Monday, July 27, 2009

The Fair Tax

This weekend I finished The FairTax Book by Neal Boortz and Congressman John Linder. This book was another one of those books that really changed the way I look at a certain political issue. In this case, it was taxation. I already supported drastically changing the U.S. tax code to either a flat-rate income tax or a flat tax on consumption, but I lacked a workable plan. Well, apparently these two men have already developed such a plan which is a 133 page bill, HR 25.

The Fair Tax is a flat, one-time tax on products at the retail level. After reading this book, their plan makes so much sense it will almost make you angry that we still have a policy of taxation that is economically wasteful and discourages saving! I don't want to go into too much detail, but the tax would actually cause prices to be about the same. How could this be so? Because corporations pass on their tax burdens to consumers. How so? Read the book, its short and you won't regret it.

The thing that I find most intriguing about this plan is that the most quick retort to a flat consumption task is that it puts a higher tax burden on the poor. With their plan, the tax burden is totally lifted from families living below the poverty line. Every head of household would get what they call a "prebate" which covers the tax payments up to the poverty line. So, if the poverty line is drawn at $20,000, every family would receive $4,600 to cover the tax liabilities up to the poverty line. This avoids making anyone pay taxes on basic necessities.

This plan makes complete sense to me. If it sounds like something that interests you, then I would recommend reading The FairTax Book. Eliminating ALL current taxes, including the IRS (since they wouldn't be needed), and implamenting a 133 page tax code I'm on board, are you?


John Linder with the 133 page FairTax Legislation compared to the current tax code.

6 comments:

Dutchman3 said...

Reading two marketing comic books written by a radio talk jock and an obscure Georgia Congressman gives you only half of the story. There is a lot of research available from both pro and con Fairtax experts that also needs reading. Try fairtaxblog.com for a good reference source.

The Fairtax isn't fair. I'm retired and living on two SS pensions plus around $6000 in interest income from my "nest egg". I pay zero income tax and, of course, pay no FICA. Why on earth would I trade that status for one where everything I purchase would have a 30% exclusive tax added to the cost of almost everything? And why should I be forced to resume paying for my pensions with my sales tax dollars? Very unfair!

The Fairtax proposes to tax State and Local government consumption which is inappropriate, if not unconstitutional, under our republican form of government. Stand by for higher rates as the base shrinks under Supreme Court guidance.

Sales taxes are regressive and the Fairtax "prebate" simply moves the point of regressivity from zero to the poverty level. It is still regressive for most of us!

Why on earth would US or foreign firms move to the USA? Read section 905 and learn about the 23% tax on income earned in the US by foreign owners.

Read Section 801-806 and learn about the implicit tax on both investment and debt instruments. That VISA/MC monthly bill is going up!

The Fairtax is a bad idea whose time has passed with the 2008 Huckabee disaster. The bill will not budge out of the House W&M Revenue subcommittee while the D's are in control. Count on it!

DC said...

So let me get this straight, I just want to see it in writing: You think our current tax system is better than the FairTax?

I just need to get it in writing that you think all the billions upon billions used each year in complying with the income tax, IRS salaries, and "tax planning" is better than the FairTax alternative?

As far as your theory that businesses would not come here, do you realize companies do not even consider basing themselves in America? Last time I checked corporations don't even have the USA on their short list of possible countries to base out of. I wonder why...

So my question to you is, do you support the current taxation system, and if not, please present an alternative that is "fair" in your opinion, since obvoiusly the fairtax is so unfair! Amazing how you do not have the facts right - 23% INCLUSIVE not exclusive tax, and the prices would be about the same (did you even read the "marketing comic book"?).

Let me guess, you support cap and trade, universal healthcare, the stimulus plan, and the bailout?

Dutchman3 said...

DC,

What I'm saying is that the Fairtax as described in HR25 is unfair to my family. It would add $2600 in taxes over my current situation, and that's including the "prebate". It double taxes my savings, forces me to resume paying for my SS pension with my sales tax dollars, and raises retail prices by an estimated 17%. Bad idea!

However, I do believe that a national sales tax would be better for the economy than the income tax. After having the income tax for 95 years, the problem is how to transition. The Fairtax tries to do too much, too quickly, and fails to recognize that Congress is institutionally conservative and much prefers evolutionary change to revolutions such as the Fairtax.

A simpler alternative I call Fairtax-Lite might have a better chance of getting rid of the IRS. Fairtax-Lite is a 12% national sales tax with no exemptions, no inventory tax credits, retains FICA and the gift/estate taxes, does not tax governments, no prebate but retains the EITC, and phases in over five years or so. While there may still be some unfairness to some folks, Fairtax-Lite is less unfair than the Fairtax and might have a better chance of Congressional consideration. Walk before running!

You wonder why industry doesn't locate in the US? There are many reasons to locate offshore and federal taxes are pretty far down the list. Do you know that corporate income taxes amounted to only 3% of sales in 2007? More important reasons might be the cost of labor in the US, the need to access both raw materials and foreign markets, and the current emphasis on offsets when dealing with foreign customers. Blaming taxes for business relocations is badly over done, imho.

A word on prices. You seem to believe that costs can be reduced by 22% and adding the 23% sales tax would be essentially a wash. Wrong on two counts. In order to arrive at a 23% inclusive price, merchants must add 30% to their costs. Simple math which I can demonstrate if you need further explanation.

What you don't seem to understand is that the 22% in embedded costs include employee payroll contributions and income tax withholding according to Dale Jorgenson, the author of the embedded cost study. That money belongs to the employee, not the employer! Unless you believe that everyone's gross pay would be reduced to their current net, then business costs can only be reduced by 10% of sales and after adding the 30% sales tax, retail prices will rise by 17%. You can't say on the one hand that everyone will get 100% of their pay, and then claim that prices will remain about the same. There is no free lunch!!!

And, no, I don't support any of those stupid proposals you suggested. Let's both pray that cap and trade and universal health care don't get enacted, and that the stimulus and bailout will come back to bite the current Congress and Administration.

Lexs said...

I was a fan of the fairtax until I learned that if we eliminated the personal income tax completely we would have a balanced budget if we spent at 1997 levels. Cut the spending (pick one: Iraq war, stimulus, TARP) and you can skip the federal tax altogether.

Lexs said...

To be clear, in general I still prefer a consumption (sales) tax over a production (income) tax EVERY time. Carrot vs stick.

Dutchman3 said...

DC,

I believe a national sales tax would be preferable to the income tax, but I don't support the Fairtax legislation. Too many moving parts. AFFT tried to do too much, too quickly. Based on lessons learned over the past five years of studying the Fairtax and HR25, I think a simplified version might be better. I call it Fairtax-Lite, and it is a 12% national sales tax with no exemptions, no inventory tax credits, no taxation of government consumption, retains the payroll tax as well as the gift/estate taxes, and phases in over five years or so. Walk before running!!!

As for prices, you seem to believe that the 22% embedded costs would be removed and a 23% sales tax added for little or no change in retail prices. Not true on two accounts. First, the merchants have to add 30% to their costs in order to arrive at a 23% tax inclusive price. Simple math! For instance, if the merchant cost is $1.00 and he added 23% as you suggested, the price would be $1.23 including a tax of $.23. But, notice that .23 divided by 1.23 is only 18.6%, not the 23% required by HR25. Add .30 and the price is $1.30, which when divided into the $.30 results in a 23% inclusive price as advertised. If you still don't believe me, go to the Fairtax site, find the FAQ section, and read the 4th faq from the bottom. When asked about what rate would be added at the cash register, AFFT answered
"30%".

Prices will not remain about the same. That 22% in embedded costs you are familiar with includes employee income tax and payroll contributions. The embedded cost study author, Dale Jorgenson, confirmed that he assumed that everyone would agree to have their gross pay reduced to their current net after withholding. That money belongs to the employee, not the employer, and the most likely scenario is that we will get 100% of our pay, and prices will rise by 17%. Based on 2007 tax revenue, business income taxes amounted to $291 billion, the business share of FICA was $435 billion, and the 2007 compliance costs were $265 billion. When measured against retail sales of $9.5 trillion in 2007, income taxes were 3% of sales, FICA was 4.5% and compliance costs were 2.5%, for a total tax cost of 10% of sales on average across 20 million businesses. Remove 10% from costs, and add a 30% sales tax and the retail price has to rise by 17%. (1.00 x .9 x 1.30 = 1.17)

And, no, I don't support any of the idiotic programs you listed.
We both should pray that cap and trade as well as universal health care don't get passed, and that the stimilus and bailout programs come back to bite the Congress and Administration!