The Unfair Tax
One of Mike Huckabee’s most outrageous proposals during this election campaign has been to abolish the IRS. Of course he gets applause every time he mentions this. Crowds love it. But the tax that he proposes to replace the federal income tax is completely mislabeled as the “fair tax.”
You can read about the Fair Tax from its supporters at fairtax.org, or you can check the facts at factcheck.org. I would recommend reading everything on both sites, because then you can pretty clearly see through the bull and see what the fair tax would really do and the problems it would have. This quote from factcheck probably sums it up: “While there are several good economic arguments for the FairTax, unless you earn more than $200,000 per year, fairness is not one of them.”
Essentially, the Fair Tax is a national retail sales tax. It would tack on at least an additional 30% to every retail item that Americans buy. It also comes with something called a “prebate,” designed to pay each American a monthly equivalent to the FairTax paid on essential goods and services, also known as the poverty level expenditures. The prebate is paid in advance, in equal installments each month. The prebate would keep this tax from destroying the poor, and would keep the appearance of a progressive system.
However, this new system would have many huge flaws and regressive features. The current gas taxes would not be repealed, so the price of gas would go up by over a dollar. That means the price of every good that is transported on trucks or trains would go up significantly also. Capital gains, dividend, and estate taxes, which apply almost exclusively to the very rich, would be completely abolished. It is well-known that the wealthy do not spend the full amount of their income. Lowe class Americans spend very close to 100% of their income, so all of it would be taxed (and they would get some of it back in the prebate); middle class Americans also spend close to 100% of their income, so they would bear the brunt of this new tax (and the prebate wouldn’t help much); upper class Americans spend a very low percentage of their income on retail goods. Most of their money is invested and would never be taxed.
Additionally, the Fair Tax would apply to some other things that aren’t normally considered “consumption items” that would likely hurt the lower and middle classes: purchases of new homes, rent, interest on credit cards, mortgages and car loans, doctor bills, utilities, and legal fees would all be taxed at 30%.
Like the people at factcheck said, unless you earn more than $200,000 per year, fairness is not one of arguments in favor of the Fair Tax.
Hmmm.. Zero responses …could it be that others see that your talking out of your anal orifice? Factcheck.org is as far from giving actual FACTS as you can get when it comes to the Fair Tax. First of it is just plain disingenuous to say that there would be a 30% tax added onto the cost of everything you buy, unless you consider the ENTIRE Fair Tax plan. So, how about if we try to use some of that intelligence that you like to make people believe that you have, o.k., are you ready? So, just imagine for a minute, ALL of the Federal Taxes that the Fair Tax talks about eliminating are GONE. Now take a minute…or five..if you need it, and just imagine what will happen to the prices of goods and services when Income Taxes, Payroll Taxes, Gift, Estate, Capital Gains, Alternative Minimum, Social Security/Medicare Taxes, Self-Employment, and Corporate Taxes…they are all gone! Now take a few minutes….just completely forget about the Fair Tax, etc. Just concentrate on what Business would be like, what would happen to the price of Goods, and Services, what would happen to the American Worker’s paycheck…what kind of Intelligent business decisions can be made when no tax code is hindering or influencing the decisions, just immerse yourself in the idea of what things would be like without all of the above taxes. Now, if you have any intelligence AT ALL, and are completely honest with yourself, you have to come to the conclusion that #1.) the price of goods and services would come down in an equal amount to the taxes that were levied upon it previously, (The Well renowned economists and millions of dollars of research, have determined the amount of reduction in price will be 22%). #2.) Your Paycheck that used to say John Doe $500.00, Federal Government $300.00, State and Local Government $100.00 will now read John Doe $800.00, State and Local Government $100.00.
O.K., with me so far right? So, forgetting about the Fair Tax for a minute…. You are now at 22% price Reduction on everything you purchase, AND You now have $300.00 more dollars in your paycheck.
Now, we need to pay for the Federal Government Services that are provided for every American, So we come in with the Fair Tax, which is 23%, which is the rate it will take to product the same amount of revenue the government currently collect.
So, we’ve reduced the price of goods and services by 22%, given you $300.00 more in your paycheck, but then come back with a 23% Sales tax so we can still fund the government. And so that the plan completely UN-TAXES the poor, and eliminates the Fair Tax on EVERYONE for the necessities of life, the government will send out a check at the beginning of the month (just like they currently do with Soc.Sec checks). For a family of Four in 2007 that would be $658.00 a month!
The Fair Tax calculations are not just some average joe’s sitting in an office with a calculator coming up with the figures. These are world renown Business and Educational economists that have spent thousands of hours, running through computer modeling programs, using undeniable facts and figures to come up with this plan. Here’s a link to the over 75 Economists who back up the plan and the numbers; http://www.fairtax.org/PDF/Open_Letter.pdf
Sure there are alot of people who will twist the facts, demagogue, and even flat out lie, about the plan. But if your honest with yourself, and honestly consider the plan, it’s not only realist, but FAR FAR better than what we have now!
While I won’t say that the Fair Tax is the best option, it does appeal to me in that it could encourage people to save more/spend less. What other tax systems do you like that would also have a similar effect of encouraging higher savings rates?
Correct me if I’m wrong Dennis but only products that are actually made in US would be subject to a price reduction due to the removal of federal taxes. All other products made outside of the US will retain their current price and will have an extra 23% federal income tax placed on them. So yes, the amount of take home pay in my paycheck “may” go up a bit, but the reality is that not all product prices will remain the same.
The first comment on this thread amused me greatly. The line between passion and immaturity is thin indeed. I’m more inclined to believe the analysis of legitimate think tanks from across the spectrum than that of an advocacy organization on an issue where my expertise is somewhat limited. All of this, however, is rendered generally moot by the fact that this is NOT GOING TO HAPPEN! Even if something truly bizarre was to happen and Huckabee not only won the GOP nomination but the White House as well, there is no chance in hell that this proposal is going anywhere past committee on the Hill. Perhaps it makes for interesting talk fodder, though I don’t think it does. There is a reason that the economic establishment of the Republican Party all but totally ignores the Fair Tax. Maybe its because they are too wedded to the almost equally absurd idea that all tax cuts increase revenues, but I imagine it has more to do with the fact that even they realize that politics is, at its most basic form, the art of the possible.
Corey, Yes you are absolutely right. So, This will be an INCREDIBLE advantage American products and the worker’s that make them will have over the rest of the world! There are Trillions of dollars of investment that will Flood into the Economy because the manufacturers will have such a tax advantage over other countries that it would be ridiculous to not manufacture their products in the U.S.A. Another thing to consider is this… the American worker is already the most productive worker in the world. But right now if your making 15 dollars an hour and get time and a half for overtime, you currently have to take into consideration the fact that by working overtime, you are now put into a higher tax bracket…so in essence the more you work, the less you take home. Under the Fair Tax, if you get 15 and hour plus time and half for overtime = $22.00 and hour…You Keep it ALL except for state and local taxes.
Passion and immaturity do seem to coexist here. Also, there is a good amount of optimism as well as misrepresentation.
The 23% characterization deals with the total amount of taxes that would be included in the total price of a good, but another way of saying that is to say that it would be an additional 30% on top of the base price. It is just misleading to refer to it as a 23% tax because nobody calculates the amount of tax as a percentage of the final price. We always always always calculate taxes as a percentage of the base price.
It does seem likely that the price of some goods will drop, but it is utterly impossible that they will drop down enough to cancel out the huge amount of sales tax. That just doesn’t make common sense that you could eliminate all of the current federal taxes and not have any net increase in the cost of the items that are taxed.
This also amused me: “John Doe $500.00, Federal Government $300.00, State and Local Government $100.00.” Evidently this “John Doe” is in a higher tax bracket than we currently have right now on the federal level (37.5%) and his state and local taxes are also crazy high at 12.5%. Nobody I know pays anything close to that. In fact, almost half of American households pay nothing in federal taxes or they get it all back. So the “John Does” among us would really lose out in this “fair” tax, wouldn’t they?
I do admire your zeal for this issue, but it probably would do you some good to look at some sources beyond the single issue advocacy group that is responsible for this disaster of a proposal.
Well yes and no Dennis, because jobs and manufacturing are currently leaving the US due to worker wage levels, not due to the federal taxes that are levied on US made products. So, in order for what you’re saying to be true, US wages must also dip in order to make it attractive for foreign companies to come and invest. Right?
Dennis, do we know you in real life? You’re not a member of this fairtax.org group, are you?
Welcome to the blog, by the way!
I think the fact there wasn’t any responses initially is because most of the people who reply are on vacation/break. We just ended a semester, Dennis.
Dennis’s caustic remarks are quite contrary to what he purports represent, but welcome to the blog, nonetheless. It’s always good to have a good passionate blogger, even if he/she comes across as a bit derisive.
It seems to me that most strong advocates get lost in the speculation of what could possibly happen if something like the fair tax was adopted, but let us come back to reality for a second. Hypothetically speaking, even if Huckabee gets elected (possible according to some) he will splinter the Repulican party — badly — between whoever his ardent supporters are and the more traditional fiscal conservatives. I am willing to bet that tradition beats out change here.
As Kuwitzky pointed out, what’s the chances of this reform program being pushed through congress? Close to zero (and that estimate is probably generous). If you isolate the fiscal conservatives from the base, what have you got? A desperate situation that would require a high number of Democrat votes. The Democrats favor a higher progressive tax on corporate dividends, capital gains, and estate taxes not shifting the burden to the Middle Class.
As for the American worker incentive, I don’t know of any foreseeable economic reform program that could hedge the foreign production advantage. It workers’ wages, as Corey pointed out, that is exporting jobs to foreign countries.
I’m glad you caught the oddly proportioned figures of “John Doe,” David. It seemed awfully disproportional when I first read the figures. I understand its an example, but a bad one. As goes fro the average blue collar worker in the U.S., how much Federal Income tax do they really pay? The IRS statistic shows the bottom 50% of wage earners pay 3.91%. Looks like their paying most of their taxes to the State, not the Feds.
This was quite interesting to read through, although you have to concede the fact that this radical plan will never garner the political capital it needs to become a debate reality. It sort of reminds me of Huey Long and his “Share the Wealth” reform. Extremely different in detail but essentially the same rationale — get more money to the people who need it, the lower-class working men and women.
Sorry, Dennis, but your price analysis is dead wrong. The Fairtax myth, about prices remaining about the same and you take home your full paycheck, was debunked long ago. But Fairtax advocates continue to espouse that nonsense even though AFFT leaders have backed away from that position.
The 1997 Jorgenson embedded cost study, that forms the basis for the 22% embedded costs, included employee payroll and income tax withholding as part of the costs. In fact, almost two thirds of the 22% in costs can be attributed to the employee related costs, and that is money that belongs to the employee, not the employer. It is not available for pre tax cost reductions.
So, if you want to continue to say that the 23% sales tax will be offset by the 22% embedded costs of the income tax system, you also need to say that everyone’s current net pay will become your new gross pay under the Fairtax. A major reduction in gross pay! And that won’t happen for fairness and contractual reasons.
The best you can hope for is a 10% drop in costs by eliminating employers income/payroll tax costs, which means when the 30% sales tax is added, the most likely result will be a 17% price increase on average at the cash register.(1.00 x .9 x 1.3 = 1.17)
However, in fairness to the Fairtax concept, when your take home pay goes up by the amount of withholding, plus you get a monthly prebate, the higher prices could be about a wash. “Real” prices won’t change much and your standard of living won’t be affected.
Even though this would seem to be a non issue, there is one set of consumers that will be significantly impacted by the price increase, and that is governments at all levels. HR25 treats all governments as consumers and they have to pay the sales tax on the purchase of all new goods and all services. But governments won’t get a “pay raise”, nor a prebate, so the only offset to higher prices would be the government employer share of FICA. There will be a large cost impact on governments, and taxes will have to go up, or services will have to be reduced. You can most likely expect a 30% increase in State and Local taxes of every kind. Stay tuned!
Well, at least I’ve got some attention and some attempts for factual Debate. I apologize for anything caustic, and I’m sure it represents a frustration that most attempts (other than individuals such as Dutchman3)to dismiss the Fair Tax, come from people who are repeating the same mis-information that they hear from groups or individuals who have done very little to No actual research of the plan using the true numbers. Even so-called “legitimate think tanks” have not used actual facts or figures from the plan to back up their assertions.
To Jkkuwitzky, The Fair Tax plan was NOT developed by some sort of “Advocacy Group”, as you may believe. It was developed by Well Renowned Economists Dale Jorgenson , Laurence Kotlikoff, analysis done by Arduin,Laffer, & Moore, and other economic analysis Groups. The figures were run through Economic Modeling programs, etc. and there are over 75 Renowned, Professional & University Economists who have also reviewed the plan and it’s numbers and have signed on in support. Here’s the link: http://www.fairtax.org/PDF/Open_Letter.pdf
It’s not a problem for someone like Dutchman to question some of the aspects of the Fair Tax using legitimate figures, and concerns on theories. But for the so-called unbiased groups to come out with obviously unresearched (some of them are dispelled with even basic research) critques of the plan, shows that there must be different agenda’s at work, other than just simply opposing a plan because they feel it won’t work.
And Dutchman, I have the utmost respect for your questions and always respectful responses. But I do question whether there are ways that your calculations are inferior to Kotlikoff and Jorgensens sometimes, since they are Economic Scholars, had access to Economic modeling programs, etc. to run the numbers through, and teams of Economists who helped verify information.
Dutchman you may be able to help me with something. They have industry specific figures for imbedded costs. For instance, Medical is said to have 26% imbedded taxes/costs, Housing 28%, Auto Industry 19%, etc.
I’ve been trying to find out what went into these calculations, but haven’t been able to locate the figures. I’m sure the actual research of numbers contains thousands of pages of numbers, figures, etc., but I’m curious whether there’s a synopsis somewhere?
Also, curious whether some of that imbedded cost includes the elimination of taxes on investment. Since many industries, ie; insurance, help to finance their industry through investments? And wouldn’t the government have the same advantage, elimination of taxes on any investments they have used governments funds for? These are honest question I have, I may not be the Brightest bulb in the box, but I try.
My concern is that even the government agrees that the current Tax System is broken, out of control, and hampering the growth and productivity and growth of the United States and the American Worker. We have a Debt that is FAR greater than 9 Trillion dollars, alot of our current debt is owned by enemies, the dollar is becoming equivalent to the pesos, many other Major economic issues are converging on us, and WORST of all…the People have lost control of the government…and a Major contributor to the loss of control is the current Tax System and it’s code!
The minor tweakings that are proposed by the majority of candidates may get us through their four to eight years as president…then What? My kids and yours will still be saddled with a country that is in serious decline, and may have very few options for saving it.
Dennis,
Now, that is a useful, civil response. I’m beginning to think you really didn’t just drink the Kool-Aide, but have done some good thinking on your own.
Unfortunately, I first have to disagree with you on your response to jkkuwitzky. The Fairtax plan was developed back in the mid 1990′s by a group of Houston tax lawyers and Houston businessmen led by Leo Linbeck, the current CEO of AFFT. Could they be called an advocacy group? Jorgenson did an embedded cost study under contract to
AFFT in May of 1997. And lately, Kotlikoff has done a number of studies using his economic model that looks out 100 years??? I’d also be very careful about quoting those 80 economists you claim support the Fairtax. Those that have responded to subsequent inquiries seem to support a national consumption tax rather than the specifics of HR25. As do I!
Dennis, I certainly wouldn’t try to compete with all those professional economists with their fancy models, but it turns out that none of them have done a price impact study. It seems that the subject of prices is sort of like the “third rail” of the Fairtax. I did one, and will stand by my results until proven wrong. Prices are going up at the cash register, and state/local taxes will also have to be increased.
As for the analysis of the embedded (not imbedded) costs, the data is a roughly 30 page study done by Jorgenson. I have been unable to obtain a copy. the study is not on his internet file, and seems to be very closely held by the AFFT. No one else I know of has seen it. I won’t comment further.
I very much agree with the remainder of your post. There is an economic train wreck coming, probably in my lifetime (and I’m old!). Entitlements are squeezing out discretionary spending including National Defense, interest on the national debt is skyrocketing, and something has to be done. I personally think those that want to revise the tax system first are working the wrong problem. The real problem is out of control federal spending!
I’d support any Presidential candidate that would commit to setting up a Grace type commission with the goal of reducing the size and cost of the federal government by 10% in the first two years. Boortz called it the 10th Amendment Commission (return power to the states/people), and I call it the FARC,(Federal Agency Reduction Commission), patterned after the BRAC, (Base Realignment and Closing Commission), which was very sucessful.
I’d be happy to share any of my studies with anyone. Price Impact, Effective Tax Rates, Purchasing Power, Impact on Governments, and even an alternative plan. (vanlinda@comcast.net)
While I don’t have a fully developed opinion on the fair tax (I currently have a mixed opinion on it), I have to correct one thing that I see as wrong in several of these comments. Businesses don’t outsource because of cheaper labor costs or lower taxes. They outsource because of larger profits. If the benefits of the fair tax outweigh the benefits of cheaper outsourced labor, businesses will remain in the United States.
Chris, they outsource because of larger profit, ok. The larger profit comes in spending much less on wages. Right?
Presently, wage benefits are the source of increased profits from outsourcing. However, if a tax system was established in which tax benefits outweighed wage benefits, firms would remain in the US. Thus what Dennis said several comments ago is correct and what Corey said is incorrect.
Ok here’s an “honest” 23 vs 30% explanation; When you talk about the FairTax as an inclusive tax, the tax rate is 23 percent. Our
current income tax system is expressed as an inclusive rate, and therefore, the best
most direct comparison of the current system rate to the FairTax rate is as an inclusive tax.
When you discuss the FairTax as an exclusive tax, the rate is 30 percent. The actual tax that you pay, however, is the exact same amount regardless of whether the tax rate is expressed in inclusive or exclusive terms.
Let me give you an example. Under the FairTax, if you pay $100 for a good, you are paying $77 for the good itself, and $23 in taxes on that good. If you take the $23 as a percentage of the $100 you paid, you have a 23 percent tax. If the take the $23 as a percentage of the $77, you have a 29.9 percent tax.
The important thing to remember is that either way you still pay the exact same $23 in taxes. Opponents of the FairTax prefer to speak about the 30 percent tax exclusive rate because it sounds higher, and unfortunately they fail to mention in their explanation that using either rate, the amount you pay in taxes is the same $23.
Here’s a great article for you all to consider concerning the benefits of the Fair Tax to the American worker and the American Economy.
( http://www.realclearmarkets.com
/articles/2007/12/the_fair_tax_is_about_economic
.html )
or visit my website http://www.fairtaxsummerville.com
Please check it out, I think you will find it very interesting.
Dennis,
I don’t particularly support the Fairtax, although I do favor a consumption tax rather than an income tax. And I certainly agree that no matter if the tax is expressed as 23% of each dollar spent or as 30% sales tax, the amount of tasx is the same.
However, you write that the inclusive rate is the one most useful to make direct comparisons to the income tax? I’ve asked the following question repeatedly on other blogs and have never received an answer. I’ll give you the Fairtax 23%. How do I compare that directly to the current income tax? What is the comparable income tax rate?
Thank you.
Economist Dale Jorgensen, Harvard University, was commissioned to find out what portion of current prices were represented by costs for complying with the federal income tax code (i.e., embedded tax costs). He concluded that 22% (average) of every retail dollar, spent by consumers, constituted a price-embedded tax. Thus, in addition to individual income tax and FICA withholding, individuals are unwittingly paying these unseen, embedded business tax costs with every purchase of a new product, or service.
Under FairTax, prices would fall, due to removal of embedded business tax-related costs. Concurrently, wages may rise due to a mix of factors, including reversion of withheld pay (or some portion thereof) to employees, advancement opportunities due to business expansion resulting from retained earnings, and/or increased demand for labor accompanying increased competition (from that expansion). Where profits (or wages) appear lucrative, competition will move into the market space, driving out excesses (immediately present after FairTax is enacted), arriving at new “market-adjusted” prices.
For FairTax to constitute 23% of new transaction cost (i.e., “market-adjusted” price plus FairTax), a mark-up of 29.9% (tax exclusive rate) on the new “market-adjusted” price is necessary. (Before balking, consider what we’re paying now if income tax rates are converted to tax-exclusive sales tax rates on net income instead of percentage of gross income. The following figures can be compared to the 29.9% FairTax mark-up: Fifteen pct bracket = 17.6%, twenty-five pct bracket = 33.3%, twenty-eight pct bracket = 38.9% (! really), and thirty-five pct bracket = 53.8% (! that’s how bad it is).
In order to make FairTax a progressive consumption tax (such as that recently called for by Warren Buffett), all citizen-families are simply sent a monthly consumption [tax] allowance, called a “prebate.” This prebate is intended to reimburse taxes on necessities for every citizen family without need for record-keeping or reporting. Moreover, the direct payment bypasses the creation of a tax code specifying exempted products and services around which a lobbyist industry could grow. The amount is variable, based on family size, and is equal to the FairTax rate on poverty-level spending, as defined by the Dept. of Commerce. At present, a family of one would receive ~$200/month, a family of four, ~$500/month. Thus, the “effective” FairTax rate paid by citizens, will *never* equal the full 23%. Of course, U.S. visitors (legal, and illegal) will pay the full FairTax when they purchase anything new, at retail (used are not taxed again). Under FairTax, working families will have their whole paychecks (minus any state or local income tax withholding) plus their monthly family prebate.
Additionally, citizens will no longer have to spend the average 50 hours per year preparing their federal tax returns. Having more monthly income may result in using credit less, and saving more. Larger savings will make it easier to purchase a home, at a lower interest rate and monthly payment. (Thus, mortgage deductions are no longer applicable when income is not the basis for taxation).
But is FairTax actually “fairer”? To provide substantive answers, Prof.’s Kotlikoff and Rapson (10/06) have concluded,
“…the FairTax imposes much lower average taxes on working-age households than does the current system. The FairTax broadens the tax base from what is now primarily a system of labor income taxation to a system that taxes, albeit indirectly, both labor income and existing wealth. By including existing wealth in the effective tax base, much of which is owned by rich and middle-class elderly households, the FairTax is able to tax labor income at a lower effective rate and, thereby, lower the average lifetime tax rates facing working-age Americans.
“Consider, as an example, a single household age 30 earning $50,000. The household’s average tax rate under the current system is 21.1 percent. It’s 13.5 percent under the FairTax. Since the FairTax would preserve the purchasing power of Social Security benefits and also provide a tax rebate, older low-income workers who will live primarily or exclusively on Social Security would be better off. As an example, the average remaining lifetime tax rate for an age 60 married couple with $20,000 of earnings falls from its current value of 7.2 percent to -11.0 percent under the FairTax. As another example, compare the current 24.0 percent remaining lifetime average tax rate of a married age 45 couple with $100,000 in earnings to the 14.7 percent rate that arises under the FairTax.”
Further, per Jokischa and Kotlikoff (2005) …
“…once one moves to generations postdating the baby boomers there are positive welfare gains for all income groups in each cohort. Under a 23 percent FairTax policy, the poorest members of the generation born in 1990 enjoy a 13.5 percent welfare gain. Their middle-class and rich contemporaries experience 5 and 2 percent welfare gains, respectively. The welfare gains are largest for future generations. Take the cohort born in 2030. The poorest members of this cohort enjoy a huge 26 percent improvement in their well-being. For middle class members of this birth group, there’s a 12 percent welfare gain. And for the richest members of the group, the gain is 5 percent.”
The current income-based tax system is also more expensive to run, because of the manner in which the tax code is gamed by politicians and lobbyists. Politicians realize great power, and attract constituencies for support, by granting tax favors (i.e., credits, deductions, exemptions) through lobbyists. Fully, fifty-three percent of Washington lobbyists are there because of the tax code! The tax code is continually changing, making it more complex – more difficult to understand. And, the salaries and costs of tax lawyers and lobbyists end up in higher prices of the products and services we buy. Additionally, the time and money required to keep records, file returns, report for audits, retain accounting and legal help, pay IRS penalties and interest, is time and money lost for other productive, or recreational, activities. Depriving us of the use of withheld wages increases our expenses through zero-interest withholding, inflation, return preparation time, and interest paid on credit cards and loans that otherwise may not have been necessary. Summed up, the cost of tax compliance, nationally, has been estimated to range anywhere from $265 billion to twice that amount, depending on the extent to which tax-avoidance consultation is sought and utilized. These expenses constitute a substantial hidden tax which is incomprehensible to the average working American. And the FairTax gets rid of all of it for most Americans, and most of it for business owners.
We, as FairTax advocates, believe that government should serve We, the People, with a fair tax system that will not enable politicians to pit poor against rich (creating barriers to achieve wealth, adding tax penalty to the sacrifices made for personal success). Nor do we want politicians to continue using business as a tool to hide taxes from consumers, often villifying business, which discourages entrepreneuship, personal achievement, economic growth. Liberty and happiness depends on restoring the fruits of labor to those who produce them. We believe that the tax function should align with economic growth, not against it, that government should be paid for in the same manner as working Americans – when, and because, something is sold!
As things stand at present, the system primarily benefits politicans who cater to special interests through lobbyists who game the tax code. The politician seeks to capture them as constituent voting blocks, dependent on continued syphoning of taxpayer dollars to their members’ benefit. This is increasingly repugnant to the average working American who often finds it difficult to meet the needs of his, or her, own family in an environment where federal and state business income taxes substantially contribute to trade inequities resulting in the loss of American jobs! Thus, the Sovereign are continually degraded by features of Congress’s income tax policy. The most rapidly-growing needs-based “special interest” group has become the Citizens! You see? Congress has nearly all the power; and We, the People, have become We, the Serfs, robbed and enslaved. Getting the federal government’s hands out of our family paychecks is the single most important reason to replace the income tax with a consumption tax, the FairTax.
Many of us have joined FairTax.org in order to build a national movement to free ourselves, our family pocketbooks, and our businesses from confiscation of income, and punishment of productivity. And this we say to our federal representatives,
“Either scrap the code and enact the FairTax, or we intend on replacing you with someone who will.”
(May reproduce in whole or part. – Ian)
Nice copy and paste job.
Using the lower, inclusive rate makes your new tax seem lower, but how can you really tell yourself that it is the most “honest?”
Since it is most directly comparable to current sales taxes, we should use the same exclusive way of expressing it that they do. In Pennsylvania, I pay a 6% sales tax and it is always expressed exclusively. I don’t just insist on using the 30% for scare-tactic reasons, but because it lets people really know what they would be getting into with this tax.
Ian,
Nice work with your calculator to express inclusive income tax rates in exclusive terms. But it doesn’t answer my question. You can’t compare a sales tax percent to an income marginal tax bracket no matter whether both are expressed in inclusive or exclusive terms. It makes no sense.
The only valid comparison that can be made is to calculate your effective tax rate for both tax systems and see which one is more favorable to your personal situation. And in general, retirees will have lower effective tax rates under current law. They no longer pay payroll taxes.
Dutchman,
I’m not sure how to compare exactly. Personally I don’t think you can “fairly” compare the Fair Tax rate, whether it be 23 or 30%, to any current Income Tax Rate. I think the only “fair” way to compare these tax rates is by using “Effective” tax rates, and then how do you do that for every individual. So, there is obviously a battle of salesmanship going on on both sides of the issue. But I do believe that the explanation I gave is a good way to show that either way you calculate it, the amount is still the same. Comparing it to a specific Income Tax rate, you could never honestly do that. A 15% Income Tax rate is NOT truly what a person pays in Federal Taxes, only the basis percentage they use on their tax return.
By the way, I very much appreciate your in-depth research and consideration into the Fair Tax. And although I don’t agree, or possibly just don’t understand all of your theories and calculations, it has opened my mind up to other possibilities and potential changes to the Fair Tax. At the very least, in the approval and finalazation phases of the plan, a thorough vetting and attempts to improve the plan should include your theories and calculations, along with any others that would improve the process. The challenge is; how do we keep a process that should be intended to make a good plan better, from becoming an opportunity to twist into something resembling what we have now…or even worse?
I think people highly underestimate the size and strength of the Fair Tax movement. And those in and joining the movement daily all want the same thing, a better, less intrusive tax system that will release the power of the American people and give the political power back to the people that has been stolen through the mis-use of the current tax system and code. If there are better alternatives or improvements to the Fair Tax that need to be made, we need to sell that to this same crowd of people, NOT alienate or isolate them as kooks, or mis-lead individuals. There’s been way too much mis-leading going on already, and people don’t know who to trust or believe in anymore, and many aren’t equipped or educated in economic / tax issues enough to determine who’s right or who’s wrong, the just know they are being taken advantage of… and are demanding a change!
I think a majority of people are smart enough to realize that the current tax code is being used for far more than just collecting taxes to fund the government. But they are also smart enough to know that you cannot completely cut off the government funding in one fell swoop without causing economic chaos, so by the droves they are accepting the Fair Tax as an alternative. Those who oppose the Fair Tax should recognize that the American are absolutely DEMANDING a change to the way taxes are collected, and they could and should be using this massive discontent to either support the Fair Tax, or find out the aspects of it that the American People approve of so much and come up with their own plan. This issue is NOT going to go away.
I’ve been fighting for a change to the Tax System for almost 15 years now, and have seen a steady increase in the demand for change. But over the last 3 years or so that rumbling in the background has turned into an absolute ROAR right in your face, and it’s getting louder by the day.
With the economic issues that we face that are very possibly Disasterous to all of us. The closer we get to those days, the more people will become discontent with their government. At this point the Fair Tax is the most sensible plan I’ve seen that favors the American people and American principles, but very soon I’m sure we will be seeing more and more Socialistic and Communistic plans floated around. So we had better coalesce around the American type ideas before the weak minded in the country are lead in the other direction.
Dennis,
Excellent post, sir! I’m going to take your response as meaning that the 23% Fairtax rate can’t really be directly compared to any income tax marginal rate. So, there really is no need to try to reeducate 300 million Americans that sales taxes should be stated in inclusive terms, is there? Except for the obvious reason that 23% sounds better than 30%!! Could that be the real reason for adopting such a convoluted definition of the sales tax in HR25?
I completely agree with your assessment of the economic disaster coming down the track, although I don’t hear the same Fairtax roar that you seem to hear. Perhaps I’m getting deaf in my old age?
I support a consumption tax to replace the income tax. But I don’t agree that the Fairtax is the best way to get there. I’ll close by quoting from a letter I sent to the Chairman of AFFT a while ago where I suggested a Fairtax alternative I call Fairtax-Lite.
“In my opinion, your group that put HR25 together badly overreached. You taxed governments at all levels in order to reduce the sales tax rate and reduce government competition with the private sector, but incurred the strong possibility that that portion of the legislation will be found to be unconstitutional under the doctrine of intergovernmental tax immunity. State and local taxes will have to be increased significantly in order to pay the federal sales tax. You added payroll taxes to the mix and created a large class of an estimated 30 million Social Security net non-contributers, all of whom will still qualify for full pension and health care benefits. You treated all current retirees very unfairly by forcing them to resume paying into the trust funds with their sales tax dollars. You completely untaxed businesses, a major political mistake even though quite sensible. You added gift and death taxes to the mix, and left yourself open to political criticisms that you are unfairly reducing the tax burden on the wealthy. You adopted a prebate, the largest cash grant entitlement in the history of the country at a time when entitlements are squeezing out discretionary spending, including critical Defense spending. You adopted an inventory tax credit which will contribute to a very large federal budget deficit in the first year of Fairtax implementation. You excluded education tuition, thus allowing the “camel’s nose under the tent flap”. That precedent would certainly encourage future politicians to try to exclude such things as medical expenses, home ownership or anything else they might consider equally important to education tuition. And finally, you chose a “cold turkey” implementation schedule. The Congress is basically conservative and far prefers evolutionary change to revolutions such as the Fairtax.
Fairtax-Lite is a broad based 15% national sales tax with (1) no exclusions, (2) a targeted prebate, (3) no government taxation, (4) leaves payroll taxes for phase 2, (5) no inventory tax credits, and (6) implements the plan over five to ten years. If you are really serious about getting rid of the income tax and the IRS, I suggest that Fairtax-Lite has a far better chance of gaining Congressional approval than HR25.”
Dennis, stay flexible. There may be a way to get rid of the hated IRS, but we need to make haste slowly.
Dutchman,
Yes, the effective income tax rate paid is widely variable based on Congressionally-determined income level, marriage status, family size, eligible deductions, credits, shelters, and any other income-affecting provisions buried somewhere in many thousands of pages of the tax code.
The effective FairTax rate is variable based on family-initiated spending (and, for citizen-families only, credits of 12 monthly poverty-level-spending tax rebates, correlated to family size, received for the year).
However, there is a reason to educate 300 million Americans about the FairTax as an inclusive rate – at least until transition – because, since birth, they have thought about taxes in terms of an inclusive tax rate bracket under which they usually fall. (Wage-earners are also conditioned to think of their earnings as the gross, which suits the Congressional establishment, that syphons off a bounty from wage-earner paychecks, just fine.)
(In fact, FairTaxers are so busy trying to deal with oppositional types who like to compare exclusive FairTax rates to inclusive income tax rates, that they forget to mention – in the same breath – that U.S. citizens will, in actuality, pay a lesser effective FairTax rate due to the prebate. Critics also occasionally forget this when they carte-blanchely state that citizens will pay 30% on everything!)
Your critique of some FairTax features is not without some merit. I learned recently that Kotlikoff concedes Social Security benefits will need to be rolled back a bit (his calculations brought the rate to 23.8%, and he also mentioned that states with sales tax would experience something of a shortfall that could be made up by applying their state tax rate to the “FairTaxed” price – basically including FairTax into the base for state tax purposes). As for the other “over-reaching” you allude to, I interpret it as an attempt to simplify – to clean up, the complexity. With every year, after the transition, the system will begin to right itself (provided, of course, that citizens do their part to act on the basis of new tax load visibility, and protest any efforts to raise the FTR absent successes in paring the shocking waste from the system.) Heck, even estates will turn money into consumption when inheritors spend it. And, money that is saved, is money that is available to lend, and grow the economy without excessive Treasury bond sales to communist countries! (They’ve become so leery of our currency that they’re now buying billions of capital stock in our major financial houses, and other businesses.)
Yes, the education exemption causes the rate to be higher to support the levels of educational financial assistance that are being provided. However, post FairTax – with every year out, in a propitious economic growth environnment – citizens will likely find it easier to accumulate capital, and thus bring relief to the government’s financial aid outlays. (However, even larger families may be possible which might offset savings this somewhat. But this gets into educational reform which is also badly needed.)
Ian,
Excellent post, and not out of a can. I appreciate that very much.
A couple of corrections. First, not all citizens will have lower effective tax rates under the Fairtax. My comparative study shows many senior retirees will actually have higher effective rates under the Fairtax. But, all of them will be gone (including myself) in ten to twenty years, so maybe it doesn’t really matter? Except that while we are around, we tend to vote! Might have been better to have some sort of sales tax credit for seniors to reflect their prior payments into the trust fund? Kind of unfair to force the retirees to resume paying for their own pensions.
Also, Kotlikoff wrote that discretionary spending, other than Social Security, might be cut by that 2.7% in order to achieve exactly 23%. Why he dragged that red herring across the path is beyond me. What is magic about 23%?
Cheers!