An interesting twist on the flat tax.

Laurence J. Kotlikoff in his essay titled "Is The United States Bankrupt?" (pdf) proposes an interesting fix for the US tax system which is different than other flat tax schemes that I have heard before: A 33% federal sales tax on all goods and services to replace all other federal taxes - income tax, corporate income tax, FICA, etc. To make this tax more equal for the poor, he proposes an end of year rebate equal to the average spending of people at the poverty line for everyone.

From his essay: "The proposed sales tax has three highly pro-
gressive elements. First, thanks to the rebate, poor households would pay no sales taxes in net terms. Second, the reform would eliminate the highly regressive FICA tax, which is levied only on the first $90,000 of earnings. Third, the sales tax would effectively tax wealth as well as wages, because when the rich spent their wealth and when workers spent their wages, they would both pay sales taxes."

This sales tax effectively eliminates the complex definitions of "income" from the tax code. If you don't need to worry about what is and what is not a gain, then you are free to maximize your own interests when investing. Further, you don't have to find your MAGI to determine what taxes you owe. Although to many, these are not overly complex tasks, to the majority of Americans you might as well be asking them to fly to the moon.

Beyond the massive simplification of the tax code and basically eliminating companies like H&R Block which act like an additional tax on the poor, it encourages saving and investing. The tax rate for capital gains is zero - you only get taxed when you spend the money.

If you are wondering about his conclusions from the provocative title of his article - according to Kotlikoff the US is indeed bankrupt. Very interesting and definitely worth a read. However, be sure to also read the commentary on the article by Anjan Thakor for a more balanced view. Thakor points out that the US is probably not at the point of liquidation (Chapter 7), but more likely is going to be forced to renegotiate it's obligations and debts (Chapter 11).