Posted on 05/19/2005 6:32:30 PM PDT by balrog666
The Fair Tax Fraud
by Laurence Vance
Since my recent article on the evils of the withholding tax, I have been inundated with e-mails by supporters of the " FairTax," including a request that I endorse "The Fair Tax Act of 2005" currently pending in the Congress. But like the calls for "fair trade" instead of "free trade," the FairTax is a fraud because it is based on the fallacy that government theft (taxation) should be done in a "fair" manner instead of eliminated altogether.
FairTax proponents are correct in their assessment of the Internal Revenue Code:
The current U.S. income tax code is widely regarded by just about everyone as unfair, complex, wasteful, confusing, and costly. Businesses and other organizations spend more than six billion hours each year complying with the federal tax code. Estimated compliance costs conservatively top $225 billion annually—costs that are ultimately embedded in retail prices paid by consumers.
The Internal Revenue Code cannot simply be "fixed," which is amply demonstrated by more than 35 years of attempted tax code reform, each round resulting in yet more complexity and unrelenting, page-after-page, mind-numbing verbiage (now exceeding 54,000 pages containing more than 2.8 million words).
But could the cure they offer be worse than the disease?
The FairTax is a consumption tax in the form of a national retail sales tax on new goods and services. It is designed to replace "federal income taxes including, personal, estate, gift, capital gains, alternative minimum, Social Security, Medicare, self-employment, and corporate taxes." The FairTax would also abolish the IRS and repeal the 16th Amendment.
The elimination of the 16th Amendment, the IRS, and all those taxes sounds like a great idea that all free market economists and advocates of liberty could agree with. So if the FairTax is such a great thing, why would anyone in their right mind oppose it?
That is exactly what I have been hearing:
* "What could you possibly have against the FairTax?" * "The FairTax is the only way to go." * "I find it weird that you would oppose the concept of the Fair Tax." * "The choice boils down to the Fair Tax (H.R. 25) or the current 'system.'"
Even Ludwig von Mises, I was told, "would approve the Fair Tax idea, as do dozens & dozens of rational economists."
Various consumption tax proposals were recently critiqued on this site in an article by Murray Rothbard. So rather than just repeat them and apply them to the current FairTax scheme, I will focus instead on problems with the FairTax proposal itself.
The Fair Tax Act of 2005 is H.R. 25 in the House (introduced on January 4) and the identical S. 25 in the Senate (introduced on January 24). FairTax proponents who complain about the complexity of the Internal Revenue Code are going to have a hard time convincing those of us who have actually read this bill (it came to 59 pages when I printed it out from my computer) that it will simplify the tax code when it contains language exactly like that which appears in the tax code:
(b) Rebate Defined- For purposes of subsection (a) (2), the term 'rebate' means so much of an abatement, credit, refund, or other payment, as was made on the ground that the tax imposed by chapter 41, 42, 43, or 44 was less than the excess of the amount specified in subsection (a)(1) over the rebates previously made.'.
Strangely absent from the list of co-sponsors of H.R. 25 is Congressman Ron Paul(R-TX). Representative Paul has consistently been named the "taxpayers' friend." If the FairTax proposal was as friendly to taxpayers as its proponents say it is, I would expect Congressman Paul's name to be first on the list of co-sponsors. FairTax advocates claim that their plan would repeal of the 16th Amendment. However, all H.R. 25 does is repeal Subtitle A of the Internal Revenue Code of 1986 that relates to income taxes and self-employment taxes and Subtitle C that relates to payroll taxes and the withholding of income taxes. The only mention of the 16th Amendment in H.R. 25 is when it says: "Congress further finds that the 16th amendment to the United States Constitution should be repealed." To repeal the 16th Amendment would require a constitutional amendment. Can Congress be relied on to pass a constitutional amendment that repeals the 16th amendment after a national sales tax has already been enacted? And even if Congress passed a constitutional amendment, it would still have to be approved by three-fourths of the states. Without the repeal of the 16th Amendment, what is to prevent an income tax from being imposed again after a national sales tax has been enacted?
Although the FairTax would eliminate the filing of all individual tax returns, the FairTax turns every business into a tax collector. Every small service business and every Internet business that does not currently collect state sales taxes will have to collect taxes for the federal government. Every doctor will now have to charge sales tax on his services. Where will this end? Will the neighborhood boy who mows lawns have to begin collecting federal sales tax on each lawn mowed? Will the neighborhood girl who baby sits have to do likewise?
The national retail sales tax rate under the FairTax plan is 23 percent. That is on top of state sales taxes that are currently collected by forty-five states. That is on top of the sales tax that many cities and counties also collect. That is on top of the special taxes that exist on hotel rooms in most areas of the country. I suppose that a national retail sales tax would also apply to gasoline. There is no mention of the federal gas tax anywhere in the Fair Tax Act of 2005. No list of taxes that are supposed to be eliminated under the FairTax includes the federal gas tax. Does this mean that there will be an additional 23 percent tax on each gallon of gasoline?
The FairTax will make it easier for Congress to raise taxes. The initial rate of 23 percent is supposed to begin in 2007. For years after 2007, "the rate of tax is the combined Federal tax rate percentage." This combined percentage is the total of three things: the general revenue rate (stated to be 14.91 percent); the old-age, survivors and disability insurance rate; and the hospital insurance rate. This is all but saying that the rate will be adjusted every year. And it will be very easy for Congress to do so. To raise several billion dollars of additional revenue, all that will be necessary is for Congress to raise the tax rate by one percentage point by small adjustments in one or more of the three items that make up the combined percentage rate. It will be sold to the American people as "a penny for progress," or some other deceitful scheme.
Under the FairTax system, there are no longer any Social Security and Medicare taxes. However, this does not mean that Social Security and Medicare will be eliminated. The inclusion in the combined percentage of the old-age, survivors and disability insurance and the hospital insurance rates means that the Ponzi scheme known as Social Security will continue as is—only the way it is funded will change.
The "underground economy" that income tax advocates complain about will certainly increase under the FairTax system. Even if the highly dubious claim that there will be an "average producer price reduction of 22 percent for goods and services in just the first year after the adoption of the FairTax" is true, not having to pay a 23 percent tax on an item is a tremendous incentive to make a purchase in the "underground economy."
The claim that the IRS will be eliminated under the FairTax is bogus. Although the national sales tax will be collected by the states from retailers, it is still a national sales tax, and as such, its collection will have to be overseen by some agency of the federal government. Just because the bureaucracy will no longer be called the IRS doesn't mean that it will be eliminated. According to The Fair Tax Act of 2005:
There shall be in the Department of the Treasury a Sales Tax Bureau to administer the national sales tax in those States where it is required pursuant to section 404, and to discharge other Federal duties and powers relating to the national sales tax (including those required by sections 402, 403, and 405). The Office of Revenue Allocation shall be within the Sales Tax Bureau.
Title II, chapter six, section 603 of The Fair Tax Act sets up the Problem Resolution Office and authorizes "problem resolution officers." There will still be tax courts according to title II, chapter six, section 602 and chapter nine, section 7451. Changing the phrase "Internal Revenue Service" to "Department of the Treasury" and "Commissioner of Internal Revenue" to "Secretary" doesn't eliminate the federal bureaucracy.
With the FairTax, the federal government will also be a tax collector in a new way: at the post office. There is no exemption of postal goods and services mentioned anywhere in the Fair Tax Act of 2005. I suppose this means that stamps, P.O. Box rental services, and package mailing services will be subject to the new 23 percent tax.
The FairTax is progressive. What could possibly be fair about a progressive tax where some people have to pay a higher percentage than others merely because they are deemed to be "rich"? How is the FairTax progressive? I thought it was a flat 23 percent on all new goods and services? It is and it isn't. Under the FairTax plan, everyone pays the 23 percent tax on everything, but "every household receives a rebate that is equal to the FairTax paid on essential goods and services." The rebate is given out each month, and is based on family size and the poverty level. But like the current tax code, the FairTax can also function as a tool for income redistribution because "the poor [will] actually pay less than zero-percent retail sales tax on their spending. Much like with the earned income tax credit of today, the rebate may give them more money than they actually spend on retail taxes."
The real problem with the FairTax is threefold. In " An Open Letter to the President, the Congress, and the American People Concerning Reform of the Federal Tax Code," which is posted on the FairTax website along with the endorsement of seventy-five "professional and university economists," we can see the trouble with the FairTax immediately:
We are not calling for elimination of federal taxation, which would be irresponsible and undesirable. Nor does our endorsement call for reduced federal spending. The tax reform plan we endorse is revenue neutral, collecting as much federal tax revenue as the current income tax code, including payroll withholding taxes.
There is only one word to describe the fact that the federal government now spends almost $3 trillion a year: obscene. At least 90 percent of what the federal government spends is unconstitutional, wasteful, or against the limited-government principles of the Founders. The only thing the FairTax does is change the way the state confiscates the wealth of its citizens. As Congressman Ron Paul says: "The real issue is total spending by government, not tax reform."
Because the FairTax is a consumption tax, Murray Rothbard's conclusion about consumption taxes is apropos:
The consumption tax, on the other hand, can only be regarded as a payment for permission-to-live. It implies that a man will not be allowed to advance or even sustain his own life, unless he pays, off the top, a fee to the State for permission to do so. The consumption tax does not strike me, in its philosophical implications, as one whit more noble, or less presumptuous, than the income tax.
The FairTax does nothing to tame the federal leviathan. The solution is nothing less than a drastic reduction or wholesale elimination of its revenue source. What is fair about allowing the government to confiscate 23 percent of the value of every new good and service? FairTax proponents may call it necessary legislation, but I call it highway robbery.
————————
Laurence M. Vance is a freelance writer and an adjunct instructor in accounting and economics at Pensacola Junior College in Pensacola, FL. See his Mises.org archive. Vancepub@juno.com.
They are already paying the tax now - they just don't know it. The tax is rolled into the cost of the house or the cost of the car.
I've heard this so many times, but if this is a "revenue neutral" how do you explain my 24% income tax and this tax that is supposedly included in the cost of a car or house? If the car already has 20% tax added and they propose collecting 24%,for a net 4% gain how do you arrive at tax neutral? Whether 29% or 23% as compared to my current contribution according to you of 20% Plus 24% (income tax) and 5% sales tax (which is also collected on used vehicles) for an effective rate of 58%, will be replaced by a 4% increase on new goods?
Also the lower cost of raw materials due to the two reasons listed above should propagate throughout the american economy and greatly reduce the cost of manufactured or constructed items. This will make our products much more competitive abroad.
As for your example of how charging 24% tax on a house can be neutral to eliminating a 20% built in tax, consider this example.
Let's say a house costs $100k but has a 20% tax built in due to corporate income taxes. Eliminate that 20% overhead and the cost of the house would be $80k. Now if a 25% tax was charged on the $80k home, then that bring the final price of the house back up to $100k.
In reality, I don't believe that prices will fall all that fast, but companies will instead become much more competitive due to the cost savings. That isn't a bad thing though as that will just create new jobs.
I would imagine that the sales tax on a home would be rolled up into the mortgage. The same with a car loan or any other major purchase.
And a couple of other factors enter in also. Keep in mind that interest rates drop about 2-2.5% and anything a person might purchase now is paid for with after-tax income; income tax has already been paid on it making it harder to aculumate money for big purchases.
All of that figures in also to help make things better economically for taxpayers under the FairTax.
I can accept the $100k can remain $100k. What I don't see is how this becomes revenue neutral when I am already paying those included taxes of that $100k plus my 30% tax on income. I don't accept business is currently devoting 30% to "tax neutralization" (compliance etc.)
I see the savings as overly optimistic on "base" prices. I'll support flat tax but never sales tax.
Think a bit about the circumstances. With the $100K house under the FairTax (assuming it declines in price and then is boosted back as in your example), you are now paying for it with untaxed income whereas before you were using after tax income.
In addition, the interest rates will be considerably less with the FairTax, too. Those things make a huge difference in the affordability of the house.
Revenue neutral does not refer to YOUR purchasing power, but to the amount of tax money raised for the government. You should actually be much better off financially since - keep in mind - the consumption tax base is much greater than the IT base which means you'll pay less for the government's raising the same amount of money.
I've never raised the issue of "tax neutralization" so I'm not sure where that came from nor what you mean by it. Keep in mind, though, that with any flat tax we still have the tax code and the IRS plus all of the political mischief that can be done by Congress with hidden taxes, exemoptions, etc. - and we'll never be the wiser since much of that isn't visible. Also, most flat taxes still retain payroll taxes which are quite regressive (not to mention high).
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.