Is it Really Just the Flat Tax versus the Fair Tax (Sales Tax)?

Dan Mitchell, with the CATO Institute, provides some reasons why he prefers the Flat Tax over the Fair Tax (sales tax) in this video:

Unfortunately, the Fair tax has one glaring weakness in that a broad-based sales tax inevitably leads to tax pyramiding–the taxation of business-to-business transactions.  Pyramiding leads to all kinds of distortions in the marketplace.  Finding solutions to pyramiding either requires shrinking the tax base–and raising the rate–or dramatically increasing tax compliance costs.

While I am a big fan of the flat tax (and have also written papers about it in the distant past), there is a third-way out there which I have discussed previously.  A little known tax in New Hampshire called the Business Enterprise Tax.  It is much like the flat tax, but I would argue it is a little less complicated for businesses.

For businesses the flat tax works on a subtractive principle (start with receipts and subtract expenses) while the BET works on an additive principle (salaries and wages, interest and dividends).  While New Hampshire does not have a personal component like the flat tax, there is no reason why you couldn’t have one to compliment the business-side tax–that is for any other state but New Hampshire. 🙂

New Hampshire’s Business Enterprise Tax

I’ve had this posted over on one of my other projects–The New Hampshire Center for Economic Policy–but I wanted to cross-post this here at Wealth Alchemy as a follow-up to my recent post on immediate expensing.  You see, thanks to NH not having an individual income tax, in combination with the Business Enterprise Tax, NH has de facto immediate expensing for many of their businesses (though their corporate income tax erodes this benefit).  Overall, this certainly plays a key role in NH’s economic success story.

So what is the Business Enterprise Tax and why should anyone care?

The BET is technically an “income-additive value-added tax” (pdf) that only taxes consumption and is model for good tax reform.  When it was first enacted in the early 1990s, the BET improved NH’s business tax climate because it was used to reduce/eliminate many other business taxes.  For example, the corporate income tax rate was lowered to 7 percent.

Bill Ardinger, one of the architects of the BET, wrote an excellent article summarizing the ten benefits of the BET (pdf) as a model for tax reform which are shown below:

  1. It is an economically neutral tax.
  2. It is a simple tax to compute and administer.
  3. It is a fair tax.
  4. It is a comprehensive tax.
  5. It is deductible for federal income tax purposes.
  6. It was enacted as a revenue-neutral tax reform.
  7. It avoided an “all at once” academic approach to tax reform.
  8. It addresses the jurisdictional challenges to traditional tax systems resulting from changing economies and technologies.
  9. It is a financially stable tax.
  10. It is a politically stable tax.

Ardinger has also pitched the BET to other states as model tax reform legislation.  Here is his presentation (pdf) to the Pennsylvania Business Tax Reform Commission.

I have an op-ed on the BET along these lines that I’m working on getting placed . . . when I do get it published I will post it.