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. 🙂