose their home mortgage interest deduction?
- Would the FreedomTax, ending of the tax-advantage of pension, 401(k), and IRA plans, hurt savings?
- Would the FreedomTax hurt Social Security recipients?
- How would insurance proceeds be taxed?
- How would welfare programs be treated?
- Why won’t capital gains be taxed under the FreedomTax?
- Why would the FreedomTax repeal the present U.S. system of worldwide taxation of income?
- Won’t the FreedomTax hurt the poor and help the rich?
- Wouldn’t the FreedomTax be a double-tax on the income of those at the bottom of the wage scale because they will still have payroll taxes deducted from their pay?
- Would the FreedomTax, as it would be structured, be more consistent with the 16th Amendment than is the present income tax?
- If the FreedomTax is so great, who would oppose it?
- So, if I like the FreedomTax proposal, what should I do?
Why is the FreedomTax called the “FreedomTax?”
The “freedom” moniker is to give accurate description to a proposed new and radical income tax system that will release Americans from the overwhelming burdens and constraints imposed upon them under the current high rate income tax system. But there is much more from the FreedomTax than just that.
First, it would free taxpayers from their serfdom to the IRS. The present system, based upon the filing of personal income-tax returns every year, functions as a direct tax on the person filing the return. The tax is assessed personally against him. That taxed person is required to make an annual accounting to the IRS of IRS’s share of his personal income. Revolutionary, the FreedomTax would overturn this tax-the-person focus, with a true income tax imposed on all income, regardless of payor, recipient, the nature of the income, or how it might be spent. The FreedomTax, with at-source taxation on most income, would be so efficient that most Americans never again would have to file an income tax return, not even a postcard return!
This is not an impossible concept. Think about the tax efficiency and fairness of the motor vehicle fuel tax paid at the pump when you gas-up your car. For most people, the FreedomTax would operate in a similar fashion. Actually, we already have a type of at-source income taxation in the form of income taxes withheld from salaries and wages and back-up withholding for other income, and these withheld amounts are carried over to the taxpayer’s return as a credit on the total tax he owes.
Second, not only would the FreedomTax free the average American from worry about being audited by the IRS and owing more tax, it would end the worry of Americans about hackers filing fraudulent income tax returns with the IRS using their names. It would end hackers accessing the IRS database for their personal information for identity-theft purposes. And, it would render the IRS powerless to use the tax system as a weapon against political opponents, where it is now unchecked and a serious threat to freedom and democracy.
Third, the FreedomTax would liberate the economy from the oppressive drag of the income tax on economic growth. The present taxing system, antiquated and grossly inefficient, stifles initiative, distorts business decision-making, and places America under a competitive disadvantage to its trading partners.
We’ve all heard about Tax Freedom Day. The modern, efficient, and even-handed low-rate design of the FreedomTax would make every day on the calendar Tax Freedom Day.
Would the FreedomTax abolish the IRS?
The FreedomTax will end the IRS, as we know it. To the average American, this will be equivalent to abolishing it.
Under the FreedomTax, most Americans would never again have to file an income-tax return. The tax on most types of personal income (dividends, interest, pensions, and salaries and wages) would be collected at source. Most Americans would no longer have any dealings with the IRS, or the IRS with them.
The FreedomTax’s simplicity, fairness, and low 10% rate of taxation would substantially reduce compliance burdens and the incentive to engage in tax avoidance transactions and tax evasion. This would be in contrast to the present high tax-rate system with innumerable special rules and tax exceptions, which requires a heavily intrusive and punitive IRS to avert massive non-compliance.
The IRS now requires nearly 95,000 employees and an annual operating budget of almost $13 billion to administer a taxation system having a design based upon over 77,000 pages and 5 million words of incomprehensible tax law. The FreedomTax would have a simple and less-burdensome tax design, estimated to reduce the size of the present Tax Code by 95%. As already noted, it would restructure the income tax into a true income tax having a low flat-tax rate, simple in application, and tax-efficient. With a “good tax” to administer, the IRS will require far fewer employees and would be dramatically down-sized, saving the Treasury billions in administrative costs. The old IRS will be gone.
Today’s IRS monolith, armed with the compulsion of universal filing of personal tax returns, too often has been seen as the facilitator of special government programs and tax subsidies. These run counter to the revenue-raising purpose of the income tax and make the income tax mess even worse. Ending the universal filing of personal tax returns will make the income tax system unsuited for these programs and subsidies and the disparate treatment of taxpayers.
The FreedomTax would require a far smaller, less intrusive administrative agency and this only to perform needed ministerial functions. No longer needed would be the large, powerful, and omnipresent IRS to keep our archaic and inefficient income tax system running. Its successor would be a modest, low-budget, non-intrusive Treasury Department agency with benign administrative duties.
Would some taxpayers still have to file a tax return under the FreedomTax?
Yes, in some cases. As noted above, most Americans, those having income only from salaries and wages, interest and dividends, and retirement plans (annuities, pensions, and Social Security), never will have to file a Federal income tax return again, not even a postcard return! The structure of the FreedomTax is for the payors of this income to deduct the 10% flat-tax from this income and pay it to the Treasury. In the hands of the recipient, that income would be already taxed, not to be the subject of any tax return filing.
But, business and rental income falls into a different category. Here, people who conduct a trade or business (such as a shop or consulting business) or who rent property to others (whether it be a home rental or vacation property), incur expenses to generate this income. They would need to file a tax return for these expenses to be taken into account to determine the amount of their business or rental income upon which the 10% flat tax would be applied. Importantly, these returns would include only that income, and not any income already taxed at source.
What would be the impact of the FreedomTax upon tax-exempt organizations?
The FreedomTax would end the tax-exempt status of today’s non-profit organizations, but their donor contributions would continue to be exempt from the income tax because gifts and bequests are not income. All of their dividend and interest income would be taxable, as would their now tax-exempt income from a business or rental activity related to their exempt purpose. The governing principle of the FreedomTax is that all income, regardless of recipient, amount or how used, is to be taxed at the uniform flat-tax rate of 10%, and all income should bear its fair share of the income tax burden.
As a shelter of income from taxation, the deduction for charitable contributions would be repealed. Loss of this deduction is not likely to have much, if any, negative impact upon the level of charitable gift-giving. Americans have always been generous charity gift-givers, even before there was an income tax and a tax deduction for charitable contributions. The deduction functions as a subsidy for the making of charitable gifts and does little to motivate a gift to a particular charity.
The deduction itself derives its value from high income-tax rates. In a low-tax environment, such as the FreedomTax, the deduction would lose its potency as a tax subsidy or incentive for gift-giving. Thus, if the deduction were to be retained with the tax rate reduced to 10% (from current high levels), people would see the rate reduction as the primary cause of an adverse impact on charitable giving, if any, from the proposal. So, if there is to be objection, it should be directed at the rate reduction of the FreedomTax, not to the further repeal of the deduction itself. But, again given the generosity of Americans, it is doubtful that the FreedomTax with its tax-rate reduction would have an adverse impact upon charitable giving.
But, the FreedomTax would be a plus to these non-profit organizations. Without a tax-exempt status to maintain, these organizations no longer would be concerned with any IRS questioning of their conduct or organizational objectives, and would be given the freedom from having to file the now-required expansive tax returns with the IRS. In terms of overall tax simplification, all of the special tax provisions in the Tax Code and regulations pertaining to tax-exempt organizations, including the voluminous tax rules pertaining to private foundations, would be repealed.
What would be the impact of the FreedomTax on state and local bond financing?
The interest exclusion for state and local bonds makes them tax-advantaged over other interest-paying obligations, and more attractive to investors. But, this advantage arises from the high income-tax rate imposed upon other interest income, to be greatly reduced under the low 10% flat-tax rate system of the FreedomTax. Thus, most of any impact upon state and local bond financing would come from this general tax-rate reduction, not from repeal of the exclusion.
The exclusion has already been partially eroded. State and local governments are subject to complicated and sometimes costly rules in order to maintain the tax-exempt status of their obligations. This adds to their financing costs. And, there has been an erosion of the exclusion at the investor level. The thought-to-be “tax-exempt” interest enters into several income-tax computations causing taxpayers to owe more income tax than they would owe without having that interest income.
The FreedomTax is designed to be tax-neutral, and not to favor the financing of certain entities over others. If state and local governments must pay higher interest rates to market their debt obligations to investors, they will be at par with all other issuers competing in the marketplace to raise capital for their needs. Granting a special subsidy to finance favored debt operates to distort the allocation of capital in the country. And, this distortion can also be seen in the tendency to be less frugal with money borrowed at below-market rates.
What about homeowners with large home mortgages, who would lose their home mortgage interest deduction?
Taxpayers should realize that the home mortgage interest deduction, if retained, would be of much less value under the 10% flat-tax system of the FreedomTax. If the homeowner is in the 28% tax bracket, his $1,000 tax deduction is worth $280, but with rates reduced to 10%, the deduction would be worth only $100. Offsetting the loss of the reduced-value mortgage deduction to the taxpayer would be the larger tax break that all income would be taxed at the flat 10% rate. It is the high marginal income-tax rates, which make the mortgage deduction so essential today.
Would the FreedomTax, ending of the tax-advantage of pension, 401(k), and IRA plans, hurt savings?
No. The FreedomTax would be a major positive for savings and investment. The present system very negatively impacts savings because it imposes high marginal tax rates on income which is invested, as well as on the returns from those reduced investments made. Because high tax rates are an evil to savings and investment, these tax-advantaged savings arrangements have been concocted to remedy that evil. If you rid the system of the evil, there’s no need for concocted remedies.
The FreedomTax would have a low flat-tax rate of 10%, taxing all interest and dividend income at the source of payment. Because capital gains are not income, they would not be taxed. The tax climate for savings and investment would be greatly improved.
Taxing all savings and investment the same will bring great simplification to the Tax Code and tax administration – no Alternative Minimum Tax (AMT), no phase-out rules, and no special tax schedules and worksheets to figure one’s personal tax liability. With the old high tax rates gone, no longer would there be a tax need for the above concocted-saving plans. These plans have their own complexities, costs, and pitfalls, all to end under the FreedomTax. The FreedomTax would not outlaw these plans, and any income received inside those plans would have been already taxed and thus distributable tax-free to the beneficiaries.
Any reduction in this country’s saving by reason of the lost attractiveness and less use of these plans would be more than made up from reduced overall tax rates making saving and investment generally more attractive. Consider these figures for comparison purposes: Under the present system, income taxed at say, 28% leaves only 72% to be invested. A 5% return on that 72%-investment would yield 3.6% after-tax (relative to the initial pre-tax amount of the income invested). But under the FreedomTax, income taxed at 10% would leave 90% to be invested, and the 5% return on that would give the saver or investor an after-tax return of 4.5% (a 25% higher after-tax return).
Would the FreedomTax hurt Social Security recipients?
No. The FreedomTax would not make any changes to the Social Security Program. The FreedomTax, as a true income tax taxing all income the same, would tax at-source the income portion of all Social Security retirement payments.
In many cases, the FreedomTax’s 10% tax rate would be lower than rates under the current income tax system. First of all, the current tax law has complicated rules governing the taxability of Social Security retirement income. In general terms, if a taxpayer has less than $12,000 of other income, none of his Social Security benefits are taxed. And, for joint filers with combined income between $32,000 and $44,000, up to 50% of Social Security benefits are taxed, but if combined income is over $44,000, 85% is taxable. Of course, as the taxpayer’s other income pushes him into a higher tax bracket, the effective tax rate on his Social Security benefits increases.
Take the case of a taxpayer (married and filing a joint return) with $15,000 of Social Security income and $45,000 of other income. Today, he would be in the 15% tax bracket with 85% of his Social Security benefits taxable, for an effective tax rate of 12.75% on those Social Security benefits. However, under the FreedomTax and its low 10% rate, that would be the tax rate on his Social Security benefits along with the rest of his income.
Another aspect of the low-rate FreedomTax is that it would tax only the income portion of the Social Security benefits. The Social Security Administration has a record of all contributions made by the beneficiary to his Social Security account by reason of the Social Security taxes deducted from his salary over his lifetime, including the employer portion paid on his behalf. These contributions made represent the cost of the benefits to be paid to him in retirement. That cost would first be recovered from his Social Security benefits to be paid out, before he would be regarded as having any income (to be at-source taxed).
How would insurance proceeds be taxed?
Insurance proceeds are to compensate for a loss, and hence are not “income” in the sense of increasing one’s financial net worth. As such, insurance proceeds generally would not be taxed under the FreedomTax. This would include insurance proceeds paid for loss of life, for property loss, or for medical treatment. However, in the case of insurance to insure against loss of business income (the premiums for that insurance coverage being a deductible business expense), those proceeds would be taxable the same as the lost income would have been, if not lost.
The rule that insurance proceeds generally are not income under the FreedomTax, would not apply to payments under government programs simply labeled as insurance, unless they were structured as insurance programs. The beneficiary, therefore, must make payments into the program in the form of insurance premiums, such as in the case of Medicare.
How would welfare programs be treated?
All welfare payments, such as for food stamps and housing allowances, are income and therefore would be subject to 10% at-source taxation under the no-exception principles of the FreedomTax. Congress could gross-up those welfare payments for the 10% income tax to be imposed (thus making the gross-up part of the welfare budget). This would be the proper course to follow rather than writing into the tax law a special tax break to exempt this income from taxation. The FreedomTax is based upon the no-exception taxation of all income, assuring that all income bears its fair share of the income tax burden. One tax break leads to yet another. The income tax system should not serve as a breeding ground for ever-more tax breaks and ultimately resulting in higher tax rates.
Why won’t capital gains be taxed under the FreedomTax?
Capital gains are not income. It’s a misnomer to call them “gains” or “income.” They are due to an increase in the value of property already owned and present before its being sold or exchanged for other property of the same value (the so-called taxable event). That sale or exchange transaction itself does not increase the owner’s wealth nor does it amount to an in-flow of income. The taxing of capital gains is akin to property taxation of one’s assets and wealth.
Analogous to the taxation of capital gains as income would be the taxing of the increased earning power of a worker changing to a higher-paying job. His gain would be measured by the extent the value of his earning power from his new job value exceeds the value of his earning power from his old job. The value of property will increase over time due to improvements made and to an opportunity presented for a better use. This is also the case of a worker, who with more training, experience gained, and an opportunity presented for a better job, can realize his increased value by effecting a job change. Income taxation is about the taxing of income, not the property or worker producing that income.
Why would the FreedomTax repeal the present U.S. system of worldwide taxation of income?
U.S. income taxation can be justified only in the case of activities receiving direct benefit and protection of U.S. law. Activities conducted in foreign countries derive their benefit and protection from the country in which the activity is situated and conducted, to be taxed there.
Worldwide taxation is a flawed concept. It’s about taxing income earned outside the borders of the United States of America, based upon the U.S. having jurisdiction and power over the person earning the income. This is yet another illustration of the income tax being a tax on the person, and not a true tax on income. The U.S. is without jurisdiction over the foreign income earned, with no power in the foreign country to levy a direct tax upon it (or to give protection to it). So, in order to tax income outside of its jurisdiction, the IRS taxes the person in the U.S. whom it can physically levy upon.
The absurdity of the U.S. system of worldwide taxation is apparent from recent news reports about the IRS trying to tax Boris Johnson on the sale of his house in London. Mr. Johnson is a long-established citizen and resident of the UK and the high-profile mayor of London. But, he happens also to be a citizen of the United States, and it’s this pretext upon which the IRS claims the right to tax him on his London house gain! Until the IRS relents, Mr. Johnson would be well-advised to keep his person outside the United States.
The FreedomTax would tax only U.S. income. Specifically, the foreign earnings of U.S. citizens and U.S. companies would not be taxed. Similarly, U.S. citizens earning wages abroad would not owe any U.S. income tax on those wages; nor would their employers be required to withhold any tax for the IRS. But, dividends and interest income paid by U.S. persons to foreign persons would be subject to at-source income taxation under the FreedomTax, unless there would be a treaty agreement to the contrary.
Won’t the FreedomTax hurt the poor and help the rich?
The FreedomTax is not such a tax; it treats everyone alike. This question carries with it the premise that our income tax is – and any reform made should continue it as – a tax on the person, not to be a direct tax on income. A true income tax is one that treats everyone the same. It has only one purpose – to impartially raise revenue, and not to target people or certain groups for special benefit or to redress wrongs against those seen as deserving unfavorable tax treatment. The FreedomTax, as a true income tax, would end all tax breaks and assure that all income bears its fair share of the income tax burden. In that sense, it’s the Egalitarian Tax. It’s a proportional income tax system under which the rich, with all tax breaks ended, will pay more than the poor.
To be expected, there will be some who will claim the proposal would not deal with the “problem” of the wealthy getting all the money and those at the bottom getting nothing. This claim, to the extent valid, essentially is a criticism of how society and the economy are organized, perhaps even a call for direct legislatively-enacted social-economic remedies. On this, the claimants themselves should have the burden to originate, advance, and defend such proposals. But, this claim cannot be regarded a serious criticism of the FreedomTax itself as failing to be a true income tax, or failing to be simple, efficient, and less costly to administer.
As already noted, the FreedomTax would be a true income tax of modern and tax-neutral design. All income would be taxed at the same. It’s the Fair-Tax, assuring that all income bears its fair share of the income tax burden. It’s the Impartial-Tax, treating all people, rich and poor, alike. It’s the Efficient-Tax, ending the IRS as we know it, freeing-up the billions it spends on administrative and compliance costs, and massively reducing taxpayer compliance burdens. It’s the Pro-Democracy Tax, ending IRS power to use the income tax against political opponents. It’s the 21st-Century Tax, modern in design and structured to avert cyber-hacking of personal data in IRS files for identity theft and other nefarious schemes. And, it’s the Pro-Growth Tax with the lowest tax rate proposed, to end the drag and disincentives under the present system on saving, investment, and job growth.
Looking at the big picture, it’s difficult to see how the poor and jobless would be hurt from this.
Wouldn’t the FreedomTax be a double-tax on the income of those at the bottom of the wage scale because they will still have payroll taxes deducted from their pay?
No. The payroll taxes (i.e., the FICA and Medicare taxes) deducted from worker salaries and wages are not income taxes. So, the FreedomTax is not a double-income tax on their wages.
It’s a ruse to contend that those who have FICA taxes and Medicare taxes deducted from their wages are paying income taxes (because these taxes are based upon the amount of their wage income). These payments, called “taxes” for collection purposes, are measured contributions to specific insurance programs run by the Federal Government for the benefit of the individual worker. When credited to his individual account in the program, these program taxes accrue to him a contribution benefit. In contrast, the income tax paid on wage, interest, and dividend income does not earn the taxpayer any benefit in his individual Social Security or Medicare account.
The double-tax claim would have merit if the Social Security and Medicare Programs were to be abandoned and the program taxes continued and collected as part of the general revenues.
Would the FreedomTax, as it would be structured, be more consistent with the 16th Amendment than is the present income tax?
Yes. The present income tax is structured with the universal requirement that every taxpayer file a personal income-tax return reporting to the IRS all income received and with that return, the tax is assessed against, levied upon, and collected from him. Under the FreedomTax, however, most income would be levied upon and the tax collected from the income itself at the payment source. Only business and rental income after deduction of the income-generating expenses would continue to be taxed under a limited tax return system, with the tax collected from the business activity.
The 16th Amendment provides: “The Congress shall have the power to lay and collect taxes on incomes, from whatever source derived ….” (Emphasis added). The literal language of the 16th Amendment authorizes only direct levy of the income tax on incomes, not on persons.
If the FreedomTax is so great, who would oppose it?
Actually, the FreedomTax is likely to face very strong opposition from groups not seeing the reform as directly benefiting them. Those not paying much, if any, income tax are certain to oppose the FreedomTax. They prefer the person-focus of the present system – so long as that focus is upon others to bear more than their fair share of the income-tax burden. Selfish and short-sighted, they do not see their tax breaks as bearing any responsibility for the high marginal tax rates so detrimental to savings, investment, and economic and job growth.
There are the many groups, now fully adapted to the income tax as it is, who would see the loss of the tax breaks for their customers and clients as a detriment. Home mortgage lenders, insurance companies, municipalities selling bonds, and even tax-return preparers would see the FreedomTax as an enemy. But, the value of those tax breaks becomes much diminished with the tax rate at 10%. The FreedomTax is intended to be a tax-neutral income tax, not one to distort economic decision-making or to favor one competitor over another.
Then, there are the fearful taxpayers, wedded to their tax deductions and personal tax breaks which function as their personal shield against high marginal tax rates. Most income-tax reform proposals to date would leave tax rates too high being timid about serious income-tax base broadening. Not able to cut rates to an attractively low level, they must retain the popular tax breaks (such as the mortgage-interest deduction and deduction for charitable contributions) to gain popular support. These proposals, with still too high tax rates, re-enforce the notion that America always will have high tax rates, and thus the prized tax breaks are seen ever more important to most taxpayers.
The FreedomTax rejects that notion. It would have a low flat rate of 10%, making tax deductions far less valuable. The FreedomTax would end the universal filing requirement of personal returns, which is the vehicle of the graduated tax-rate system and for the granting of tax breaks narrowing the tax base and leading to higher income-tax rates than necessary. Without the universal personal-tax return system, the graduated high-marginal tax-rate system cannot work. This means that under the FreedomTax, tax rates could be increased only as a general tax-rate increase made across-the-board with all income to bear the burden of that increase. So, with the FreedomTax, fearful taxpayers should be more willing to forego the popular tax breaks knowing this new income tax system is very unlikely to return high marginal tax rates upon them.
So, if I like the FreedomTax proposal, what should I do?
It’s not going to happen, if you sit on your hands. The challenge to supporters of the FreedomTax is to talk-it-up and convince Americans (including your representatives in Congress) that the proposal would benefit everyone in terms of economic growth (particularly job and wage growth). Just from its low-rate income tax, there would be more disposable income available for savings and investment. Tax burdens would be lightened.
It’s going to happen, if you act decisively in your community, county and state to help mobilize a nationwide grassroots movement.
You can also endorse The FreedomTax and you can volunteer. Authorized representatives of organizations and companies, including small businesses, can click the “Endorse Us” button on our homepage or endorse The FreedomTax from here by completing the endorsement form. Encourage other organizations to do the same. And, you can also sign up as an individual to become a volunteer leader in your state.
There are many selling points to the FreedomTax: Most people would never have to file an income tax return again. With at source collection and without the universal tax-return requirement, there would be no accumulation of personal information at the IRS to be used as a weapon against political opponents and there would be no accumulation of personal information in the IRS data banks to be hacked. It’s the ultimate fair tax, low-rate such that all income would bear its fair share of the income tax burden. It would bring about great simplification, reduce the Tax Code by an estimated 95%, and end the IRS as we know it. It would end the focus of the income tax as a person tax. It would make every day Tax Freedom Day.