So Long, IRS? Debate Swirls Around “Fair Tax”

RTTNews ^ | September 16, 2007

[Man50D]

Sunday, September 16, 2007 9:54:57 AM - In 2005, talk-show host Neal Boortz and Georgia congressman John Linder co-authored "The FairTax Book: Saying Goodbye to the Income Tax and the IRS." The proposal for a national sales tax took the financial world by storm, spawning a national drive for the so-called “fair tax.”

Soon, what was a No. 1 New York Times best-seller became an issue in Washington and is poised to add to the debate taking place in the presidential primaries. However, the proposed legislation is exceedingly controversial, drawing fire from economists and politicians across the board.

In its basic form, the fair tax is a national sales tax of 23 percent that would be applied to all retail goods, excluding business input and education spending. The sales tax would eliminate the following taxes: the federal individual income tax, alternative minimum tax, corporate and business taxes, capital gains tax, Social Security and Medicare taxes, and estate and gift taxes. The legislation would also abolish the IRS and all jobs associated with that organization (12,000) as well as eliminate the export tax.

The organization most closely associated with the fair tax is Americans for Fair Tax, located at fairtax.org. Ken Hoagland, their national communications director, explains the benefits:

“In essence, every single federal tax that is on income and earnings and savings goes away,” he explained. “That means you take home your whole paycheck, nothing is withheld by the federal government, April 15th becomes just another nice spring day, capital gains taxes go away, corporate taxes go away, embedded taxes that are found in all of the prices of our retail goods they go away, and instead we always pay the taxes at the cash register - one time at the point of final retail sale.”

To protect the nation's poor, the architects of the plan introduced a $5,600 pre-bate to the sales tax.

“A sales tax unlike any other sales tax because this one has a prebate,” Hoagland explained. “That's a rebate that comes before you pay the tax to every American household to make sure that this doesn't fall heavier on the poor.” The prebate is designed to give Americans living at or below money they will be charged in sales tax before they have to pay. That way, those living in the lowest-tier of income won't be paying the same tax as those in the highest-tier.However, there are several drawbacks to the plan. Opponents claim that the fair tax is unfairly heavy on the middle class, and will collect more money from those earning between $15,000 and $200,000 per year and less from those earning more than $200,000 per year. Mark Luscombe, a Principal Tax Analyst at CCH, is skeptical about the legislation.“I think most of the people that have looked at this have estimated that it would have the biggest negative impact on the middle class,” Luscombe pointed out. “It's projected by many people that the very wealthy would benefit because most of their income is not consumed but rather goes into investments and would not be taxed until its ultimate consumption which may be many generations down the line.”Also, the 23 percent sales tax is in addition to existing state and local taxes. Therefore, the tax would be upwards of 30 percent in some areas. Consumers would also pay tax on a host of items previously exempt, including new homes, rent, interest on credit cards, mortgages and car loans, doctor bills, utilities, gasoline, and legal fees. “I'd be pretty hesitant to adopt the full part of their agenda which is to abandon the Internal Revenue Service, abandon the internal revenue code, repeal the 16th amendment and go whole-hog into a national sales tax without really being able to test the waters first,” Luscombe stated. “And one reason I say that is I think that the proposal, at least the more recent proposals for the sales tax, rely on projections into the future.”

Rather, Luscombe believes that “A better approach would be to test the waters with a limited national sales tax.”

However, proponents of the fair ax claim that anything less than a total change would leave the system unchanged. In terms of possible exemptions, Hoagland claims that they are the quickest way to kill the legislation.

"Once you have one exemption, this time next year you'll have a thousand exemptions,” he stated.

Luscombe agrees that the current tax system is in need of reform. However, the source of that reform is up for debate. For Hoagland, the choice is clear. Although the fair tax won't end all the problems, he believes it is a strong step forward.

"It's not going to be perfect, no tax system is," Hoagland admitted. "Just 100 times better than the income tax system."

“I don't think it's fairer than any other tax, on the face of it,” Luscombe analyzed.

One of the chief areas of concern regarding the fair tax is its ability to raise enough money to keep the government functioning. Due to the fact that the average taxpayer would be saving money with the 23 percent tax, the ability of taxpayers saving money plus the government making the same amount seems unbalanced.

Hoagland claims that a broadened economic base, where people are taxed at the point of consumption rather than earnings, would play a large role in taxing those who are able to cheat the system. Business benefits are also a large part of the plan.

"Under the fair tax the United States becomes the most favorable tax environment in the world," Hoagland claimed. Were this the case, foreign investment in the United States would increase. However, many economists remain unsure.

“Most of the individual people who have looked at this plan say that ‘no this would not be enough,'” Luscombe warned. He referred to the “rosy projections” given by fair tax proponents, citing that, in general, “rosy projections” do not come true. Though the legislation is getting increased attention, both parties agree that the likelihood of a change in the near-future is minimal.

“I will tell you on the timeline we're still some time away from winning the debate in Washington,” Hoagland admitted.

“I would give it a very small chance of going into effect,” Luscombe predicted. According to Hoagland, five of the eight GOP candidates and one Democratic candidate said they will sign this into law. It's prominence in the campaign is a large part of the fair tax focus. “We hope that we make the income tax system at worst a subject for public policy debate in the presidential campaign, Hoagland said.

Those most firmly in support of the bill include Republican hopeful Mike Huckabee and Democratic hopeful Mike Gravel.

[Man50D]

Opponents claim that the fair tax is unfairly heavy on the middle class, and will collect more money from those earning between $15,000 and $200,000 per year and less from those earning more than $200,000 per year.

These people don't have a clue about The Fair Tax. They don't realize it will tax consumption instead of income! People will only be taxed when they make a purchase and therefore will have the choice of when and how much they will be taxed!

Luscombe pointed out. “It's projected by many people that the very wealthy would benefit because most of their income is not consumed but rather goes into investments and would not be taxed until its ultimate consumption which may be many generations down the line.”

Just who are these "people" you refer to but fail to give names Mr. Luscombe? Mr. Luscombe is either not aware or chooses to ignore one very basic point. The more money people have the more they tend to spend. Additionally wealthier people tend to buy the more expensive big ticket items.

Also, the 23 percent sales tax is in addition to existing state and local taxes. Therefore, the tax would be upwards of 30 percent in some areas.

The tax burden with the income tax is already greater than 30% when you factor in the hidden taxes and compliance costs! Regardless of that fact, The maximum Fair Tax rate will not exceed the 23%/30% (tax inclusive/tax exclusive repesctively). The effective rate(after the prebate) will be on average 15.5%

“I'd be pretty hesitant to adopt the full part of their agenda which is to abandon the Internal Revenue Service, abandon the internal revenue code, repeal the 16th amendment and go whole-hog into a national sales tax without really being able to test the waters first,” Luscombe stated. “And one reason I say that is I think that the proposal, at least the more recent proposals for the sales tax, rely on projections into the future.”

This is ridiculous. "Testing the waters" as Mr. Luscombe puts could not accurately measure the effect of the bill because his method would require gutting the bill(HR.25/S.1025) and create a completely different tax code. It is not a standard procedure used for other bills being considered.

The debate in this article also points out the fact that more people are becoming aware of The Fair Tax and considering it as a viable alternative to the income tax. This is confirmed by the increasing number of articles I am finding to post. Consequently I maybe pinging all of you on my list more often in the future

[Man50D]

Fair Tax ping!

[Turret Gunner A20]

ping

[RC2]

Question here....for those that know. What is the difference between the “Fair Tax” and the “Flat Tax”? One problem I have with the Fair Tax is how much will it add to the cost of, say, a new vehicle, new house, etc? Seems to me that a Flat Tax of 10% would give the government more than they need. It also seems that the “Fair Tax” would stop people from buying products which would raise the cost of products. Companies are going to keep their profit levels up and if the Fair Tax stops people from purchasing, they’ll raise the prices.

[Crucis Country]

Fair Tax, my a$$. What we'll get is a national sales tax AND income and the IRS.

The only fair tax is a flat tax. Let the states collect it and prohibit the Feds from any collection of taxes. The Feds can get their cut from the states.

Let's re-inforce the 10th Amendment.

[goldstategop]

A list of federal taxes would be done away with. Of course, those in favor of the status quo want to keep all those taxes and add still new ones. If given a choice between paying 50% of my income to the government under the current system and 30% under the Fair Tax system, I will take the 30%. The less we owe government, the better off we will all be. No tax reform proposal is perfect but the Fair Tax offers the best way to both shrink the size of government and its attendant financial burden.

"Show me just what Mohammed brought that was new, and there you will find things only evil and inhuman, such as his command to spread by the sword the faith he preached." - Manuel II Palelologus

[KarlInOhio]

One of the biggest advantages of the Fair Tax is that it puts US and foreign producers on the same level. Our current tax law is punitive to domestic producers. Foreign producers can always price their exports to make sure that little or no profits are made in the US or by their US subsidiaries. Many of these countries strip a large part of their domestic taxes off at the border.

[KarlInOhio]

Seems to me that a Flat Tax of 10% would give the government more than they need.

Maybe more than they need but a lot less than they want or take now. The federales consume between 20 and 25% of the GDP. Anyway you split it, if you have one tax rate for everyone that rate will be pretty darn close to the portion of the economy the federal government consumes. They like splitting it between differnet rates, having employers pay portions and hiding it in a million little nips rather than one big bite, but they get "their" one quarter of everything.

[sheana]

I agree, a flat-tax. A flat 10%, no exemptions, no poverty level, nada. Everyone pays their 10% period.

[3niner]

Question here....for those that know. What is the difference between the “Fair Tax” and the “Flat Tax”?

The "Fair Tax" is a sales (or consumption) tax, the "Flat Tax" is a tweak to the income tax setting a more uniform tax rate and getting rid of deductions.

One seldom mentioned point, in favor of the "Fair Tax", is that it is expected that criminals would have more trouble evading it. This is because it would be charged to them anytime they went to a store to buy something, and it would be extremely inconvient to go through life never buying anything through legal means.

[mysterio]

We'll have to double the size of the IRS to fight the blackmarket that the sales tax is going to generate.

And why hasn't anyone figured out that punishing people with a 30% tax for buying new goods when they can buy used goods tax free is going to cripple the economy?

[TChris]

“A better approach would be to test the waters with a limited national sales tax.”

No, no, no and NO!

A "limited national sales tax" would just stay as-is for all eternity, adding on to the existing Income Tax. Either do it or don't do it. Playing around in the middle will be even worse than either end.

[TChris]

And why hasn't anyone figured out that punishing people with a 30% tax for buying new goods when they can buy used goods tax free is going to cripple the economy?

Really? And what has prevented this crippling effect from happening already? After all, buying used allows a consumer to avoid existing sales taxes. Why hasn't this created a huge black market?

[agooga]

I really like the Fair Tax, but I’ll take any substantial tax reform which makes it easier and “fairer” for people.

[CONSERVE]

can you add me to your ping list please?

[socialismisinsidious]

www.fairtaxcalculator.org

Easy, anonymous way to calculate what the fairtax would cost you.

[DoughtyOne]

When we first started talking about the flat tax, I was a skeptic. Today I mostly remain so.

One of my first objections was based on the assumption that the flat tax would not remain low. It sure is nice to talk about the IRS going away, but when push comes to shove, there could be worse things.

Okay, was my fear of the flat tax increasing unfounded? Let’s see...

Here’s an article from 1997, that touts a 17% flat tax rate.

http://www.freerepublic.com/focus/news/790908/posts

Here’s a report of the flat tax proposal from April of 2003. Russia’s flat tax was being touted. Note that the poster states that the Russian rate was 13%, that’s 4% lower than the radical Steve Forbes plan. Steve’s plan was 17% then.

http://www.freerepublic.com/focus/f-news/893806/posts

Today, in this very article the rate is touted as 23%. Even before this project has gotten off the ground, the base rate has grown by more than 33% in the last four years. I’m sure someone will be along any moment to explain why this is good, and that future raises to this tax rate would be out of the question.

Others have reminded us that 1% was supposed to be the highest income taxes would ever get, back in the early 1900s. Well, that didn’t quite pan out did it.

Let me ask folks on this forum what will happen if you start paying out 31.25% on top of the base cost of goods, every time you make a purchase? Will you reduce your purchases? If your new car that you wheeled and dealed down to $30,000.00 would suddenly cost you $41,000.00 would you buy it today, or would you wait a couple of years? I know I’d put the purchase off.

If I were buying groceries, I’d purchase as little as possible. If I wanted to remodel the home, I’d put that off. If I had to pay 31.25% on top of the purchase price of anything I bought, you can be damned sure I’d be buying a lot less. And when I did two things would happen. First there would be a downturn in the economy like none bofore. Second, the base rate of the flat tax would have to be adjusted upwards by 30 to 50%, because of a fall-off in revenues. People don’t purchase, and no taxes are collected. Taxes get raised and purchases plumet even further.

This vicious cycle is something that I think sinks the project within a year or two.

Withholding before we are paid, is a very clever way of taking taxes. Forcing folks to pay those taxes every day, isn’t something that’s going to fly. It’s going to cause far more problems than we have now. At least that’s the way I see it.

One thing that the flat taxers haven’t contemplated, is that states which collect their own income taxes, would immediately take off any exemptions that didn’t match the federal government’s tax plan. Food, medicines et all, would no longer be exempt. Bank on it.

One more thing that bothers me about this plan, is the immediate inclusion of redistribution of wealth. Don’t come to me and talk about fixing the current tax plan if you’re going to immediately install a way for the govenrment to steal my money and give it to others. No way this side of hell bub...

[Man50D]

Question here....for those that know. What is the difference between the “Fair Tax” and the “Flat Tax”?

The Flat tax will still tax income, keep all the embededed/value added taxes(VATS)and retain the IRS. The Fair Tax will shift the tax from income to consumption, eliminate embedded taxes and abolish the IRS.

One problem I have with the Fair Tax is how much will it add to the cost of, say, a new vehicle, new house, etc?

The insidious problem with the income tax is the taxes and compliance costs embedded in the cost of all goods and services at each stage of production add up to more than The Fair Tax rate. Fair Tax FAQ#5. The effective rate(after the prebate) will lower the Fair Tax rate on average to 15.5% Fair Tax FAQ #5. You also need to consider abolishing federal income taxes will put more money in your paycheck and increase purchasing power. Companies will be forced to pass on the costs savings of eliminated corporate taxes and less compliance costs in the form of lower prices in due to competition equivalent to the NRST rate. The end result is you will pay about the same for goods and services as you do now.

It also seems that the “Fair Tax” would stop people from buying products which would raise the cost of products.

People will be more inclined to make purchases since they will have more money in their paychecks due to federal income taxes being abolished.

Competition will force businesses to pass on the cost savings and lower prices since they won't have to pay anymore corporate taxes and much lower compliance costs.

[Kevmo]

I don’t trust the guvmint. They’ll add this tax ON TOP OF the income tax.

[E. Pluribus Unum]

We'll get a national sales tax one of these days, don't worry about that.

But the income tax will never go away.

Government only knows how to create new taxes and increase them.

The idea of repealing any tax is impossible for them even to contemplate, other than as a ruse.