A Misleading Sales Pitch (Why the campaign for the Fair Tax will set back the cause of Tax Reform)

National Review ^ | 03/15/2010 | Ramesh Ponnuru

[Man50D]

Another misleading article by an uniformed source. Fair Tax ping!

[Raycpa]

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.

[ClearCase_guy]

I like the Fair Tax. I think it is moral and fair. The economics will sort itself -- as long as the foundation is fair and moral, I think the economics will end up being acceptable.

I consider a progressive income tax to be unfair, immoral, and economically destructive.

[Moose4]

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.

}:-)4

[CSM]

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.

[Matchett-PI]

http://www.amazon.com/FAIRTAX-FANTASY-Hugh-Hewitt/dp/1607913046

[CSM]

“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.

[OldDeckHand]

"AND a national sales tax."

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.

[PapaBear3625]

I would prefer we go back to Article I Section 2 of the constitution:

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 Persons

Translation: 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.

[BitWielder1]

I'd prefer Flat Tax. Even Fair Tax has too much bureaucracy and exceptions.
Flat Tax is much simpler. A simple personal deduction for yourself and dependencies and then one single rate after that.
Eliminate all other taxes. Abolish the IRS.

But first: CUT GOVERNMENT SPENDING!!!

Any and all tax reforms will be meaningless without that first step.

[cizinec]

“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.

[Little Ray]

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?

[chrisser]

"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."

I used to think as you do.

Now, I am convinced that we are past the point of no return. They only way back is forward until the corrupt behemoth collapses under it's own weight. Taking advantage of any legal federal bennie while starving Washington of as much tax revenue as possible (legally, of course) is a legitimate means to hasten that end.

[KarlInOhio]

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 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.

[Man50D]

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.

Ramesh's first sign of ignorance. Currently ever item purchased contains embedded taxes thanks to businesses passing on the cost of their income taxes and associated compliance costs onto the consumer at each stage of production. The total percentage of these VATs amounts to nearly 23%. A $100 item today actually costs $77 with a $23 tax. This is known as the tax inclusive costs. The Fair Tax will remove the embedded tax by eliminating corporate income taxes and applying the rate of 23% one time, externally from the actual price, at the point of sale on only new items. This is known as the tax exclusive rate. Do the math 23/77=30%. The bottom line is the amount of tax collected($23) will be the same regardless which rate is quoted. AFFT uses the 23% rate because the Fair Tax will replace the income tax and its 23% embedded tax.

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.

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.

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.

Ramesh continues to distort the facts. All economic classes will pay taxed based on what they can afford to spend. The Prebate has no direct connection to the costs of goods. The prebate will be based on already established guidelines from the Department of Human and Health Services. people must prove citzenship.

Section 302 of HR25/S296:

(2) IDENTIFICATION REQUIREMENTS- In order for a person to be counted as a member of the family for purposes of determining the size of the qualified family, such person must--

`(A) have a bona fide Social Security number; and

(B) be a lawful resident of the United States.

Ramesh's thinking on the prebate for the rich is 180 degrees backwards. The wealthy will pay more out of pocket for taxes on items since the prebate will be a much smaller percentage as compared to income given that the prebate is based solely on the household size.

If prices stay flat after a sales tax, workers can’t keep their “entire paychecks”: Wages have to fall. The paycheck you’re keeping would be smaller. (Think about it this way: If existing taxes are embedded in the cost of every product, they’re embedded in the cost of labor, too.) If wages don’t 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.

Prices may stay flat for certain industries but rise slightly in other industries. The price rise will vary among industries. The increase in purchasing power will more than offset any price increase. Ramesh also ignores one fundamental point. The elimination of corporate income taxes will spur U.S. companies to return to the U.S. those assets they transferred over seas to avoid income taxes thereby creating more jobs and lowering unemployment.

Most experts in tax administration also say that enforcing sales taxes gets hard quickly once the rates hit double digits. That’s 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.

Who are these experts Ramesh? HJow many is most? You better tell that to the eighty economists who have signed onto the Fair Tax and sent a letter to President Bush in support of The Fair Tax.

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 people’s wages in order to determine how much they have earned in Social Security benefits. (Which leads to another problem, albeit a surmountable one.

How is that anymore intrusive than what we have now? How is not having to fill out a multitude of tax forms seeking information about every aspect of a person's life anymore intrusive? It's far less intrusive.

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?

Ramesh is really twisting in the wind at this point in the article. The Fair Tax will over the overall burden. People will no pay any tax on homes with previous owners as used items will not be taxed! There will not be a different class for purchasing a home as an investment under The Fair Tax in order to avoid the tax.

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.

Again Ramesh shows ignorance. First of all it's not AFT it's AFFT(Americans For Fair Taxation). The Fair Tax will immediately defund the IRS. AFFT is working on concurrent legislation(House Joint Resolution 16) that will repeal the 16th Amendment.

The FairTax is not going to come close to reality.

Ramesh hasn't been doing his homework on this point. The number of cosponsors for The Fair Tax has grown with each session of Congress since 1999. Politicians don't support bills out of altruism. They do so because they feel the heat from their constituents. Those who have signed onto The Fair Tax did so due to increased pressure from a growing grassroots movement. Michael Reagan recently agreed to be the Honorary Chairman of the Fair Tax National Victory Campaign. He wouldn't have joined if The fair Tax was losing support.

[DakotaRed]

If Fair Taxers would remove their blinders they would see that this notion will hurt more than help.

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.

[Man50D]

I'd prefer Flat Tax. Even Fair Tax has too much bureaucracy and exceptions.

Huh? The closest thing to an exemption is not taxing used items but that's because those items have already had a tax imposed on them. All new items are taxed at the point of sale. No exceptions. Please explain how The Fair Tax will have more bureaucracy when the tax code will be reduced from more than 67,500 pages to 136?

[achilles2000]

Good informative post.

[Man50D]

If Fair Taxers would remove their blinders they would see that this notion will hurt more than help.

You cannot repeal an amendment simply by passing another amendment. It also takes ratification by a majority of the states.

Americans For Fair Taxation has been aware since 1995. The purpose of House Joint Resolution 16 is to repeal the 16th Amendment. If you took of your blinders you would realize The Fair Tax Act(HR25/S296) has a provision in their bill recognizing the need to repeal the 16th Amendment.

It simply replaces one bureaucracy with another, to handle the monthly rebates.

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.

It stands to kill manufacturing and purchase of new items as it will only apply to new items, not used

You really need to read the bill. There will not be any taxes on business to business transactions.

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 wealthy will no longer have their investments taxed thereby increasing their purchasing power.

The author hasn't a clue and obviously hasn't spent one second reading the bill.