Skip to comments.A Misleading Sales Pitch (Why the campaign for the Fair Tax will set back the cause of Tax Reform)
Posted on 03/15/2010 9:36:14 AM PDT by SeekAndFind
Heres the pitch: The FairTax a plan to replace the federal income tax and payroll tax with a national sales tax will get rid of the IRS forever. It will let workers keep their entire paychecks and retirees keep their entire pensions. It will raise just as much money as the current tax code. It will promote economic growth. It wont hurt the middle class, and it wont cause prices to rise. It will even end our illegal-immigration problem.
These claims are drawn from the leading proponents of the plan: a group called Americans for Fair Taxation, former Republican presidential candidate Mike Huckabee, and the trio behind the book FairTax: The Truth. By painting an attractive picture of a prosperous America without an IRS, they have gotten many conservatives to become enthusiasts for their cause. Rising conservative star Marco Rubio, a Senate candidate in Florida, has endorsed the FairTax in the past (although more recently he has hedged on it). Republican congressman John Linder of Georgia, a FairTax co-author who just announced that he will not run for reelection, has made promoting it his principal mission in Congress. The Iowa Republican party has endorsed it. It seems to be gaining support among tea partiers.
The FairTax sounds too good to be true. It is. The campaign for the FairTax is deeply misleading, and much more likely to set back the cause of tax reform than to advance it.
The FairTaxers give a misleading answer to the first question everyone asks about their idea: How big will the tax be? The FairTaxers say they want a 23 percent sales tax. Most people will assume that a product that costs $100 before the tax is added would cost $123 with the tax. Actually, the tax would be $30 and the total price $130. They call it a 23 percent rate because $30 is 23 percent of $130. Those FairTaxers who understand the numbers defend this way of calculating the tax rate because it makes it comparable to the income-tax rates theyre trying to replace. But its not the way any of the 45 states that have sales taxes calculate their rates. Whether or not the FairTaxers intend to mislead people by using the 23 percent figure, confusion is the effect.
It is not at all clear that this 30 percent sales tax would raise enough revenue to eliminate income and payroll taxes. Brookings Institution economist William Gale has estimated that to replace current federal tax revenues, the tax rate would have to be 44 percent (or 31 percent the way the FairTaxers calculate rates: A $100 product would cost $144 after tax). Gales calculation assumed that nobody would evade the sales tax and that Congress would not narrow the tax base by, for example, exempting medical services from the tax. Relaxing those assumptions increases the rate required even further.
Several groups of people would be adversely affected by the tax. Retirees, for example, have paid taxes on their wages during their working lives. After a FairTax was implemented, they would find themselves also having to pay higher taxes on everything they used their accumulated savings to buy. The value of non-retirees accumulated savings would drop, too.
The middle class would also pay higher taxes. Under the FairTax plan, the federal government would give all legal residents of the U.S. a prebate to cover sales taxes on all purchases up to the poverty line. That would protect the poor (except for illegal immigrants; higher prices are supposed to induce immigrants to come legally so they can get their prebate). And the rich would pay less than they do now, since returns to investment typically are a large share of their income, and these would go untaxed. So if revenues are to stay the same, the middle class will have to pay more. If the change in tax policy increases economic growth, this effect will be mitigated but it will take a very long time for it to disappear under any plausible assumptions. Governor Huckabees claim that voters in all income groups would come out ahead while the federal government would raise the same amount of revenue as before is of course unsupportable.
FairTax proponents generally respond to these criticisms with what we would have to call flimflammery if we thought they understood the issues. Existing taxes are embedded in todays consumer prices, they say, so getting rid of them would cause prices to drop. Adding sales taxes would be a wash, says Huckabee. So prices dont go up, and workers get to keep their entire paycheck. Again, it sounds too good to be true.
And again, it is. If prices stay flat after a sales tax, workers cant keep their entire paychecks: Wages have to fall. The paycheck youre keeping would be smaller. (Think about it this way: If existing taxes are embedded in the cost of every product, theyre embedded in the cost of labor, too.) If wages dont adjust downward, then unemployment has to rise. If the Federal Reserve increases the money supply to prevent this combination of falling wages and rising unemployment, then consumer prices will increase.
Most experts in tax administration also say that enforcing sales taxes gets hard quickly once the rates hit double digits. Thats one reason that many countries with broad-based consumption taxes levy value-added taxes, which are collected in smaller amounts at each step along the production and distribution chain, instead of sales taxes, which are collected in one big lump at the end. The fact that no country relies on sales taxes to the extent the FairTaxers advocate does not, however, faze them. Americans for Fair Taxations website discusses the issue thus: Two of the largest economies in the world rely almost solely on sales taxes: Florida and Texas. Many civilizations in history have relied solely on transaction-based consumption taxes: a percentage of a grain shipment in exchange for a safe harbor. Sales taxes in Florida and Texas are under 10 percent. Might imposing a 30 percent tax rate on the sales of a non-grain-based economy pose different issues? AFT doesnt say.
Even some of the real advantages of the FairTax are overstated. Households would not have to prepare returns, and would thus enjoy more privacy. On the other hand, the federal government would still have to know peoples wages in order to determine how much they have earned in Social Security benefits. (Which leads to another problem, albeit a surmountable one. Those benefits are now linked to payroll taxes paid, which would of course end with the FairTax. As a result, people would have an incentive, for the first time, to make the federal government think they earned more than they actually did: They would accrue higher Social Security benefits while paying no extra taxes. Waitresses would start over-reporting their tips. The FairTax proposal has to take steps to combat this misreporting.)
And we havent even gotten to the politics of it. How likely is it that Congress and the president any Congress, any president will agree to create a new tax system that punishes the middle class and senior citizens? One that taxes people when they buy a home in which to live, but not when they buy a house as an investment? (This example comes from The FairTax Fantasy, a fairly comprehensive attack on the idea by Hank Adler and Hugh Hewitt.) That requires state and local governments to pay taxes to the federal government whenever they buy something and thus, in all likelihood, to raise their own taxes? Lets even stipulate that these are good ideas, and that the protests of the homebuilders and the charities at the loss of their popular deductions should be ignored. What are the odds that they will be?
AFT also advocates the repeal of the Sixteenth Amendment, which permits a federal income tax. Doing so would require the approval of 38 states legislatures. Good luck with that.
In their book FairTax, talk-show host Neal Boortz, Congressman Linder, and Linder aide Rob Woodall dismiss the notion that their campaign is quixotic by arguing that the American Revolution seemed that way too. Abandoning the FairTax as politically impractical, they say, would betray the American spirit. They add: How sad it would be if the FairTax came so very close to reality, then failed legislatively because just a few people people who could really have helped, people who could have made such a positive difference just shrugged their shoulders and said, Hey, its a good idea, but I dont see it happening.
They need not worry about that scenario. The FairTax is not going to come close to reality. It is true that some things once considered unlikely have come to pass, but working to enact the FairTax is still a waste of time. The American spirit has historically included a fair amount of calculating of odds. And the vast majority of times that people have said, That will never happen, they were right.
But even if, per impossibile, the FairTax were enacted, its vulnerability to public sentiment would not end. One of the FairTaxers arguments against reform of the income tax is that no reform will stick. The income tax, they say, started as a simple flat tax, and look where we are now. Leaving aside the fact that it has proven quite possible to improve the income tax for long periods of time most people dont want to see a restoration of the pre-Reagan code the same objection applies to the FairTax. Over time, wouldnt it become just as riddled with exemptions and loopholes as the income tax is? Or as existing state sales taxes are? Or more so: How hard is it to imagine Congress adopting different tax rates for recyclable and non-recyclable products? And wouldnt the FairTax be at least as easy for politicians to raise as the income tax?
AFT says no. The FairTax is highly visible. And because there is only one tax rate, it will be very hard for Congress to adopt the typical divide-and-conquer, hide-and-disguise strategy employed today to ratchet up the burden gradually, by manipulating the income tax code. But how visible would the FairTax really be? Each receipt would show how much the tax had raised the cost of a purchase, but most people would have no sense of how much they had given the federal government over the course of a year. Ask yourself whether you are better at estimating how much income and payroll tax you paid last year, or how much sales tax you paid.
The sound insight behind the FairTax is that the income tax pushes down the return on savings and thus creates a bias toward consumption today instead of consumption tomorrow. So taxing consumption instead of income, as the FairTax aims to do, makes a lot of sense. But there are many other ways to tax consumption. You could, for example, tax income but exempt savings. Other methods of taxing consumption pose far fewer economic, administrative, and political problems.
We do need to reform taxes to make them simpler, more conducive to growth, and lighter on families. But if conservative politicians campaign for the FairTax, they will lose elections. If tax reformers define reform as the FairTax, there will be no tax reform. The nice thing to say would be that the people who came up with the FairTax and its marketing campaign need to go back to the drawing board. The truth is that they shouldnt be allowed near drawing boards.
The fair tax works perfectly, it acts as a holy grail for many and keeps them busy thinking they are changing something while the income tax moves plods along.
I consider a progressive income tax to be unfair, immoral, and economically destructive.
One other problem with something like the Fair Tax—even if the government passed it, you know that Congress would say something like “oh, sure, we’ll get right on repealing the Sixteenth Amendment after we get this in place.” And then they never will, and we’d end up with the current unworkable income tax system (buggered to exempt favored classes such as minorities and “the poor” from the new tax) AND a national sales tax.
The only way you could ever pass the Fair Tax would be to repeal the Sixteenth Amendment FIRST and break the government’s power to levy an income tax BEFORE discussing a national sales tax or VAT. Otherwise you will end up with both, and the income tax system will be used to exempt the liberals’ favored groups from the effects of the sales tax while double-loading the tax burden onto the productive middle class and the productive rich.
Potentially nice idea, but completely unworkable in the real world. Oh, and that whole 23-vs.-30-percent snake oil bugs me too. Call it what it is, a 30% tax on sales. To call it anything else is to engage in obfuscation.
Why are so many fighting so hard to keep taxes hidden? The single biggest advantage to the FairTax is that every member of the electorate would see, with every purchase, the actual cost of government largesse. Just imagine when discussing a government program linking it to a % increase in the sales tax at the register...
I am amazed that so many fight so hard to keep taxes hidden.
“The only way you could ever pass the Fair Tax would be to repeal the Sixteenth Amendment FIRST”
That is part of the bill. In fact, there is nothing today to prevent from having both an income tax and a sales tax, or any other added tax. The FairTax legislation actually sets in law that we can’t have both.
That's almost a certainty already - probably in the form of a VAT tax.
Milton Friedman used to advocate "starving the beast". IOW, he wanted taxes cut to a minimum, assuming as the the government's annual coffers shrank, so would spending. It never occurred to Friedman - a responsible economist - that the government would run deficits with the vigor that they do today.
The liberal economists have the directly antithetical argument. Rather than "starve the beast", there's is "feed the addiction". They're planning on (and succeeding in), spending themselves into a "crisis", where some other emergency tax(es) will need to be levied to keep the US from defaulting on its debt. All of the a sudden, their dream tax, the VAT tax, becomes a reality.
I'm convinced that's the plan.
Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers, which shall be determined by adding to the whole Number of free PersonsTranslation: if the federal budget exceeds the revenues provided by duties on imports and excise taxes, then the state legislatures get the bill for the difference, with each state's share of the bill being calculated according to its share of the population.
To make this work, the Senate would once again need to be appointed by the state legislatures.
“I am amazed that so many fight so hard to keep taxes hidden.”
I’m not. A lot of people get a little break on their income taxes (motor fuels taxes, you name it) and they want to keep their loophole open because *their* loophole is important. This includes many so-called conservatives who vote Republican at every election.
End the pork, unless it’s my pork, and then I need it.
I’ve been a tax consultant for fifteen years and am amazed at the things political “conservatives” can justify to themselves in the realm of tax. I can understand why liberals do it. Most Republicans in my world are as liberal as Democrats.
The Fair Tax is calculated the same way Income Tax is: if you are in a 35% tax bracket, you pay $35 of every $100 you earn to the Federales. The same is true of the Fair Tax. If you spend $100, $23 goes to the government.
IIRC, there is no Social Security tax under the Fair Tax. Its part of the Fair Tax. Since Social Security taxes go straight into the general budget, who cares anyway?
The Fair Tax already has a clause that can be paraphrased as "This law doesn't go into effect until the 16th amendment is repealed".
I like the FairTax. It removes the social and fiscal engineering of the current tax code. Also removed will be all of the sales (or rental, Congressmen aren't honest enough to stay bought) of legislation. The biggest lobbying efforts are to game the tax code. One tax rate for every person and none for business and that goes away. Another benefit is that foreign and multinational companies can't play around with which country's subsidiaries actually make the profit, so foreign/multinational companies won't have a tax advantage over purely domestic companies.
Is it perfect? No. The biggest problem is that savings have already been taxed when earned will be taxed again when spent, while those who have been irresponsible and have borrowed and spent didn't pay tax and then won't pay tax when they earn and repay get off tax free.
You cannot repeal an amendment simply by passing another amendment. It also takes ratification by a majority of the states.
It does not address local taxes or state income taxes.
It simply replaces one bureaucracy with another, to handle the monthly rebates.
It stands to kill manufacturing and purchase of new items as it will only apply to new items, not used. People’s anti-tax attitude will drive them to buy less new and more used, which could also create an inflated market there as well.
The wealthy, who don't want to pay the tax, will simply purchase large items elsewhere as they did to avoid the luxury tax years ago.
The author is correct.
Good informative post.
“Two of the largest economies in the world rely almost solely on sales taxes: Florida and Texas”
Texas state sales tax rate is under 7%, with local taxes about 8%.
I agree totally! The prebate is going to be ripe for fraud (a la the EITC), and there are too many moving parts in the FairTax.
I’d like to see a flat tax of, say, 1%.
There is nothing fair about the Fair Tax. First you set the taxing event at the entrance of the “Pipeline of life’s accumulation” with the income tax. Everything that one earns goes through this taxing event before it can enter the pipeline of savings, retirement, property accumulation and all other capital accumulation for which one has a tax basis to keep from being taxed on that same money twice should one elect to sell the capital item, but would only be taxed on the gain.
Then, just about the time that you reach the age where you will no longer be a wage earner and will no longer be adding to your pipeline of accumulation, but will instead begin to live off of your savings, retirement and capital accumulation some smart guy comes along and says hey, I’ve got a great idea; lets move the taxing event from the entrance of your pipeline of accumulation to the exit of that pipeline! We won’t tax you when you earn the money, we will tax you when you spend it. You can fill your pipeline of accumulated savings with all that you can earn before paying tax on it. We will call it the Fair Tax!
But wait, you might say,”I am no longer earning or accumulating wealth. I was taught that I should save for my retirement so that I could support myself and would not be a burden on society. I made many sacrifices throughout my life to accomplish that goal and now you tell me that you want to change the rules of the game and move the taxing event to the other end of the ‘pipeline’, so that everything that I have already paid taxes on over my entire life, which I was able to save, will now be taxed a second time when I spend it!!? And you will call this a FAIR TAX?”
You might ask yourself, “What the hell is fair about that?”
Proponents of the Fair Tax try to argue that, “Prices will go down, etc.”
I say Bull S**t. That doesn’t change the fact that current earners will be buying goods and services and saving, with untaxed dollars, and those that sacrificed and did things right and managed, by acting responsibly, to reach retirement age with accumulated capital through sacrifice will be competing for those same goods and services with dollars that have already been taxed!
For the retired or soon to be retired person, there is nothing fair about the Fair Tax until they can figure out a way to provide a credit against the tax for accumulated capital which has already been subject to tax.
To change the rules of the game in this drastic manner without accommodating the responsible people who saved to accomplish the admirable goal of self-sufficency, would be akin to waiting until a football team had moved the ball to within one foot of the goal line and then unilaterally declaring that the rules have just changed and they must cross the center of the field to score and no adjustment will be made for yardage they have already gained. Except, I suspect, those so affected by the Fair Tax, will take this “stick in the eye” a lot more seriously than any football game!
Once again Ramesh proves not to have a clue. The overall tax burden will be lower under the Fair Tax. Currently under the income tax retirees are taxed on their savings and any capital gains. These forms of income taxes will be eliminated by The Fair Tax. They will consequently have more purchasing power and be able to save and invest more than with the income tax.
You are wrong. Retirees are not taxed on their savings. They are taxed only on the earnings of their savings.
Under the Fair Tax proposal, they would be taxed on their entire savings, (savings plus earnings) should they decide to cash in their savings and use it to buy something. As a consequence, they will have paid tax twice on their savings, first when they earned it, and second when they spend it. Some Fair Tax that is!
You have nailed it!
Abolish the income tax, rein the federal government back into the restraints of the Constitution, seat Senators through the respective state legislatures and never let the federal government out of that box again!
The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.allowed the feds to tax individuals directly, without having to go thru the states.
The 17th, direct election of Senators (who were previously appointed by the state legislatures), took away the ability of the state legislators to stop federal encroachments on their power.
Do you think a Senate, appointed by state legislators, is going to allow unnecessary budget items that have to be paid for by the states, from out of STATE revenue?
And, should that provision not be ratified, then what? So-called Fair Tax and Income tax both?
The bureaucracy will be much smaller. The IRS consisting of approximately 100,000 agents will be replaced with an agency requiring about 5,000 agents.
Any idea on how many began with the IRS? Can you name any bureaucracy that has not grown?
You really need to read the bill. There will not be any taxes on business to business transactions.
I printed it all out long ago and did read it, all 133 pages of it. I wonder if any supporters actually read the bill or rely more on Boortz's book.
The wealthy will no longer have their investments taxed thereby increasing their purchasing power.
The wealthy are the least of my worries. It is John Q. Public that will see he now must pay 30 cents on the dollar in tax that I see running to buy used over new items.
The author hasn't a clue and obviously hasn't spent one second reading the bill.
From where I sit, it appears like people more follow Boortz's book than the actual bill. The problems in this bill are way too apparent and clear for them to be so easily missed by supporters.
I am constantly amazed to see those who readily see big problems in the healthcare takeover, but who, out of hatred for the IRS or whatever, ignore glaring problems within this bill.
As I have long maintained, we do not tame the beast by changing how we feed the beast. The beast being out of control government spending.
Put down Boortz's book and actually read the entire bill.
The socialists behind the “Fair Tax” universal national welfare scheme want every American on the monthly federal dole. They will make any promise, no matter how outlandish, to advance that agenda.
I completely agree with you. I am sure there will be problems that we can sort out. Personally, I would get rid of the prebate concept and lower the overall rate. But that's just me. Beyond that the people that constantly say nothing can be changed are inevitably wrong. Wilson got the permanent income tax yoke around our throats. What is done can be undone. Indeed history tells us that is always the case. The marxist income tax must be eliminated to protect the freedom of our citizens. The Constitution must be amended to prevent the government hitting the citizens with both a sales tax and an income tax. While we are at it we need to amend the constitution to prevent states and localities from taxing property. It is time to reign in the bloated, arrogant and abusive government.
I absolute agree with this.
Taxes are not for controlling spending, that is a strawman. But, taxes continue to feed spending.
And, pray tell, what occurs during the 7 years we wait for ratification of repealing the 16th Amendment and Fair Tax is instituted?
When was that ratification clause added? It’s not in the original.
I didn’t say it before, but I will now, you ignored very relevant points of trouble with this and addrssed more minor points.
Typical of Fair Taxers and Ron Paulies (not saying you are a Paulie).
There are several problems I did not even address.
I’d rather see the IRS gone and a flat tax instead.
The simpler the better and Fair Tax is far from simple.
the Oligargy gets antsy when the peons and peasants get uppity!!!
You’re already being taxed on savings and capital gains! The Fair Tax will eliminate this taxation and therefore will be able to acquire more wealth via investments and increase savings!
I reiterate, I am not being taxed on savings. That event happened when I earned the money to save. I am only taxed on the earnings generated by the savings. Under the concept of the Fair Tax when I cash in my savings and spend it. Same for capital gains. If I have spent $1 million on land for my ranch and I sell it for $1.2 million, I will pay tax on $200K, and can spend the money with no further consiquences. At 28% capital gain rate my tax would be $56K. Under the Fair tax, when I have spent the $1.2 mil., I will have paid a tax of $276K, not to mention that tax has already been paid on the $1Mil. when it was earned.
The thing I think you fail to grasp is, retirees are not in the mode of acquiring more wealth that would no longer be taxed, but are instead in the mode of spending the wealth that they have acquired and paid tax on. You propose to increase their burden by 23%.
As for your attempt to appeal to my conscience:
“Are you willing to sacrifice the opportunity for future generations not to have their wealth taxed to avoid your perceived double taxation?”
First, double taxation is not a perception with the Fair Tax with regard to accumulated capital, it is a fact.
As for the future generations, especially the idiots that voted this communist into office, I am not prepared to wreck the security of my family to right their ship. I am obligated to not support anything that will put them further into debt on the spending side of the equation and will act accordingly. I would gladly sacrifice social security, which I never expected to collect anyway, and Medicare, which has done nothing but screw up my hospitalization plan that I already had in place (it used to pay virtually all claims after deductible and now pays nothing if Medicare elects to deny their portion).
The solution to their problem (future generations) is: Abolish the income tax, rein the federal government back into the restraints of the Constitution, seat Senators through the respective state legislatures and never let the federal government out of that box again! See Papabear post # 29.
PapaBear, You have the solution! I could not agree more.
I mostly agree. The government should be constitutionally limited to only 4 sources of revenue: A 10% income tax, a land tax (acreage only, not buildings); loser pays civil trials; and perhaps some infrastructure usage fees.
I don't like the Fair Tax, it hurts cost of production and encourages smuggling from foreign countries.
“It is John Q. Public that will see he now must pay 30 cents on the dollar in tax that I see running to buy used over new items.”
There is a huge difference between 30 cents on every dollar spent on new goods and services and 30 (or 40 or 50) cents tax on every dollar earned.
“The splitting hairs argument only weakens your position. That is money that would otherwise be saved for your retirement. The Fair Tax will remove that tax.”
I don’t know how you define splitting hairs. The principal, or actual savings portion of a savings account is signifacantly more substantial than the current period’s earnings.
And again, I am not saving money for my retirement. I am spending money from my retirement.
So you now tell me: “Wrong again. You won’t be taxed on used items, nor will you be taxed on necessities up to the poverty level. You are taxed multiple times with every purchase due to corporate income taxes included in the price at each stage of production.”
So here is your advice?: Either pay a second tax on the money you have already paid tax on, cause we are changing the rules or buy all of your stuff second hand and /or live under the poverty level.
That’s very nice of you.
My response: F. Y.
As for the so called Corporate Income Tax that you claim is imbedded in the cost of all products, I believe this is a dream fostered on the public. Having spent over twenty years in the tax department of a major corporation I can tell you that the goal of the corporation was always net book income. Corporate taxes are paid on Net Taxable Income. Anything that adds to the bottom line of a corporation is a resource to pay those taxes. Corporations pay a lot of money to tax professionals in an effort to defer taxes on book income, through timing differences, such as depreciation and depletion but the market is the detemining factor in the price of goods and services. I will grant that payroll and excises taxes are imbedded factors, but not income tax, which is a tax paid on profit.
“I don’t like the Fair Tax, it hurts cost of production and encourages smuggling from foreign countries.”
Would you be so kind as to explain why you believe that? Everything that I have read about the FairTax says the opposite.
The tax is collected at the register so how would smuggled goods hurt anything?
The removal of taxes on business would make the US a haven for business and manufacturing. I don’t see how removing the cost of taxes is going to hurt the cost of production.