Fair Tax, Flawed Tax

The Wall Street Journal ^ | August 26, 2007 12:01 a.m. EDT | BRUCE BARTLETT

[Aristotelian]

Former Arkansas Gov. Mike Huckabee's unexpectedly strong second-place showing in the recent Iowa Republican straw poll is widely attributed to his support for the FairTax.

For those who never heard about it, the FairTax is a national retail sales tax that would replace the entire current federal tax system. It was originally devised by the Church of Scientology in the early 1990s as a way to get rid of the Internal Revenue Service, with which the church was then at war....

Rep. John Linder (R., Ga.) and Sen. Saxby Chambliss (R., Ga.) have introduced legislation (H.R. 25/S. 1025) to implement the FairTax. They assert that a rate of 23% would be sufficient to replace federal individual and corporate income taxes as well as payroll and estate taxes. Mr. Linder's Web site claims that U.S. gross domestic product will rise 10.5% the first year after enactment, exports will grow by 26%, and real investment spending will increase an astonishing 76%.

In reality, the FairTax rate is not 23%. Messrs. Linder and Chambliss get this figure by calculating the tax as if it were already incorporated into the price of goods and services. (This is known as the tax-inclusive rate.) Calculating it the conventional way that every other [sic](This is called the tax-exclusive rate.)

The distinction is confusing, but think of it this way. If a product costs $1 at retail, the FairTax adds 30%, for a total of $1.30. Since the 30-cent tax is 23% of $1.30, FairTax supporters say the rate is 23% rather than 30%.

This is only the beginning of the deceptions in the FairTax.

[Jacquerie]

The question is not, “Is the Fair Tax perfect?”

The question is “Which is better, the FT or the current income tax?”

[jmyrlefuller]

That assumes those are the only choices.

The income tax is salvageable, but it needs to be greatly simplified. 25 years ago there were 2 tax brackets— lower and upper. Now there are 6, plus more deductions, credits and various doohickeys than anyone can make sense out of, so much to the point that the accounting and software industries get a boom every April 15.

We don’t need to throw the baby out with the bathwater to fix the tax code.

[Aristotelian]

I’d encourage you to read the entire article, which points out just how unworkable the Fair Tax is. The tax rate would have to be ridiculously high and apply to all manner of goods and services. It would even result in the federal government taxing itself. Pure nonsense. The private sector retail sales base is simply too small to support a Fair Tax as a replacement for the current income tax.

[Mark was here]

One man, one vote, one tax bill, that is if you believe everyone should be treated equally under the law.

If not, from each according to his means, may be what you’re searching for.

[ejonesie22]

To be honest, the income tax is better than the fair tax as it is currently being developed.

It needs a little more maturing. In the mean time flat tax or a simplifying overhaul maybe a more workable plan. I will grant, any day of the week, that something needs to be done.

[jmyrlefuller]

If that were the case, the solution would neither be an income nor a sales tax, but a head tax: a tax on sheer existence.

[Aristotelian]

Acknowledging the Fair Tax’s flaws does not make me a socialist.

[mazda77]

Better yet, read both, the book and the article. At first blush I did not subscribe to Linder and Boortz’s idea. I always thought such a thing would give too many opportunities to the black market. But seeing the details has not totally sold me but it is palatable as in the which is worse arguement.

Be mindful the WSJ is written for the financial community and that group is home to all the tax preparers, attorneys, accountants, et al who would be displaced by the FairTax. One article is not the sum total of all points of truth in reality for any issue since that paper has a vested interest in making sure everything stays the way it is.

The profile of this article is high enough that I’m sure Boortz will spend a great deal of time with it on his radio show tomorrow. You should listen and read his book. As I said, it is much better than the current system, but scruitiny is still required.

[mek1959]

I’ll tell ya, all of these discussions about what is fair as a tax model obfuscates the real issue in my view. Yes, there needs to be taxation, but the issue is how much, not what model. The real fight for conservatives is a bloated federal government. Until the country experiences some real economic pain, there will be no honest discussion about the size issue. And all of the leading candidates pay lip service to the cutting the almost $3,000,000,000 federal budget that represents about 18% to 20% of GDP and the CBO expects it to grow to 39.5% in the next generation!!! Before the FDR debacle of a presidency, federal spending was only 3%-5% of GDP. Oh, how far we’ve come.

The conservatives better stay focused on the real issues in front of us and not just tinker with a tax model - unless that tax model pares back the monstrosity we call Washington.

And no, I’m not a libertarian.

[Always Right]

Thus if the Defense Department buys a tank that now costs $1 million, the manufacturer would have to add the FairTax and send it to the Treasury Department. The tank would then cost the federal government $300,000 more than it does today, but its tax collection will also be $300,000 higher.

This legerdemain is done solely to make revenues under the FairTax seem larger than they really are

The fairtax expert economists are experts of smoke and mirror accounting principles. It is no wonder they show prices decreasing, paychecks raising, and every person in the known universe benefiting from the fairtax. It is all an accounting illusion.

[Mark was here]

Acknowledging the Fair Tax’s flaws does not make me a socialist.

The point I am making is this, if the Fair Tax was truly fair, everyone would have to pay the same amount of taxes. It does not, so I believe the Fair Tax is a fraud, and is not fair.

Say two guys work side by side getting the same pay. One works all the overtime offered, while the other does not. At the end of the year the hard worker is hit with a higher tax bill, this is not fair. A fair tax should tax them both the same amount.

I never meant to imply you were a socialist.

[theBuckwheat]

>>
The distinction is confusing, but think of it this way. If a product costs $1 at retail, the FairTax adds 30%...
<<

So, what is the real complaint? That the Fair Tax, expressed as a percent like a sales tax customarily is, is higher as a number, or (and I suspect this is the real rub) that the number is high enough that it starts to offend the sensibilities of the tax payer?

If the case is the latter, than it is just time to wake up to the truth about big and Bigger government- that it indeed consumes a shocking percent of our wealth.

The core issue must then be the amount of money that government spends. Common sense tells us it cannot spend what it does not have, so it must either raise that money through taxation, borrowing or inflating the currency.

Various studies have put the total economic burden of all levels of government at 43% of GDP, and the only reason the tax rate is not that percent is because politicians have succeeded in hiding a lot of taxes by making them indirect, such as taxing a corporation’s activities so it must have higher prices than taxing the customer’s income.

Even if the Fair Tax has flaws, at least it does not destroy financial privacy like all income-based tax schemes do. Protecting that important aspect of liberty must at least count for something.

[Mark was here]

If that were the case, the solution would neither be an income nor a sales tax, but a head tax: a tax on sheer existence.

Yep, and everyone would be charged the same amount. No more dividing and conquering the people, to get taxes raised that the other guy has to pay. We would all be equal under the law, and treated that way.

[SomeCallMeTim]

It would even result in the federal government taxing itself. Pure nonsense

You mean, like taxing the income provided by Social Security checks?? No way OUR government would do anything THAT stupid!

I did read the entire article.... and, I think most of it is hogwash. Economist on BOTH sides of this are grasping at straws due to the complexity of the calculation required to understand the impact of such a massive change... I think, it's probably impossible to do.

For example: The article intentionally scares the reader by raising the example of having to pay a 30% tax on the purchase or a house... or car. What they don't say is.... the CURRENT price of a house or car includes substantial costs for.. guess what?... income taxes. Under the Fair Tax, primary producers are exempted from taxation... so, the COST of nearly everything will be greatly reduced.

Here's the test... My family is, fortunately, fairly high up on the IRS wage scale... yet, my final federal tax bill is only ~ 20%. If the Fair Tax is SO REGRESSIVE .. meaning lower and middle income people are going to pay so much more... how would my tax rate be increasing by 50%?? It just doesn't make sense. If so.. the government will be buried in money.

The article did, however, point out a serious flaw for me. This rebate based on income means... people will STILL have to prove their income!! Not having to do THAT is the whole point behind the Fair Tax. The better way to reduce the regressiveness of the tax is to exempt food. Lower income people spend a much higher % of their income on food.

Until this problem is corrected, I guess I do NOT support the Fair Tax as it is currently written.

[Jacquerie]

In all the past FT threads I have never read a defense of the current progrssive income tax system, of why it is better for America than the FT.

I will not likely read one today.

[xcamel]

posted:
http://www.freerepublic.com/focus/f-news/1886636/posts

[HANG THE EXPENSE]

Its a tax on what you spend, not what you make! Be a cheap bastard like me and watch what you buy. Buy used. It gets the govt out of your back pocket.Come on, what can be wrong with that.

[Man50D]

The tax rate would have to be ridiculously high and apply to all manner of goods and services.

Mr. Bartlett is being deceptive by not fully explaining inclusive vs exclusive or he is showing his lack of understanding about The Fair Tax. The dollar amount collected from The Fair Tax will be the same whether the inclusive 23% or exclusive 30% Fair Tax rate is quoted. He also fails to discuss most people are paying that much or more today much of it is just hidden from view. The income tax bracket most people fall into is 15 percent, and all wage earners pay 7.65 percent in payroll taxes. That’s 23 percent, without taking into account the 7.65 percent employer matching! That's more than 30%!

He also neglects to mention the effective Fair Tax rate (after the rebate) will reduce the tax rate on average to 15.5%. That same individual will pay 17.3 percent of his or her income to federal taxes under current law.

It would even result in the federal government taxing itself.

That simply means the federal government retains the money it already possesses.

The private sector retail sales base is simply too small to support a Fair Tax as a replacement for the current income tax.

A sales tax base is far broader than the income tax base as more people have to make purchases than have an income. This is especially true when unemployment rises during an economic down turn. The unemployed still have to make purchases.

Fair Tax ping!

[vetsvette]

“I’d encourage you to read the entire article, which points out just how unworkable the Fair Tax is. The tax rate would have to be ridiculously high and apply to all manner of goods and services. It would even result in the federal government taxing itself. Pure nonsense. The private sector retail sales base is simply too small to support a Fair Tax as a replacement for the current income tax.”

I think that we may have found someone that pays little or no income tax.