Fair Tax, Foul Politics [NRO on FairTax]

Fair Tax, Foul Politics ^ | August 16, 2007 | NRO Editors

[RobFromGa]

Fair Tax, Foul Politics

By The Editors

Advocates of a national sales tax to replace the income tax have built an impressive grassroots army. They have given their idea an appealing, if somewhat gimmicky, name: the Fair Tax. And they have managed to get five Republican presidential candidates to suggest that they would sign a sales-tax bill if it reached their desk. Some observers credit the enthusiasm of the Fair Taxers for Gov. Mike Huckabee’s surprisingly strong showing in the Iowa straw poll. Huckabee is the candidate most committed to the Fair Tax.

Former senator Fred Thompson is, however, backing away from the idea. Fair Tax advocates have released a video in which Thompson, asked about the proposal, appears to say he would “absolutely” sign it if elected. On August 10, however, Thompson wrote those advocates a letter that said merely that the Fair Tax was a good starting point in thinking about tax reform. Mitt Romney’s campaign says that the Fair Tax has some attractive elements, but that the candidate would need to see details before making any pledges. Rudolph Giuliani has said that he does not think he would sign any such legislation.

The leading candidates are right to be wary. The tax code needs major reform to become fairer, simpler, and more efficient. The Fair Tax is one instantiation of those goals, but its political impracticality makes it fatally flawed. If conservatives force a choice between a Fair Tax and no tax reform at all, the latter is what they are likely to get.

There is widespread confusion about what the Fair Tax would entail. If you bought $100 of clothing and paid a $30 tax on it, you would probably think you had paid a 30 percent tax. The Fair Taxers say that you paid a 23 percent tax: $30 is 23 percent of the $130 you paid in total. When they say they want a 23 percent tax, that’s what they mean.

Since there would be no more income tax in this system, there would also be no more standard exemption to make sure that the basic necessities of life went untaxed. The Fair Taxers would solve this problem by sending out monthly “prebate” checks to all Americans.

The great, undeniably attractive selling point of the Fair Tax is that it would allow the country to dispense with the IRS. But the sad truth is that if the federal government is going to collect as much money as it currently does—which the Fair Taxers say their system would—its methods of tax collection will inevitably be intrusive. The real difference between the current system and this proposal is that the primary brunt of tax collection will be borne by a smaller group of people: business owners.

Over time, then, enforcement measures could become more draconian than they are today: especially since a massive retail sales tax would create a massive incentive to evade it. That’s why every country that has ever tried to impose retail sales taxes this high has quickly moved to a Value Added Tax levied at every stage of production. Consumers rarely see or keep track of these taxes, and they seem to be fairly easy for governments to raise.

These pitfalls are beside the point, however, since a national sales tax is not going to become law. No presidential candidate could be elected on a sales-tax platform, and no Congress would enact one if he were.

A candidate who ran on the national sales tax would be able to run on nothing else. He would have to spend all of his time defending the idea. Off the top of our heads, we can think of three devastating lines of attack an opponent could use in television ads. One ad could argue that getting rid of the mortgage deduction would send home prices into free fall (something that voters are going to find especially worrisome now). Another could ask why senior citizens, having paid taxes all their lives as they made income, should have to spend their retirements paying taxes on everything they use that money to buy. A third could simply ask voters if they look forward to paying a brand new tax.

There are answers to each attack. But no Republican candidate, especially in the daunting environment of 2008, is going to want to have to make them. Republicans cannot win a national election without the tax issue. If they ran on the national sales tax, Republicans would be taking one of their natural strengths and making it into a liability. Which is why we expect them to say nice things about the Fair Taxers’ passion, and move on.

[RobFromGa]

The FairTax is a double-counting, fraudulent proposal masqerading as tax reform. The supporters commonly mis-represent the truth in order to bring people on board with the FairTax idea. It is hurting the effort at real reform by selling people a Free Lunch pipedream.

[RobFromGa]

The NRO editors have figured out the FairTax is a pipedream, maybe some of the supporters will start to realize that they are supporting a fraudulent plan. Probably not, they are too invested in the FreeLunch at this point...

[xcamel]

The whole “fairtax” red herring is a scheme entirely fueled by “joe sixpack” rage against a system they couldn’t pray to comprehend. It is the brainchild of an extremely wealthy texas developer on a lifelong “jihad” against the IRS who got caught cheating the system, while milking the the public funds for millions doing nearly no-bid projects for the state, cities, and towns of texas.

Look up the history of AFFT, and the players, and you’ll find out everything they don’t want you to know.

Even more interesting, is watching what they do, instead of what they say. Especially if you oppose the idea - you immediately get branded as “stupid”, or “unwilling to educate yourself” or an IRS agent, or a tax adviser, or some other demeaning label. If they’re feeling particularly kind, they’ll take pity on you and tell you to “buy the book” (sounds like L.Ron Hubbard, eh?)

They post pretty websites with hundreds of pages of legalspeak, and economic doubletalk, but won’t answer the most basic questions. Silence on some fundamental points is downright deafening.

[WestSylvanian]

Huckabee in the latest debate thought the tax was a wonderful idea. Romney challenged him by suggesting that he was unaware of the details. Romney mentioned one that he said would have a major adverse impact on the construction industry. Which shows you why a smart businessman is a better potential presidential candidate than a crowd pleasing huckster like Huckabee.

[Always Right]

It has taken many years, but it appears more and more people are on to the deception of the fairtax. One major item I think is not understood is how the fairtax uses fraudulent accounting in having the government tax itself to raise money.

[bahblahbah]

I'm just the messenger...

NATIONAL REVIEW GETS IT WRONG

National Review has come out with an editorial opposed to the FairTax.  Here's an excerpt:

'There is widespread confusion about what the Fair Tax would entail. If you bought $100 of clothing and paid a $30 tax on it, you would probably think you had paid a 30 percent tax. The Fair Taxers say that you paid a 23 percent tax: $30 is 23 percent of the $130 you paid in total. When they say they want a 23 percent tax, that's what they mean.'

OK ... let's work on the assumption that these editors are actually intelligent.  You don't get to be an editor at NRO by filling out an end panel on a box of Grape Nuts.  So ... if these guys have any brains at all, how can they so badly misrepresent the FairTax?  There are crane operators out there who know that if you buy $100 worth of clothes the 23% FairTax comes out of the $100.  Nothing is added to the price.  The clothes don't cost you $130 in total ... they cost you $100.  The 23% FairTax merely replaces the imbedded tax that would be there if you bought those clothes today!

Look ... if you're going to criticize the FairTax, can you at least read the book before you make fools out of yourselves? 

[groanup]

he supporters commonly mis-represent the truth in order to bring people on board with the FairTax idea.

That is not true.

[Your Nightmare]

That is a very reasoned assessment of the political aspects of the FairTax. Basically, there are none.

[bahblahbah]

http://boortz.com/nuze/index.html

[Texas Eagle]

The Fair Tax or National Sales Tax or any other tax that purports to replace the IRS will never happen.

No politician is going to throw literally millions of accountants, tax preparers and IRS employees out of work.

[samm1148]

“The NRO editors have figured out the FairTax is a pipedream, maybe some of the supporters will start to realize that they are supporting a fraudulent plan. Probably not, they are too invested in the FreeLunch at this point...”

Just another way to supply a junkie with his fix. The problem is spending and our lords our addicted to it. Any fantasy about a new tax scheme is tantamount to offering an addict methadone rather than heroine.

[groanup]

A thread that needs some truth injection.

[RobFromGa]

Your statement is wrong and this is the basic FairTax Free Lunch myth that has been abandoned. Even the authors of the FairTax book made a 2nd edition to remove this double-counting.

If people get 100% of their paychecks, there is no longer 23% of embedded tax costs to remove from the price of goods and services. At most there is 7-8% to remove. So, the $100 item becomes at best $92-93, and then when the 30% FairTax is added, the price out the door is about $120-- a 20% INCREASE!

For more information, please see these links...

DEBUNKING THE FairTax:
A Fair Question about Fair Tax
OPEN LETTER TO BOORTZ/LINDER (FairTax)
JORGENSON EXPLODES FAIRTAX MYTH (FR Exclusive)
Fair Tax - Straightening Out Some Confusion
FAIR TAX BOOK- 2nd Ed. Revisions
A FAIRTAX PRIMER

What Will Happen Under a FairTax?

WAGES: It has been made clear by many proponents of the FairTax that they are expecting 100% of their current gross pay, and that many employer/employee wage relationships, including those for government workers are controlled by contract. So, we'll assume every wage earner gets to keep 100% of their current gross pay. Everyone can figure out for him or herself what that gives them in terms of a take-home pay increase.

BUSINESS COSTS: If we assume that businesses get to keep their half of the payroll taxes (7.65% of all payroll costs up to first $95k per employee), plus taxes on corporate profits (average <2% of Cost of Goods sold) and some tax compliance savings (being generous we'll call this 1% savings), this gives the business about 8% of cost savings with which to potentially reduce prices.

PRICES: For domestic goods, if we assume that the entire 8% is passed along to the consumer, this means that pre-tax prices will be 92% of present day prices. That $10 twelve pack will now be $9.20. Of course, the twelve pack of imported beer is still $10 pre-tax. Once the 30% FairTax is added, the price of the domestic beer will be $11.96 and the price of the imported beer will be $13.00 even. So, domestic prices will go up about 20% and imported item prices will go up about 30%.

GOVERNMENT EXPENSES: Since the government expects this plan to enable them to purchase the same things they purchase now, they will need to raise sufficient revenue in order to achieve purchasing power parity. Since they will be paying the 30% FairTax on every item, we can assume that for stuff they buy, they will see the same 20% price increase on domestic items and 30% increase on imported items as other end consumers. So they will need to increase their dollar intake by this 20%+ to enable them to buy the same amount of stuff. And, of course all government salaries will have the 30% FairTax paid on the salary, less the employer half of the payroll taxes, so this is a net 22.35% increase in the cost of the entire payroll of the US government (and states too, but that is another can of worms).

ENTITLEMENT COSTS: Since the social security payments are linked to CPI, when this 20%+ price rise slams through the economy all the social security checks will have to be raised to cover this massive FairTax caused inflation. They will rise by at least 20%, and a litle more because the basket of goods will include some imported items like oil. Medicare/medical expenses will have the FairTax added, for a 20%+ increase.

GOVERNMENT PURCHASING POWER PARITY: with the cost of Payroll, plus everything they buy, plus the entitlements, all going up 20% plus we can assume that the governement will need to collect approximately 20%+ more of the new inflated dollars in order to buy what they are today with today's more stable dollars.

FAIR TAX RATE: Assuming nothing else changes regarding purchasing behavior, size of the government, etc. this means that the 30% FairTax would need to immediately raised 20% (to 36%) just to bring in all the inflated dollars that are required to fund the govt at present level. The price of domestic beer is now $12.50 and the import is $13.60. This assumes no evasion and no reduction in spending by consumers on new goods and services when the large sales tax is imposed. (an unrealistic assumption by the FairTaxers)

SAVED MONEY: All dollars that are post-tax savings would be devalued by the FairTax inflation by 20% in terms of what they can buy with their hard-earned and saved after-tax money.

Does this sound like a utopia to anyone? Isn't it very likely that a 36% sales tax (or much higher like 50%) will cause consumption to suffer and/or transactions driven into a barter system or the black market where they cannot be taxed. And every dollar that is taken from the legitimate economy is another increase that is needed in the FairTax rate in order to feed the government the amount of money it needs.

Isn't is likely that we will end up with an income tax again on top of the FairTax when this all plays out?

And once people either stop buying, or buy used, or barter for services, or buy on the black market, or funnel purchases through their businesses for a tax exemption, it is very likely that the FairTax inclusive rate would be 33%-- which is an exclusive rate of 50%, making the problem worse.

What will the Real FairTax Rate Be? [Hint: much higher than the 29.87% they claim]

The FairTax plan makes the false ASSUMPTION that 23% inclusive will be enough to fully find the government at today's level.

FairTaxers generally agree that the FairTax will cause higher prices and FairTaxers think that these will be ok because the purchasing power is what matters. Wage earners will receive a pay increase with their 100% paychecks to compensate for the higher prices.

Domestic prices will rise about 18-25% after a small (max 8%) price cut and then the 30% FairTax is added-- and rise the full 30% for foreign items.

Stick with me here for just one more minute. The government will also need a "raise" to pay the higher prices (because the government pays the FairTax on everything too), and it will take the form of additional revenue that needs to be raised. That additional revenue can ONLY be raised by increasing the FairTax rate, there is no other source to generate revenue. So, the 23% rate when multiplied by 1.18 is now 27.1% inclusive, which is 37.2% exclusive.

And that assumes no reduction in the base. If we assume just the very minimum that the base reduces 8% due to reduction in shelf prices-- ie. no reduction in unit volume of sales, just an 8% lower price for everything, then we need to divide the 27.1% by 0.92 to get a new inclusive rate of 29.5%, which is 41.8% exclusive. And this assumes ZERO evasion, and the same exact level of unit sales as now.

Most recently the FairTax commission found that the FairTax Rate was grossly understated by the FairTax people and that the actual rate would have to be MUCH HIGHER than 29.87% exclusive due to 1)government paying itself tax and 2) erosion of the taxable base due to all factors. Just a 15% erosion in base, coupled with a Federal government costing 20% more than presently (the cost with the FairTax added) makes the rate 33% inclusive which is 50% exclusive.

The FairTax people need to go back to the drawing board and plug in the new reality where prices go up 18-25% and stick that in their models and see what somes out the other side. It won't be pretty is my expectation.

OK, FairTax opponent, if you're so smart, what do you think we should do to fix the problem?

I want to see elimination of corporate taxes, elimination of death taxes, additional reductions in the marginal income tax rates until we find that we are the Laffer optimal point.

In addition I want to see Social Security privatized, and I am willing to pay extra money to pay for those who were promised this benefit, and never receive a penny of it myself. I also want to see Medicare reformed from top-to-bottom. I also want to see Tort Reform to reduce the exorbitant costs of insurance on our medical costs. And we need to reduce the scope of the Federal Government to its constitutionally mandated responsibilities and get rid of the rest. The Golden Goose that is America is way too fat and needs to be put on a severe diet.

These are what we need to do, incremental improvements in what we already have. This is already working and we should keep at it...even Boortz seems to think so. Boortz (9/20): "...the economy continues to go like gangbusters. We are right in the middle of an historic economic boom. Don't let the mainstream media or the Democrats tell you otherwise...we've never had it so good...

[groanup]

The SQL’s are out playing tonight.

[ari-freedom]

I really don’t like this fair tax idea. Especially the prebate idea. Why try to collect money from everyone only to give it back? Just don’t take it in the first place! It also gives people the illusion of getting free money from the government and they don’t see the bill for the total tax they are paying.

The flat tax is already tried and tested in Hong Kong, Russia, several European countries as well as Alberta, Illinois, Indiana, Massachusetts, Michigan and Pennsylvania.

why not go with that?

[Always Right]

There are crane operators out there who know that if you buy $100 worth of clothes the 23% FairTax comes out of the $100. Nothing is added to the price. The clothes don't cost you $130 in total ... they cost you $100. The 23% FairTax merely replaces the imbedded tax that would be there if you bought those clothes today!

Except the embedded tax does not come out of the price as claimed. One of the fairtax lead researcher has admitted that happens only if employees and owners take a paycut in the amount of their current taxes.

[RobFromGa]

if you're going to criticize the FairTax, can you at least read the book before you make fools out of yourselves?

I did read the book, and I emailed Jorgenson, and wrote a letter to Boortz and Linder, and they revised the 2nd Edition and removed the FreeLunch part. Now they still talk about the FreeLunch on the radio and in speeches still though, so I'm not sure they understand the bill or the way business works.

[FewsOrange]

There are crane operators out there who know that if you buy $100 worth of clothes the 23% FairTax comes out of the $100. Nothing is added to the price. The clothes don't cost you $130 in total ... they cost you $100.

If you go into a store and see an item of clothing with a price label of $100 you will end up paying $130 under the Fair Tax system.

[groanup]

So, domestic prices will go up about 20% and imported item prices will go up about 30%.

And, for salaried individuals, take home pay will go up by a similar amount. For self employed individuals a similar situation. Purchasing power for the average American will remain the same. No inflation. PERIOD!

[xcamel]

"can you at least read the book"

Someone page "L. Ron SalesTax" again?