Why Republicans Should Support the FairTax

Feb. 11, 2004 | Wm. Donald Tabor Jr., DDS

[phil_will1]

It would be a lot easier to get support from Republicans if it were called the ClearTax or the TrueTax, since 'fairness', in the political arena, has become a synonym for redistribution of wealth. But the FairTax is the road out of this class warfare mess that paralyzes the country and prevents the Congress and President from attending to the country's business.

Populists pander to their constituencies by manipulating a complex illusion, a fraud upon the public, we call the Income Tax. We waste our time and energies fighting over changes in that system, but the truth is that no one, neither corporation, nor individual, really pays income taxes, or FICA taxes either, for that matter. For all the fighting and demagoguery over every change in the tax code, those complex schemes are no more than changing assignments over who will be required to COLLECT a hidden sales tax from consumers.

Economists have long been aware that corporations don't pay taxes, they only pass them along to their customers, but the same is really true for all of us. We trade our labor for what we take home, not for what our employer forwards to the government in our names. Few people are even aware of the gross amount of their pay. We pass our perceived income taxes and FICA taxes along to our employers, as a cost of the 'business' of being employed. Employers then regard our withheld taxes as just another cost of doing business, like their own taxes. And like every other cost of doing business those taxes become a part of the price of whatever goods or services we produce.

The simple truth is that ALL taxes are passed along like this and eventually paid by the consumer, as a hidden sales tax buried in the cost of those goods and services. The average portion of the price of everything, from a loaf of bread to brain surgery, that is really someone else's Federal Income, FICA, or corporate tax is about 22% of the price of everything you buy. And since everyone buys products and services, rich or poor, no one escapes that taxation. The real impact of taxation is not on our Form 1040, but at the grocery store and the doctor's office.

Imagine the change in the political landscape if that truth suddenly became clear to every American.

It really doesn't matter if we shift the total income tax burden to the top 10% of tax payers or if everyone pays the same percentage from bottom to top, NONE of that is real. Varied income tax rates only change the relative prices of the things we buy. Healthcare costs more because the income tax system makes doctors collect a lot of tax to earn their after tax incomes. The only REAL tax is that hidden sales tax, because that is the only one that cannot be passed along to someone else down the line. The FairTax simply makes this hidden sales tax visible.

Under the FairTax plan, (www.FairTax.org) the IRS and FICA are gone. You get your whole paycheck with no Federal deductions. There would instead be a 28% Federal sales tax. This would be revenue neutral to the government, and cost neutral to us, since the increases in our paychecks and the fall in prices would exactly cancel out the new sales tax. It would have to be that way if you think about it, as all we really would be doing, in the short term, is to replace the existing hidden sales tax with a visible sales tax of the same size. So why do it?

The answer is CLARITY, and that is what changes everything.

No more could the populists pander to the voters with promises to tax someone else for their goodies. Everyone would know exactly what government costs them, it would be on every receipt they get for a hamburger or a new house. And they would know that the burden falls proportionately on all, as it always has, even though they do not know it now.

Any major new program would have to be accompanied by a raise in the sales tax, with no illusion that the cost could be shifted to someone else. Every cut in the size of government would be visible money in the pocket of every American.

Class Warfare would be DEAD forever and we could at last go about the business of the country and set our priorities based on an honest understanding of the costs. And that is how we can bring this country together to face the real threats to our liberty and prosperity.

[phil_will1]

Another very good explanation of the benefits of the FairTax - or some of them, anyway.

[Cobra64]

Everyone would know exactly what government costs them, it would be on every receipt they get for a hamburger or a new house. And they would know that the burden falls proportionately on all, as it always has, even though they do not know it now.

I've been saying this since I started working in 1970. My father's words rang true when I saw the deductions on my pay stub.

[Willie Green]

It would be a lot easier to get support from Republicans if it were called the ClearTax or the TrueTax, since 'fairness', in the political arena, has become a synonym for redistribution of wealth. But the FairTax is the road out of this class warfare mess that paralyzes the country and prevents the Congress and President from attending to the country's business.

The NRST is an inherently regressive form of taxation that is truly despotic.
Long term, it would result in a two-tiered socio-economic stratification of our society.
It is not disimilar to a 21st Century eco-feudal system where the corporate aristocracy invest and expand their property holdings completely tax-free, while the serfs are overburdened with the excessive taxation on consumption and persuaded that it's supposedly "fair" because the consumption taxes are redistributed through the formal social welfare system.

[Luke Skyfreeper]

Huh?

[kevkrom]

Tax reform bump.

[glowworm]

It should prevent the Federal Government from collecting revenue Directly from the people. The tax should be collected by the States from sellers proceeds. Then the State will be responsible for collection and remission. (Simular to the Federal Gasolene tax). Therefor all you need is one person at the Treasury to collect State remissions. The IRS would not be needed at all, nor Income Tax "experts"..

The name doesn't bug me.. A rose is still a rose by any other name.. IMHO.

[phil_will1]

Income taxes are also "inherently regressive" without modifications to make them less regressive.

The FairTax's Personal Consumption Allowance is the simplest and most effective mechanism for removing regressivity. It is far less regressive, for example, than the payroll taxes that it replaces. As someone else has said, the FairTax is more regressive than the concept of a progressive income tax but less regressive than ours in actuality.

[Gorjus]

Another very good explanation....

Well, if that's a good explanation, then it's clear this thing called a 'Fair Tax' is not at all what's being claimed. .

The specific example is not a sales tax at all! It's an income tax. It happens to be a flat tax of 28%, rather than a graduated income tax, but it's still - as the essay explicitly states - a tax on income taken from your paycheck, not a tax on any sale.

And there is an even greater flaw. I'll buy that all taxes are ultimately sales taxes. Certainly the consumer pays all taxes. But the issue is not and never has been where the total sum of taxes come from. The issue is the distribution of how the total burden is applied. Right now, if one assumes that the nominal pay is 'right' in some sense of value rendered to the organization, then the burden of taxes is higher on higher incomes. If one went to the flat income tax this essay really advocates, then it would either amount to a pay increase for upper brackets and a penalty to lower brackets, or salaries would need to be adjusted so that take home pay remains the same, in which case the only real difference is semantics.

The real problem is that there is any tax on income at all. It sends the wrong message - that the official government policy is to penalize people for providing services others are willing to pay for. Instead, we should have a true 'sales' tax, collected at point of sale of some good or service someone is willing to pay for. In the end, labor can be considered such a service - and after all, the true source of tax revenue is always the consumer - but if it's treated exactly the same for federal tax tax purposes as every other sales transaction, the proportion of the total tax burden collected for providing a service someone is willing to pay for would go down, and that's a good thing.

[LowCountryJoe]

...Therefor all you need is one person at the Treasury to collect State remissions....

Hmmm, I like the way your thinking.

[labard1]

Although not necessarily show stoppers, I see two problems. First, there is a big transition problem. Do folks with huge Profit Sharing Plans avoid EVER facing an income tax, even though they got tax deductions for contributions to the plans in prior years? Same issue with stock options and appreciated property when the new system is implemented.

Second, do we no longer distinguish between payroll taxes that in theory were to fund "social insurance" for the earner? Historically, we've been pretty consistent in accounting for those taxes separately from general government revenues, though there has been some erosion in recent years. The theory was that general tax revenues are not subject to claims for social security and medicare. I suspect we're moving to blur that historical distinction, but given the massive shortfalls coming in future years on social security and medicare, those decisions should not be made lightly.

[phil_will1]

"The specific example is not a sales tax at all! It's an income tax."

The FairTax is a National Retail Sales Tax (NRST). I'm not sure where you got the idea that its a flat income tax, but that is wrong.

[kevkrom]

I think you mis-read the article. The NRST/FairTax is indeed a sales tax -- it is imposed/colelcted at the point of retail sale. If you choose to save or invest part of your paycheck, you would pay no taxes on it.

Neither is the NRST inherently unfair or regressive. Not only, as you mention, are most people already paying a hidden sales tax in the form of increased costs to production, but the NRST actually provides a mechanism to offset the amount of the sales tax paid on purchases up to the poverty line under the assumption that necessities should not be taxed. While this leaves everyone's marginal tax rates identical, it does make the effective tax rate progressive based on amount of consumption.

For example, let's assume the poverty line for a family of four is $14,000. A family spending $15,000 would be paying a 23% marginal rate on each dollar spent in the sales tax, but their effective tax rate, after the rebate is factored in, is only 1.5%. A family spending $30,000 would be paying a 23% marginal rate on each dollar spent in the sales tax, but their effective tax rate, after the rebate is factored in, is 12.3%. At $100,000 in expenditures, the effective tax rate becomes 19.8%.

[NYFriend]

It's not really an income tax, since you don't pay it on what you save. But you're both right. There are 260M people in the US and one way or another they will collectively pay the taxes, no matter how those taxes are calculated. Technically, the tax that's being discussed, which is a lot like the Euro. VAT (that is a consumption VAT, except that, from the description it is not clear that it is a Value Added Tax, since that really depends on how it is calculated, paid and credited at intermediate steps in the production and commerce process; really it doesn't matter since at the sales counter it will look like a VAT). The tax is not regressive, nor is it inherently regressive to income (which is what people really mean now when they call a tax regressive). Rich people buy goods and services whose true value (or utility) is lower than those generally purchased by the poor. We call those luxury items. How much more useful is a BMW than a Chevy? Not much, but you pay more for the BMW. What really makes it look like it is regressive to income is that the savings rates for rich people are generally higher than for poor people. Does anyone know if this Fair Tax would tax securities and investments?

[goodnesswins]

Ah....but it WOULD be unfair to all the POOR who pay $150 for Air Jordan's or other hyped merchandise....dontcha know!

[kevkrom]

Although not necessarily show stoppers, I see two problems. First, there is a big transition problem. Do folks with huge Profit Sharing Plans avoid EVER facing an income tax, even though they got tax deductions for contributions to the plans in prior years? Same issue with stock options and appreciated property when the new system is implemented.

Yes, those investments would avoid income taxes entirely. They will stay pay taxes on anything the spend for new retail goods and services.

Second, do we no longer distinguish between payroll taxes that in theory were to fund "social insurance" for the earner? Historically, we've been pretty consistent in accounting for those taxes separately from general government revenues, though there has been some erosion in recent years. The theory was that general tax revenues are not subject to claims for social security and medicare. I suspect we're moving to blur that historical distinction, but given the massive shortfalls coming in future years on social security and medicare, those decisions should not be made lightly.

First of all, there is no Social Security "trust fund". FICA taxes go straight into the general fund and benefits are paid from there.

That aside, barring changes to the Social Security and Medicare laws, the NRST still does require employers to report wages for their employees (assuming those employees want to be eligible for their correct level of benefits). A portion, and a large one at that, of the NRST rate is specifically set to raise the same revenue as the old FICA taxes -- this is, I seem to recall, 8.09% whereas the remainign 14.91% is to replace income and similar taxes.

[NYFriend]

Ah, a rebate! Now you've messed with the whole thing. Well, at least it won't distort prices, but now I'm starting to wonder if it would effect work/leisure choices?

BTW, has any one ever said that social programs are effectively regressive against taxes?

[hilaryrhymeswithrich]

Georgians remember that Herman Cain, running for Zell Miller's seat, is a STRONG Fairtax supporter.

[Onelifetogive]

Therefor all you need is one person at the Treasury to collect State remissions.

With direct deposit.....we can ditch that loser too!

[LowCountryJoe]

It's kind of related but not entirely, has anybody read The Economic Report of the President? In particular, chapters 4 through 6.

If interested, curious, or just plain bored:

http://a257.g.akamaitech.net/7/257/2422/09feb20040900/www.gpoaccess.gov/usbudget/fy05/pdf/2004_erp.pdf

[phil_will1]

"Does anyone know if this Fair Tax would tax securities and investments?"

No, its a tax on new goods and services purchased for consumption only.