I am a true believer in tax reform but the fair tax does not appeal to me as reform for two reasons: first it has as its main assumption that it will be revenue neutral and second it will require a massive federal bureauracy to run its monthly rebate program to taxpayers.
Size of the federal bureaucracy is an understandable concern. There are some points as to how The Fair Tax will reduce the bureaucracy you need to consider. There are currently 140 million individual tax filers with the income tax. That figure will drop to 20 million businesses filing the consumption tax collected from purchases. Such a dramatic drop in filers will allow for a considerable drop in size of bureaucracy needed to monitor The Fair Tax. Another factor that will reduce bureaucracy is The Fair Tax and it's 133 page tax code will replace the 67,000+ page tax code by abolishing the IRS. The existing Treasury Department will administer the consumption tax.
Their power stems largely from how much money overall they take away from people through taxes and how they spend that money and this is the factor that is specifically not reformed through the fair tax "revenue neutrality" assumption.
No tax code is designed or can be designed specifically to address spending. However The Fair Tax does reduce spending to some extent by abolishing the IRS and its $11 billion dollar price tag. Also you need to also consider The Fair Tax will collect tax money from a much larger number of people(310 million) than the income tax (140 million thereby reducing the tax burden on each individual more than the income tax. Another advantage to The Fair Tax is that people will be able to see the tax rate as it will be itemized on each receipt. People will be able to see any change Congress makes as opposed to the unseen changes for the hidden taxes with the income tax code and therefore more likely to speak up against any changes. Congress will be less likely to make a consumption tax rate too high as it will only encourage people to reduce their purchases. Reduced purchases results in less taxes collected by the Treasury and will force Congress to reduce spending. Congress can only maximize tax collection by keeping the rates within reasonable boundaries. Founding father and first Secretary Of The Treasury Alexander Hamilton pointed out this concept in his Federalist paper #21. To quote:
It is a signal advantage of taxes on articles of consumption that they contain in their own nature a security against excess. They prescribe their own limit, which cannot be exceeded without defeating the end proposed-that is, an extension of the revenue. When applied to this object, the saying is as just as it is witty that, "in political arithmetic, two and two do not always make four." If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds. This forms a complete barrier against any material oppression of the citizens by taxes of this class, and is itself a natural limitation of the power of imposing them.
It seems to me, to be fair, the government would have to have detailed information about people's incomes and purchases and life circumstances such as illnesses to correctly figure out how much each citizen deserved to be prebated.
Income will not be a factor to determine the size of the prebate. The size of the prebate will be determined by the Department of Health & Human Services’ poverty level guideline multiplied by the tax rate and is based on family size as you can see from the chart below.
Fair Tax FAQ #3
Such intensive and personal monitoring of individuals would be no improvement over the IRS which most people now only deal with once a year.
The IRS requires people to fill out a multitude of forms detailing every aspect of a person's life. No system could be more intrusive. Contrast that with The Fair Tax that will not require any tax forms. You will only have to fill out a form for the prebate but it will not require near the detail demanded from the IRS.
"It is a signal advantage of taxes on articles of consumption that they contain in their own nature a security against excess. They prescribe their own limit, which cannot be exceeded without defeating the end proposed-that is, an extension of the revenue. When applied to this object, the saying is as just as it is witty that, "in political arithmetic, two and two do not always make four." If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds. This forms a complete barrier against any material oppression of the citizens by taxes of this class, and is itself a natural limitation of the power of imposing them."This is probably the single most important point of the Fair Tax. It cojoins the tax suppression efforts of the traditional lobby interests with individual taxpayers. The only objective will be to seek the minimum rate. Imagine the universal uproar and the constituent pressures that legislators would feel with any increase in a base tax rate above the initial 23/30% (for all you incluseive/exclusive debaters) tax rate. Not to mention the immediate market effects.
I agree that the keystone to any tax plan requires a balanced budget ammendment. We should no longer allow our governemnt to spend more than we allow them to collect!
There are some points as to how The Fair Tax will reduce the bureaucracy you need to consider…. Another factor that will reduce bureaucracy is The Fair Tax and it's 133 page tax code will replace the 67,000+ page tax code by abolishing the IRS. The existing Treasury Department will administer the consumption tax. No tax code is designed or can be designed specifically to address spending. However The Fair Tax does reduce spending to some extent by abolishing the IRS and its $11 billion dollar price tag.
Well, I have considered these “points” (perhaps more accurately termed “claims”) and, as desperate as I am to enact significant federal tax reform, I am still not convinced. Overall, the problem I have with your response to my post is that it does not even recognize the revenue neutrality assumption embedded in the proposal and what that means for how the tax must operate in the real world. Your answers presume a feature of the fair tax that is ruled out from the beginning, that changes in consumption will be allowed to influence tax revenues.
While I focused on the need for any tax reform proposal to reduce spending you focused on the claim that it would reduce the IRS bureaucracy. But, according to the “revenue neutrality“ pledge it doesn’t matter how much bureaucracy is reduced in the IRS, the fair tax must still raise the same amount of revenue as before reform. So even if we spend less on the taxing bureaucracy, which I am not ready to admit will likely happen, it will not matter overall because the government will get the same amount of tax money as before which it will just spend on some other government programs which will be administered with another governmental bureaucracy. It is not the total number of people employed by the IRS that is the central problem, it is the total amount of money spent by the government.
I’m not sure what you mean by “No tax code is designed or can be designed specifically to address spending.” They are inextricably linked. Governmental spending is necessarily limited by the tax revenues raised and taxing schemes are designed with that in mind. Right now federal revenues depend on peoples’ incomes. When incomes go down the federal tax revenues are decreased and governmental spending must either be cut or income tax rates must be raised to meet spending demands. With the fair tax revenue neutrality pledge, if individuals consume less to avoid the fair tax, the fair tax rates must be raised until revenue neutrality is reached. It won’t matter that you quit buying some things to avoid the fair tax, rates on everything else you do buy will be raised to make up the difference. Without this happening there can be no “revenue neutrality.”
I appreciate your quote from James Madison, my favorite founder, but I believe his analysis of how a consumption tax would work was based on the assumption that people could determine with their consumption behavior how much tax they would pay. He says in Federalist 21: “The amount to be contributed by each citizen will in a degree be at his own option, and can be regulated by an attention to his resources. The rich may be extravagant, the poor can be frugal’ and private oppression may always be avoided by a judicious selection of objects proper for such impositions.” Under Madison’s example, if the consumption tax was too high, people would not buy the goods and tax receipts would go down. Allowing tax revenues to go down in response to lowered consumption is a necessary component if a consumption tax is to work as you (and Madison) claim. But this simply can’t happen under the fair tax because revenues by definition will not be allowed to decrease due to the revenue neutrality assumption.
Lastly, I also do not accept the argument that because the IRS is already extremely intrusive that we should accept an equally intrusive “fair tax” bureaucracy and no one will convince me that a government agency that hands out money every month to a large portion of the population will not be extremely intrusive. One signal advantage of the sales tax is that it is administered more or less automatically and without the need to identify individuals. The “prebate” part of the fair tax negates that benefit and opens the door for what is supposed to be essentially a sales tax to be administered as a welfare program with all the concomitant lobbying, need for personal identifying information and politically correct posturing by politicians.
If the fair tax prebate is truly not determined by income, spending or any other factor other than family size, as I understand you to claim, then it also has no connection to the amount of sales taxes that have been (or will be) paid. If there is no connection to actual taxes paid then the governmental payment is not a rebate at all, it is merely a transfer payment made by head count. I really do not see any advantage at all and many serious problems this with this “prebate” concept. In my view we have enough people getting transfer payments from the government right now and expanding this to a greater portion of the citizenry just further impairs our ability to maintain our system of republican self-governance.